Grindrod Shipping Holdings Ltd. (GRIN) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining this call, where Taylor Maritime Investments Management will present details regarding its acquisition announced this morning of a 22.6% stake in Grindrod Shipping Holdings from Durban, and sale of 2 vessels. Edward Buttery, CEO will be presenting and will be available along with Camilla Pierrepont, Head of Strategy and Investor Relations, to answer any questions you may have. Can I please ask you to remain on mute throughout the presentation and Q&A session. For information, the call is being recorded. Edward, please could you ahead.

Thank you, Ali. Thanks, everyone. Good morning. I'm delighted to announce that TMI has entered into an agreement to acquire 22.6% in the leading shipping company, Grindrod Shipping listed on the NASDAQ and in Johannesburg. TMI knows Grindrod's fleet and management well, and we believe this investment is complementary alongside our fleet and, obviously, our experience within the industry. We've signed an agreement now to acquire 4.329 million shares in Grindrod, 22.6%, in a negotiation that occurred directly with Remgro, the major shareholder in the company. The total consideration is $77.9 million or $18 per share. Remgro was the largest shareholder. We've even purchased the entire shareholding. They will be exiting. It's noncore for them and was a spin-off, as many of you will know from Grindrod Limited. So TMI is now -- or will be Grindrod's largest single shareholder. In addition to the shares from Remgro, we've acquired an additional 2.2% of the outstanding shares. And over the next few slides, we -- sorry, I'm on Slide 3. I apologize, Ali, can we turn to Slide 3. Over the next few slides, we will be explaining the features that make us so excited about this investment. -- and alignment of interests in 2 of our companies that I believe are well positioned for the next 3, 4 years of good markets in the dry bulk space, specifically within the geared space. Grindrod has high-quality assets that are complementary to our own fleet. We have managed to acquire these shares at what we believe is a significant discount to NAV. The average age of their fleet is about 6 years. So we're averaging down a little bit in terms of what we're invested in. Further to that, as you may know, we've sold 2 noncore Chinese ships. And this is an optimal way of recycling our capital versus going into the market and simply buying assets, where we would be competing against other bidders paying full price. But also it's becoming more and more difficult to find high-quality tonnage in today's market. Furthermore, we're able to benefit from the yield and performance of Grindrod shipping from day 1, whereas if we went and bought physical ships in the market, we would have to wait several months for delivery. And there's, of course, the risk that we can't get our crew in, which is just part of the COVID situation that we're having to deal with on a daily basis. So high-quality assets at a discount to NAV, optimally recycling our capital. And of course, last but not least, we're investing in a business that we think is highly cash generative. The recent announcement from Grindrod proposed that 30% of net income will be distributed back to shareholders through share buybacks or dividends. We calculate that to be equal to roughly 16% annualized yield on our purchase price of $18. Next page, please. Singapore domiciled company, South Africa office and NASDAQ listed as well as Johannesburg. It's an international company with a high-quality reputation in Japan. Country and shipping community where Taylor Maritime is also heavily invested in many ways. So the alignment of interest here are compelling. Market cap of Grindrod is about $290 million as of last week, with an NAV, in our opinion, significantly higher than that. 16% yield based on their Q3 dividend based on the 18% purchase price. The company originated in South Africa and has offices in Singapore, where the headquarters are, Japan, London and other key shipping hubs. They've been involved in various shipping subsectors for more than 100 years. They're a really high-quality name, with high-quality team of management and a great Board with, as I said earlier, an alignment of interests in terms of debt, risk management, dividend policy and also fleet management. Next slide, please. When it came to rationalizing this deal, we wanted to focus on 3 core items, the quality of the fleet, mostly Japanese. They have 7 chartered in ships. We'll come on to the justification for them being value-add shortly. Very high returns in terms of the fact that they're generating a lot of cash even with an $18 share price, we believe that the fleet is generating at least a 40% annualized yield. Some research analysts believe the yield is even higher. At $18 a share, the dividend yield is 16% annualized. So the deal is accretive to TMI's own dividend. This deal does not affect our ability to pay a dividend or even an extraordinary dividend, and, in fact, we believe, could be accretive towards those 2 things. We do think it's the right time in the cycle. Yards are filled for the next few years. There's limited availability beyond that for Handys. And we feel that the shortage of ships in the next few years for contracted deliveries is not sufficient to catch up with the demand, and there will be a shortage of ships. So we feel that we have at least 3 years of runway, certainly 2 years to 3 years of visibility. And of course, we expect the good market to continue during that time. That's not to say we're expecting $40,000 to $50,000 a market. We don't need such a high market for this deal to make sense or for TMIs own investments to make sense. So we feel comfortable around the timing as well. From a capital recycling point of view, the third thing we focused on, we sold 2 noncore Chinese ships for about 100% IRRs. We made a profit of about $20 million on those ships, and we're using that capital and recycling it very quickly to acquire even more high-quality vessels at a greater discount to NAV, so exiting at a premium and reinvesting very efficiently at discount. The value arbitrage we've structured selling these 2 ships, in return, we're getting the equivalent of 5.65 ships. That sort of a deal is simply not available anywhere else in the market, public or private. And as such, we felt, again, it was compelling. For a value of about $127 million, we're investing only $80 million. We're recycling $42.8 million of capital from the disposal of the 2 ships, along with cash from our balance sheet and drawings from our revolving credit facility from Nordea and SEB into a 22.6% interest in 25 ships. So if you turn to the next page, please, the fleet list, it's Slide 6, you'll see that the fleet is highly complementary to us. 15 Handys, except for the 4 J&S Chinese-built ships. They've got a young fleet age both at Handys and Supers and Ultras. They've got 1 MR tanker, which is on strong charter, highly profitable. And so again, this fleet is of a quality that is complementary to us. Next page, please. So talking about the 7 chartered in ships the company has. They've been chartered in at a low breakeven, compliments to the management team at Grindrod for negotiating those contracts. They have purchase options on 5 of them. The last ship where they exercised their purchase option, they exercised at $23.5 million compared to a plausible valuation of about $30 million. If you make conservative estimates on the valuation of those purchase options, it's accretive to the NAV and in fact, significantly higher than where some analysts have their NAVs. And as such, that is just -- that's a bonus value there on top of what we think is already a fantastic deal. Next page, please. So the key takeaways from this investment and our presentation, which is about to come to an end, we've invested in high-quality assets. We've invested at a huge discount to NAV. We've got 2 to 3 years at least of runway to derisk the investment, return shareholder capital, deleverage our position. It's consistent with our strategy of optimal recycling of capital. I appreciate this is a bit left field, but the reality is it's a great investment, the mathematics stack up, and we are confident in the management team and the Board. I've worked personally with several members of the management team over the last 10 years. I get on very well with them. I think their approach towards risk and chartering strategy and leverage is aligned with ours. The company has 20% net debt, and we'll have the ability to significantly reduce that if the Board so chooses in the coming year. And the business is obviously highly cash generative. The management did a fantastic team -- teamwork or job in positioning the fleet to benefit significantly from the strong earnings in Q3 that were generated through the strong market. So what I would like you to go away with here today is we've invested in high-quality assets at a discount to NAV, 2- to 3-year runway. We've recycled capital very efficiently. We're earning from day 1, and we're invested in a business where there's a strong alignment between the Board and the management in terms of our approach to shipping as well as being a highly cash-generative business. So to that end, thank you very much for listening. And I think, Ali, your intention was to take some questions.

