Grindrod Shipping: Still Not My Favorite Dry Bulk Stock

seekingalpha04-11

Grindrod reported declining FY23 revenue and profits due to weak rates for Handysize and Ultra/Supramax vessels.The company maintains a clean balance sheet with $59.3 million cash and $176 million ...

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Given its failure in 2022 to convince the shareholder with a $26/share tender offer, I doubt the deal will pass.GRIN stock trades at 89% PNAV, which is too expensive for its (lack of) qualities and negatively skewed risk-reward.   bfk92/E+ via Getty Images Note: I previously covered Grindrod Shipping (NASDAQ:GRIN) in January 2024. I discussed the company’s drawbacks, such as a lack of scrubber-fitted vessels and a large percentage of chartered-in ships compared to its own fleet. As reported in 3Q23 filling, GRIN had a healthy balance sheet with $71 million cash and $168 million total debt. At the time of the publication, its stock traded at a 41% discount to its PNAV, although those facts were not enough to compensate for the downsides. Today, I will review the last company earnings report for 2023, Taylor Maritime's proposal to buy out minority shareholders, and update on the company’s valuation. Fleet Since my last take on GRIN, the company has made minor changes in its fleet. As per its 2023 annual statement, GRIN owns 11 Handysize bulk carriers and 7 Ultramax/Supramax bulk carriers. The company also has seven chartered-in ships (one Handy and six Ultramax/Supramax vessels). GRIN’s fleet average age is 9.6 years, and none of its vessels have scrubbers installed. The company has made a few changes in its fleet structure in 4Q23. GRIN exercises a purchase option on one of its chartered-in ships, Supramax IVS Naruo (2014 built), for $12 million. The expected delivery is in June 2024. In November, the company delivered two Handysize vessels to its new owners: IVS Merlion and IVS Raf. GRIN agreed to charter-in two more ships in December 2023. The expected delivery is 1H24, and the company intends to employ those ships for a minimum of one year. The table below from the 2023 report shows fleet data for 2023 and 4Q23. GRIN 2023 report  2023 was challenging for small and mid-size bulkers. GRIN realized significantly lower TCE rates in FY23 on its Handy and Ultra/Supramax segments. Handy TCE declined by 54% YoY, dropping to $10,351/day FY23. Similarly, Ultra/Supramax rates decreased by 46% YoY. The company’s daily OPEX per vessel increased slightly YoY. FY23 Handy OPEX per ship was $5,841/day vs $5,776/day in 2022. Respectively, Ultra/Supramax OPEX was $5,616/day in 2023 vs $5,297/day in 2022. The transition from a 2.5-year intermediate drydock to a five-year drydock required additional crew and operating expenses for repairs and maintenance, resulting in increased daily OPEX. Fleet utilization remained strong, 98.7% for Handy and 98.4% for Ultra/Supramax. GRIN reported that in FY24, the company had 1,274 operating days covered at $11,875/day for Handysize and 1,004 operating days at $14,795/day for Ultra/Supramax ships. As their names suggest, Handysize vessels are the most versatile size. They can carry major bulk (iron ore, coal, and bauxite) and minor bulk (steel, fertilizer, cement, sugar etc.). So, those vessels are not that exposed to Chinese and Indian economies who are the prime consumers of iron ore, coal and bauxite. Having long-term exposure only to small/mid-size bulkers means less volatility in TCE and earnings for the shipowners. The trade-off is the limited upside potential in case of strong demand for major bulks. In other words, GRIN operates a segment suitable for shipping investors seeking less volatility. 2023 financials discussion  The following table shows the company’s last income statement. GRIN 2023 report  In 2023, GRIN delivered $387 million in revenue, $39.3 million in gross profit, and $26.7 million in EBITDA. The company realized a net loss of $9.6 million, resulting in $(0.49)/share EPS. For comparison, for 2022, GRIN scored $460 million in revenue, $166 million in gross profit, $150 million in EBITDA, and $5.45/share in EPS. In 2023, the company reported 18% lower voyage expenses and 55% lower charter hire costs than in 2022. Total fleet operating costs also declined by 6%. In 2023 GRIN reported $155 million operating cash flow and $77.7 million FCF (unlevered). For comparison, in 2022, the company reached $186 million operating cash flow and $145 