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OVERVIEW

The group generated earnings of R435,5 million for the six months ended 30 June 2010 (H1 2009: R483,8 million), down 10% on the corresponding period of the prior year. Headline earnings per share decreased by 10% to 95,4 cents per share (H1 2009: 105,7 cents per share). The decline in earnings and headline earnings per share was primarily due to a stronger Rand/US Dollar exchange rate and no ship sale profits compared to a profit of R152 million in the prior period. However, stronger dry bulk markets and interest earned on cancelled ship newbuilding contracts in H1 2010, reduced the impact.

An interim ordinary dividend of 27 cents per share (H1 2009: 30 cents per share) was declared. Dividend cover has been maintained at 3,5 times in line with historical practice. Return on ordinary shareholders’ funds for the six months was an acceptable 16,2% annualised.

Headline earnings per share 2010 H1 attributable income by division

The Shipping and Trading divisions reported lower earnings for the interim period for the reasons set out above, however, the group continues to benefit from the growth of the Freight Services operations. Despite the impact of internal and external industrial action, good earnings growth was achieved by this division and by Financial Services. Group costs were significantly lower due to the recognition of a once-off BEE cost in the prior period.

2009 H1 attributable income by division Dividends/distribution per share

The group’s balance sheet is sound and although the debt:equity ratio has increased to 18,7%, due to a number of acquisitions by the group, there is still substantial capacity for debt funding to drive expansion of the group’s businesses.

CAPITAL EXPENDITURE AND COMMITMENTS

  Capital  
Description expenditure Capital commitments
  Six Six      
  months months to      
  to June December     Total
R million 2010 2010 2011 2012 commitments
Ships 604 505 640 92 1 237
Property and terminals 48 240 152 392
Vehicles, equipment and software 82 71 2 1 74
  734 816 794 93 1 703
Acquisition of businesses 278 53 17 70
Total 1 012 869 811 93 1 773

Major items of capital expenditure for the period included instalments paid under the group’s newbuilding ship orders, the purchase of ships, the expansion of drybulk terminal capacity, the acquisition of a bunker shipping and trading operation and an investment in a petrochemical road transport company.

CASH FLOW AND BORROWINGS

Cash generated from operations was R392,9 million (H1 2009: R584,2 million). Cash outflows included capital expenditure of R1 012 million and dividends of R166,3 million during the period. This resulted in the net debt position of R258 million at 31 December 2009 increasing to R1 183 million at 30 June 2010 and the net debt:equity ratio rising from 4,4% to 18,7%. The group generated net interest income of R6 million for the period compared to an expense of R73 million in the prior period mainly due to low net debt levels during most of the period, interest earned on cancelled ship newbuilding contracts and the utilisation of US Dollar cash to reduce Rand debt.

The group is confident that it has adequate funding available for all capital commitments through its cash resources, cash generated from operations and existing committed bank facilities.

net cash/debt analysis

SHAREHOLDERS’ EQUITY

Shareholders’ equity increased from R5 738 million at 31 December 2009 to R6 220 million at 30 June 2010 due mainly to retained profits and to the effect of the weaker closing Rand/US Dollar exchange rate.

9 179 348 ordinary shares repurchased by subsidiaries in prior years continue to be held in treasury.

Return on ordinary shareholders’ funds (%) net debt/eBiTda (2010) (times)

MARKET OVERVIEW

The drybulk shipping market experienced a positive first half of the year with the smaller ship sizes in particular benefiting from continuing strong demand from China for a range of commodities. Both the handysize and handymax sectors reached 18 month highs in May before a combination of the World Cup and the early onset of a traditional northern hemisphere summer slowdown caused rates to drop. The same could not be said of the capesize market which, struggling under the weight of a steady stream of newbuildings, was hit by a tightening of Chinese government stimulus measures. The resultant slowdown in iron ore imports caused rates to fall dramatically, which ended the half year at levels not seen since early 2009. Handysize earnings have remained the least affected by the recent decline in the drybulk market which, whilst 30% down from their recent peak, look well underpinned by growing Asian demand for minor bulks. Drybulk asset prices firmed in line with the buoyant market while modest declines in second-hand vessel prices are being seen as spot market rates come under pressure. Newbuilding prices to date continue to gradually increase.

Drybulk rates at the date of preparing this report are:

          Average spot rates
        Three-year    
      One-year time time charter    
    Spot rates charter rates rates H1 2010 H1 2009
    (US$ per day) (US$ per day) (US$ per day) (US$ per day) (US$ per day)
  Handysize 15 015 15 250 14 000 18 834 9 092
  Panamax 23 013 23 500 19 500 30 155 13 985
  Capesize 29 956 28 750 26 000 36 160 35 031
  (Source : Clarksons Research Services Limited)

The tanker shipping market in general, whilst experiencing some volatility, performed better than the last six months of 2009, obtaining support from increasing oil demand as western economies improved. This trend has continued and tanker asset prices across all sectors have increased (10 – 20%) in both newbuildings and second-hand ships since the end of last calendar year. The tanker market still faces a relatively high level of ships on order, however, growing oil demand should absorb most of these deliveries.

