Grindrod Shipping Is A Buy: The Stock Is Worth $23 (NASDAQ:GRIN)

Grindrod Shipping (GRIN) is one of the leading international dry bulk shipping companies that is based in Singapore. I am bullish on GRIN due to its financial statements analysis, my stock valuations, and my estimations on the company’s TCE rates. Using the Comparable Company Analysis (CCA), I estimate a fair value of $23 for the stock. Furthermore, I used the company’s TCE per day data, its fleet, and the Baltic Dry Index data, to estimate the company’s 4Q 2021 TCE per day. I estimate a fourth quarter TCE per day of $27,649 for GRIN. In a word, the stock is a Buy.

3Q 2021 results and implications

On November 17, 2021, the company announced that it would pay a quarterly cash dividend of $0.72 per ordinary share to all shareholders. It was the first dividend payment and contained about 30% of the company’s net income for 3Q 2021. The third quarter total revenue was $135.1 million, and compared with 3Q 2020, the total revenue increased more than 150%. Moreover, its adjusted EBITDA increased to $69.0 million in 3Q 2021, compared to $40.7 million in 2Q 2021. Through the nine months ended September 30, 2021, the company repurchased a combined total of 125,338 shares at an average price of $13.16 per share. In 3Q 2021, the company announced a TCE per day of $33,102 for handysize vessels, and a TCE per day of $33,102 for supramax/ultramax vessels. Grindrod Shipping’s fleet is six years old on average, which indicates that the fleet contains approximately 70% “Eco” vessels and is among the youngest in the industry.

Estimation of the company’s 4Q 2021 TCE rate

Due to the robust market conditions in the first nine months of 2021, the TCE revenue of Grindrod Shipping increased to $366,388, compared with a TCE revenue of $221,088 in the same period last year, up 65.7%. Also, GRIN’s TCE revenue for 3Q 2021 increased to $135,141, compared with a TCE revenue of $53,943 in the third quarter of 2020, up 150%. Furthermore, Grindrod Shipping expanded its owned fleet after the company completely acquired the IVS Bulk subsidiary. Using GRIN’s TCE per day data, the number of its handysize and supramax/ultramax vessels, and the Baltic Dry Index data, I estimated the company’s 4Q 2021 TCE per day.

Figure 1 shows the Baltic Dry Index from July 2017 to January 2022. From 4 January 2021 to 4 October 2021, the Baltic Dry Index increased from 1606 to 5526, up 244%. The significant growth of the Baltic Dry Index was mainly due to the global economic recovery after COVID-19 vaccination started.

Figure 1 – The Baltic Dry Index

In my recent article on Golden Ocean Group (GOGL), “Golden Ocean Group is worth $10 per share: The stock is a Hold“, I showed how the Baltic Dry Index and TCE rates are correlated. Based on this correlation, I estimate a 4Q 2021 TCE per day of $27,649 for Grindrod Shipping, 12.7% below the company’s estimation (see Table 1).

Table 1 – GRIN’s quarterly TCE per day (the numbers highlighted in Yellow are author’s estimation based on the company’s financial reports)

You may be curious why my TCE per day estimation is 12.7% below the company’s estimate. In its financial report for the three months and nine months ended 30 September 2021, Grindrod Shipping announced a 4Q 2021 TCE per day of $30,265 for handysize vessels and a TCE per day of $33,102 for supramax/ultramax vessels. However, from 15 Nov 2021 to 24 Dec 2021, the Baltic Dry Index dropped from 2759 to 2021, down 19.64%.

GRIN performance outlook

Besides its surging total equity by 13% to $289M since 2020, GRIN has decreased its net debt by 25% to 215.7M (see Table 2). It shows that the company has generated or retained earnings. Also, the company’s total cash and short-term investments have massively boosted by 90% to 78.5M since 2020. Its capital structure implies that the company has the ability to return cash to shareholders by paying dividends and buying back shares. Moreover, the company is able to do debt and equity financing, which may absorb risks of surprise losses. Thus, the capital structure separates GRIN from others in the shipping industry.

Table 2 – Grindrod Shipping Capital Structure

Figure 2 shows that the company’s current and cash ratios have increased to 1.290 and 0.771, respectively. These liquidity ratios indicate that GRIN’s liquidity is strong, thereby making their financial position very healthy and hence well-positioned to boost their future dividends. Looking ahead, the company’s capital structure and increasing cash generation ensure that there is less probability of liquidity issues.

Figure 2- GRIN’s current and cash ratios

As Figure 3 indicates, Seeking Alpha Quant Rating History indicates that during the last year, almost all analysts were BUY on this stock. Also, Figure 4 shows the average price target is $25.5, which is very close to my fair value estimation of $23.40 per share.

Figure 3- Seeking Alpha Quant Rating History

Seeking Alpha

Figure 4 – Average Price Target

Valuation

Using Comparable Company Analysis, I evaluated that GRIN stock is relatively attractive and undervalued. Comparing Grindrod Shipping with other peer competitors – Dorian (NYSE:LPG), Eagle Bulk Shipping (NASDAQ:EGLE), Golden Ocean Group and Safe Bulkers (NYSE:SB) – and using the CCA method, I estimate that the stock’s fair value is about $23. This method reflects the real-market data and is an appropriate way of analyzing GRIN since the company is relatively stable. However, choosing a set of comparable companies is the first and most crucial step in the CCA method. In doing so, I considered different factors like size, industry classifications, and profitability. Factors like revenues and assets were considered to determine the competitor’s size. Therefore, I chose competitors with relatively similar profit margins. Data was gathered from the most recent quarterly and TTM data.

