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income statement

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declaration of interim dividends

OVERVIEW

Grindrod Limited generated earnings of R483,8 million for the six months ended 30 June 2009 (H1 2008: R1 104,5 million), down 56% on the corresponding period of the prior year which is in line with the trading update issued on 1 July 2009. Headline earnings per share also decreased by 56% to 105,7 cents per share (H1 2008: 242,8 cents). An interim ordinary dividend per share of 30 cents (H1 2008: 68 cents) and a preference share dividend of 522,5 cents per share (H1 2008: 589 cents) have been declared. The annualised return on ordinary shareholders’ funds was 17,5% (H1 2008: 68%).

These results were achieved against the backdrop of a worldwide recession, leading to substantially reduced economic activity, lower trade volumes, declining commodity prices and a continued lack of credit, which increased counterparty risk and significantly impacted shipping markets.

In reaction to these conditions, Grindrod focused its efforts on the key operational areas of:

• protecting the balance sheet and ensuring sufficient liquidity;
  
• increasing contract cover and selectively selling ships to lock in value and improve liquidity;
  
• reducing costs and improving efficiencies to support the earnings base; and
  
• monitoring counterparty risk and protecting customer relationships to ensure continued growth as conditions normalise.
  

While earnings for the six months were not dissimilar to those achieved prior to the record levels of 2008, the composition of the earnings has changed. The actions to diversify the group from Shipping to a broader spectrum of freight and logistics activities has supported the profitability of the group during this period although these businesses were by no means unaffected by the global economic turmoil.

Divisional earnings

	H1	H1	Growth
(R millions)	2009	2008*	%
Shipping	337	1 039	(68)
Trading	85	13	561
Freight Services	89	77	15
Financial Services	18	10	84
Group cost	(45)	(34)	(33)
Attributable earnings	484	1 105	(56)
* Prior year numbers have been restated due to the adoption of IFRS 8 Operating Segments.

The fortunes of the Shipping division changed substantially since the fourth quarter of 2008, when shipping markets experienced the sharpest decline in history. Attributable earnings declined by 68% compared to the first half of 2008 on the back of the significant drop in shipping rates, triggered by the lack of credit to support international trade and the slowdown in major economies.

The Trading division’s earnings grew considerably on the back of operational improvement, increased margins and the buy up to 100% of the marine fuel and industrial raw materials trading businesses. Despite extremely difficult trading conditions in the Logistics, Intermodal and Ships Agency businesses, Freight Services grew earnings by 15% through a good performance from Terminals. Financial Services experienced growth in earnings of 84%, with commendable performance across key portfolios.

It is pleasing to note that Grindrod (South Africa) (Pty) Limited has achieved level 3 BEE contributor status in 2009. Included in the group cost above is a once-off R21 million IFRS 2 charge against headline earnings for the BEE deal between Grindrod (South Africa) (Pty) Limited, Calulo Petrochemical and the Adopt-a-School Foundation, announced in February 2009, together with listing related overheads and secondary tax on companies (STC).

CAPITAL EXPENDITURE AND COMMITMENTS

	Capital
Description	expenditure	Capital commitments
		Six months			Total
	Six months	to			commit-
	to June	December			ments
(R millions)	2009	2009	2010	2011
Ships	582	465	910	473	1 848
Property and terminals	122	127	186	–	313
Vehicles and equipment	72	19	5	2	26
	776	611	1 101	475	2 187
Acquisition of businesses	25	14	–	–	14
Total	801	625	1 101	475	2 201

Ship newbuilding contracts make up the bulk of the capital commitments. While it is difficult to determine current market values of these contracts, management is comfortable that the contract prices are in line with value-in-use assessments.

In addition to the above, provision has been made for a goodwill payment due as a result of a final settlement reached in relation to the acquisition of a trading business.

CASH FLOW AND BORROWINGS

Cash generated from operations was R1 159 million (H1 2008: R1 637 million). Cash outflows included capital expenditure of R801 million and net dividends of R278 million during the period. This resulted in net debt increasing from a net cash position of R325 million at 31 December 2008 to a net debt position of R37 million at 30 June 2009 and a net debt:equity ratio of less than 1%. Net interest costs, although decreasing by 12% are still significant due to low interest earned on substantial US Dollar cash resources.

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.

SHAREHOLDERS’ EQUITY

Shareholders’ equity decreased from R6 713 million at 31 December 2008 to R5 854 million at 30 June 2009 due to the effect of the stronger Rand/US Dollar exchange rate and the revaluation of hedging instruments.