Tanker charter rates at the date of preparing this report are:

          Average spot rates
        Three-year    
      One-year time time charter    
    Spot rates charter rates rates H1 2010 H1 2009
    (US$ per day) (US$ per day) (US$ per day) (US$ per day) (US$ per day)
  Medium range  10 180  13 500    14 750 8 304 9 257
  Small * 9 250 * 9 700 * 10 500 9 250 12 500
  (Source: Clarksons Research Services Limited except * which are per management assessment)
(Meaningful chemical tanker rates are not available)

Trading conditions in agricultural products have been difficult as customers tended to buy spot due to market uncertainties, a trend that is expected to continue in the medium-term. At the same time there has been increased competitor activity in the markets.

Bunker fuel prices have been volatile on the back of a similar pattern in crude markets. Nevertheless demand has remained good and there has been significant consolidation in the market.

Metallurgical product markets in the last six months improved, particularly in China. Capacity utilisation improved as steel and alloy producers increased their production to cater for customer restocking. Buyers are now operating more in the spot market and for smaller quantities.

There has been improved demand for containers, vehicles, coal and other bulk commodities.

In the financial sector the first six months of the year were dominated by global financial events, with the problems faced by certain Eurozone countries continuing to impact heavily on the prospects for global economic recovery.

In the South African environment, corporate results are not providing any clear indication of the real state of the economy. The next six months are likely to see some guarded optimism in the corporate sector as the local economy improves which should result in an improved lending and asset management environment.

DIVISIONAL OPERATING REVIEWS

SHIPPING

The Shipping division was relatively active in the first half of 2010, taking delivery of a South African built 4 200 dwt bunker tanker (owned), a 32 000 dwt handysize bulk carrier (owned), a 40 000 dwt products tanker (contracted to purchase in H1 2010), a 47 350 dwt products tanker (chartered) and exercised a purchase option on one of its long-term charters, a 32 400 dwt handysize bulk carrier. It also contracted the purchase of a further 40 000 dwt products carrier, which will be delivered in September 2010. The division concluded the acquisition of Associated Bunkeroil Contractors (ABC), a Rotterdam-based bunker tanker business, which has a fleet of four bunker tankers. The acquisition of ABC saw the group expand its existing bunker tanker business with this investment in one of the world‘s major bunkering ports.

A 16 500 dwt products carrier on order from a yard in China was cancelled due to a breach of the contractual delivery date. A further three shipbuilding contracts for similar ships with the same Chinese yard were cancelled due to a dispute on contractual terms. Instalment refunds and interest totalling US$71 million, secured by refund guarantees, are payable by the shipyard on conclusion of legal proceedings. The division also negotiated the cancellation of a chartered capesize bulk carrier.

The division’s drybulk business performed well during the first half of 2010. The capesize business benefited from the high level of contract cover, which ensured that the extreme market volatility did not have a negative effect. The panamax ships again generated good profits under their fixed income charters and the development of the handymax operating business continues. The handysize ships, which are mainly employed via a pool, generated substantial profits due to low vessel costs.

The tanker business had a challenging period, with chemical tankers earning close to breakeven levels due to the worldwide downturn in chemical and industrial production. The small product tankers earnings reduced due to higher repair and maintenance costs while the medium range products tanker performed well as a result of good contract cover.

The division had significant contract cover during the period with average earnings per day marginally better than average spot rates for the period.

The ship operating activities performed well during the half year. Increasing volumes were achieved in the parcel business which continues to operate efficiently under its formula of market-linked rates. The handmax business was negatively affected by the strengthening drybulk market in the first half of the year. The bunker tanker business performed well, as did the South African-based tanker operating joint venture with a South African partner, Calulo Shipping.

