CA - Triton International: Why I Am Holding This Stock Pending Transaction Close

2023-07-11 05:01:17 ET

Summary

• Triton International Limited's share price has grown significantly, boosted by a potential $13.3 billion acquisition by Brookfield Infrastructure Partners, set to close in Q4 2023.
• TRTN's Q1 2023 results showed a decline in net income and revenue, indicating weak logistics leasing activity. However, the company expects fleet utilization rates to rise post-transaction in 2024.
• The deal with Brookfield Infrastructure Partners will provide Triton with growth opportunities and consistent cash flow due to existing long-term contracts, while Triton will continue paying quarterly dividends on preferred shares.

Triton International Limited ( TRTN ) is up 22.10% (YTD) and +59.74% (Y/Y). The share price growth of the intermodal container leasing company was boosted by its possible acquisition announcement by "Brookfield Infrastructure Partners ( BIP ) in a $13.3 billion take-private transaction" on April 12, 2023. Both Triton and Brookfield Infrastructure are hopeful the transaction will close in Q4 2023. This comes after it announced the expiry of the waiting period under the Hart-Scott-Rodino ((HSR)) Antitrust Improvement Act of 1976.

Thesis

I believe Triton is a hold pending the completion of the Brookfield transaction with the sale price offering value to shareholders. From my viewpoint, Triton's management is looking to lock in high contractual rates for container management as demand shores up for longer-term contracts. Additionally, the buyout deal that includes $68.5 in cash and $16.5 in stock is worthwhile and a good price for Brookfield. It will also allow shareholders to make pro-rationed elections in compliance with the ratios since the value per share will be equalized before the close of the transaction.

Weak Quarterly results

Over the years, Triton has built its business operations by leasing its containers to customers in the shipping line industry through lease agreements. In Q1 2023, its net income declined 12.2% (QoQ) to $136.8 million equal to $2.44 per diluted share. This income also indicated a drop of 6.5% from Q4 2022. Quarterly revenue also declined 8% (YoY) to $414.3 million against $450.2 million realized in Q1 2022. These figures show weak logistics leasing activity in the quarter revealing that costs continue to ravage the sector. Triton's operating income fell 15.46% (YoY) to $221.5 million levels witnessed in 2021.

At the beginning of 2023, Triton had indicated that it was anticipating a decline in its adjusted net income per share. This decrease was to be in line with its utilization and used container sale prices from the high levels witnessed in 2022. In the three months to March 31, 2023, Triton's total leasing revenues dropped 4.47% to $397.7 million and -4.65% (YoY).

I expect Triton to maintain its current footprint for Q4 2023 when the acquisition finally takes shape. In my view, take-up is likely to grow with the economic improvement signaled by high manufacturing activity and shipping. Triton's fleet is composed of more than 7 million twenty-foot equivalent units (TEUs) adopted by major shipping lines across the world.

Points to consider in Triton's deal with Brookfield Infrastructure

Brookfield is set to acquire all of Triton's outstanding common shares at $85 per share, possibly in Q4 2023 after all regulatory approvals are done. This cash and stock deal will consist of $68.50 in cash and $16.50 in Brookfield's shares. In its Q1 2023 press release, Triton disclosed that all its preferred shares will remain outstanding after the closing of the transaction. The company stated that it will continue paying quarterly dividends on these shares post-closure.

BIP's share price over the past year has declined 6.89% (Y/Y) while Triton has surged above 59%.

In June 2023, Triton declared and paid a quarterly cash dividend of $0.70 per common share. According to me, TRTN's share price may not drop significantly since the sales price has already been set at $85. For Brookfield, this transaction may open up more long-term contracts and expand the company's business operations. I believe that the long-term lease portfolio protects the fleet in cases of economic turmoil. Triton expects that its fleet utilization rate will rise into 2024 post-transaction.

Another point to consider is that this deal will reveal immense growth opportunities even as Triton will still be operating with its investment-grade balance sheet. On the table is BIP's $143 billion assets under management. BIP is part of Brookfield Corp (From Toronto, Canada) which has about $800 billion in assets under management.

Triton describes itself as a market leader in container leasing and logistics. For Brookfield, this deal will give it a consistent cash flow due to the existing long-term contracts with Triton. I have also observed various acquisitions of container lessors by private equity firms. In November 2021, CAI International, a marine container leasing firm was acquired by Japanese firm Mitsubishi HC Capital (MIUFY) in a $1.1 billion deal. In its financial results for the fiscal year ending on March 3, 2023; Mitsubishi stated that its net income rose by 16.8 billion yen to a record high of 116.2 billion yen with a considerable contribution from CAI International.

In 2022, Triton's leasing revenue was nearly $1.7 billion with its adjusted net income slightly above $700 million. The company employed part of its robust cash flow generation to repurchase about 14% of its outstanding shares. It also worked to decrease its debt leverage while still maintaining a 30% dividend payout ratio of its net income.

As an investor, I have contemplated whether BIP as a master limited partnership ((MLP)) will make TRTN preferred to issue a schedule K-1 after this acquisition is successful. However, as I previously stated, TRTN is determined to keep outstanding its preferred stocks as a Triton mandate. By inference, it means the company will continue reporting its quarterly dividend. So, despite being a subsidiary of BIP, Triton will still be responsible for its preferred shares.

Risks to Consider

Failure to close this deal will adversely affect Triton's share price. Additionally, Triton will need to improve its business operations post-transaction so that it does not lose its current financial strength. It reminds me of Altera Infrastructure LP, formerly Teekay Offshore which was acquired by Brookfield Business Partners in January 2020. In its 2022 earnings report, Altera indicated that it has $186 million in liquidity (as of June 30, 2022) against a debt balance of $2.42 billion. Brookfield held 98% of the company's outstanding shares (as of March 2022) and 100% of its general partner. Altera at the time owed $797 million to Brookfield and only emerged from Chapter 11 in the beginning of 2023. I believe Triton should avoid the Altera playbook to protect its preferred shareholders.

Triton's weak Q1 2023 results indicate that the company is yet to fully recover its business operations. According to me, there are plenty of containers with new containers coming at even lower prices. I believe that Triton will lower container production in the fleet over the next two years or so while offering lower rates for contract renewals. This may affect earnings as the company seeks to fit into the new model.

Bottom Line

Triton is a hold pending the close of the Brookfield transaction. The company's fleet is protected by its long-term lease portfolio. Despite anticipating lower adjusted EPS into the third and fourth quarters of 2023, it is still looking towards an increase in utilization levels into 2024. I believe the company will raise its cash flow and profitability after the transaction even as preferred shareholders are rewarded with perpetual dividends. Proper leveraging of Brookfield's potential will help Triton in the long run.

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