Too much on board, not enough of it pay­ing well

Financial Mail - Investors Monthly - - Analysis - Shaun Har­ris

Ship­ping is a cycli­cal busi­ness. Right now, the cy­cle is very much down, with de­pressed com­mod­ity prices and low rates in the global ship­ping mar­ket. This is bad news for South African-based Grindrod, as re­flected in the most re­cent fi­nan­cial re­sults, for the year to end De­cem­ber 31 2014.

Top num­bers were not too bad, with rev­enue and earn­ings up, al­beit marginally. But at the HEPS and EPS level Grindrod took a hit, down 9% and 26% re­spec­tively. In the course of the fi­nan­cial year Grindrod is­sued 96m new shares to raise R2,4bn. This ac­cen­tu­ated the de­crease in EPS. What is a bit of a puz­zle is why Grindrod is­sued a div­i­dend of 20c/share, up 17% on the pre­vi­ous year. Fi­nan­cial re­sults did not war­rant this. Maybe the di­rec­tors and share­hold­ers hang­ing out at the Dur­ban Club, a road down from Grindrod’s head of­fice, needed a bit of cash to re­gain their sea legs.

In the old days of for­mer CEO and later chair­man Ivan Clark, Grindrod was pre­dom­i­nantly a ship­ping com­pany. That has changed. It has ex­panded into lo­gis­tics and freight ser­vices, largely on the ship­ping ter­mi­nals and rail links side.

“Grindrod is evolv­ing from a ship­ping busi­ness to a full lo­gis­tics and freight so­lu­tion

busi­ness,” says Imara in its lat­est Stocks & Strate­gies pub­li­ca­tion. Imara rates the share a hold, say­ing it is bullish for the long term but still wary of fac­tors work­ing against ship­ping in the short term.

Ship­ping re­mains the group’s back­bone, but is not the most prof­itable di­vi­sion. It still earns the most rev­enue, but more prof­its, in the lat­est re­sults, came from freight ser­vices. And this is where Grindrod con­tin­ues to in­vest, with to­tal cap­i­tal ex­pen­di­ture of R2,4bn in the fi­nan­cial year. Much of this went on the ac­qui­si­tion of 12 dry-bulk ships, but CEO Alan Olivier says “the group con­tin­ues to po­si­tion it­self for long-term growth through fur­ther in­vest­ments and ex­pand­ing its in­te­grated source-to-des­ti­na­tion lo­gis­tics ser­vices, in both com­mod­ity spread and geo­graphic reach”.

Com­mod­ity spread is im­por­tant. Grindrod is suf­fer­ing un­der col­laps­ing iron ore and oil prices, which make up the bulk of its ship­ping busi­ness. The group does not do much con­tainer ship­ping. It has sug­gested that it might list the ship­ping busi­ness separately. This makes sense. At present in­vestors don’t re­ally know what they are buy­ing, with the wide spread of ship­ping, lo­gis­tics and freight ser­vices, and the dif­fer­ent cy­cles they fol­low. But a sep­a­rate list­ing for ship­ping is not likely to hap­pen soon.

The out­look for Grindrod is far from shipshape. “Cur­rent de­pressed com­mod­ity prices and ship­ping rates will con­tinue to put pres­sure on earn­ings in the near term,” says Olivier. With a world­wide glut in iron ore, prices for the metal will prob­a­bly re­main low for some time, and oil prices are al­ready low and could fall fur­ther. Trans­port­ing th­ese com­modi­ties is not a good busi­ness to be in right now.

But Grindrod’s share has of­ten sur­prised in­vestors. When it reaches a low, it tends to bounce back quickly. That’s partly how Clark made his for­tune. He took a bank loan, sev­eral years ago, for more than R9m and bought Grindrod shares at around R2. Lit­tle won­der he has the best col­lec­tion of sports cars, a hobby of his, in Dur­ban to­day.

The prob­lem, though, is try­ing to de­cide when the share price might re­cover. It has lost nearly a third of its value in the past year, mov­ing it into value in­vestor ter­ri­tory. A for­ward earn­ings mul­ti­ple of 7,8 is also at­trac­tive. But is it go­ing to come back soon? Fi­nan­cial prospects, at least for the short term, sug­gest not.

One pos­i­tive is that Grindrod, with healthy cash flow, has net cash of R0,5bn on the bal­ance sheet, mak­ing it ungeared. What will count in the year ahead is the ac­qui­si­tions it makes. It is sniff­ing around Africa, which is prob­a­bly a good idea. And it has bought 12 new ships at the right time in the de­pressed ship­ping mar­ket.

The PSG Eq­uity Fund has been sell­ing the share. That’s the rec­om­men­da­tion IM would go with. The share price will come back, but prob­a­bly not soon.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.