On the move

The transportation sector is proving resilient amid global supply chain disruptions

On the move

Global supply-chain interruptions wrought by the COVID-19 pandemic continue to persist. They are one of the reasons why Shoprite Holdings, SA’s largest supermarket group, increased stock levels across the business by 19% last year. And it’s why, for example, the latest iPhone or Samsung Galaxy smartphone is harder to come by than usual.

KPMG notes that the flow of consumer goods remains ‘restricted by the continued shutdowns of major global ports and airports, largely in China, South Korea and the US. The major logistics disruptions create a ripple effect across global supply chains that ultimately cause goods to pile up in storage, impacting ships on their way to ports – in the form of diversions or delays as they arrive at major transit hubs, restricting global trade flows and limiting access for businesses to import products and refill their inventory stocks’.

Even the recovery of global air traffic to pre-COVID-19 levels has a major impact, as fewer passenger flights means less cargo space onboard.

We are seeing evidence of these factors within businesses already, accelerated by the knock-ons from the pandemic. Increasingly they are focusing on ensuring their operations and supply chains are flexible as well as resilient, and they’re looking to technology to help.

Anthony Clark, independent research analyst at Small Talk Daily, says that while these disruptions had been weighing on the entire industry since the onset of COVID-19, shareholders in many of these companies have enjoyed strong returns. The JSE’s transportation sector comprises eight companies, each forming a part of the supply chain and all vastly different from one another.

Among the largest in the sector by market value, Textainer, Grindrod Shipping and Grindrod are all exposed – to varying extents – to shipping and transit of goods through ports. Textainer, with a primary listing on the New York Stock Exchange and a market cap of R30.76 billion, is the world’s second-largest lessor of shipping containers. It has more than 4.5 million twenty-foot equivalent units, or TEUs – the industry measurement of a standard shipping container. It leases containers to approximately 200 customers. Together, major shipping lines own half of the world’s container fleet. Practically all (97%) of its leases are fixed rate and long term (with an average remaining term of just less than seven years).

Textainer is also one of the largest sellers of new and used containers globally. On average, it sells 130 000 of these each year. In the past 12 months, it received lease rental income of $796 million and reported EBITDA of $740 million.

The company makes the point that ‘container lessors, shipping lines and container manufacturers have experienced a recent wave of consolidation and organic growth, with enhanced economies of scale greatly improving the competitive landscape and facilitating a greater level of stability over economic cycles’. The top five container lessors now account for 86% of the market globally, while the 10 largest shipping lines account for 84% of market share.

Container demand is inherently tied to trade. Growth is, therefore, expected to be in line with GDP growth, although the size of the global container fleet has shown a CAGR of 5% since 2006.

In his letter to shareholders earlier this year, Textainer CEO Olivier Ghesquiere said that ‘while uncertainty remains on how the pandemic evolves and the […] conflict in Ukraine creates additional concerns, there is underlying strength in the shipping market. Cargo-congestion issues haven’t been resolved and elevated cargo volumes are expected to continue for globally recovering economies. These factors should support continued high container utilisation in 2022. Given the over 6.5 million TEU produced in 2021, it’s reasonable to expect moderation in container production in 2022 as shipping lines digest last year’s record production’.

A far smaller entity in the sector, Trencor – with a market value of R997.8 million, originally held 47.5% of Textainer as its primary asset but unbundled the majority of this stake to shareholders in December 2019. Today, Trencor holds cash including $62 million in lieu of a complex indemnity resulting from the distribution of the stake in Textainer. This indemnity terminates at the end of 2024, at which point whatever amounts due will be paid and the remaining cash will then likely be returned to shareholders.

Logistics group Grindrod and its former subsidiary – and now independently listed – Grindrod Shipping are valued by the market at R6.84 billion and R9.075 billion respectively. The latter was unbundled by Grindrod in 2018 and owns, charters in and operates a fleet of 31 dry-bulk vessels. These transport a range of commodities, including various ores, coal, grains, forestry products, steel products and fertilisers. It has historically operated a tanker fleet but announced last year that it would divest this unit.

In H1/2022, Grindrod Shipping reported revenue of $271.9 million, a 52% increase on the corresponding period last year with adjusted EBITDA of $124 million. It had $160 million in cash on its balance sheet at the end of June, which is a substantial amount for a shipping company. In August, the shipping business received a takeover offer from rival Taylor Maritime Investment. While spun as a buyout, Taylor itself doesn’t actually have enough cash and will pay a special dividend of $5 a share from Grindrod Shipping should the deal be successful (along with its cash payment of $21 a share).

Grindrod Shipping says that during this year, impacts from COVID-19 include ‘reduced efficiency of cargo handling and other delays at certain ports, delays in drydocking, limited availability of drydocking capacity and an increase in related drydocking costs, delays to scheduled changes of crew and off-hire days due to quarantine restrictions, [as well as] higher individual airline ticket prices particularly affecting the exchange of crews to our vessels, but a lower incidence of travel by our landside employees generally’.

Grindrod itself, post the spin-out of its shipping line, is now focused on ports, terminals and logistics. Revenue for the first six months of this year was up 31% to R3.1 billion, with headline earnings 53% higher at R529.1 million.

