Choppy seas rock Grindrod investors

Logistics company Grindrod is gradually becoming a landlubber, but the market's view of the company established in 1910 by Captain John Grindrod is still intimately tied to shipping rates and commodity prices.

Last year, Grindrod raised R4-billion in a rights issue, and earmarked three-quarters of the proceeds for its long-term projects - including investing in rail infrastructure.

Grindrod also bought out its empowerment partners and brought in Brimstone as a replacement. Johann Rupert's company Remgro also took a 25% stake in the group.

And yet, in the space of a year, Grindrod's share price has nearly halved to around R16.02 from R28.40 last May, thanks mainly to depressed dry bulk shipping rates, as well as its diluted earnings per share.

Analysts are divided on whether Grindrod's earnings are simply too volatile to back - although all seem to agree that this volatility is set to reduce.

Alpha Wealth fund manager Keith McLachlan said several of Grindrod's units had performed well - including its bank, its property portfolio and its asset management business.

This was despite the fact that Bidvest abandoned its attempt to buy Grindrod Bank last year, a unit the shipping specialist wanted to ditch so that it did not become a drag on the rest of the company.

"The ports, terminals and railways business - the integrated logistics side - currently has slightly soft volumes and a surplus of capital. That's where the book-build went. That capital is being applied to some exciting projects which will likely ramp up in three to five years," he said.

McLachlan warned, however, that although Grindrod was still profitable, the extra capital raised would "drag down the return on equity" until that money was invested.

Most likely, investors bailed on Grindrod because the long-expected recovery of the broader commodity market had not yet happened.

Brent Madel, analyst at BPI Capital Africa, said the current price was below his valuation of the group based on short-term earnings, even disregarding the capex roll-out.

"You get value in the short end and effectively a free call option on the long-term capex which should roll out over the short to medium term."

He said there were several positive triggers in Grindrod's stock, from new rail concessions and construction to improved rail capacity and more competitive rail freight rates.

"Depressed dry bulk rates are unlikely to reverse materially, but tanker and ship operating activities could more than counter this weakness in the short term," Madel said.

"This stock effectively offers exposure to both local and African infrastructure development, a theme high on local and international institutional priority lists."

Madel said there had been many one-off events in the first half of last year, including strikes, low rail capacity and restructuring costs.

Despite the improving signs in the rail business, he said the fall in shipping rates tended to spook investors, who still assumed a close correlation between these rates and the company's performance.

But those investors had not factored in the increasing number of arrows in Grindrod's quiver, which provided a buffer.

McLachlan said Grindrod would benefit from maritime trade because it managed strategic ports. This meant that even though customers might use other shipping lines, Grindrod would still benefit.

He said China would continue to import iron ore until the price breached a level that made it more viable for the country to buy from its domestic mines. This meant Grindrod's shipping business could do better than expected in a soft global economic environment.

"It probably won't do worse than the current financial year, and a lot of the negative effects are felt years down the line from cancellations because of the long lead times in this industry," he said.

"The ports aren't necessarily doing well right now, but they have far greater pricing power. Fast-forward three years, when these projects have been ramped up, they could be doing well," McLachlan said.

Rowan Williams of Nitrogen Fund Managers agreed that the outlook had improved for the commodities market, which probably indicated that the shipping cycle had bottomed out. Still, said Williams, it could take up to 10 years for Grindrod's capital expenditure to deliver full benefits.

He said Grindrod's investment in the Maputo port would pay off.

"That's good foresight in long-term investment. Grindrod has smart backers in the form of Remgro, which would have done an analysis of capex and expected returns over time."

The boom in African trade represents a potential windfall for Grindrod.

"The extent and length of the downturn took Grindrod by surprise, but at these levels and valuation it's much more reasonably priced for expected growth and the risks involved. The long-term story remains a sound one," said Williams.

But Vestact CEO Paul Theron said he was "not really a fan" of the company because of the high volatility of the earnings in its shipping and commodity-trading operations. "I do like the logistics industry, though, so over time that part growing would be a good thing," he said.