Grindrod: Thys Visser’s seed has grown shipper into a mighty business

In September 2011, I had a joint interview with then CEO of Remgro Thys Visser and Grindrod's newly appointed boss, Alan Olivier. Remgro had just agreed to underwrite a R2bn capital injection into the KZN-based group and Visser saw it as the first step in a partnership he was keen to forge in the years to come. Seven months later Visser passed away after a car accident, but the seed he planted has flourished. Remgro now owns more than 20% of Grindrod, supporting over R5bn in capital raising by the one-time highly cyclical shipping business. Other shareholders have benefitted from the Remgro involvement – the share price has virtually doubled in the last three years with the market cap now a sizeable R18bn. Olivier visited the CNBC Africa Power Lunch studio today to provide an update on financial results for the half-year to end June. – AH

ALEC HOGG:  Joining us to have a look at Grindrod's first-half results is Alan Olivier Chief Executive of Grindrod – an R18bn company now.  Alan, it's a different ballgame for you guys.  You've raised a lot of capital.  You've made some big bets. You've transformed into a sizeable operation – pretty much all of it happening under your watch.

ALAN OLIVIER:  Clearly, from a profitability point of view, when we were a shipping company and still developing the infrastructure side of the business, we were making a lot more money in a very healthy shipping market.  That hasn't been the case for some years.  Shipping earnings have been fairly poor, but we've been focusing on the other side of the business.  We've been growing it.  We've been investing and it has grown, but it is a capital-intensive business.  We need the balance sheet to be able to do that and we need the long-term strategic shareholders to be able to support it as well.

GUGULETHU MFUPHI:  A lot of that capital is going to Mozambique, as we understand, with infrastructure developments there.

ALAN OLIVIER:  Yes.  Initially, we got in early, in Mozambique.  We've been able to develop that facility from nothing, essentially: from a loss-making facility into the facilities that they are today.  We have invested in that, but we are looking at other areas as well, into Zimbabwe and Zambian rail network – looking to support that Zambian copper belt and places like that.  We're up in Sierra Leone, so we're looking in the region, more than just…  Obviously, there are many opportunities in Mozambique with oil and gas coming on stream as well.

ALEC HOGG:  Before we go into the results themselves, Sierra Leone: are you exposed at all, to Ebola?

ALAN OLIVIER:  Well, we have people there.  We don't have any current issues.  Clearly, health is a big issue.  We have to manage it very carefully, but we have 34 locomotives in Sierra Leone.  They're all operating and we have to maintain them, so it's really a foresight there – maintaining the locomotives that we have there.

ALEC HOGG:  Getting back to the numbers, headline earnings down by one-third.  What happened?

ALAN OLIVIER:  Many things happened.  Firstly, last year, on the shipping side of the business, we had a reasonable profit in the first half of last year, but that came largely, from the cancellation of a number of long-term charters we had where the Japanese owners wanted to get out of them, so they settled with us.  Quite a big part of the shipping profit in the first half of last year came from that.  We didn't have that in the first half of this year, so that's part of the reason.  In addition, in the first half of last year – not through last year – we had good earnings from our locomotive construction business.  We had a very productive year, last year, from a sale point of view.  In the first half of this year, sales have been slow.  We had one order postponed.  Another cancelled on us.  Those locomotives that we build are being used, but they weren't sold.  They're now part of our lease operation and they're out in the market, operating.

ALEC HOGG:  Locomotives.  Is this like the old-style coal-fired puffer?

ALAN OLIVIER:  Not quite.  Diesel locomotives, but they're good diesel locomotives.  We built 60 or 70 of them over the last three or four years and they're operating, as I've said, as far afield as Sierra Leone, DRC, Congo, Tanzania, and South Africa.  There's a number of them out there and they're operating very well.

ALEC HOGG:  Did you tender for the Transnet contract?

ALAN OLIVIER:  No, we didn't tender for it.  Why didn't we tender for it?  I was asked that question this morning.  Those orders that Transnet placed are big orders.  Our locomotive facility has the capacity to build 100 locomotives per year, but we don't intend building 100 locomotives per year because you'll get a contract.  You'll build 100 and then tomorrow, you have nothing, but you've had to scale up for it.  We want to build 30 to 40 locomotives per year and have that sustainable if we can, so we didn't tender for that contract, but we're hopeful that those contracts have been awarded to a number of the big players.  They have to establish operations in South Africa because they have to build a lot of that and they have a lot of local content that has to go into those buys in terms of the contractual…  Well, their contractual terms require that.  Maybe there's some opportunity for us to assist in that.

GUGULETHU MFUPHI:  Remgro is a very significant shareholder as well.  The support that you're getting from them, is that changing the way you're viewing the strategy now?

ALAN OLIVIER:  Yes, I think it's very important – as I said earlier – to have the appropriate shareholders in a business like ours.  It's not a short-term business.  It's a long-term business, building infrastructure, getting concessions, getting the contracts in place, and the support from people like Transnet etcetera whom we work very closely with, is absolutely critical to this development.  They aren't things where you can just turn a switch, and decide to build tomorrow.  They are long-term businesses and this infrastructure…  They're 30-year infrastructure types of deals, so that's important.  Having shareholders that (1) understand that and (2) are prepared to invest in that strategy, is very important, so somebody like Remgro is very important for us and for the stability of our business and to give us the chance to implement our plan.  That's been absolutely critical over the past few years.

ALEC HOGG:  How much have you raised?

ALAN OLIVIER:  Initially, when they came into the business, we raised about R2bn then and now we've done the additional raise where we've raised R3bn of cash, but of the black empowerment businesses that we had at an operating level, of which we had about 11 of them, we bought out between 75 and 50 percent shareholding in those business.  We've also moved the shareholdings, so they've reinvested up at the top, so they've come back in at the top.  We've therefore, effectively issued shares to buy those businesses, so that consortium now has eight-point-four percent of Grindrod at the top.  What it allows us to do is really, to rationalise our business down where you have 11 little companies and board meeting etcetera, it's not an efficient structure.  We've therefore been able to get driver efficiencies there and restructure those businesses.

ALEC HOGG:  Just to close off with Alan, looking ahead, is shipping still the swing factor for you?

ALAN OLIVIER:  When you have a business where you have R3bn or R4bn invested in an asset that's not making any money, it's very difficult to get the kind of returns you want to, for your shareholders.  Traditionally, yes, it did do very well.  It gave us the capital initially, to be able to invest in the infrastructure business.  This market is going to turn eventually.  It did start turning at the end of last year.  The first quarter of this year on the dry cargo side was okay, but then we had a very poor second quarter.  The market came off substantially and that wasn't due to an oversupply or a lack of growth and demand.  It was, basically, due to the Indonesians putting up a ban on exporting of un-beneficiated raw material.  That just messed the shipping market up until re-trade lanes could be re-established.

ALEC HOGG:  It sounds like you'd have a political decision done in Indonesia, which they have reversed, haven't they?

ALAN OLIVIER:  Well, a little bit, but also, the Chinese and others have been able to source that commodity elsewhere, and that's starting to work against us.

ALEC HOGG:  Something like that can affect a company listed on the JSE. 

ALAN OLIVIER:  Absolutely.

ALEC HOGG:  Alan Olivier is the Chief Executive of Grindrod, one of the rising industrial giants here in South Africa – R18bn market cap.