Grindrod’s heavy investment in good times pays off handsomely, ends reliance on volatile shipping cycle

We KZN lads never really leave the province. No matter how much they might disappoint, we keep supporting the Sharks and

Ivan Clark: While he was CEO started the Great Transformation of Grindrod. Ten years ago 90% profits from shipping; now almost none.
Ivan Clark: While CEO, started the Great Transformation of Grindrod. Ten years ago 90% profits from shipping; in 2012 shipping lost money, but group still flourished.

keep an eye out for the scoresheets of the Dolphins. And when a KZN-bred racehorse does well it usually has a few of our Rand behind it. Similarly with the province’s few major listed businesses. Aspen’s success is a source of great pride for those from the region. Ditto sugar group Tongaat Hulett. Grindrod is increasingly being added to that list.

Transformed through a strategy first adopted under the watchful eye of then CEO and now deputy chairman Ivan Clark, Grindrod is no longer the cyclical nightmare whose profits – and share price – swung wildly. As CEO Alan Olivier told me during the group’s results interview yesterday, during the last great shipping boom Grindrod put the super profits to advantage, building a R600m a year profit base in Freight Services and boosting its Financial Services operations into a R100m profit operation.

Investors love the story, pushing Grindrod’s share price up 7% at one point after the interim results were released yesterday, before profit taking saw it ease back to a still healthy 4% gain in the day. I was concerned at the decision to increase the interim dividend 14% at a time when it needs to service a far bigger base of issued shares following Remgro’s R2bn investment two years ago. That means this year’s interim dividend outflow was R120m compared with R62m the year before. Especially as operating cash flow had dropped. But Olivier is confident that plenty of capital will be unlocked through the restructuring of the complex Trading division, so my mind was put at ease. As should those of investors.

There’s plenty of upside in Grindrod. It has a large chink of capital still invested in the Shipping side. Olivier says there are signs of life there as the global economy starts to improve. With the rest of the group performing strongly, it’s a lovely potential booster that’s not been built into the share price. Yet. – AH 

To watch the video from our interview on CNBC PowerLunch click here.

ALEC HOGG: Grindrod has achieved a 29% improvement in its first half headline earnings per share. It’s bumped its dividend up to 20 cents. That’s a 14% improvement. The market loved the numbers, the shares are 7% higher. Alan Olivier, Chief Executive of Grindrod is here with us in the studio. 7% improvement on your market cap when you’re already a R14.5bn business; that’s quite some buying.

ALAN OLIVIER: Certainly, it is.

ALEC HOGG: Did you expect this kind of a positive reaction or have you not been managing expectations as well as you should?

ALAN OLIVIER: I try not to manage expectations. We’ve been working on a strategy for a long time now, and it’s slowly coming into play. The capacity is being added which we’re filling. The shipping market has been bouncing along the bottom for a while and hopefully there’s some light at the end of the shipping tunnel. There’s a lot happening but I don’t tend to watch the share price. The market deals with that. From my point of view it’s all about getting the business right and doing things properly.

ALEC HOGG: Over the last ten years, what has happened to the share of your bottom-line profit from shipping versus others?

ALAN OLIVIER: Well, we’ve gone from a position where shipping generated 90% of the earnings, to this year where it has produced some but last year it didn’t produce any. It was actually a loss last year. We’ve got the freight service business producing significant profits as well as the bank producing some quite nice profits – it’s a total shift

ALEC HOGG: Who takes the credit for that?

ALAN OLIVIER: There’s a good management team in place. We’ve changed that team a lot and we’ve added a lot of strength to the team, and we are focused. We’re focused on our rail developments, our port developments, on the terminals and also the shipping. We just keep trying to do what we do best.

ALEC HOGG: Lots of company management teams can see things are changing but they don’t have the stomach, they don’t have the grit to do what you guys have done. In the last ten years that’s an incredible transformation. What triggered it? What personalities or what thought processes went into Grindrod that made sure you could take those difficult steps?