Analyzing other companies’ ratios and comparing them with GRIN’s, we can figure out that Grindrod Shipping looks relatively attractive and is undervalued. The company’s P/E ratio is 5.9x which is 19% higher than the peer’s average. It could be a sign of higher future growth expectations (see Figure 5 and Figure 6).

Figure 5 – The peers’ EV to Revenue

Figure 6 – The peers’ PE ratio

Moreover, the company’s EV/Sales ratio is 1.102, about 57% lower than the peer’s average. Despite observing drops in the company’s per-share price recently, using the CCA method, I investigate that GRIN stock is potentially undervalued and has more than 40% upside potential – a fair value of $23.40 (see Table 3). Besides GRIN, I have done some analysis on the peer companies. Safe Bulkers’ EV/EBIT amount is 5.40x, which is 23% lower than the peer’s average. Generally speaking, a company with an EV/EBIT value below 10 is healthy. Also, Eagle Bulk Shipping’s EV/EBITDA is 5.44x, which is 11% higher than the group’s average. It implies that EGLE is potentially overvalued.

Table 3 – GRIN stock valuation based on CCA method (as of 29 January 2022)

Apart from the CCA method, I used Discounted Cash Flow (DCF) model to estimate Grindrod Shipping’s fair value (see Table 4). DCF estimates that GRIN is worth $15.8, which I think is unrealistic. DCF contains quite conservative inputs, and the main drawback is its overconfidence about future cash flows and high sensitivity to changes in assumptions. In a nutshell, I believe that the CCA’s result is more realistic.

Table 4 – GRIN stock valuation based on DCF method (as of 29 January 2022)

In Table 5, I estimate the fair price for the peer companies as well. Based on the provided details, the peers’ stock price valuation is supporting my observations. It shows Safe Bulkers has a 24.81% upside potential, while Eagle Bulk Shipping has about 60% downside potential. Among peers, Grindrod Shipping Holdings has the highest upside potential – about 41%.

Table 5 – Peer stock valuations (as of January 29, 2022)

One reason that GRIN is not trading at its fair price is that the company is very young in the US stock market. Grindrod Shipping joined the Nasdaq market in 2018. “We were pleased to complete the company’s first capital markets secondary offering since our spin-off and listing in 2018. The company did not sell any shares in the offering, but it has benefited from increased daily trading liquidity, has a stronger US institutional shareholder base, and increased market float in the US, which has now reached over 37% of shares outstanding, as of October 2021”, the CEO of the company said. The management is still trying to increase its daily trading liquidity, US institutional shareholder base, and market float in the US. Reaching these goals, the company’s potential to obtain its fair value may increase.

Also, comparing GRIN’s TCE rates with GOGL’s TCE rates, implies that GRIN is a Buy stock. In my recent article on Golden Ocean, I investigated that GOGL is a Hold at prices around $10. GOGL has been trading in the US stock market since 1997, indicating that it is a well-known stock in the US. Thus, the recent rise in Golden Ocean’s TCE rates was well-reflected in its market price. Therefore, since GRIN is still very young in the Nasdaq market, it may take time to reach its fair value price. Figure 7 shows the quarterly Baltic Dry Index, GRIN’s TCE rates, and GOGL’s TCE rates. Both companies’ TCE rates moved alongside through 2021. GOGL is now trading at its fair value price. GRIN, too, has the potential to grow and reach its fair value of $23 per share price.

Figure 7 – Quarterly Baltic Dry Index, GRIN’s TCE rates, and GOGL’s TCE rates

Risks

Grindrod Shipping has benefited from chartering-in vessels in recent quarters. The revenues generated from chartered-in vessels at attractive rates pushed the company toward exercising its option to extend the charter-in period of the 2015-built supramax bulk carrier IVS Pinehurst for 11 to 13 months at $10,000 per day. Also, the company exercised its option to extend the charter-in period of the 2014-built supramax bulk carrier IVS Naruo for 12 months at $13,000 per day (see figure 8). Exercising these options makes the company vulnerable to unexpected events, like the future potential waves of COVID-19 and the environmental restrictions. COVID-19 future waves and subsequent environmental regulations may slow the global economic recovery and could decrease the dry bulk commodities demand.

Figure 8 – Grindrod Shipping’s chartered-in vessels

Figure 9 shows Grindrod Shipping fleet. It shows that 7 vessels out of its 16 supramax/ultramax bulk carriers are chartered-in vessels. The chartered-in strategy has been beneficial for the company as Grindrod Shipping was able to charter these 7 vessels at low levels. However, the chartering-in strategy may cause the company to lose control over its costs caused by unprecedented events like the pandemic. Also, the jump of the Baltic Dry Index in the first 9 months of 2021 caused Grindrod Shipping’s earnings to increase significantly; however, from October 2021, the Baltic Dry Index has dropped around 75%. If the Baltic Dry Index remains in the downside trend, GRIN’s TCE revenue drops, making its fair value decrease. Thus, make sure you keep an eye on the Baltic Dry Index and the dry bulk commodities demand.

Figure 9 – Grindrod Shipping’s Fleet

Conclusion

Grindrod Shipping took advantage of the market conditions in the first nine months of 2021. Based on my calculations, the company’s TCE per day increased from $8,772 in 3Q 2020 to $27,927 in 3Q 2021. I estimate the stock is worth $23 per share, implying a 40% upside potential. If you are on board, keep an eye on the Baltic Dry Index, which is positively correlated with the company’s TCE revenues.