During the period, 19 044 230 ordinary shares and 100 000 preference shares, held by a subsidiary company were delisted.

DIVISIONAL REVIEWS
SHIPPING

An analysis of the divisional results is as follows:

Profit from owned and long-term chartered ships	Bulk carriers			Tankers		H1 2009	H1 2008
				Mid-		Total	Total	Growth
	Handysize	Panamax	Capesize	range	Chemical			%
Average number of owned/long-term chartered ships	18,7	2,0	2,9	7,9	4,0	35,6	38,3	(7)
Average daily revenue (US$)	11 500	20 800	30 000	19 100	13 800	15 500	28 700	(46)
Average daily cost (US$)	7 700	9 400	20 900	14 800	14 500	11 200	10 900	(3)
Profit (US$ millions)	12,9	4,1	4,8	6,3	(0,5)	27,6	122,2	(77)
(US$ millions)
Profit from ship operating activities						18,1	10,6	71
Profit from ship sales						16,4	25,7	(36)
Overheads/other expenses						(14,0)	(18,9)	26
Foreign exchange (loss)/profit						(1,9)	10,5	(118)
Funding costs/taxation						(9,7)	(14,7)	34
						36,5	135,4	(73)

Shipping revenue and earnings declined during this period as a result of significantly lower drybulk and tanker spot charter rates against a relatively fixed cost base. However, the high level of contract cover at favourable levels, together with the required utilisation of onerous contract provisions significantly reduced the impact of lower spot charter rates during the first half of 2009. The reduction in the average number of ships above was due mainly to ship sales in the second half of last year, but also due to late delivery of ships from shipyards. These delays and shipyard performance issues have resulted in the cancellation of a contracted sale of a ship and three long-term charters to oil majors.

Ship operating activities performed satisfactorily considering the adverse worldwide market conditions and substantially reduced volumes shipped. The new handymax, tanker and bunker barge operating businesses contributed significantly and the parcel service benefited from contractual earnings and lower fleet charter-in costs. There has been a gradual improvement in volumes shipped over the period, which bodes well for the second half of 2009.

The strengthening of the Rand over the past six months has had a significant negative effect on translation adjustments recognised in earnings compared to the prior year. The translation adjustment as a result of the stronger Rand/US Dollar exchange rate amounted to a R15 million (US$1,9 million) loss for the half year, compared to a profit of R81 million (US$10,5 million) in the prior year. There has, however, been some benefit from a weaker average exchange rate compared to the prior period.

The following transactions were concluded during the first half of the year:

	Ships ordered/
Ships delivered	purchased	Ships sold/redelivered	Contracted sales
1 x 52 000 dwt supramax bulk carrier (long-term charter)	Nil	2 x 31 000 dwt handysize bulk carriers	3 x 32 000 dwt handysize bulk carriers
1 x 16 500 dwt products tanker		1 x 45 000 dwt products tanker (chartered ship redelivered – 50%)
1 x 40 000 dwt products tanker		1 x 40 000 dwt products tanker
1 x 40 000 dwt products tanker (long-term charter back of sold ship)		1 x 5 800 dwt products tanker

The division has taken the opportunity to reduce its exposure to spot market earnings by selling some ships on which it did not have long-term contracted employment as referred to above. Subsequent to 30 June 2009 an order for a 40 000 dwt products tanker newbuilding was cancelled due to late delivery by the shipyard.

Fleet overview (owned and long-term chartered ships)

Contracted in at 30.06.2009		Bulk carriers			Tankers
		Handysize	Panamax	Capesize	Mid-range	Small	Chemical	Total
2009 (H2)	Number (average)	16,5	2,0	3,0	8,0	2,0	4,0	35,5
	Cost (US$/day)	9 400	9 400	21 200	15 000	9 800	14 600	12 300
2010	Number (average)	16,1	2,0	3,0	9,7	4,8	4,0	39,6
	Cost (US$/day)	9 300	9 400	20 500	15 100	9 800	14 600	12 200
2011	Number (average)	17,3	2,0	3,4	8,1	7,5	4,0	42,3
	Cost (US$/day)	9 300	9 400	26 400	14 600	10 200	14 600	12 300
2012	Number (average)	18,8	2,0	3,0	7,6	9,5	4,0	44,9
	Cost (US$/day)	9 400	9 900	27 700	14 800	10 300	14 700	12 200
2013	Number (average)	19,0	2,0	3,0	7,5	9,5	4,0	45,0
	Cost (US$/day)	9 400	10 200	27 700	14 900	10 400	14 700	12 300
Current fleet		18	2	3	8	1,5	4	*36,5
Net number of ships to deliver
2009 (H2)		(2,5)	–	–	–	1	–	(1,5)
2010		1	–	–	1	3	–	5
2011		2	–	–	(2)	3	–	3
2012		0,5	–	–	(0,5)	1	–	1
2013		–	–	–	–	–	–	–
Fleet at end of 2013		19	2	3	6,5	9,5	4	**44
( * owned fleet 8.5; chartered fleet 28)
(** owned fleet 25; chartered fleet 19)