ALAN OLIVIER: I think it all started at the peak of the shipping cycle where we decided that we were at the peak, that we needed to take some money off the table. We sold ships, made some very good profit out of selling ships. All through that cycle, where shipping was doing really well, we started banking some of that into the ports, terminals and rail business and a little bit into the trading business. The reason for that is that we know shipping markets are cyclical. We knew that they were becoming overheated. We knew that pricing was too high and therefore we withdrew a bit from the market. We reduced our position, but we always believed that the commodity market would stay intact – that there would continue to be demand. We also believed that Africa would see demand for infrastructure. And yes, it was a bet, but a fairly educated bet at the time. We could see the problems in infrastructure. We could see commodities couldn’t get to market and we were fortunate that we were able to position ourselves, particularly in a place like Maputo, at a very low point in the market, a very low cost to entry. It’s been a matter of hanging in, investing time, grit and some equity into turning the business.

ALEC HOGG: Investors are now, certainly from today’s reaction and the explanation to the numbers, is starting to believe. Remgro is a significant shareholder of yours and I just wonder a little bit on the downside here. Your operating cash flow; if you take the dividend you paid this year – because you’ve got all these additional shares – you paid out a big percentage of operating cash. In fact in your numbers you say there was a net outflow of R58m for the period. Was there ever a temptation – because you’ve got so many more shares now to service – to perhaps not keep your dividend at these levels?

ALAN OLIVIER: I think the cash generated from operations is reasonable. There has been a little bit of investing – quite a lot of investing in working capital more than anything else. But we’re looking at restructuring the trading businesses. You always tend, when you come to a reporting period, to think about what hasn’t worked rather than what has worked. And yes, there are things that haven’t worked and for a long time now, we’ve been trying to turn, particularly our Agri-trading business. It hasn’t really fired for the last two years. We’ve brought new management in. We’ve refocused it. We’ve cleared out a lot of the prior ills and right now we’re working very hard on restructuring and refocusing that business, ensuring that it’s part of the total integrated operation that we have and that it’s well-positioned strategically to actually perform, going forward. So I think that’s part of it. From a cash point of view; if we are able to achieve that, it actually releases a lot of cash off that balance sheet.

ALEC HOGG: So there was no problem with paying the dividend in the context of what you’re doing in the business?

ALAN OLIVIER: I don’t think there was any concern around the cash. I think if you look longer term with what we have in the pipeline in terms of developing Maputo Port – the coal and magma-type terminal – the developments in Richard’s Bay, the Coega tank terminal, our own tank terminals which we’ve now sold into Kulula Oil Tanking, Kulula in Durban and in Cape Town and then the rail infrastructure developments. There’s this offer we’ve made for Racec. All of that requires capital and we’re going to have to watch the balance sheet very carefully going forward because the infrastructure projects absorb a lot of equity and they absorb a lot of balance sheet, so we have to manage the balance sheets quite carefully.

ALEC HOGG: But presumably, Remgro is still sitting with a lot of cash in its balance sheet.

ALAN OLIVIER: One hopes so.

ALEC HOGG: If you really needed capital would you knock on their doors?

ALAN OLIVIER: Absolutely.

ALEC HOGG:  They’re good shareholders?

ALAN OLIVIER: I think Remgro are excellent shareholders. We did this deal a little over two years ago. They invested over R2bn. Hopefully we are rewarding them for their faith in management and in our strategy. But we see things from them that we haven’t seen before -that we wouldn’t have seen before, and we can actually look at new projects knowing that we’ve got substantial shareholders behind us. If the right project does come along we can certainly entertain it.

ALEC HOGG: Exciting days ahead. The second half of the financial year; expect another 29%?

ALAN OLIVIER: That might be a bit of a tall one, but we’re certainly expecting growth. We’re well-positioned for growth. We’ve got a few things in the pipeline that could add to the bottom-line for the second half. There are also a few challenges out there, there always are. I’ve spoken about the Trading one. We’ve got to fix that on the second half. Some of our logistics business, particularly the fuel business and the automotive transport businesses, are ones that we have been slow in turning, but hopefully we get into a position now where we can turn them.

ALEC HOGG: Well, Alan. You guys are obviously doing a lot of good thinking down in Durban. Thank you for coming into the Power Lunch studio today. That was Alan Olivier who is the Chief Executive of Grindrod.

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