Grindrod has been an astonishing growth stock in the JSE mid-cap sector. It’s rallied nearly 300% over the past three years as the wider market eventually saw the underlying potential of the slimmed-down group and its prospects in rail transport.
As superfluous assets that had been accumulated over the years were exited — such as Grindrod Bank, the agricultural assets and much of the private equity interests — a renewed focus on logistics, ports and rail has powered investor interest in the stock and the share price.
Further growth vectors have emerged with the willingness of the government to open up state-owned assets to the private sector under public-private partnerships (PPPs). With South Africa’s ports and rail system in dire need of operational upgrades for goods to be moved more efficiently, companies such as Grindrod, with expertise, assets and experience in this area, are set to benefit from this participation.
At R13.51, with Grindrod ahead 19% year to date, is there more to come?
Recent engagements at the AGM and results presentation lead IM to set a target price of R17.50. In the year-end results to January, headline earnings from core operations surged 29% to R1.4bn. Headline earnings from continuing operations rose 36% to 151.7c a share, with NAV ahead 13% to R13.68 a share.
Record port volumes went through Grindrod’s Maputo and Matola terminals in Mozambique as customers bypassed Transnet’s ports to get goods to market. Grindrod has extended that operational lease to 2058 — providing certainty with plans to expand the operations with its partner DP World.
On the logistics and rail side, Grindrod recorded a record earnings performance, and underlying volumes through its operations remain robust.
As the coal price has fallen, volumes through terminals have slumped, but there has been a strong uplift in chrome and magnetite. With the repair of the conveyor at the Richards Bay Coal Terminal, more trains have moved back to the port, offsetting slower truck volumes. Sulphur volumes have also risen.
Recent engagements at the AGM and results presentation lead IM to set a target price of R17.50
The key area of expansion has been rail. Industry research shows that 120Mt of goods and freight want to move from road to rail, mostly ore. Lower cost is the main feature once private operators gain rail slots. Grindrod has bought some second-hand sets which it has refurbished. This is cheaper than buying new — $6m vs $1.5m for a refurb — and the lead time on a new loco can be 18 months.
Grindrod now directly owns 40 locomotives, with the old joint venture owning the balance. Grindrod also has five locomotives that have been recently refurbished but are not yet in service. A further 150 wagons are awaiting implementation.
Thanks to its low gearing, solid balance sheet and buoyant share price, Grindrod is well positioned to power into the PPP segment — especially in rail. With discussions under way with the government and Transnet over open rail access, all participants await the final cost per ton per kilometre. It has to be worthwhile to get much-needed sector investment, and the government knows this.
The open-access agreement that will allow for the seamless transition of trains from South African rail through the border to ports in Maputo will increase volumes and reduce time and costs.
Further opportunity in rail comes from the copper boom in Zambia. Grindrod is looking at that link to port. Another link through Zimbabwe that skirts the Kruger National Park to get to Maputo also offers promise.
The real area of growth for Grindrod is rail — and this is where institutional confidence in the company comes from. IM believes Grindrod could, in future, be split into distinct separate rail and ports listings. This will clearly unlock further value as the business evolves into those growing platforms.
IM expects a first-half update by end-June and believes the market should be pleased with the narrative on current trading and prospects, if the feedback from the AGM is anything to go by.
* The writer owns shares in Grindrod
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