Grindrod: Calmer waters ahead?
Prospects are good because few new ships are coming onto the market, unlike in the years between 2003 and 2008
Will long-suffering Grindrod shareholders finally get the investment break they’ve been craving? The centenarian company, whose shares have more than halved since they hit a peak of R28.78 in 2014, has formally hewn its business into a shipping and logistics operation with the listing of Grindrod Shipping on the Nasdaq last week.
Thanks to a long-awaited upturn in demand for shipping vessels, the timing of Grindrod’s listing "is about as good as you can get", says long-time watcher, equity analyst Arnold Werbeloff of Vunani Securities. Being listed on the Nasdaq means the company is now on the radar of global shipping investors, who’ll be able to better benchmark it against the 19 shipping stocks also listed on the American exchange.
In terms of the separation, Grindrod shareholders received one shipping stock for every 40 Grindrod Ltd shares they already owned.
What investors now have is access to the business that owns Grindrod’s port assets, Grindrod Bank, its marine fuels, its agricultural logistics arm, its carrier transport business and its ships agency and clearing division – as well as the dry-bulk and liquid-bulk shipping assets that trade under the names Island View Shipping and Unicorn.
Grindrod Shipping’s debut has been wild, however — and its shares have slumped from the initial trading price of R195 to settle at R130, giving the company a market cap of R2.4bn. Still, explains Werbeloff, the order book as a percentage of the global shipping fleet is less than 10% — in other words, very few new ships are coming onto the market, unlike in the years between 2003 and 2008, when a surge in demand prompted a glut of ships.
"People got greedy, and they just ordered ships like there was no tomorrow. And then there was no tomorrow," says Werbeloff.
The combination of a supply glut and the financial crisis meant shipping rates fell off a cliff after 2008, driving the Baltic dry index — the bellwether for the shipping industry — from its record high of 11,793 on May 20 2008 to around 700 by November that year, though the index dropped to its real nadir only in February 2016, when it sank to 290 points.
It takes two to three years to deliver a ship, and Werbeloff estimates that the sluggish pace of shipbuilding means that the global fleet is growing at just 2%/year, while demand in terms of tonne kilometres — a standard measurement for the industry — is now between 3% and 4% a year, "so it looks like a really good time to list a shipping company" Werbeloff says.
Another element is a battalion of stern new rules floated by the International Maritime Organisation that will force owners to install equipment to clean ships’ dirty ballast water as well as a strict cap on the sulphur content in marine fuel to cut carbon emissions. These rules are set to kick in between 2020 and 2024 and mean plenty of older vessels will be headed for the scrapyard.
Grindrod Shipping, Werbeloff believes, is "very well placed to raise further capital if it wants to expand the fleet, because the demand is there", giving it the muscle to buy newer, eco-friendly ships set to benefit from the organisation’s laws. "If it expands its fleet, instead of being a smaller cap it could reach $500m or $600m." Werbeloff expects a capital raising down the line.
The Baltic dry index is dominated by the largest, Capesize, container ships, while Grindrod owns medium and smaller ships: 20 "handysize drybulk carriers" and 12 Supramax vessels. Its liquid bulk fleet, which transports things like refined petroleum products, owns 11 medium-range and four small tankers.
As for potential trade wars between the US and China, Grindrod Shipping’s CEO Martyn Wade indicates the company is not overly bothered. "The goods sanctioned by the US will have little, if any, effect on Grindrod Shipping, and while the Chinese tariffs on soya beans could be detrimental to the dry cargo market, other exporting nations will look to make up the shortfall, with a potential positive increase in the ton-per-sea-mile equation," he says.
Meanwhile, the old Grindrod business — which is focused largely on SA and neighbouring Mozambique through its port assets — is also poised for better times.
For one, the bank is on the shortlist to buy Portuguese lender Mercantile, which would dramatically boost its scale. Grindrod also owns 25% of the Maputo port, which buys it a quarter stake in a multiyear concession. Analysts believe these are becoming increasingly attractive infrastructure assets given their annuity income.
Revenue from the company’s continuing operations — that’s everything except shipping — fell to R3.06bn for the year ended December, but headline earnings more than doubled, to R570.8m.
There’s likely more restructuring on the cards, though Grindrod is keeping mum on exactly what it has planned.
"If I were to say to a shareholder now that we’ve done everything — we’ve listed shipping and we’re now sitting on our hands — [that would be untrue;] we have not. There are a few other things we’re still doing," says executive chair Mike Hankinson.
Grindrod Limited shares recently ticked up to over R9.30, giving the company a market cap of R7.16bn.