The group has the option to redeliver 11 chartered ships to owners, to the end of 2013, should market conditions justify this.

Market value adjustments to fleet book value		R millions	Comments
Excess of market value of owned fleet and charters with purchase options over book value		535	Indicative ship values obtained in consultation with reputable ship brokers
			Book value of charters = PV @ 6,5% of capital element (i.e. excluding running costs) of charter commitments and purchase option price. Yen options valued at closing rate
Market value of other long-term charters and contracts		766	Differential between market rates and Grindrod charter/contract rates. PV @ 6,5%
		1 301
Assumptions used in respect of the group’s fleet in the market value adjustment calculation above are as follows:
		Average ship market value US$000		Average market long-term charter rates US$ per day
Bulkers	– Handysize	22 765		10 000
	– Handymax	n/a		15 301
	– Panamax	37 000		17 500
	– Capesize	65 000		31 143
Tankers	– Mid-range	25 760		13 637
	– Small	18 780		n/a
	– Chemical	n/a		19 142

Contracted profits

Contracted out at 30.06.2009		Bulk carriers			Tankers			Total
		Handysize	Panamax	Capesize	Mid-range	Small	Chemical
2009 (H2)	Number (average)	10,0	2,0	2,3	7,3	–	2,0	23,6
	Revenue (US$/day)	13 500	20 800	31 600	18 700	–	15 000	17 600
2010	Number (average)	7,0	2,0	2,0	7,0	–	1,7	19,7
	Revenue (US$/day)	10 400	23 400	39 300	18 900	–	18 000	18 300
2011	Number (average)	2,2	2,0	2,1	1,7	–	0,7	8,7
	Revenue (US$/day)	12 400	24 000	40 500	19 600	–	18 500	23 700
2012	Number (average)	1,5	2,0	2,2	–	–	–	5,7
	Revenue (US$/day)	13 700	24 000	38 900	–	–	–	27 000
2013	Number (average)	0,5	1,4	1,0	–	–	–	2,9
	Revenue (US$/day)	20 000	25 300	52 400	–	–	–	33 700
Contract profits		% of fleet fixed	Charters (US$m)		Ship sales (US$m)		Total (US$m)
2009 (H2)		71	19,8		11,7		31,5
2010		55	39,8				39,8
2011		27	25,7				25,7
2012		20	21,4				21,4
2013		10	15,4				15,4
In addition, ±8% of fleet is fixed for 2014/2015

Note: Variable volume contracts have been included at forecast volumes.

The group continues to maintain a high level of contract cover on its fleet through contracts of affreightment, time charters and freight forward agreements. Contracted rates, however, are at lower levels than those achieved in the past and, as discussed above, have been impacted by cancellations resulting from contractual and performance issues with shipyards. The group has been diligent in assessing the creditworthiness of counterparties and will continue to monitor this exposure carefully in the current market. Although some contracts have been affected by lower volumes, no defaults have taken place.

Drybulk market

The first half of 2009 saw a gradual upward correction and surprising firmness in the drybulk markets. The drybulk shipping markets were supported by China’s continued high demand for iron ore and coal. The rates in both the cape and panamax sectors improved substantially throughout the half year due to this demand. The handysize sector also firmed, but not to the same extent.

Looking forward, a reasonably strong commodity demand from developing countries, particularly China, will continue to support drybulk seaborne trade. The significant newbuilding order book in the capesize sector is likely to put downward pressure on charter rates as these ships deliver towards the end of 2009 and into 2010. The group, however, continues to be well positioned through its contract book with good counterparties in what is seen as a potentially over-tonnaged capesize sector. The handysize sector continues to look well balanced from a supply-demand perspective, which will support handysize earnings in the medium-term.