million FCF (unlevered). GRIN distributes dividends with a disappointing yield at 0.41% LTM. The graphs below compare GRIN buyback and dividend yield vs. Pangaea Logistics (PANL), Diana Shipping (DSX), and Safe Bulkers (SB). Koyfin DSX delivers significantly higher dividend yields than SB and PANL. However, DSX's dividend safety is disputable at 154% payout ratio. GRIN distributed $1.169 million as dividends in 2023. On the other hand, GRIN made cash distributions for $32.4 million in 4Q23, resulting in 12.18% LTM yield (on the chart above is shown as buyback yield). On December 31, 2023 GRIN reported $59.3 million cash (ex. restricted cash), $123 million long-term debt, and $176 million total debt. Its capital composition has not really changed since my last report. The company had 71.5% total debt/equity and 46.6% total liabilities/total assets. In 2023, GRIN repaid $115 million in debt, resulting in lower interest expenses. In 2023, the company incurred $14.3 million in net interest expenses vs $14.9 million in 2022. GRIN achieved a $155 million operating cash flow and $7.3 million operating income in 2023. The following table from the 2023 filling shows GRIN’s bank loans and borrowings. GRIN 2023 filling A larger portion ($101 million) of the company’s debt matures within two to five years, while $22 million is due beyond five years. GRIN maintains a strong liquidity position even during a weak market for its vessels, so I am confident the company will be able to pay down its debts. Valuation The table below compares GRIN, PANL, SB, and DSX based on fleet quality (age, composition, and scrubbers' availability), value (price vs. NAV), and leverage (gross Loan to Value).   Author's data GRIN trades at 89% PNAV and comes with 42% gross LTV. Given GRIN's downsides, in my opinion, this is too generous. Considering the creeping inflation, its fleet replacement cost will likely grow. Let’s not forget that tangible assets cherish inflation, or at least their owners. Rising inflation means higher capital, labor, and steel costs, resulting in higher costs of new buildings and higher prices on the secondhand market. In other words, GRIN’s fleet will become more valuable, resulting in a more attractive PNAV (if the market cap remains the same). Over the last few days, the price of GRIN’s shares picked up due to the offer by Taylor Maritime (the largest shareholder, owning 83% of the company's shares) to buy minority shareholders' shares at $14.25/share. Market Screener The price was $10.54 on April 04, a day before the announcement. On April 05, GRIN stock opened with a gap reaching $13.70. At that price level, the company traded at an 89% PNAV. It is too dear for a company with a ten-year-old fleet without scrubbers and questionable dividend payments. Looking at the TTM EV multiples, GRIN trades at 0.99 EV/Sales and 14.86 EV/EBITDA. For reference, when I published my previous note in January, GRIN traded at 0.99 EV/Sales and 14.3 EV/EBITDA. Seeking Alpha GRIN scores the highest TTM EV/EBITDA and the lowest TTM EV/Sales in its peer group. SB owns the best fleet, considering that 47% of its ships have scrubbers and the company's focus on mid-size bulk carriers. PANL also brings value with its ice class vessels and 5.85% dividend yields. GRIN does not offer much value at the present market price. Investor Takeaway My opinion remains unchanged on GRIN. The company maintains healthy financials, but its fleet is not impressive, considering its age, lack of scrubbers, and a large number of chartered-in vessels. I expect strong demand for dry bulk shipping. To play the dry bulk theme, I prefer exposure to Capesize and Newcastlemax segments due to their lower order book and growing demand for major bulks. The Taylor Maritime proposal adds even more uncertainty to the GRIN stock price. Taylor’s goal is to reach 100% ownership. The deal requires the approval of 75% of GRIN’s shareholders. On October 2022 (GRIN’s stock price was about $17.5), Taylor Maritime proposed a $26.0/share tender offer, which was declined. So, I sincerely doubt the deal will pass now. If the shareholders vote against it, GRIN's share price will drop significantly. Hence, the risk-reward is not skewed in investors' favor.  There are more enticing stock picks among the smaller dry bulk shipping companies, having better fleets and attractive dividend yields. I give GRIN a Hold rating.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426265984"}