Share

Sailing through choppy waters

accreditation
To an outsider, sea trade and transport globally would probably seem full of contradictions. Commodity prices have been increasing for three years or more and many are reaching new highs. Demand remains strong, especially from the large developing economies of China and India. Yet freight rates for the large ships that carry those commodities have been tumbling and are currently at levels close to the early 2000s before the commodity boom started.

Grindrod is spared much of that apparent contradiction due to contract cover on more than half its fleet of 35 vessels, which means it might miss out when spot market rates are high but there’s downside protection when rates drop. But low freight rates remain a factor and affect other parts of the shipping industry.

Much of the shipping industry worldwide is battling. There are cycles within cycles, and for some ship owners it’s so tough that contracts are not being met and covenants not upheld with banks. Grindrod seems to have come through that pretty well. Its financial results turned down but there was no disaster, key benchmarks – such as return on equity and dividend cover – were maintained. Benefits are coming through from decisions taken years back, some of which looked risky at the time, and bold new developments are being navigated now.

But Grindrod – founded 100 years ago as a small shipping business in Durban by Captain John Grindrod – is a group in transformation. While CEO Alan Olivier says Grindrod will always remain focused on shipping and ship ownership, there’s a lot more to the business than shipping. So much so that in its recent full-year financial results (to end-December 2010) 54% of attributable income came from non-shipping businesses, mainly freight services.

Is it going to stay this way?

“Shipping is a very cyclical business. We’ll always remain focused on it, but at the same time we’ll invest in our other businesses, particularly the ports and terminals. It removes some of that cyclicality,” Olivier says.

Last year was a difficult year for the shipping industry, chiefly due to an oversupply of ships. More ships competing for orders put pressure on rates. As mentioned, Grindrod had some protection from that due to contract cover. Olivier says that, together with operational efficiencies, meant daily average revenues for its shipping division were above average spot rates for the year.

But while Grindrod has expanded into a number of landside activities, shipping remains the big number in group accounts. So when earnings from the shipping division slid from R492m in 2009 to R362m last year it hit group profits. Second biggest contributor to earnings is freight services: here income grew from R222m to R262m.

What’s encouraging is that despite a difficult global market, Olivier says trading conditions improved generally, both in SA and overseas, especially towards year-end 2010. “I think trading conditions will continue to improve, especially in the commodities we ship.”

The recent earthquake and tsunami in Japan will have an impact on the world’s shipping industry, and our thoughts and sympathies go to our friends and their families in Japan. “Some small ports are gone and oil refining capacity has been affected. Japan will have to use other forms of energy as it rebuilds. There will be demand for coal and all sorts of commodities.” Olivier says Grindrod has had ships going to Japan “from time to time” but the tragic disaster in that country is likely to open up further opportunities.

What at times must be frustrating for Grindrod is that it battles to meet the strong demand for commodities, as it can be difficult getting goods – especially high volume dry commodities – out of ports. “While demand for commodities remains strong, we can’t deliver as much as demanded, due to infrastructure and capacity constraints.” However, Olivier says that can be good for Grindrod. For example, in Maputo – where Grindrod has a dedicated coal terminal, the company has invested in the rail link. While rail capacity has been a limitation, Transnet Freight Rail (TFR) has recently added significant capacity to this service. Grindrod also has an economic interest in the Port of Maputo, which seems to have become its most efficient commodity export outlet.

It’s a simple but brave strategy: if the infrastructure isn’t working, fix it yourself. So Grindrod, with partners, has already invested around US$210m in the Port of Maputo, which included dredging the harbour to allow the entry of the larger Panamax size vessels. But the main focus has been on expanding its coal terminal. “We increased the coal terminal capacity from 2m t about four years ago to 8m t last year and expect to reach more than 12m t through our dry bulk terminals this year. The plan is to get to 50m t by 2025, but I think we’ll get there sooner than that,” says Olivier.

He adds that TFR has played its part by enhancing efficiency along the corridor and increasing rolling stock to Maputo to meet additional coal for export coming through. “We have a good relationship with Transnet,” says Olivier.

New Transnet CEO Brian Molefe reportedly said in a recent interview he would be paying particular attention to TFR. There have been a few signs of improvement, as in the rail link to Maputo, but its line to Richards Bay remains notoriously unreliable.

