General Finance Corporation Baby Bonds are Worrisome
By: Tim McPartland,
Finance company General Finance Corporation (NASDAQ:GFN) is a relatively small, but profitable company that provides temporary (modular, portable containers and liquid tanks) storage – unfortunately much tied to the energy sector. The company owns a subsidiary in Australia named Royal Wolf that is 90% owned and in the same business.
Royal Wolf recently reported earnings and revenue from leasing storage was down by near 9% and from sales off about 3.6%. Net income was down by 50%–although still remaining in the black.
GFN is slated to release 1st quarter earnings on 11/9/2015 and there is a fear the numbers will be terrible–and there is a chance that they will be bad. For the 4th quarter of last fiscal year (which ended 6/30/2015) revenues were down almost 30% from a year ago and the company had a loss of $3.1 million for the quarter–for fiscal 2014 they had a profit of $3.5 million–so all in all not so bad. Unfortunately the company has too much debt on the books–over $300 million which is a big number for a company which will have revenues under $300 million for this year. Looking at the company from another perspective GFN had good free cash flow of over $50 million last year. So the question is just how poorly will they perform in the quarter ending 9/30/2015?
Revenue (and profits) of companies that are energy related have been coming in almost consistently worse than expected in the last year–whether it be frack sand companies, oil field services, steel pipe producers–you name and they have been terrrible financial performs.
We hold GFN 8.125% Senior Notes (NASDAQ:GFNSL) in the 2015 Blended Income Portfolio as well as the 2014/2015 Short/Medium Duration Portfolio. Since the Blended Income Portfolio is well diversified we will continue to hold the issue in this portfolio. On the other hand the 2014/2015 Short/Medium Duration Portfolio is not well diversified and we will be forced to remove the issue from this portfolio–a conservative move. While there is not any current evidence to make us believe this issue will fail, we set the Short/Medium Duration Portfolio up to simply provide a decent income stream and if we take too much risk we will undermine the more conservative nature of this portfolio. Additionally, we personally hold a small position in this issue which we will let go.
We would advise holders of the issue to review earlier financial releases from GFN and determine their own risk/reward tolerance. Some will want to get rid of it while others may see it as a chance to buy a bargain–it all depends on your personal situations.