Current spot and one-year time charter rates at the date of this report are as follows:

	Spot rate (US$ per day)	One-year time charter rate (US$ per day)
Handysize	12 051	11 000
Panamax	20 880	20 250
Capesize	45 528	39 000

Tanker market

The decline in worldwide oil demand and the delay in the commissioning of new refining capacity in supply areas have led to low earnings levels across all tanker segments. The reasonably large product tanker order book delivering during 2009 and 2010, together with predicted low oil demand growth over the same period, is likely to result in continued low markets in the tanker sector for the medium term. However, the group has a number of long-term contracts at good rates with top rated counterparties which will, to some extent, mitigate the effects of the expected soft tanker market.

Current spot and one-year time charter rates at the date of this report are as follows:

	Spot rate (US$ per day)	One-year time charter rate (US$ per day)
Mid-range	8 722*	13 000
Small	10 200	12 000
Chemical	16 535*	Appropriate market rates not available

* Management assessment in respect of Grindrod’s fleet.

Ship values

There have been few, if any, reported newbuilding orders in the first half of 2009. The yards continue to remain well positioned in the medium-term with large forward order books and are therefore not being pressurised into quoting reduced prices. Owners likewise are reluctant to enter into newbuilding orders whilst second hand prices remain soft and markets volatile.

There has been active trade in second hand drybulk ships and values have improved slightly during the period. On the tanker front, very few ships have been transacted for sale and asset prices remain soft as a result of the low earnings levels. Ship values are not expected to vary significantly from current levels in the medium-term.

Outlook

Whilst the drybulk market has remained underpinned by strong commodity demand from the East, the division has taken advantage of firm asset prices and exercised purchase options on handysize ships with immediate on-sale of these units. The division has also chartered out further ships and rationalised operations to maximize synergies and reduce costs. This has had the effect of reducing the division’s exposure to the spot market, as a further softening is expected in these markets in the second half of 2009 and 2010. The cape and panamax sectors remain well covered through time charters or contracts of affreightment.

Management has expected a downturn in the tanker sector for some time and has contracted a number of the larger units out on period employment and continues to look for suitable employment on the new deliveries in the small tanker sector.

The Shipping division is well positioned, with a low cost fleet, good contract cover with sound counterparties and a strong balance sheet. This will allow the division to look for and take advantage of opportunities which will present themselves as markets bottom out and world economic growth turns positive.

TRADING

The Trading division has performed well during the period. Although all businesses are now 100% owned, revenue is in line with 2008 due to lower commodity prices. However, margins and therefore earnings have increased year-on-year predominantly as a result of profit growth in the agricultural and marine fuel sectors. After adjusting for the shareholding increase and group cost allocations, contributions from attributable earnings increased by 228%.

Agricultural

Agricultural commodity markets were characterised by continued volatility and increased prices, including increased freight rates. The commodity price volatility has resulted in traders, crushers and millers remaining cautious and predominantly operating in the spot market. In addition to this, a slowdown in demand impacted business traded across all commodities.

Marine Fuel

Renewed concern in the global economy is the main driver of weaker oil market sentiment. Despite operating in markets which have contracted, the business has continued to grow its customer base and its volume. In addition, it has successfully maintained good trading margins. The trading segment is performing well although management remains cautious with counterparty risk management being the key focus.

Industrial Raw Material

This business is still experiencing reduced trade on the back of low demand from the global commodity slowdown and overstocking, with some improvement in selected commodities. The outlook for the remainder of the year remains unclear. Management is, however, optimistic for a recovery in the industrial raw materials business.

Outlook

The strategic focus remains on sourcing and investment in origination projects and participating in opportunities that extend the trading platform.

Management is expecting slightly more challenging trading conditions in the second half of the year.

FREIGHT SERVICES

Freight Services reported profits of R89 million for the period, a 15% increase over the equivalent period in 2008.

Despite the overall growth in attributable income, certain segments of Freight Service’s operations have come under pressure in 2009, most notably a substantial loss by the logistics operations and reduced earnings for Intermodal and Ships Agency where lower volumes compared to the same period in the prior year have led to a contraction of both revenue and margins.

The Ports and Terminal operations have traded largely in line with expectations and have benefited from the expansion of terminal capacities, improved operating efficiencies and a good contract base. Seafreight, although negatively affected by declines in freight rates and container volumes, has maintained profitability over the same period in the prior year on the back of the negotiation of lower charter rates on vessels, fleet reduction and improved scheduling integrity.

