Obvious value in Grindrod

Well positioned and efficiently operated ports and railways have unique attributes that can make them attractive investments.

Firstly, they have natural barriers to entry because once there is an (adequate) port or railway, no one is going to build one right next to it.

Secondly, once ports and railways are built, they have a geographic competitive advantage. If they are nearer to their customers, then they are cheaper to their customers and, ultimately, as volumes pick up, they can reflect this in pricing.

Finally, ports and railways are fixed-cost businesses and most of this is sunk into the capital used to build and operate them. Thus, when volumes pick up, anything beyond break-even starts to fall to the bottom line. Small upticks in volumes can translate into large upticks in profit.

Powerful proposition

For these reasons, owning and/or operating a port or railway can be a powerful proposition. From an investment perspective, this can be particularly attractive when these investments can be acquired below the price of (re)building them (simplistically, this would be buying the investment at ‘below book value’).

In the heady days of pre-credit crisis, Grindrod’s (code: GND) original shipping business made so much cash that the group invested into a bank, a large chunk of private equity, land-based logistics and, yes, ports, terminals, locomotives, and railways.

It all went sideways from there and the group has spent the last decade trying to clean itself up.

It has unbundled its shipping business, sold most (but not all) of its private equity, closed out a number of marginal businesses, and paid down large amounts of debt.

Read: Fallen giants: How are the turnarounds going?

While the bank remains (and is no longer for sale) along with the marine fuels business (still for sale), Grindrod is now almost entirely focused on Ports & Terminals and Logistics. And, by all appearances, this is at exactly the right time.

Grindrod’s FY 21 results show sequential improvement from the first half (H1) to the second half (H2), while volumes through its key ports, terminals and railways steadily grew.

Maputo Port saw 20% y/y growth in volumes – 7% period-on-period (p/p) in H1 and 17% p/p in H2 – and Matola drybulk [terminal] roared ahead by 51% (8% p/p in H1 and 68% p/p in H2).

The group has medium-term plans to basically double the potential volumes it can handle here (increasingly valuable as Durban port grinds to an inept halt).

Logistics and the bank all also performed well, particularly the former dovetailing into the group’s operations for complete client solutions.

Excluding non-core assets, Grindrod’s revenue rose 9%, its profit jumped 32%, and core headline earnings grew 166% (profits rising greater than revenues is the wonderful operating leverage I spoke of earlier). The group’s net asset value is 1 176 cents per share (cps) and its net debt is reasonable at 26% of equity (excluding the bank).

The group’s share price of 576 cents and market cap of R4 billion mean that its price-earnings ratio is a measly 4.5x and its shares change hands at a whopping 51% discount to its net asset value.

This net asset value of Grindrod is at historical accounting prices, arguably meaning it would cost more to rebuild all these assets in today’s terms (if you could also line up all the concessions and hire all the key people with the know-how to operate them).

With such a low valuation attached to Grindrod’s assets, you would be forgiven for thinking that the market was pricing in tough times ahead. But you would be wrong ….

As commodities boom, mines produce more and need to physically move them out of southern Africa into global markets. At least some of these volumes will be moved by Grindrod, if not a large chunk.

More subtly, the presidential drive to privatise Transnet (or at least allow private operators onto its railways) means that Grindrod will either directly benefit (it has 55 locomotives ready to go) or indirectly, as this unlocks large amounts of volume that will push through the Southern African Development Community (SADC) and out of its ports and terminals.

For an illustration of the pent-up demand here, have a look at the whopping large inventories of mined coal and iron ore sitting on the Exxaro (code: EXX), Kumba (code: KIO) and Thungela (code: TGA) balance sheets.

Like I said, you would be forgiven for thinking that the market is pricing in tough times ahead for Grindrod. But you would also probably be wrong – and, sometimes, value is just obvious.

Listen to Fifi Peters’s interview with Grindrod CEO Andrew Waller:

Keith McLachlan is investment officer at Integral Asset Management
* Some of Integral Asset Management’s portfolios hold Grindrod ordinary or preference shares.