IM wrote about Grindrod as our pick of the month back in November 2020, when it stood at 370c.
At that time the share traded at a 70% discount to its probable net asset value (NAV).
IM believed such a large discount would draw in investors who hoped to capitalise on the narrative that management had articulated about the sale of noncore asset sales. Proceeds would be used for a rapid reduction in debt, and there was the probability of material share buy-backs.
In December 2020 the company announced the sale of its 20% stake in agricultural business Senwes for R385m, or the equivalent of 55c a share.
That money should hit Grindrod’s bank account by the end of March.
Other asset sale talk has swirled around the vast tract of coastal and beachfront land in KwaZulu-Natal that Grindrod had taken in lieu of a defaulting debt. The private equity arm that houses 33 assets was also on the block, as well as the marine fuels business Cockett Marine. Ultimately, IM suspects, Grindrod Bank will also be put up for sale.
Grindrod is adamant it wants to return to its core ports and logistics operations.
The process started when Grindrod demerged its highly volatile and cyclical shipping division via a dual JSE and Nasdaq listing in 2018.
But some legacy issued remained, as Grindrod still holds a minority stake in its former shipping unit, and that caused a mark-to-market loss of R82m in recent results.
The share price in Grindrod Shipping, however, has recovered strongly, as shipping rates have firmed markedly over the past few months.
While the unfolding asset-unlock scenario has pushed up the Grindrod share by nearly 50% since late last year, some dark clouds are still on the horizon.
Earlier this month the company reported a loss of 24.8c a share for the year to end December.
It skipped the final dividend and, more importantly, cut the vaunted NAV by 15% to R10.75 a share.
It also noted that the KwaZulu-Natal land deal had collapsed, the sale of Cockett Marine was more than a year off and the private equity hub would now be sold piecemeal rather than as a whole.
Clearly, developments have shaken market confidence, and management will need to work hard to regain the trust of a segment of the market which feels let down.
But not all is lost. Grindrod, on a look-through basis, continues to offer material attractions. The core logistics and ports businesses are performing extremely well, and ongoing demand in the early part of 2021 shows a continuation of the buoyant 2020 trend.
Whispers suggest that the land deal is now back on the table and could lead to some welcome news in the coming months.
A back-of-an-envelope NAV calculation on a look-through basis by some market analysts place NAV as high as R14 a share. IM takes a far more pragmatic view, and even if a suitable discount is levied, there should be considerable upside value in Grindrod at current levels.
It’s frustrating that IM’s initial assumptions and beliefs around the value unlocking timetable have been thwarted and that deal delays have now crept in.
With another five months until the release of the interim results and presumably no imminent announcement around asset sales, IM suspects the counter might sit in the dry dock for a while.
IM had a 750c price target on Grindrod in our original recommendation last year. We still hold that view — albeit with a slightly tempered shorter-term target of 635c.
So IM maintains its buy on Grindrod, but with a caveat that the stock may have a dull trading period ahead until there is concrete news of asset sales and proof that money from these sales has been banked.
We recommend accumulating the stock on weakness with a view that in 12 months investor sentiment should be a good deal calmer and have a far clearer earnings horizon.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.