Cleaning up and unlocking value

An illustrious name in shipping and logistics in SA has had a momentous couple of years, and IM sees the potential for material value uplift in Grindrod Ltd as asset sales unlock the current NAV of R11.75 a share compared to the share price of 447c at the time of writing.

Grindrod has been a feature of the SA shipping scene since 1910 and has diversified and expanded into ports, transport and logistics.

A few years ago there was investor disquiet that the material valuation trap within the greater Grindrod company undervalued the business and added to its volatility. The shipping side was highly cyclical.

In 2018, Grindrod unbundled the shipping interests with a separate listing on the JSE and Nasdaq. The valuation of Grindrod Shipping in June 2018 was a meaty $320m, with the share price hitting near $18. Today, the shipping assets are valued by the market at $74m and trade at a share price of $3.88.

The “rump” assets held in JSE-listed Grindrod Ltd have hardly had a stellar performance, with the share price declining 47% over the past 12 months. But they have performed better than the shipping unit.

What has changed over the past 12 months is the valuation mindset towards Grindrod Ltd, with management now charged, encouraged by 23.3% shareholder Rembrandt, to unlock and release value.

Results for the year ended December 2019 saw a 12% rise in revenue to R3.9bn. Headline earnings from continuing operations rose 9% to R525m, with earnings moving from a R20m loss in 2018 to a R300m profit in 2019.

The key reason for this was significant uplift in volumes and profits at the port assets, where profit rose 121% to R308m, and the logistics assets saw profits rise year on year from R50m to R174m.

Headline EPS rose 21% to 77.2c, with total dividends for the year of 19.2c a share.

But the main premise of this company review is the potential of corporate break-up and asset unlock. On management’s NAV valuation, Grindrod is trading at a discount of 62% to the stated NAV of R11.75 a share. Grindrod has stated that its noncore assets are agriculture, marine fuels and the private equity assets.

The 20% stake in North West grain co-op NWK was sold for R204m. A similar 20% stake in grain titan Senwes is also slated for a sale.

The marine fuels business Cockett Marine Oil is one of the world’s largest value-added resellers of marine and petroleum products and services. Despite mixed results, a valuation of R600m for Cockett is touted.

Private equity may take longer to sell but has been “cleaned up” and could fetch R500m.

Market talk also suggests that Grindrod Bank, potentially worth R800m, may be sold.

Possibly even the crown jewel could be sold — the 25% stake in the Maputo Port Development Co. That could be worth north of R4bn, with the remaining logistics assets worth R1.5bn.

Stripping out the debt and preference shares, the R4bn market valuation for Grindrod clearly has upside should the asset sales gather momentum.

IM has the feeling that extracting value from Grindrod will occur, but not as quickly as some shareholders may want.

That may result in a drag on the share price until some catalyst is seen from a material asset sale, and 2020 should see some movement in that direction. At 447c we place a buy on Grindrod as a special situation play. ●