[Operator Instructions] So we have a first question from Marcus Jeff. What is the discount on the acquisition price to your estimates of the NAV?

At least 30%.

Thank you. [Operator Instructions] We've got another question. If you could possibly let me know your institution name, from Peter, that would be kind? We've got a question from Peter at Chocolate Asset Management. The question is, could this lead to a full buyout of the company?

There are obviously lots of -- hi Peter, first of all, and thank you for being here. There are obviously lots of possibilities that could happen. For the time being, I'd like to underline that we like this investment on a stand-alone basis. It stacks up both commercially as well as mathematically we would entertain any possibility. But for the time being, the company is being run by the management and the Board. And we're going to leave it there for the time being. If those discussions should arise then, of course, we'll have them, and we'll do whatever is best for both TMI shareholders and the shareholders of Grindrod or the Board of Grindrod I'm sure will want to do that. But for the time being, it's a great investment on its own.

We've got another question this time relating to the dividend. This is from Elaine Schuster from Signal Asset Management. And the question is, just what are your thoughts on the dividend policy?

Sorry, could you repeat that, Ali, I apologize my friend. What are our...?

What are your thoughts on the dividend policy?

Well, as I said, the business is highly cash generative, and they did declare a dividend in Q3. They -- in their policy release in Q3 results, they did state that they plan on distributing 30% to shareholders through either share buybacks or through dividends. So we would expect the Board to continue with their dividend policy, certainly for the foreseeable future. They're generating a lot of cash. And the very fact that companies like TMI are looking further afield than just the physical market for acquisitions is a sign that it's harder and harder to find quality assets to invest in, in the open market. And as such, the hope would be that excess cash would be returned as per their stated policy. If you -- just one thing to add would be, as per listing rules, if we are to mark-to-market -- if we were to mark-to-market the investment and the Grindrod share price doesn't move, you're looking at about a $14 million mark-to-market loss between what we've paid and where the share price is. If we believe in the company policy of distributing about 30%, we translate that into a 16% dividend. A 16% dividend on our investment is about $12.5 million. So you have very limited risk in that position, which translates to significantly less than a $0.01 mark-to-market loss in the TMI share.

We've got another question from Gavin Rabbolini this time, which is, what is your limitations to buying a larger stake?

Well, in terms of listing rules, once you hit 30%, you're required to make a mandatory offer. But as I've said earlier, this investment stacks up very nicely on its own feet. So any future discussions with the Board, I'm afraid we'll have to -- will depend on how the Board feel about our investments and where they want to take the discussions further. But we're very happy to sit as passive investors in a company that we think will generate a lot of value in the coming years with a high-quality fleet out of an acquisition price that we think is highly attractive and certainly a significant discount to NAV.

We have another question from Ian at RN Funds. What's your thoughts as to why the market values of Grindrod at its current levels, which seem compared -- low compared to your cash yield and NAV?

Which seems low compared to our cash yield and NAV? Sorry, can you repeat that? I'm just...?

Yes, sorry. What are your thoughts about the current market value of Grindrod, which seems low compared to its cash yield and NAV?

Okay. I think that the -- I think the earnings power of GrindRod has been significant and may not have been recognized -- And I think I would -- I have no inside information whatsoever, of course. But our in-house estimates are positive in terms of what we expect the Q4 results to look like. And therefore, we think there's significant upside in the share price even at $18. This is a highly compelling investment. There are a lot of shipping companies listed in the U.S. This is one of the smaller ones. And as such, the lack of liquidity and the fact that it's listed in Jobo where there's very little liquidity, are reflected in the share price. So as the company generates additional cash and the value of the company increases, we would expect that liquidity issue to be unlocked and would be reflected in a healthier share price.

We've got another question from Pete Benevose asking, who the other major shareholders of Grindrod are?