The division’s financial performance is summarised below:

    Bulk carriers Tankers      
  Profit from owned and long-term chartered ships Handysize Panamax Capesize Medium range Small Chemical H1 2010
Total
H1 2009
Total
Growth
%
  Average number of owned/long-term chartered ships 14,2 2,0 3,3 8,9 1,3 4,0 33,7 35,6 (5)
  Average daily revenue (US$) 13 400 21 800 39 200 17 700 10 800 15 900 17 800 16 500 8
  Average daily cost (US$) 7 800 9 400 26 600 15 000 11 700 12 600 12 600 11 800 (7)
  Profit (US$ million) 14,2 4,4 7,5 4,4 (0,2) 0,9 31,2 30,1 4
  (US$ millions)                  
  Profit from ship operating activities             14,4 15,6 (8)
  Profit from ship sales             16,4 (100)
  Overheads/other             (11,7) (14,0) 16
  Funding costs/preference dividends/taxation             (2,6) (9,7) 73
  Foreign exchange             1,8 (1,9) 194
                33,1 36,5 (9)

The Shipping division currently has an owned and long-term chartered fleet of 34 ships which have a market value of R1,4 billion in excess of book value. For H2: 2010, 83% (weighted by revenue) of the ships are contracted out and 40% (weighted by revenue) for 2011. The value of profit contracted is US$30 million for the second half of 2010 and US$35 million for 2011.

A fleet overview, contract cover information and details of the fleet market value calculations are included in the group’s results presentation on the website www.grindrod.co.za.

Outlook

The drybulk market is expected to recover from the summer lows currently being experienced, however, any dramatic upside will probably be capped by the sheer volume of capesize newbuilding deliveries. Asset prices of drybulk ships are likely to remain at close to current levels.

The tanker market is expected to remain at current levels in the short term, improving during the northern hemisphere winter. Asset prices are likely to stabilise at the present levels for both newbuilding and second-hand ships.

The Shipping division is well placed for the remainder of 2010, due to its high level of contractual cover in both the wet and dry markets together with continuing strong demand for commodities which will support the ship operating businesses.

TRADING

Trading increased its presence in Singapore in order to take advantage of new opportunities, products and markets in Asia both in metallurgical and agricultural products. Physical supply of bunker fuels is being further developed particularly in Rotterdam and on the River Thames. Those developments and others in both agricultural and metallurgical areas are a continuation of the division's strategy to embed itself in the supply chain to provide sustainable business going forward.

Prices in most products were somewhat higher and although volumes were only slightly up (6%), overall US Dollar revenue was up by 23% due mainly to a change in the product mix with increased activity in some higher valued products. US Dollar operating margins were slightly reduced by the change in product mix and although US Dollar profits were up 2%, attributable profit in Rand declined 16% because of the stronger average Rand/US Dollar exchange rate.

Outlook

The outlook for trading for the balance of 2010 remains challenging as market conditions continue to be volatile leading to continued customer uncertainty. However, the outlook ahead is very positive across the division’s whole range of commodities with further significant increases in demand expected.

FREIGHT SERVICES

Freight Services reported profits of R103,3 million for the period, an increase of 16% over the equivalent period in 2009. Results were negatively impacted by third party industrial action across most businesses in the segment. In addition, volumes were also affected by limited availability of rail wagons to meet the demand for export capacity at the division’s drybulk terminals. However, a good performance by Intermodal, together with an improved performance from Logistics and recognition of earnings from the Maputo Port, contributed to earnings growth.

Ports and Terminals

The concession for the Port of Maputo was extended for an additional 15 years, with the initial term of the concession now running until 2033, with the option for a 10 year extension thereafter. The extension provides a timeline for the implementation of the port master plan and for sub-concessionaires to undertake additional investment. The immediate expansion plans include the dredging of the port from its current 9.4 metre draft to 11 metres to accommodate panamax vessels, which will significantly increase competitiveness, particularly with respect to bulk and container traffic. The project is expected to be completed in early 2011.

The extension of the Maputo coal terminal sub-concession to 2043 was concluded, together with an agreement to expand the Maputo coal terminal from its current planned annual capacity of 6 million tonnes per annum (on schedule for completion in the last quarter of 2010) to between 16 and 25 million tonnes. The project is currently in feasibility stage with completion planned for 2013.

Agreements were concluded with CFM (Mozambique state-owned rail and port company) and DP World for the joint development and operation of an intermodal container depot adjacent to the Maputo Port, with phase 1 of the project due for completion by June 2011.

Volumes through the drybulk terminals were negatively impacted by third party strike action and insufficient rail wagon resources, however, additional rail wagons are due to be released by Transnet in the second half of the year. Grindrod is also actively pursuing initiatives to provide the necessary rail wagons to service the Richards Bay and Maputo drybulk terminals and the Maputo car terminal.

The sale of a 30% stake in the car terminal to Höegh Autoliners, one of the largest automotive shipping companies in the world, was concluded in the first half of the year.

Logistics

The Logistics operations returned to profitability following a successful restructure and rationalisation of operations to align with lower market volumes. Further improvements in profitability are expected in the second half of the year, as markets improve further and additional rationalisation benefits are realised. The acquisition of Fuelogic, a petrochemical road transport operation, was concluded in the first half of the year, making Grindrod one of the largest operators in South Africa in this sector.

