Grindrod Shipping Holdings Ltd.
Summary
Marine shipping stocks continue to provide an excellent investment opportunity. Disruption in global supply chains, container shortages, and surges in worldwide trade are combining to benefit these companies.
The consensus is that spot rates should remain strong in the near term, if not rise further. The container sector continues to be well supported and this year could be even more lucrative for shipping companies. Strong drybulk market conditions will provide support for topline growth.
We are bullish on GRIN due to its strong Free Cash Flow, dynamic operational strategy, and balanced capital structure.
GRIN’s liquidity is strong and its financial position is very healthy. Adding shipping stocks to your portfolio continues to be a prudent move.
Grindrod Shipping (GRIN)
Grindrod Shipping operates a fleet of owned and long-term and short-term chartered-in drybulk vessels predominantly in the handysize and supramax/ultramax segments. The drybulk business, which operates under the brand “Island View Shipping” (“IVS”), includes a Core Fleet of 31 vessels consisting of 15 handysize drybulk carriers and 16 supramax/ultramax drybulk carriers. The Company also owns one medium range product tanker on bareboat charter. The Company is based in Singapore, with offices in London, Durban, Tokyo, Cape Town and Rotterdam.
With an average age of approximately 7 years, GRIN’s core fleet consists predominantly of eco vessels built in Japan, which is among the youngest and most efficient in the industry with distinct commercial and operational advantages. Grindrod Shipping is listed on NASDAQ under the ticker “GRIN” and on the JSE under the ticker “GSH”.
Q3 2021 – Earnings
Revenue increased to $135 million, an increase of $81 million year-over-year. And gross profit increased to $62 million, compared to $1.6 million in Q3 2020.
Adjusted EBITDA increased to $69 million, compared to $8.1 million in Q3 2020.
Adjusted Net Income increased to $45.8 million, or $2.38 per ordinary share.
Debt Amortization and Maturity Schedule
GRIN has limited debt maturities until 2025 and maintains a conservative amortization profile.
GRIN has decreased its net debt by 25% to $215 million as of Q3 2021.
Strong operational and financial performance of allowed the company to strengthen its cash liquidity and reduce its net debt to $167.1 million from $227.2 million at year-end 2020, while simultaneously pursuing growth initiatives such as the IVS Bulk transaction.
Over the past year, GRIN has increased it’s cash and short-term investment by more than 90% to $79 million.
GRIN is Acquisitive
GRIN continues to operate on a commercial strategy that demonstrates material profits from both long- and short-term charter-in vessels, along with below market acquisitions. On September 15th, 2021, in conjunction with the previously announced acquisition of the remaining 31.14% equity stake in its IVS Bulk joint venture and the concurrent redemption of the IVS Bulk preference shares on September 1, 2021, GRIN closed the $23 million upsizing of one of its existing IVS Bulk credit facilities to replace the working capital used to fund the transaction. The new debt is on the same terms as the existing facility. On September 16th, 2021, the Company closed the acquisition and concurrent financing of the 2019 Japanese-built ultramax bulk carrier IVS Phoenix. As previously disclosed, the vessel was already in the Grindrod Shipping Core Fleet and originally chartered-in for a minimum period of three years from delivery with two one-year extensions and no purchase options. Upon closing, the Company acquired the vessel for $23.5 million, which reflects a significantly reduced price relative to management’s estimate of the fair market value of the vessel due to the early termination of the prevailing charter agreement.
Dividend Policy
GRIN currently pays a $0.72 dividend. The dividend was last paid on December 13, 2021. The dividend yield is about 4%. The dividend is the first dividend declared under the Company’s recently announced capital return policy and represents approximately 30% of the Company’s net income for the third quarter of 2021, as adjusted for certain extraordinary items and after deducting the $1.4 million of shares repurchased during the quarter
Increased Trading Liquidity
In 2021, GRIN completed its first secondary offering, which has benefited shareholders through increased daily trading liquidity, a stronger US institutional shareholder base, and increased market float in the US, which has now reached over 37% of shares outstanding.
