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‘Still a lot of upside’ in Grindrod Shipping

Drikus Combrink – CEO, Capicraft: shipping industry players may lose money eight years out of ten, and then make up the losses in one or two years.

SIMON BROWN: I’m chatting to Drikus Combrinck. You’ll find him, of course, at Capicraft. I want to chat to him about Grindrod Shipping, which is now distinct from the old Grindrod. Drikus, I appreciate your time. It was about three or four years ago that Grindrod essentially broke in half, pushed off their shipping part of the business (which is) now listed on the JSE, but also listed on the Nasdaq. And that’s a pure shipping play these days.

DRIKUS COMBRINCK: Yes. More than that, Simon, they’ve streamlined corporate governance a bit, and they’ve exited a few joint ventures which make the financial statements less opaque. You know, the industry is well known for muddying the waters with regard to incentives and who gets what inside the financial statements. But they’ve cleared the waters a bit.

Secondly, they’ve actually become more focused. They’re focusing more on dry bulk now. I think they’ve only got about four liquid tanker/product tanker ships left in the fleet of about 34.

SIMON BROWN: And they’re also not doing the containers. So that Ever Given story which dominated – that that’s not them at all. They are just dry bulk and a bit of liquid bulk.

DRIKUS COMBRINCK: I’m not even sure that they do those shipping lines. Most of the lines they do are around Africa or south trade. So basically in the southern hemisphere, most of it, between Brazil, India, Africa, Australia and the East.

SIMON BROWN: So [Ever Given] is not in any way managed here. But this is a stock, and you were on TV – what, it must’ve been more than a year ago because it was lockdown – and you were liking the stock.

And then [you sent] a tweet a couple of weeks ago:

What we have seen is – I’ve chatted with some shipping experts out of Denmark – and certainly we’ve seen freight rates, which are [generally] volatile … there’ve been challenges not just the last year. But certainly, Covid and supply chains have pushed those rates higher.

DRIKUS COMBRINCK: I think there are three things that we have to keep in mind with shipping rates. One is that it’s very seasonal. So normally around the Chinese lunar year, because [of] a lot of dry bulk heads towards the East, you’ve got to slow down and that rate looks like the dry bulk market is crashing, but that’s just the Chinese lunar year.

And then the second thing is supply disruptions – always a positive. And that’s what’s happened the last year. There were a lot of supply disruptions. Obviously, Covid played a large role in that. Now we’ve got pent-up demand for a lot of stuff. A lot of manufacturing is still not happening. The West is having to import a lot of stuff from the East, and so forth. 

And obviously the trade spat between China and Australia had a big impact on drybulk markets, with them refusing to take coal from Australia. So all of a sudden they had to take coal from Brazil and Africa, and Australia had to sell their coal to Europe, and that just increased what we call the ton-miles – the same amount of tonnage, but it has to cross a vast or a larger amount of ocean at the end of the day, and that actually increases the demand for shipping, or limits supply, if you will. That’s had a big impact in the short term.

And then there’s obviously longer-term stuff driving the market as well, the third factor. But we’ll get into that.

SIMON BROWN: The trick with the stock is – and you’re literally the only person I know who’s ever mentioned it before – it’s deeply uncovered. And you’re of the view that in the short term they’re going to have a fairly good year and they’re going to have fairly solid earnings, and the market is just fundamentally not pricing it in.

DRIKUS COMBRINCK: This is part and parcel of the industry. This is the feature of the industry. It’s not a bug. But they lose money eight years out of ten. And then normally, because there’s such a big lag with regard to shipbuilding, and so on, you get into a situation where you make up the last eight years of losses in one or two years. Maybe this is the year or two that’s in front of us – I don’t know; we’ve had a few false starts in the last few years – maybe this is it.

But if we just like spot rates at the moment, if these spot rates continue throughout the year – a big maybe to be sure – but if the spot rates for these shipping classes, which are handysize, handymax and supramax (which are medium to small dry bulk ships), if those hold then they will probably almost double their revenue. And if that flows down right to the bottom line, you’ll see free cash flow, or about – and this is a take-it-with-a pinch-of-salt/back-of-the-envelope type of calculation – more or less a hundred million conservatively, $100 million worth of free cash flow, which they can buy new ships with or retire debt or buy back shares. I think they will buy back shares at these levels because they are trading at quite a significant discount to Nav. And with a $100 million free cash flow, if you buy the company outright at the moment, just the equity is worth only R2 billion (corrected). What’s that? That’s $130 million.

So they’ll probably earn their market cap in the next year if shipping rates hold at these levels.

A big maybe, but I think even though the share has doubled from its recent lows, there’s still a lot of upside, even if shipping rates drop by 10%, 20, 30% from here.

SIMON BROWN: It’s a lot of, as you say, buts and maybes. But if it works there’s a giant upside potential here. This is not a granny and orphans, it’s not boots and all, but perhaps there’s a space for it. 

Drikus Combrinck from Capicraft, I’m going to catch with you another time and talk about the longer-term picture around shipping. But I appreciate your time today. 

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