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- It Is The Right Time To Buy Grindrod Shipping
From mid-February to mid-May, Grindrod Shipping Holdings Ltd. (NASDAQ:GRIN) stock price, on average, has been around $25. What is next? GRIN is worth $35, meaning more than 40% upside potential (if you buy the stock at prices around $25). During the last month, the Dry Bulk Index increased by 50%. Also, the pandemic lockdowns and heavy rains in China will end eventually. I am bullish on the stock, as I expect GRIN will face strong demand for its Japanese-built eco fleet soon.
2021 financial results
According to GRIN’s 2021 audited financial statements, the company reported a 2021 total revenue of $455.9 million, compared with a 2020 total revenue of $210.7 million. The company’s announced 2021 profit of $118.9 million, or $5.94 per diluted share, compared to a 2020 loss of $35 million, or $2.05 per diluted share. GRIN’s net cash flows (generated from operating activities) increased from $70.4 million in 2020 to $204.9 million in 2021, up 191%. “Looking ahead, the outlook for the dry bulk sector appears positive,” Martyn Wade, the CEO, commented.
Mentioning healthy demand for minor bulk commodities, supply chain disruptions, and new environmental regulations that come into effect in 2023, Wade expects minimum ordering of new ships and fleet growth in the near term. “In this environment, Grindrod Shipping is strategically positioned to benefit not only from strong sector fundamental but also from the efficiency and competitiveness of our modern, Japanese built eco fleet,” Wade said.
Grindrod has 15 owned handysize vessels, 9 owned supramax/ultramax vessels, and 7 chartered-in supramax/ultramax vessels. In 2021, the company’s total revenues from its handysize vessels and supramax/ultramax vessels were $158 million and $292 million, respectively. Also, GRIN’s handysize vessels and supramax/ultramax vessels’ costs of sales were $84 million and $196 million, respectively. The company reported a 2021 gross profit of $74 million for its handysize vessels and a gross profit of $96 million for its supramax/ultramax vessels. The gross margin of GRIN’s handysize vessels and supramax/ultramax vessels in 2021 were 47% and 33%, respectively.
The future is bright
Figure 1 shows dry time charter estimates on 13 April 2022 (up) and 11 May 2022 (down). We can see that compared with 13 April 2022, numbers have increased on 11 May 2022. Figure 2 shows that recently, bulk carrier freight rates for iron ore and coal have increased. The implication of Figures 1 and 2 is that in the last month, the demand for dry bulk commodities has increased.
Figure 1 – Dry time charter estimates
Figure 2 – Bulk carrier freight rates
A report by Metal Market Index on 16 May 2022 shows that compared with April 2022, steelmakers in China have increased their production by 2.16%. Figure 3 shows that from the beginning of March 2022 to the end of April 2022, Chinese steel mill profitability dropped. On the other hand, since the beginning of May, Chinese still profitability has been increasing. Also, Figure 3 shows that recently, Chinese still consumption and production have increased. However, two things are still suppressing China’s steel production and consumption: the COVID-19 pandemic and heavy rains in south China; both will eventually end in the next few months.
Already, the demand for dry bulk carriers has jumped. From 11 April 2022 to 16 Amy 2022, the Dry Bulk Index increased by 52%. When the pandemic lockdowns and heavy rains in China end, the demand for GRIN’s handysize and supramax/ultramax vessels will rise significantly.
Figure 3 – Chinese still profitability, production, and consumption
I have observed Grindrod Shipping Company under the lenses of cash and capital structure to analyze the company’s operating conditions. Grindrod Shipping paid its second-ever dividend payment of $0.72 in March 2022. Doing some detailed analysis indicates that GRIN’s cash flow surged amazingly to $104.24 million in 2021, compared with its amount of $37.9 million at the end of 2020. This cash performance led to a deep drop in its net debt amount. The company’s net debt plunged by over 41% to $141.4 million in 2021 compared with its previous level of $240.5 million at the end of 2020.
Moreover, GRIN’s operating cash jumped by 190% YoY to $204.8 million in 2021. Combined with its capital expenditure’s decline of 86%, GRIN could generate over $204 million of free cash flow at the end of 2021. Thus, Grindrod Shipping’s cash and capital structure represent the company’s ability to pay its shareholders’ dividends in the future and even pay back more debts (see Figure 4).
Figure 4- GRIN’s cash and capital structure
GRIN’s well-performed cash operations and increasing free cash flow have boosted its liquidity in the current and quick ratios. The company’s current ratio is 1.6x, and its quick ratio sat at 1.36x at the end of 2021. Also, compared with some of its competitors, Grindrod Shipping’s current ratio is higher than both the Golden Ocean (GOGL) and Star Bulk (SBLK) companies. SBLK has the highest quick ratio of 1.86x. In one of my previous articles, I analyzed and compared these shipping companies in detail.
In a word, GRIN’s liquidity condition supports the company’s new dividend policy and ensures its ability to absorb future downturn risks (see Figure 5).
Figure 5- GRIN liquidity condition vs. its peers
GRIN stock valuation
I used Competitive Companies Analysis (CCA) to evaluate GRIN stock. Comparing Grindrod Shipping Holdings with other peer competitors and using the CCA method, I estimate that the stock is still undervalued and has around 40% upside potential to reach $35. This method reflects the real-market data and is an appropriate way of analyzing SBLK due to the company’s relative stability. Based on market cap and financial operations, I selected the dry bulk peers and used common key ratios in a CCA method to illustrate the value of similar companies. Apart from GRIN, I have done some analysis on the peer companies. Data was gathered from the most recent quarterly and TTM data (see Table 1).
Table 1- GRIN financial data vs. its peers
Comparing GRIN’s ratios with other peer companies, I observe that the stock is undervalued – GRIN’s P/E ratio is 3.61x, which is in line with the group’s average of 3.54x. Also, the company’s EV/EBIT ratio is 4.35x, which is 22% lower than the peer’s average of 5.61x. Moreover, GRIN’s EV/EBITDA ratio equals 3.83x, which is 15% below the average of 4.54x. These ratios indicate that the company is attractive as a potential investment (see Table 2).
Besides Grindrod Shipping, I have done some analysis on the peer competitors. Golden Ocean’s EV/EBIT is 7.87x, which is about 40% higher than the average. Also, GOGL’s P/E is 5.25x is about 48% higher than the group’s average. Star Bulk’s most ratios are in line with the group’s average. SBLK’s P/E ratio is 4.51x, which is about 27% higher than the average (see Table 2).
Table 2- GRIN stock valuation
It is the right time to buy Grindrod Shipping. As the COVID-19 lockdowns and heavy rains in China end, the country’s iron ore demand will increase. The Dry Bulk Index has already jumped, and GRIN will face strong demand for its vessels. In a word, GRIN is a buy.