Operational Strategy
GRIN maintains a flexible commercial strategy of opportunistically chartering-in vessels on both long and short-term time charters with extension options. This strategy optimizes the Company’s ability to service cargo contracts, and it enables GRIN to maximize earnings and profitability as all of these have been contracted at levels significantly below current charter market rates.
GRIN also holds purchase options for five of our long-term chartered-in vessels, all of which are now well in the money and below prevailing market values, thereby presenting the Company with attractive options to grow its fleet. The recent acquisition and financing of the IVS Phoenix during the quarter is a prime example of the advantages and benefits of this strategy.
Recent News – Taylor Maritime Ups its Stake
Last month, Taylor Maritime (TMILF) agreed to acquire a 22.6% stake in GRIN for $77.9 million. This was done via a private, off-market acquisition. The purchase price of $18.00 represented roughly an 18% premium to the stock price on December 10, 2021. Taylor now owns a 24.8% position on Grindrod. The deal will close by the end of this month (February 2022).
Prior to this announcement, GRN repurchased 591k shares between November and December 2021. Representing 3% of outstanding shares.
Rising Container Costs are a Boon for GRIN
The historic rate boom appears alive and well — bad news for cargo shippers and good news for container shipping investors. There was a dip in spot prices over recent months from stratospherically high levels, but downward momentum did not hold. Rates stabilized at extremely high levels, and in several trade lanes, including Asia-to-U.S., rates are now gravitating upward yet again.
Annual contract rates are up sharply in 2022. According to the latest data from Xeneta, Asia-U.S. contract rates are up 122% from 2020, pre-COVID, with bids in early negotiations of 2022 contracts averaging $5,700 per forty-foot equivalent unit.
Approximately 90% of the GRIN’s fleet was predominantly trading either on index-linked cargo contract, short-term time charters, or in the sport market, leaving the Company well positioned to take advantage of the strong freight rate environment.
Shipping Market
In 2021, the pandemic blew up supply chains of all sorts, shipping prices spiked, and ocean shipping stocks benefited. For 2022, there are few signs suggesting circumstances might change.
The shipping market is largely broken down across tankers, containers and dry bulk. Dry bulk includes commodities such as grains, metals, and coal. The action continues to be in dry bulk shipping and containers.
Most dry bulk shipping stocks have market capitalizations below $1 billion – and many others fall below $500 million. Container shipping has few publicly traded options. While trends in dry bulk shipping are driven by supply and demand, the opportunity for containers appears to be driven by the challenges at shipping ports caused by closures, delays and shortages.
It is likely that high container pricing will persist as ports deal with lengthy backlogs due to the pandemic and an increase in vessel capacity.
The dry bulk market is likely to remain attractive in 2022 as economic activities continue to grow. Improved demand for dry bulk commodities and a relatively slow fleet growth are expected to boost the freight rate market in the current year.
Wall Street expects shipping industry per-share profits, at least in some cases, to fade from a record 2021. But industry consolidation is likely to keep shipping industry prices locked above pre-pandemic levels. Due to record amounts of containership orders thus far in 2021, even if drybulk orders were to pick up, limited shipyard spare capacity means that most new orders could not hit the water until 2024. To the extent that demand continues to grow, the lack of available supply growth leads to an attractive potential multi-year window for the drybulk market.
On the Company’s most recent earnings call, management noted that demand outside of China throughout the world is there and is increasing. GRIN is particularly optimistic about growth stemming from U.S. infrastructure. “… America is going to do infrastructure; it needs steel and cement. And a lot of that’s going to have to be imported. That’s going to come on ships. So, this is really very exciting going forward.” -Martyn Wade, CEO
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Wild Cards That Could Impact Shipping Price
The big wild cards for 2022: COVID, port labor negotiations and the Taiwan “gray swan.”
As this year began, essential services were being curtailed by a large number of workers out sick or testing positive, as the omicron variant rapidly spread. If the same pattern emerges for longshoremen and other workers essential to supply chains, congestion could worsen. China continues to pursue a “zero-COVID” policy in which large population centers are locked down for a small number of cases.
The International Longshore and Warehouse Union contract with West Coast terminals expires on July 1. The previous round of negotiations, in 2014-15, did not go smoothly.
