NM - Grindrod Shipping Is Cheap Compared To Other Dry Bulk Stocks

Summary

• Due to the high inflation rates, COVID-19, and the continuing war in Ukraine, the global recession likely will continue hurting the demand for dry bulk commodities.
• However, the measures of the Chinese government and central bank should support iron ore demand.
• In a vulnerable market condition, Grindrod Shipping Holdings Ltd.’s margin and return ratios improved.
• Compared to other dry bulk stocks, Grindrod Shipping's stock price is low.

The market outlook for dry bulk companies is neither terrible nor very good. On the one hand, as a result of the continuing global recession, the demand for dry bulk commodities is negatively affected. On the other hand, due to the recent measures of the Chinese government and central bank, the demand for iron ore is positively affected.

The important thing to be considered is that even in this market condition, Grindrod Shipping Holdings Ltd. (GRIN) improved its margin and return ratios. Moreover, according to the comparative company analysis ((CCA)), compared with other dry bulk companies, GRIN is cheap. Thus, even with the current market outlook, GRIN is a buy.

3Q 2022 results

In its 3Q 2022 financial results, GRIN reported a handysize segment revenue of $44 million, compared with a 3Q 2021 handysize segment revenue of $47 million. The company's handysize segment cost of sales increased from $21 million in 3Q 2021 to $26 million in 3Q 2022. As a result, GRIN's handysize segment gross profit dropped from $25 million in 3Q 2021 to $18 million in 3Q 2022. Grindrod reported 3Q 2022 supramax/ultramax segment revenue of $64 million in 3Q 2022, compared with $87 million in 3Q 2021. The company's supramax/ultramax segment cost of sales decreased from $52 million in 3Q 2021 to $44 million in 3Q 2022. GRIN's supramax/ultramax segment gross profit dropped from $35 million in 3Q 2021 to $20 million in 3Q 2022. For the three months ended 30 September 2022, GRIN reported a handysize segment TCE per day of $23257, compared with $25919 in the same period last year. Also, in 3Q 2022, GRIN reported supramax/ultramax segment TCE per day of $25645, compared with $29934 in 3Q 2021.

GRIN's total revenue of $135 million in 3Q 2021, decreased to $107 million in 3Q 2022, down 21% YoY. Also, its profit attributable to owners of the company decreased from $44 million in 3Q 2021 to $22 million in 3Q 2022, down 50% YoY. Moreover, the company's 3Q 2022 financial results were not as strong as in 2Q 2022:

"Our results for the third quarter of 2022 were quite strong overall, though lower sequentially relative to the second quarter of 2022 as charter rates persistently declined over the course of the quarter," the CEO commented. "In the first half of the year, minor bulks were the only major category of drybulk cargoes to remain positive from a cargo growth perspective, but they too contracted in the third quarter. Our vessels continued to outperform the larger drybulk vessel classes during the quarter and year to date periods and have delivered robust free cash flows for the company," he continued.

The market outlook

Major economies are still suffering from the negative results of COVID-19 and the war between Russia and Ukraine. Inflation rates are still high and monetary authorities around the world will stick to their tight monetary policies in 2023 to prevent prices from increasing further. The Federal Reserve may continue increasing interest rates to combat inflation. Moreover, as the war in Ukraine is still going on, the world cannot get rid of its damaging effects in the following months. Thus, I don't expect the global demand for iron ore to improve soon. However, despite the weak outlook for the global economy, which means low demand for dry bulk vessels, we have to consider the effect of China's move to ease COVID-19 restrictions that can unblock supply chains.

One of the main reasons behind the low steel demand in China in the past months was the weakened construction in the country. However, due to the recent real-estate-friendly policies in China, Shanghai Metals Market ((SMM)) expects significant real estate growth in 2023. Also, SMM expects that infrastructure investment to progress in 2023 as the Chinese government may increase its investments in infrastructures to hedge the economy against the global economic downtrend. Figure 1 shows that iron ore prices increased significantly in the past two months as a result of the recent pro-growth measures of the Chinese government and the central bank of China. It is worth mentioning that China's biggest commercial banks pledged $162 billion in new credit lines for private developers. In November 2022, China's stainless steel imports decreased by 6.22% MoM and increased by 22.6% YoY. Also, the country's stainless steel exports increased by 35.5% MoM and 1.71% YoY in November 2022. According to Figure 2 , the Baltic Dry Index increased from 1149 on 22 November 2022 to 1723 on 21 December 2022. However, it decreased to 1515 on 23 December 2022.

Figure 1 - Iron ore price

Figure 2 - The Baltic Dry Index

GRIN performance outlook

I looked at Grindrod Shipping's profitability ratios in this thorough article to assess how well the company can turn a profit and use its assets to make money for its investors. I have examined the profitability ratios for margin ratios and return ratios to provide useful insights into the financial health of the company. I calculated the ratios in comparison to earlier time periods to be more helpful. In general, margin ratios evaluate the company's ability to turn revenues into profits in a number of ways. Notwithstanding the shortcomings of the dry bulk market in 2022, this shipping company had slightly better gross profit and EBITDA margins compared with the end of 2021 (see Figure 3).

Also, I looked into GRIN's return on equity and return on assets ratios to show how well the company can tailor returns to its shareholders. The ROA ratio illustrates the amount of profit an organization may produce for each dollar of its assets. The ROA ratio for Grindrod Shipping has been rising over the past year, which is a witness to the company's scope of ability to recover. The return on assets for GRIN is 24.66% in TTM compared to its value of 18.43% at the end of 2021. Additionally, its return on equity in TTM is 41.26%, which is above the ROE level of 37.2% at the end of 2021. This ratio shows the company's net income in relation to shareholders' equity and is important since it calculates the rate of return on the capital invested in the business. This means that GRIN's return ratios could indicate that the corporation has improved its return circumstances (see Figure 4).

Figure 3 - GRIN's margin ratios

Figure 4 - GRIN's return ratios

GRIN stock valuations

CCA method indicates that GRIN stock is investment attractive. Comparing Grindrod Shipping with other dry bulk competitors like Genco Shipping ( GNK ), Golden Ocean Group ( GOGL ), Eagle Bulk Shipping ( EGLE ), Navios Maritime ( NM ), and Star Bulk Carriers ( SBLK ) I estimate that the stock's fair value is about $25. This method reflects the real-market data and is an appropriate way to analyze GRIN for the sake of the company's stability. To choose the peers, I considered dry bulk companies with similar size and financial conditions. Data was gathered from the most recent quarterly and TTM data (see Table 1).

Table 1 - GRIN financial data vs. peers

When looking at GRIN's valuation ratios and comparing them with the peers, we can realize that Grindrod is relatively attractive. The company's EV/EBIT ratio is 2.78x, which is 21% lower than the peer's average of 3.56x. It represents that the stock price is lower than its potential value. Also, GRIN's EV/EBITDA ratio is 15% lower than the average of 2.92x. Meanwhile, the company's P/E ratio is 2.46x, which is on the same line with the average of 2.44x. Ultimately, I evaluate that GRIN's fair value is around $25 per share (see Table 2).

Table 2 - GRIN's valuation

Conclusion

According to the preceding remarks, Grindrod Shipping Holdings Ltd.'s profitability performance, and the global demand for dry bulk shipping, I believe that the stock will experience a better improving trend in the near future. Also, compared to its competitors, GRIN's stock price is low. Thus, a buy rating would be appropriate for Grindrod Shipping Holdings Ltd. stock.

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