Capital projects at those ports are being headed by Captain Dave Rennie, a veteran Grindrod director. Though his early experience was at sea, Rennie now runs a lot of the landside projects and heads freight services.

“Strategically, we saw the increased demand for commodities coming so we positioned ourselves for it with our ships. But the industry is in a situation where there’s an oversupply of ships but undersupply of infrastructure. Grindrod is in a position to supply significant additional infrastructure at Maputo and Richards Bay,” says Olivier.

Another remarkably strategic move has been the establishment of its bunker supply business in London. Grindrod bought and has deployed bunker barges in Queen’s Channel on the Thames to meet ship owners’ requirements in the area. “It was strategic, in that there are new regulations coming in that won’t allow bunkers to be loaded offshore: ships have to come into port or be bunkered in the Thames. So we’re strategically positioned there through Cockett Marine as the bunker supplier.” Olivier points out there are also synergies between its shipping division’s tanker business and bunker trade. “It’s part of the whole supply chain, just as there are synergies between other divisions and businesses.”

Grindrod has built up a well-diversified but related portfolio of businesses and Olivier seems to be pushing it further. It even extends to the small niche Grindrod Bank. Headed by MD David Polkinghorne, the bank put through strong results, admittedly off a low base. Earnings increased by 27% as operating profit grew 47% off a margin that widened to 46,2% (38,5% in 2009). Fee income is strong, and Polkinghorne says there are significant deals in the pipeline coming through now. The bank, which on the retail side focuses on private clients, also has a top-performing asset management division. Investors, both retail and institutional, will probably know Grindrod Bank best through its Grindrod Global Property Income Fund and its Diversified Preference Share Fund. Both are leading performers in their respective unit trust categories. (See p 61)

Olivier is developing those synergies as he positions Grindrod as an integrated group. For example, there’s ample integrations between liquid bulk cargo and drybulk cargo that spans shipping, trading, freight services and even the bank, which can conduct trade finance and invoice discounting. ”Many of these businesses are involved in the same commodities,” says Olivier.

That’s one area where Grindrod chairman Ivan Clark pays tribute to Olivier. “There’s been further integration of Grindrod as the commodity trading business grows. Alan Olivier is refining business down to substantial commodity movements, not trying to be everything to everyone,” Clark says.

Yet despite some troubled shipping markets there are other factors affecting the group. Part of the pressure on earnings came from current piracy on the east coast of Africa. “It’s not just the Horn of Africa and Somalia but has spread through the Mozambique Channel. Looking after ships and cargo entails additional expenses. For example, we deviate as widely east as possible through that region – sailing east of the Seychelles. That adds a lot to fuel costs.”

Olivier confirms one of Grindrod’s fleet was followed by a pirate ship about 18 months ago but managed to outpace it and shake it off. But as with other shipping lines the threat of piracy adds to expenses – razor wire around the decks of ships, extra lookouts, installing water cannons – though Olivier says the high pressure hoses onboard can serve as pretty good protection.

So where to now for Grindrod?

On the upside this year is the ongoing positive outlook for commodity demand, which Grindrod can probably further capitalise on as its investments in infrastructure start to pay off. On the downside is the oversupply of ships. Olivier says the glut of tankers will probably work through the system this year, restoring more of a balance between supply and demand. But oversupply in the drybulk sector will continue to pose problems.

And the financial distress being experienced in parts of the shipping industry worldwide could provide opportunities for Grindrod to expand its fleet at reasonable cost. “We wouldn’t overpay. But we’re looking and might expand the fleet at the right price at the right time.”

And the offshore listing, which Grindrod has been hinting at for a number of years? London was originally mentioned, but Olivier now talks about an “alternative listing” – suggesting if it happens it might be somewhere else. “An overseas listing is always an option but there would have to be a trigger for it – such as the need to raise capital.”

Grindrod has a strong balance sheet, current cash holdings of R1,28bn and the ability to raise further capital if necessary. But Olivier acknowledges there could be other good reasons to list offshore. “Who do you compare Grindrod to on the JSE? In SA there’s no comparable stock. An offshore listing could be beneficial to the share price and would give us the right valuation if we wanted to raise capital.”

Olivier refers to the upcoming listing of Glencore, Swiss-based and the world’s largest commodity trader. There are some red tape tangles but the first listing is aimed at the London Stock Exchange. But Glencore has made it clear that will be followed by a listing in Hong Kong. That could give a clue as to where Grindrod might seek an “alternative listing” if it happens. Possibly Hong Kong or Singapore.

