JOHANNESBURG (Business Day) -- Long-term plans and commitments may be impaired by the current economic crisis but, on a longer-term view, some companies will continue to invest in further operational capacity. Doing so could put strain on cash flows and their returns on assets may suffer. Consequently, their short- to medium-term growth in bottom-line earnings per share growth could slow or even reverse temporarily.
Jean and I continue steadfastly, and possibly over optimistically, to hold the shares we have in the Private Investor portfolio as long as we are convinced that the long-term investment fundamentals of the companies whose shares we hold remain sound.
An important input to our monitoring is the daily report we receive from our stockbrokers, T-Sec. This report reminded me that on Monday, Grindrod posted its presentation on its plans to invest more than $500 million over 20 years to increase the capacity of its Maputo coal terminal.
The company reported that its Phase 3 expansion project at its Maputo coal terminal will start next year, increasing capacity from 2-million tons to 6-million tons by 2010. From early next year, the facility, consisting of rail wagons, tippers, conveyors and ship loaders, would have the capacity to handle 4-million tons.
I then viewed the website presentation to see the details and noted that the company had made a projection of cargo volumes through Port Maputo over the next 20 years. I was also interested in Grindrod's current and planned activities in other ports in SA and other countries.
While so may companies have begun to follow the piggy-bank strategy, Grindrod's was a striking example of contrarian pragmatism. An investment of $500m is roughly R5bn - equivalent to an awful lot of Cape mansions. As a matter of course, I looked at the latest report on the company's capital commitments and also its cash flow. Did it have the money?
In the half-year ended June 30, Grindrod had capital expenditure of R1.08 billion, of which R201 million was in new businesses, R652 million in ships and R38 million in terminals.
In the current half-year to December 31, its capital commitments were reported as R1.08 billion of which R674 million was for ships and R80 million for terminals. On the face of it, there is much yet to be invested for the Maputo project.
The point is that Grindrod already has the terminal and its additional investment in capacity does not require contracted commitments now.
Another point is that while R5 billion is a lot of money, over 20 years the average annual spend is R250 million, although the weight of the spend will probably be in the early years.
Cash flow was especially strong in the June half-year, but even in less ebullient times the cost of the Maputo expansion should be easily affordable.
Grindrod's gearing is low: the debt:equity ratio at the end of June was just 23%. Who knows, its management may be contrarian enough to borrow money and buy some other businesses at below their current value.
