Grindrod Shipping: Shifting To Longer-Term Value Play
Summary
- I still hold GRIN and have suffered losses. But still believe in the stock, just shifting my focus to a longer investment horizon.
- GRIN falls in line with the Baltic Exchange Dry Index. But the stock has become indecently undervalued with a P/E ratio of 2.26x and an EV/EBITDA of 2.33x.
- Grindrod Shipping has a fairly young fleet - this is undoubtedly one of the company's key competitive advantages compared to other representatives of this sector.
- I expect a) a post-report rebound in GRIN's quotes and b) upcoming revisions over the next quarter.
- Anyway, I continue to hold GRIN, but I no longer consider it a medium-term swing trading idea - it's a longer-term value play.
Cameron Spencer/Getty Images News
Instead of an investment thesis
If you have been reading my articles for a while, then most likely you remember that I was very bullish on certain companies, in particular on Grindrod Shipping Holdings (NASDAQ:GRIN). However, I did not get the timing right - the first article appeared near the local high, the second article talked about the attractiveness of a drawdown, but neither idea has been realized yet.
GRIN sank deep enough from its September peak, which coincided with the correction of The Baltic Dry Bulk Index.
Source: Author's notes based on TradingEconomics.com
By and large, timing is almost always a matter of luck when dealing with a business whose operations are highly dependent on political and macroeconomic changes. I myself still hold GRIN and have suffered losses. But I have changed my mind about the investment horizon - I will not try to sell a stock in the short term and wait for the right moment or a change in trend. On the contrary, I will buy on dips and lower the average purchase price when I have the opportunity. So I am shifting my focus to the long term, not the medium term as before. I recommend that those who have bought the stock with me do the same. Fortunately, I still have reasons to believe in this company and the dry bulkers in general.
What's next for the dry bulk shipping market?
We can only speculate on this question, not knowing the future for sure. However, it seems to me that such a strong drop in rates, expressed through the dynamics of the index, should inevitably lead to a new round of growth, as it was in different periods of anomalous market behavior in the past.
Source: TradingEconomics
We must understand that most likely it is all about China's attempts to overcome the energy crisis, which is only gaining momentum as winter approaches. Back in early October, the Chinese authorities ordered their coalminers to significantly increase production, seeing to what levels the rates for dry bulk shipping have managed to climb. Industrial regions such as Zhejiang province were forced to arrange the supply of coal from Kazakhstan by rail - a much less profitable method compared to sea transportation.
The 136,000-tonne shipment of 6,000-calorie premium quality coal was being discharged at Liuheng terminal after a 30-day voyage, state-run Zhejiang Daily reported.
Coal from the landlocked central Asian nation is more costly than from rival suppliers as it has to be transported by rail, and China imported almost no Kazakh thermal coal in the first eight months of the year, according to customs data.
Source: From Reuters
We know what such external government interventions usually lead to - even if China manages to lower the price of coal even lower by raising electricity prices and increasing the supply of coal on the market through "orders", in the end, it will still have to return everything to circles, once again starting to order coal from abroad.
What we are seeing now in the container shipping market indicates a potential continuation of the supercycle in the dry bulkers market. "Disruptions in logistics supplies", about which many people talk and write, is a strong enough catalyst for the further growth of HARPEX because, in an attempt to speed up the unloading of goods, two Southern California ports announced additional duties of $100 per container (compounding in $100 increments each day) with goods that were not taken by truck drivers for more than 9 days - according to the executive director of Los Angeles Port, about 40% of all unloading will fall under these sanctions.
Of course, this is a completely different market, because in our world it is much more difficult to refuse container shipping than dry cargo. However, given the interconnectedness of these two markets, I do not rule out the same situation 'spilling over' to dry cargo if China's interference in market processes is mitigated.
What else?
In addition to all of the above, I believe that if investors who bought GRIN solely to make a quick profit, switch their view to a longer period, they will see a classic "value play story".
First, you need to keep in mind the valuation of the company - with a GAAP P/E (FWD) of 2.26 and EV/EBITDA (FWD) of 2.33 the stock is simply a steal.
According to the company's dividend policy, 30% of the adjusted net income will be paid in dividends/buybacks. That is, if we assume that there will be only dividends from just net income (without deducting extraordinary expenses), then investors should receive ~15.53% of the company's market capitalization after the next 4 quarters (based on EPS forecasts by analysts and the current price of $13.79/share, Seeking Alpha's data). Not a bad return on equity, huh? Especially against the backdrop of how much the price has fallen and what opportunities there are for the recovery of the supercycle.
Second, Grindrod Shipping has a fairly young fleet - this is undoubtedly one of the company's key competitive advantages compared to other representatives of this sector.
Source: From GRIN's official website
This is especially beneficial for long-term investors. Sooner or later, supply and demand in the market will rebalance, and even this super-cycle may be remembered as something abnormal in the years to come. What is certainly inevitable, however, are new regulatory measures for shipping companies and the widespread "desire for net-zero emissions." While other players in this segment of shipping, such as Golden Ocean Group (GOGL), are getting rid of old ships and ordering new ones, everything is fine at GRIN in this respect.
Third, in about 2 weeks (November 18) GRIN will release its quarterly results. As you probably recall from my last article, the company has been trying to get the most out of short-term contracts, and Q3 fell right at the peak of rates. Analysts are expecting Q3 earnings per share of about $2.88, which is about 21% of the current price. Of course, not everything will be so colorful in Q4, but it's too early to talk about a 64.58% drop in EPS from Q3 (as the Street is predicting). So I expect a) a post-report rebound and b) upcoming revisions over the next quarter.
The Takeaway
Among the main risks, I include the continuation of China's attempts to lower coal prices, which will lead to a further decline in the Baltic Exchange Dry Index. Of course, this is very likely, and GRIN could fall even further - bear this in mind and do your own due diligence before jumping in. My conclusions and reasoning may appear to some as an excuse for previous unsuccessful recommendations - this should also be considered as one of the risks of my thesis today.
Anyway, I continue to hold GRIN, but I no longer consider it a medium-term swing trading idea. As it continues to fall, taking all of its multiples with it, it is getting better in terms of fundamental long-term investing. A key advantage the company has, namely its relatively new fleet, will play into its hands when this supercycle finally ends.
Please, share your opinion in the comments, even if you think otherwise.
This article was written by
Oakoff Investments is a personal portfolio manager and a quantitative research analyst with 5 years helping readers find a reasonable balance between growth and value by sharing proprietary Wall Street information.
He leads the investing group Beyond the Wall Investing with features that include: a fundamentals-based portfolio, weekly analysis on insights from institutional investors, regular alerts for short-term trade ideas based on technical signals, ticker feedback by request from readers, and community chat. Learn more.Analyst’s Disclosure: I/we have a beneficial long position in the shares of GRIN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Please consult your financial advisor before making an investment decision. This article is not an individual investment recommendation.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (9)
Minus Debt Service: $ (27,000,000.00)
Minus Principal Payments on Lease Liabilities: $ (32,486,000.00)Est. Annual Free Cash Flow = $ 107,096,000.00 This is a 37% yield of FCF on todays market price. If they continue this performance, they will generate more than today's market cap in free cash flow in three years. The economics look extraordinary, but why the extreme mispricing? Why so much doubt regarding the future prospects of the business?To GRIN's credit, their management team is aggressively buying back shares at a deep discounts to intrinsic value.Your thoughts would be greatly appreciated.