The other wild card for container shipping, given America’s exceptionally high dependence on Chinese exports, is the geopolitical tensions over Taiwan. America’s encouragement of Taiwan’s independence forces may potentially put Taiwan into a dangerous situation. the Chinese have coveted the island of Taiwan for years and tension has been rising. Any overt military action on the part of the Chinese would be very bad for all things shipping, as it would likely lead to sanctions and a reduction of the flow of goods.
Shipping stocks also face a long list of questions surrounding the nation’s transportation infrastructure. Those questions concern aging roads and bridges, disputes over automation, available land on which ports can actually expand, available truck drivers and warehouses.
Shipping Stocks and Consolidation
The 10 largest shipping companies control more than 80% of the total market. Roughly two decades ago, that figure hovered at around 50%. Three major shipping alliances formed over the past several years — 2M, THE Alliance and Ocean Alliance — have kept a tighter leash on shipping capacity.
Will Oil Prices Decline in 2022?
It is possible that oil price will decline in 2022, which should support bottom-line growth of shipping companies. In December 2021, the U.S. Energy Information Administration (EIA) slashed its oil price forecast. The EIA in its December short-term energy outlook stated that it expects the average Brent spot price to be $70.05 per barrel for 2022. This marks a decline from its November forecast.
Valuation
We believe that GRIN’s stock has upside. For our analysis, GRIN’s peers include DAC, SBLK, GOGL, EGLE, CMRE, and SB.
P/E Ratio: GRIN’s P/E (trailing) is 7.26X and 3.34X on a forward basis.
DAC: 1.92X and 4.62X
SBLK: 6.49X and 4.17X
GOGL: 5.82X and 4.79X
EGLE: 7.58X and 3.35X
CMRE: 6.28X and 5.86X
SB: 4.24X and 3.24X
We believe that the higher trailing multiple is supported by GRIN’s growth expectations relative to these names. Additionally, GRIN’s EV/Sales multiple is well below that of its peers.
EV/Sales: Grin’s EV/Sales (trailing) is 1.29X.
DAC: 4.70X
SBLK: 3.55X
GOGL: 3.62X
EGLE: 2.26X
CMRE: 6.35X
SB: 2.81X
GRIN also maintains a strong Free Cash Flow margin; one that is competitive with its Peers.
Seeking Alpha indicates an average Wall Street Analyst price target of $25.50.
Q4 2021 Earnings This Week
GRIN is scheduled to release Q4 2021 earnings on February 16, 2022. Estimate for fourth-quarter earnings has been stable at $2.50 over the past seven days. The consensus mark for revenues is currently pegged at $118.51 million.
References
Business Insider
https://markets.businessinsider.com/news/stocks/msc-overtakes-maersk-worlds-largest-container-line-2022-1
EIA
https://www.eia.gov/outlooks/steo/
Freightwaves
https://www.freightwaves.com/news/about-that-rate-relief-ocean-shipping-costs-are-rising-again
https://www.freightwaves.com/news/container-shippings-2022-outlook-the-bulls-bears-and-wild-cards#:~:text=Annual%20contract%20rates%20are%20up,per%20forty%2Dfoot%20equivalent%20unit
https://www.freightwaves.com/news/top-10-liners-control-85-of-market-and-theyre-not-done-yet
Grindrod Shipping
https://www.grinshipping.com/Content/FinancialResults
Investor’s Business Daily
https://www.investors.com/research/industry-snapshot/shipping-stocks-in-2022-why-this-year-could-echo-the-2021-boom/
Kiplinger
https://www.kiplinger.com/investing/stocks/603389/shipping-stocks-that-could-sail-higher
Seeking Alpha
https://seekingalpha.com/news/3779395-taylor-maritime-to-buy-about-23-stake-in-grindrod-shipping-for-78-million-in-cash
https://seekingalpha.com/article/4470623-grindrod-shipping-holdings-ltd-grin-ceo-martyn-wade-on-q3-2021-results-earnings-call
Disclosure
I am/we are long GRIN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Nothing on this site nor any published commentary by The Investor Weekly is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.
Additional Disclosure
Every investor’s situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies’ SEC filings. Any opinions or estimates constitute the author’s best judgment as of the date of publication and are subject to change without notice.