Other

The improvement in container volumes in the first half of the year has positively benefited the Intermodal operations. Intermodal continues to invest in the consolidation and expansion of its existing operations, with a development in Durban due for completion in the third quarter of this year and developments in Johannesburg and Maputo expected to commence in the second half of the year.

The Seafreight business conducted by Ocean Africa Container Lines did not benefit from improved container volumes due to port congestion which raised operating costs and freight rates remained under pressure. This was exacerbated by the strike activity during the period. It is expected that some improvement will be achieved in the second half.

Ships Agencies results were impacted by low container freight rates and the strong Rand/US Dollar exchange rate.

The Rail business conducted by RRL Grindrod performed in line with expectations. A number of concession opportunities are being explored, which would positively impact on performance over the next few years.

Outlook

Further market improvement is expected in the second half of the year, based on the following anticipated trends:

  • Port and terminal operations have been largely unaffected by market challenges, with demand for capacity remaining strong. Throughput, which until now has been negatively impacted by the lack of rail wagon availability, is expected to increase in the second half of the year, primarily as a result of more rail wagons being committed by Transnet.
  • Profitability of the Logistics business segment is expected to further improve in the second half of the year as greater benefits are extracted from the restructure of the operations combined with the expected improvement in volumes; and
  • Other operations are expected to benefit from improved trading conditions in the second half of the year, which historically is a seasonally stronger trading period compared to the first half of the year.

FINANCIAL SERVICES

The Bank had a good first half, with attributable earnings 19% up on the comparative period in 2009. Significant fees were realised from lending activities and net interest income has held up, with both net margin and advances levels being maintained. Liquidity remains at a healthy level and the lending book is well managed from a credit perspective. Expansion in the Asset Management division has resulted in revenue growth on last year, which is anticipated to continue from the base that has been created.

Third party assets under management continued to increase over the period. The performance of the funds managed by the Bank was particularly encouraging, with the Grindrod Global Property Income Fund rated the second best performing South African unit trust fund for the year to 30 June 2010 with a total return of 42.6%. Grindrod Asset Management has also been appointed manager of Nedgroup Investment’s South African listed property unit trust which was officially launched on 30 July 2010.

Outlook

The Bank expects a solid second half with good earnings growth for the 2010 financial year.

BASIS OF PREPARATION

The results have been prepared in terms of IAS 34 Interim Financial Reporting and are in accordance with the group’s accounting policies which fully comply with International Financial Reporting Standards (IFRS), the Companies Act as amended and the JSE Listings Requirements. They are consistent with those applied in the previous year except for the June 2009 condensed cash flow statement which has been restated due to a reallocation in relation to IAS 7 Condensed Cash Flow  Statements. This reallocation has resulted in certain disclosure changes, but has not resulted in any changes in accounting policy.

The accounting for the acquisition of Fuelogic (Proprietary) Limited and the Associated Bunkeroil Contractors group has only been provisionally determined as at 30 June 2010. At the date of finalisation of these results, the necessary market valuations and other calculations had not been finalised and they have therefore only been provisionally determined based on the directors’ best estimates of the likely values.

DIRECTORATE

TJT McClure retired as an Executive Director of Grindrod Limited effective 31 July 2010. The board of directors wishes to express appreciation for his significant contribution to the Company.

PROSPECTS

Continuing strong growth from China, India and Brazil is anticipated together with an upturn in other economies, although at a relatively subdued level. Volatility is likely in shipping, commodity and financial markets which may offer opportunities to the group.

The high contract cover will reduce the group’s exposure to possible shipping market fluctuations.

The group results are sensitive to Rand/US Dollar exchange rates.

Acceptable returns on shareholder funds are expected for 2010. 

Statements contained throughout this announcement regarding the prospects of the group have not been reviewed or reported on by the group’s external auditors.

For and on behalf of the Board

IAJ Clark AK Olivier
Chairman Chief Executive Officer

DISCLAIMER

Grindrod Limited – Disclaimer:- The market value of the fleet is based on valuations obtained from ship brokers and published market information on ship charter rates. These values and rates are subject to risks and uncertainties, as various factors beyond the control of the group may cause values to fluctuate materially subsequent to the date of this announcement.

Clarkson Research Services Limited – Disclaimer: The information supplied herewith is believed to be correct but the accuracy thereof is not guaranteed and the Company and its employees cannot accept liability for loss suffered in consequence of reliance on the information provided. Provision of this data does not obviate the need to make further appropriate enquiries and inspections. The information is for the use of the recipient only and is not to be used in any document for the purposes of raising finance without the written permission of Clarkson Research Services Limited.