Description

Grindrod Shipping (GRIN US & GSH SJ) is a dry bulk and tanker shipping company.  The company is listed in the US and South Africa as a result of a June 2018 spin-off from Grindrod Limited, a South African conglomerate.  GRIN was spun in June 2018 with a 1 for 40 ratio to shareholders with the shares initially mainly trading on the JSE with the shares being able to be repositioned to the US.  The goal of the spin was to unlock Grindrod’s NAV by eventually transitioning the bulk of the ownership to the NASDAQ which has more investors with shipping expertise than the JSE.   While more volume has moved to the NASDAQ, Grindrod Shipping still has more trading volume on the JSE which is depressing the price.

This spin created a significant share overhang as Grindrod Limited’s shareholders were not natural owners of a pure shipping company causing significant selling as most shipping focused buyers do not generally trade on the JSE.  While more volume has moved to the NASDAQ, Grindrod Shipping still has more trading volume on the JSE where it often trades at a discount to the NASDAQ price.  This shareholder overhang has provided the opportunity to buy GRIN at ~40% of NAV and provides a very inexpensive way to profit from the cyclical upturn in dry bulk and tankers as well as the potential benefits to the industry from IMO 2020.

Business

GRIN operates both Handysize and Supramax dry bulk carries under its Island View Shipping Bulk brand and small and medium range product tankers under Unicorn Shipping.  The company currently has a fleet of 47 vessels including 19 owned and JV Handysize, 7 owned and JV Supramaxes, 8 chartered-in Supramaxes, 8 owned and JV MR Product tankers, 3 chartered-in product tankers and 3 owned small tankers.  The company has a young fleet (avg age ~6 years for drybulk, 7 years for tankers) with high quality ships (mostly Japanese bulkers and Korean tankers and a large number of “eco” vessels).

On the dry bulk side, GRIN has strong internal operating capabilities with in-house chartering and technical management expertise.  The company has global capabilities with offices in London, Durban, Cape Town, Tokyo and Rotterdam.  The company’s core focus is smaller ports in Africa and Asia where they have long term relationships with n variety of industry players.  Historically, the company has outperformed the industry benchmarks.

On the tanker side, the company acts more as a tonnage provider with its main commercial partners Vitol and Maersk.

Importantly in the shipping area, the company’s internal capabilities means that there is not outside fee leakage to 3rd parties.

Capital Structure

GRIN has 19.1mln shares for a $112mln market cap at $5.90.  At H1 18, the company had $127mln of debt, 86mln of proportional JV debt and 54mln of cash for a total net debt of 160mln and a total EV of 272mln.   The debt is well-termed out with 18mln due annually from 2019-21 and 30+min in 2022 and 2023.

Strategy

GRIN intends to grow in dry bulk where it has significant operational expertise and has 2 new Japanese Supramaxes being delivered in 2019 and 3 new Ultramax charter-ins in delivering in 2019 and 2020.   The company also has a significant opportunity to grow is by acquiring greater interests in their existing JVs.  In fact, their IVS Bulk JV terminates on 12/31/18 and GRIN has the right of first refusal to purchase the vessels at market value.  This transaction could allow GRIN to quickly increase its proportional ownership of its fleet in advance of a potential dry bulk market upturn.

As the company noted on the H1 2018 call, another way for GRIN to grow is through a ship-for-share transaction on a NAV like-for like basis.  This would be a way for them to grow and would act as a potential catalyst highlighting the current significant NAV discount.

The company does not intend to invest further capital into the tanker market but plans to continue owning it for now as the industry recovers from the cyclical bottom.

Industry Supply

According to Fearnley, the dry bulk orderbook is very low relative to the total fleet size, a factor which is generally very supportive of rates over the mid-term. Especially supportive for GRIN is the fact that the Supramax and Handysize vessel classes have the lowest orderbook/fleet ratios.

The MR tanker market should also be similarly supported the order book is only 8% of the fleet.

IMO 2020

Another factor that is potentially supportive of rates is IMO 2020, a regulation that limits the sulfur content of fuel for shipping from 3.5wt % to 0.5wt %.  Shippers have the option of burning more expensive compliant fuel or installing scrubbers to remove the excess sulfur which will allow them to continue using heavy fuel oil. The likely outcome of this is that the global shipping fleet will slow-steam to realize better fuel economy. This slow steaming will effectively reduce industry capacity.   IMO 2020 could also reduce vessel supply in 2019 as vessels have to go into dry dock for the installation of scrubbers.

This effective reduction of supply should be supportive of rates.  GRIN is well positioned for IMO 2020 with a modern eco fleet.  As CEO Martyn Wade noted on the H1 2018 call, “We've always tried to maintain a modern fleet due to the life cycle of a ship and also the nature of our trades. So, we've had long-term cargo commitments with some people close on 40 years and the expectation is that you will be putting in modern efficient ships and obviously modern ships are efficient. The eco angle, we targeted some years ago, obviously the old market changed. But looking at 2020, we firmly believe that modern eco ships with the potential to slow steam will come into their own.”

Earnings Leverage

Shipping companies enjoy significant operating leverage as increases in rates drop almost 100% to the bottom line.  Looking at GRIN’s fleet, the company is well poised to benefit from increases in rates.

This earnings leverage creates the potential for significantly higher EBITDA with rate rises.  Using Clarkson’s 2020 rates from their Sept 2018 shipping biannual provides and example of this leverage.

Obviously, given the earnings leverage, EBITDA is very sensitive to your rate assumptions but its clear that there is significant room for material earnings upside. For example, it should be noted that MR tanker spot rates have staged an impressive rally in the last month+ going from $26k per day in December (compared to $20k per day in my earnings sensitivity. If I plug $26k in to my sensitivity above, GRIN EBITDA increases to ~$85mln. This example shows both how quickly rates can move and how much EBITDA upside there is from improving rates.

Valuation-NAV

The simplest way to value shippers is through an NAV analysis.   Using Clarkson’s valuation data, here is my estimate for GRIN’s current NAV.

For the spin-off, GRIN was valued at $320mln or $16.82 per share and the CFO noted that he thought that undervalued the company, “"We could easily have sold it to someone, but we don't think selling shipping for $320m is a very clever idea. We would rather our shareholders hold that share."[1]

It should also be noted that Clarkson’s Platou, the sole analyst covering with significant shipping expertise generated a $13.50 NAV estimate for GRIN in Sept 2018.

This valuation can also be supported by an EBITDA based analysis.  In fact, an EBITDA analysis can generate higher numbers in an upside scenario because GRIN also has a significant number of chartered-in vessels which are not counted in my NAV analysis but would add significant earnings as rates improve.

RISKS

Like most shippers, GRIN faces risks from lower rates which could stem from a sharp decline in the global economy leading to lower demand for minor bulks and products as well as lower vessel valuations.

GRIN’s stock is also relatively illiquid with a combined NASDAQ/JSE value traded of ~$300k per day.  I believe GRIN’s liquidity should improve as the company gets more seasoned in the market after its odd-spin and becomes better known by investors.

[1] https://www.pressreader.com/south-africa/pretoria-news/20180327/281895888789968, $16.82-Pre-Listing Statement Cover

Catalyst

Increased investor awareness of GRIN as more shares transition to NASDAQ

Continued improvement in rates

IMO 2020