It is a 24.7% shareholder in the Maputo Port Development Company, and also includes coal and dry-bulk terminals, an intermodal container terminal and a car terminal at the Mozambique ports of Maputo and Matola. In May the development company presented its master plan, which sees volumes growing to 42 million tons per year in 2033 and 54 million tons per year in 2043. Grindrod also operates terminals at Richards Bay, Durban, and at Walvis Bay in Namibia. Grindrod, together with the Port of Hamburg, is one of the 10 shortlisted consortia for Transnet’s Durban Container Terminal Pier 2 upgrade project.

It also operates a bank focused on SMEs, with a loan book of R8.3 billion and a strong deposit funding base of R11.7 billion. The group notes that the bank has R6 billion in excess liquidity. In May, African Bank proposed a transaction whereby it would buy Grindrod Bank for R1.5 billion. This has been approved by competition authorities but still requires Prudential Authority approval.

The lender says its ‘strategy is to build a sustainable diversified offering across the consumer and business banking segments. Grindrod Bank will provide an entry into the business banking market, which will be grown off African Bank’s larger balance sheet and additional allocation of capital’.

In August, Grindrod CEO Andrew Waller said its ‘strategy of separating the three businesses [freight services, shipping, bank] and focusing on the core is almost complete’. Each of these is well placed to grow, and the group will be able to focus solely on its terminals/port and logistics businesses.

Remgro, which owns 25% of Grindrod, announced in late September that it would unbundle this stake to shareholders. In effect, Remgro shareholders will receive a proportional number of Grindrod shares for each Remgro one held, and the investment holding company will cease to hold this stake directly. In January, it sold its holding of 4.3 million shares in Grindrod Shipping for R1.19 billion. It says both of these assets are non-core.

Clark says that, counter-intuitively, the unbundling of Grindrod by Remgro presents ‘an extreme opportunity. The company has a solid track record of operating in supply chains, logistics, ports and rail, and is attractive. Should any international entity make an approach for the company, it no longer has a blocking shareholder’.

Santova, with a market cap of R1 billion, is a technology-based trade-solutions specialist with operations in 10 countries. It works with around 2 500 specialised logistics service providers to ‘design, develop and execute end-to-end supply chain solutions’ for its almost 5 000 clients. As one would imagine given global constraints and disruptions, business is booming. It saw a 40% increase in revenue in 2022 to R619 million, with growth in after-tax profit of 144%. This growth was in all its operating regions. It explains that COVID-19 caused ‘a severe disruption in the normal repositioning of empty containers. The result was that available capacity in the market was not sufficient. The consequences thereof are a shortage of empty containers in Asia while the ports in the US have become congested and freight rates exorbitant’.

Santova expects that ‘the forces underlying this extreme supply-chain dysfunction will continue in 2022; however, the outlook for the next financial year seems positive overall. It’s highly probable that in the post-pandemic economy, we might witness a stronger than anticipated pent-up demand due to accumulated cash reserves and growing stock replenishment requirements.’ It does contend, however, that ‘a meaningful comparison [to other listed companies in the sector] is difficult due to the fact that our peers within the sector are typically asset-based entities and/or more focused on local land-side logistics and, therefore, are not necessarily direct competitors’.

Super Group, valued by the market at R8.8 billion, provides logistics and mobility solutions in SA, Europe, Australasia and the UK. Nearly 90c in every R1 of revenue comes from three of these – SA, the UK and Australia. In the UK, it owns a network of 29 dealerships, while in Australia, it owns 52% of SG Fleet, a specialist fleet provider.

The overall business operates in three divisions, namely supply chain (Africa and Europe), fleet solutions (Africa and Australia) and dealerships (SA and the UK). Locally, it owns 45 dealerships. In the last financial year, Super Group’s revenue increased by 17% to R46.24 billion, with EBITDA of R7.03 billion.

With a market cap of about R800 million, OneLogix is a more traditional ‘trucking’ business. In the year ended May, it reported revenue of R3.07 billion, with EBITDA of R411.3 million. It operates in a number of niches, including primary product logistics (including tankers) and abnormal logistics.

In the latter, it owns Vehicle Delivery Services, a major vehicle transport operator in Southern Africa.

Labat Africa, which previously operated in the bulk-transport sector, has shifted to focus on healthcare, primarily on establishing a cannabis industry in Southern Africa.

Looking ahead, Clark says the sector remains a ‘good place to be’, even after a remarkable run that many of these stocks have had in the past two to three years. He says shipping companies, in particular, remain compelling. ‘Even though the underlying global shipping rates on a 12-month basis are off more than 60% from the COVID-19 highs, these companies are still all making very good money.’

HSBC Global Research forecasts that a downcycle for container shipping into 2023/24 is ‘unavoidable’, driven by overcapacity. Still, the broader logistics market will continue to grow. Allied Market Research estimates the value of the global logistics market at $10 billion (2021). This is expected to grow to $13 billion on the back of ‘an increase in global trade activities in developing economies, a rise in trade-related agreements, and advancements in IT and transportation’.

By Hilton Tarrant
Image: Gallo/Getty Images