GRIN - Grindrod Shipping: Large One-Time Distribution Ahead But Uncertainties Remain

2023-09-05 22:34:21 ET

Summary

• Company reported profitable second quarter results well above the single analyst estimate with the outperformance mostly a result of recent vessel sales.
• However, even when adjusted for $50.2 million in sales proceeds, Grindrod Shipping still managed to generate $17.5 million in cash flow from operating activities.
• Looking ahead, with preliminary Q3 average daily time charter equivalent ("TCE") rates down approximately 15% on a sequential basis, cash generation will be impacted quite meaningfully.
• Last month, a capital reduction was approved at an extraordinary general meeting, which would result in a total cash distribution up to a maximum of $45.0 million or approximately $2.31 per share for shareholders of record as of October 20.
• Even with shares trading at a 50%+ discount to net asset value and a large one-time distribution ahead, I am keeping my "Hold" rating on the stock due to ongoing concerns related to Taylor Maritime's future course of action and a very weak market environment.

Note:

I have covered Grindrod Shipping Holdings Ltd. ( GRIN ) previously, so investors should view this as an update to my earlier article on the company.

Grindrod Shipping Holdings Ltd. 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 20 dry bulk carriers with an average age of approximately 8 years:

In addition, the company operates eight long-term chartered-in vessels of which three 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 shareholders.

Nevertheless, Taylor Maritime warned investors of a potential delisting and deregistration of Grindrod Shipping's common shares.

Ongoing uncertainty in combination with a deteriorating charter rate environment has resulted in shares tumbling to new 2-year lows in late May before recovering slightly in recent months.

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 $132.6 million year-to-date.

On the flipside, the company exercised its purchase option for the IVS Hayakita and agreed to acquire two vessels from parent Taylor Maritime at less-than-stellar terms.

On Tuesday, the company reported profitable second quarter results well above the single analyst estimate with the outperformance mostly a result of recent vessel sales:

However, even when adjusted for $50.2 million in sales proceeds, Grindrod Shipping still managed to generate $17.5 million in cash flow from operating activities.

Not surprisingly, the company's unrestricted cash balance increased from $46.1 million to $83.3 million on a sequential basis while total debt and lease liabilities decreased just slightly to $202.5 million mostly due the decision to lease back the recently sold vessel IVS Kestrel :

On June 9, 2023, the Company completed the previously disclosed sale of the 2014-built handysize bulk carrier, IVS Kestrel for $17.3 million (before costs). Approximately $7.0 million debt was repaid on the Company’s $114.1 million senior secured credit facility and the sale generated net proceeds to the Company of $10.3 million after the debt repayment. Following delivery to the new owners, IVS Kestrel was chartered-in for 11 to 13 months and has two one-year options to extend the charter.

Last month, a special resolution was passed at an extraordinary general meeting for a capital reduction which would result in a total cash distribution up to a maximum of $45.0 million or approximately $2.31 per share for shareholders of record as of October 20.

Valuation-wise, the company continues to trade at a steep discount to net asset value ("NAV") likely due to the above discussed delisting threat in combination with a challenging charter rate environment:

While a 50%+ discount to estimated NAV in combination with the above-discussed large one-time dividend looks enticing, ongoing uncertainties regarding parent Taylor Maritime's course of action are likely to keep market participants sidelined, particularly as Taylor Maritime appears unlikely to make a move for the remaining shares anytime soon if ever.

Looking ahead, with preliminary Q3 average daily time charter equivalent ("TCE") rates down approximately 15% on a sequential basis, cash generation will be impacted quite meaningfully:

However, even at these levels the company should continue to generate cash from operating activities.

Bottom Line

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

In addition, Taylor Maritime has started to extract cash from Grindrod Shipping by selling selected vessels at above market prices to the company.

Please note also that Taylor Maritime will be the prime beneficiary of the proposed capital reduction as the parent would be entitled to up to $38 million in dividends.

Even with shares trading at a 50%+ discount to net asset value and a large one-time distribution for shareholders ahead, I am keeping my " Hold " rating on the stock due to ongoing concerns related to Taylor Maritime and very weak market conditions.

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