Some Durbanites still feel Grindrod is a Durban group, only much larger than it was when founded in Durban a century ago. It’s a huge misconception. Grindrod keeps its head office in Durban but with offices in 24 countries it’s become a truly global business. Much of its trade and shipping activity takes place between those countries.

However, Durban will remain Grindrod’s nostalgic home. It’s perhaps best summed up in Quadrant House, one of the head office buildings that houses senior management. It’s an architectural landmark in Durban and has been proclaimed a national monument. And it has a wonderful little idiosyncrasy: its postal address is simply PO Box 1, Durban, 4000.

INVESTMENT CASE

No balmy sailing

AS A BEST-PERFORMING share in the past, Grindrod has earned an endeared status among retail investors. Some personal fortunes have been made along the way. But that’s history. Looking ahead, is the share worth buying? Much like sailing the ocean off the east coast of South Africa, its share price has been through bumpy swells. Through peaks and troughs, the end result is a decline of 1,3% over the past 12 months. Not inspiring, given the fairly buoyant JSE. But that could present an opportunity, with longer-term prospects for the group looking good and a number of possibilities, including an offshore listing.

A forward earnings multiple of 5,4 times isn’t demanding and a dividend yield of 3,7% is probably OK. Share price performance will change dramatically when the global shipping cycle again turns up, probably over the next one or two years.

Grindrod has always been a share for long-term investors and remains so. On that basis it’s certainly worth buying. 

IVAN CLARKE

Off the bridge but on the ball

Grindrod according to the chairman

IVAN CLARK’S only problem with being Grindrod’s chairman is it doesn’t keep him busy enough. “There’s a top-class CEO and good management team. My role is to support management in its growth initiatives and offer strategic input when I can. I’m always available for any big decisions and can draw on my background in shipping and logistics.”

Clark has developed outside interests through his company, Clark Investments, but having headed Grindrod through some crucial years as CEO, it seems the group will always be close to his heart. Perhaps not surprisingly for a chairman, he has a bullish outlook about Grindrod’s future.

“We’ve had two years of what I’d call protecting the silverware. It’s been done deliberately: when there’s trouble around, keep your head down, because we worked so hard to get there. So profits have been flat the past two years and probably will be again this year. But there’s a new executive team in place and I have confidence in that team. It’s important for the future to revitalise management without taking away anything from the past.”

Clark achieved a lot while CEO, laying the keel for its current low-cost fleet, buying Island View Shipping and starting the diversification into logistics.

“When we started that, some investors said it wasn’t a good idea – that we should stick to shipping. But it was done carefully, and every development in the landside chain had to do with the movement of cargo. It achieved two things: we could ride out the shipping cycle better and it was complementary to the shipping business. Both of those happened and I see it now in Grindrod riding out a shipping cycle that’s down.”

On the investment side, Clark succeeded in convincing chairman and Grindrod owner Murray Grindrod to abandon its dual ordinary and N-share structure. Shares held by Bidvest were bought back, a group that has more than a passing interest in Grindrod. The ordinary shares were split five-to-one, introducing much- needed liquidity to the stock and attracting overseas investors. The share price took off, with Grindrod at least twice being the best-performing share on the JSE over calendar years.

“It might sound silly now but when investors didn’t have a choice, with the N-shares removed it made the retail investment decisions simpler. And each individual investor had a full vote,” Clark says.

He now sees South Africa, and Africa, entering a super-cycle based on commodities and the strong emergence of the Bric countries’ – now Brics, with the inclusion of SA – economies. “Adding the cocktail of trading and logistics – and with Grindrod’s strong track record and balance sheet – I quite frankly feel the world’s our oyster in our fields of business.” 

 
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.5%
Rand - Pound
24.02
-0.5%
Rand - Euro
20.51
-0.2%
Rand - Aus dollar
12.34
+0.1%
Rand - Yen
0.13
-0.6%
Platinum
900.15
+0.4%
Palladium
1,000.00
-0.2%
Gold
2,209.06
+0.7%
Silver
24.59
-0.2%
Brent Crude
86.09
-0.2%
Top 40
68,122
+0.7%
All Share
74,310
+0.5%
Resource 10
56,908
+2.2%
Industrial 25
103,615
+0.3%
Financial 15
16,488
-0.2%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders