Too much on board, not enough of it paying well
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.