GRIN - Grindrod Shipping: Controlling Shareholders' Delisting Threat Likely To Remain An Overhang

2023-07-05 23:09:02 ET

Summary

• Initiating coverage on Grindrod Shipping Holdings Ltd., a Singapore-based mid-sized dry bulk shipper, with a focus on the geared vessel classes.
• Last year, Taylor Maritime Investments Limited took control of the company after a majority of equity holders tendered their holdings for an aggregate consideration of $26 in cash per share.
• Despite not reaching the compulsory acquisition threshold, Taylor Maritime has warned investors of a potential delisting/deregistering of Grindrod Shipping's common shares.
• The ongoing uncertainty in combination with a deteriorating charter rate environment has resulted in Grindrod Shipping's shares tumbling to new 2-year lows in late May before recovering somewhat in recent weeks.
• Even with shares trading at a 55%+ discount to net asset value and plenty of upside, in case of an acquisition by Taylor Maritime, risks associated with a potential delisting/deregistering are keeping me from assigning a "Buy" rating to the shares at this point.

Grindrod Shipping Holdings Ltd. ( GRIN ) or "Grindrod Shipping" is a medium-sized dry bulk shipping company focused on the smaller, geared vessel classes.

While the company is based in Singapore, its shares are dual-listed on Nasdaq and the Johannesburg Stock Exchange ("JSE").

Grindrod Shipping currently owns a fleet of 21 dry bulk carriers with an average age of approximately 8 years:

In addition, the company operates seven long-term chartered-in vessels of which four are subject to in-the-money purchase options:

Please note that Grindrod Shipping has decided against retrofitting its fleet with exhaust gas cleaning systems, commonly referred to as "scrubbers".

Late last year, significant shareholder Taylor Maritime Investments Limited ( TMILF ) or "Taylor Maritime" increased its stake in Grindrod Shipping to 83.23% after the vast majority of the company's equity holders accepted a cash tender offer with an aggregate value of $26 per common share.

That said, Taylor Maritime failed to reach the compulsory acquisition threshold of 90% thus preventing the company from squeezing out remaining Grindrod Shipping shareholders.

Nevertheless, Taylor Maritime warned investors of a potential delisting and deregistration of Grindrod Shipping's common shares (emphasis added by author):

LISTING STATUS

Shareholders should note that the Offeror may seek to delist from NASDAQ and terminate the registration of the Shares with the SEC and/or to delist from the Main Board of the JSE even though the Compulsory Acquisition Threshold has not been met , subject to satisfying applicable legal and regulatory requirements (including any requirements imposed by NASDAQ, the SEC, the JSE and/or the South African Reserve Bank) at the relevant time. Shareholders should also note that, even though the Compulsory Acquisition Threshold has not been met, the Shares may no longer meet the listing requirements of NASDAQ and/or the Main Board of the JSE and may be delisted from NASDAQ or the Main Board of the JSE at the discretion of those exchanges and their relevant regulatory authorities.

Delisting of the Shares from NASDAQ and terminating the registration of the Shares with the SEC would significantly reduce the liquidity and marketability of the Shares. Delisting of the Shares from the JSE would significantly reduce the liquidity and marketability of the Shares held on the South African register. Shareholders are advised to seek their own independent advice on this point

The ongoing uncertainty in combination with a deteriorating charter rate environment has resulted in Grindrod Shipping's shares tumbling to new 2-year lows in late May before recovering somewhat in recent weeks.

Last month, the company reported seasonally weak first quarter results but still managed to generate $27.8 million in cash flow from operating activities.

In addition, Grindrod Shipping declared an interim cash dividend of $0.03 per share for the quarter which represents the minimum under the company's current dividend policy as outlined in the annual report on form 20-F (emphasis added by author):

We intend, subject to operating needs and other circumstances, to return approximately 30% of our adjusted net income (adjusted for extraordinary items) to shareholders through a combination of quarterly dividends and/or share repurchases.

The Company intends to pay a minimum quarterly base dividend of $0.03 per share and an additional variable component, that will consist of additional dividends and/or share repurchases.

We expect that the return to shareholders will be primarily in the form of dividends , though the Company retains the right to adjust the allocation to maximize value to shareholders based on market conditions, share price levels, share liquidity, and other related matters.

At the end of Q1, Grindrod Shipping had cash and cash equivalents of $46.1 million and restricted cash of $10.1 million as compared to outstanding debt principal and lease liabilities of approximately $205.5 million.

Following the close of last year's tender offer, both Taylor Maritime and Grindrod Shipping have committed to reducing their respective debt levels while working on integrating operations under the leadership of Taylor Maritime founder Edward Buttery:

Consequently, Grindrod Shipping has started to sell selected vessels in recent months for gross proceeds of $75.3 million year-to-date:

Related debt repayments are expected to be $26.6 million.

Valuation-wise, the company is trading at a steep discount to net asset value ("NAV") likely due to the above discussed delisting threat in combination with a less-than-stellar charter rate environment:

While a 55%+ discount to estimated NAV looks enticing, a potential delisting and deregistering of the common shares would preclude retail investors from trading the shares.

Consequently, I would expect a delisting announcement to result in a major sell-off.

On the flip side, the large discount to net asset value might cause Taylor Maritime to make another move for the remaining shares at a substantial premium to prevailing prices.

For example, a cash tender offer and subsequent squeeze-out of remaining shareholders at $15 per share would only require $49 million, approximately 50% of Grindrod Shipping's cash balance adjusted for the above-discussed vessel sales and debt repayments.

That said, management's stated intent to reduce debt levels to 25% of gross assets makes another tender offer appear unlikely at this point.

Bottom Line

After Taylor Maritime took control of Grindrod Shipping last year and threatened to delist and deregister the company's common shares, the stock price has tumbled by approximately 70% as a result of lingering uncertainties regarding Taylor Maritime's course of action going forward and a less-than-stellar charter rate environment.

Given ongoing efforts to reduce debt levels, I wouldn't bet on Taylor Maritime trying to take out the remaining Grindrod Shipping shares anytime soon.

In addition, a delisting/deregistering announcement would most likely result in a major sell-off.

Even with shares trading at a 55%+ discount to net asset value und plenty of upside in case of an acquisition by Taylor Maritime, risks associated with a potential delisting/deregistering are keeping me from assigning a " Buy " rating to the shares at this point.

Investors looking for a somewhat less risky bet on dry bulk shipping at a similar discount to net asset value, should potentially consider an investment in Safe Bulkers ( SB ).

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