Significant developments in the last six months include:

Logistics

The Logistics operations have been rationalised and restructured in light of lower market volumes which should result in significantly improved trading going forward. In addition to the restructures, Logistics has been successful in growing its market share with the award of a number of large tenders.

Rail

Grindrod re-entered the rail sector through the conclusion of a 50% joint venture agreement with Solethu Investments during the first quarter of 2009, culminating in the establishment of RRL Grindrod, a 51% black owned company providing locomotive leasing, rail operations and shunting services.

Ports and Terminals

The expansion of the Maputo Coal Terminal’s export capacity from 2 million to 4 million tonnes per annum was completed in May 2009, with the further expansion of the terminal capacity to 6 million tonnes currently underway with completion expected by the end of 2010.

The expansion of the Richards Bay dry bulk export and import handling capacities to 5,1 million and 1,3 million tonnes respectively with the addition of 2,8 million tonnes export and 600 000 tonnes import capacity per annum was completed in June 2009. The further planned expansion of export capacity by an additional 1,2 million tonnes per annum is expected to be completed in the third quarter of 2010.

Capital expenditure

The majority of the capital expenditure incurred in the six months to 30 June 2009 related to the expansion of the export capacity of the Maputo coal terminal and the growth of vehicle storage capacity in Rosslyn, Pretoria.

Capital expenditure for the remainder of 2009 is mainly in respect of the further increase in the export capacity of the Maputo coal terminal and the Richards Bay facility.

Outlook

Market weakness is expected to continue for the remainder of 2009, with some improvement evidenced by tentative signs of recovery. Significant anticipated trends are as follows:

• Ports and Terminal operations are expected to be largely unaffected by continued market weakness due to the demand for these facilities and a strong contracts base. The additional capacity being developed will further position the business to take advantage of increased requirement for commodities. The Maputo port master plan has been finalised and identifies significant opportunities for growth.
• The Logistics business segment is expected to return to profitability in the second half of the year as costs savings on the back of the restructuring of the operations take effect and volumes improve on the back of improved market conditions generally and new business awards in the automotive storage and distribution operations.
• Intermodal and Ships Agency 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.
• Seafreight volumes are expected to remain under pressure for the remainder of 2009, however, the business should continue to benefit from a lower fleet cost and the improved scheduling integrity.

FINANCIAL SERVICES

The Bank reported good results for the period. Attributable earnings increased by 84% on the back of fee income growth from Property Solutions, Corporate Banking and Treasury activities.

Levels of assets under management and deposits were maintained in a very difficult market and the performance of the portfolios has been commendable. Credit and liquidity have continued to be conservatively managed, which resulted in a healthy liquidity surplus at 30 June 2009. This positions the Bank to continue to seek well priced lending. The lack of exposure to the retail market kept the Bank free of the bad debt pressure seen in the rest of the sector. The Bank’s capital adequacy ratio at 16,5%, remains comfortably above the requirements for banks as stipulated under Basel II.

During the period a new unit trust fund, the Grindrod Global Property Income Fund, was launched to take advantage of the high yields being generated in the offshore listed real estate market.

The Bank expects the difficult operating environment for financial service entities to continue in the second half of the year. As a result, it will mainly focus on opportunities to earn fee income rather than advances growth and maintain its conservative liquidity, credit and asset management policies, to ensure its clients are well serviced and their risks well managed.

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 Listing Requirements. They are consistent with those applied in the previous period with the exception of the revised IAS 1 Presentation of Financial Statements and IFRS 8 Operating Segments, which were adopted in the current year. The adoption of these new standards has resulted in certain disclosure reclassification, but has not resulted in any changes in accounting policy.

PROSPECTS

The credit crisis and global economic downturn have impacted volumes of cargo moved by sea, as well as land based freight services businesses. However, there has been recent improvement in international business activity, particularly in the demand for and price of commodities. A recovery in shipping markets will, however, be countered by the delivery of a large number of new ships in the short-term.

The group has a low-cost fleet of ships, a high level of contract cover, considerable cash resources and continues to anticipate earnings growth from its Trading, Freight Services and Financial Services businesses for the full year. This positions it favourably for a recovery in world markets in the medium-term. The group will have lower earnings for the full year compared with the extraordinary levels achieved in 2008.

For and on behalf of the Board

I A J Clark Chairman

A K Olivier Chief Executive Officer

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 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