GRIN - Grindrod Shipping - Lower-Than-Expected Cash Distribution And Related Party Dealing Disappoint

2023-10-04 17:45:02 ET

Summary

• Grindrod Shipping announces the purchase of parent Taylor Maritime's vessel management operations for total consideration of approximately $11.75 million dollars.
• As a result of a recently approved capital reduction, the company will distribute an aggregate $1.65 in cash per share to common equity holders.
• The distribution will be made in two tranches on October 26 and December 13 to shareholders of record as of October 20.
• In sum, I consider last week's news as somewhat disappointing as Taylor Maritime managed to extract additional cash from Grindrod Shipping while at the same time slightly increasing its ownership in the company by the means of a well-timed related party transaction with underlying economics difficult to assess from the outside.
• Even with shares still trading at close to a 45%+ discount to net asset value and a large one-time distribution ahead, I am keeping my "Hold" rating on the stock due to Grindrod Shipping's fate being entirely dependent on decisions made by parent Taylor Maritime.

Note:

I have covered Grindrod Shipping Holdings Ltd. ( GRIN ) previously, so investors should view this as an update to my earlier articles 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 the Nasdaq and the Johannesburg Stock Exchange ("JSE").

Grindrod Shipping currently owns a fleet of 20 dry bulk carriers with an average age of approximately eight years.

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 somewhat 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 for gross proceeds of $132.6 million year-to-date.

On the flipside, the company agreed to acquire two vessels from parent Taylor Maritime at less-than-stellar terms and exercised its purchase option for a chartered-in Ultramax carrier.

On August 10, 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 to shareholders of record as of October 20.

Last week, Grindrod Shipping surprisingly announced the purchase of Taylor Maritime's vessel management operations for total consideration of approximately $11.75 million:

Under the terms of the transaction, Grindrod Shipping Pte. Ltd. and Island View Ship Management Pte. Ltd. have agreed to acquire all of the shares of the Companies for a total consideration of approximately US$11.75 million via (i) a completion cash amount of US$2.0 million (subject to usual working capital and indebtedness adjustments), (ii) an allotment and issuance of completion consideration shares of approximately US$1.95 million, (iii) an issuance of consideration shares at the first anniversary of the completion date of up to approximately US$3.9 million (subject to certain earn-out related conditions), and (iv) an issuance of consideration shares at the second anniversary of the completion date of up to approximately US$3.9 million (subject to certain earn-out related conditions). The aggregate maximum value of the consideration for the Acquisition will not exceed US$13.5 million.

Grindrod Shipping intends to finance the transaction with a combination of cash on hand and allotment of new Grindrod Shipping ordinary shares over the two years from completion. The number of consideration shares issuable is calculated based on the volume weighted average price on both NASDAQ and the Johannesburg Stock Exchange, plus 7.5 percent premium over a three month period prior to the date of entry of the Sale and Purchase Agreements. At the discretion of the Board of Directors, in lieu of new share issuances, there is an option for any portion of the first year and second year consideration amounts to be paid in cash, at an increase of 1.10 times and 1.20 times, respectively. (...)

While neither Taylor Maritime nor Grindrod Shipping have provided sufficient information for market participants to fully assess the transaction and its impact on the company's financial results, the chairman of Grindrod Shipping's Board of Directors celebrated the related party deal:

We are very pleased with the acquisition of Tamar Ship Management Limited and Taylor Maritime Management Limited, whose current operations are aligned with our technical ship-management practice and our commercial strategy. This Acquisition will further increase our revenue streams in terms of ship-management income, unlock synergies in our commercial deployment of the dry bulk fleet and we will achieve savings on the technical side with a larger fleet. With the central management of a combined group fleet, we will certainly achieve better returns to our shareholders.”

The transaction was completed on Tuesday.

Based on the stated terms, Taylor Maritime received a first installment of $2 million in cash and 0.21 million newly issued shares of Grindrod Shipping that will be entitled to the above discussed cash distribution on which the company provided additional details in a press release on September 29 (emphasis added by author):

Pursuant to the Proposed Capital Reduction, the fully paid-up share capital of the Company will be reduced by USD 32.44 million (being an amount within the maximum Reduction Amount of USD 45.00 million as set out in paragraph 2.1(a) of the Notice). Based on the fully paid-up share capital of the Company as at the date hereof, the fully paid-up share capital of the Company will be reduced from USD 320.68 million to USD 288.24 million.

Accordingly, an amount of USD 32.44 million will be distributed to Entitled Shareholders (as defined below).

The Company will reduce the share capital and distribute cash in two tranches ; the first distribution of $1.01598 per ordinary share, payable on or about October 26, 2023 and the second distribution of $0.63193 per ordinary share, payable on or about December 11, 2023 , to all shareholders of record as of October 20, 2023 (the “Record Date”).

As of September 29, 2023, there are 19,472,008 common shares of the Company outstanding. As at record date of October 20, 2023, the number of common shares of the Company will be increased to 19,685,590, including the consideration shares to be issued for the previously announced purchase of the shares of Taylor Maritime Management Limited and Tamar Ship Management Limited. (...)

The capital distribution to be distributed by the Company is regarded as a “capital distribution” and is not subject to any tax in Singapore .

In aggregate, common equity holders will receive approximately $1.65 in cash distributions as a result of the capital reduction.

For my part, I would have expected the company to distribute the maximum amount of $45 million or approximately $2.31 per share with the full distribution being paid soon after the October 20 record date.

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 an almost 45% discount to estimated NAV in combination with the above-discussed large one-time distribution 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.

On the flip side, dry bulk charter rates have recovered in recent weeks which should result in improved cash generation in Q4.

Bottom Line

In sum, I consider last week's news as somewhat disappointing as Taylor Maritime managed to extract additional cash from Grindrod Shipping while at the same time slightly increasing its ownership in the company by the means of a well-timed related party transaction with underlying economics difficult to assess from the outside.

However, combining ship management operations apparently makes sense for both companies and considering the limited size of the transaction, investors shouldn't overreact to this most recent related party dealing.

Readers looking to take a position in Grindrod Shipping for the upcoming distributions should consider the stock's low trading volume and the fact that the payouts will be reflected in the share price following the distribution dates.

Even with shares trading at a close to 45%+ discount to net asset value and a large one-time distribution ahead, I am keeping my " Hold " rating on the stock due to Grindrod Shipping's fate being entirely dependent on decisions made by parent Taylor Maritime.

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