Taylor Maritime Investments 13 March 2023

After the acquisition of an 83% stake in Grindrod Shipping in December 2022, Taylor Maritime Investments (TMI) has a broader, younger fleet of ships and an improved competitive position in its industry. The combined fleet numbers 57 ships with an average age of nine years, and one of the key strategic objectives for the year is to find synergies and savings – with a reduction in the insurance cost per ship one material saving has already been made.

To fund this acquisition required debt, and as we discuss under the Gearing section, the primary strategic priority for CEO Ed Buttery is to reduce debt to gross assets to 25% by June this year, with some ship sales agreed and more to follow. The acquisition is expected to boost earnings per share, which would increase flexibility with regards to de-gearing, and provide additional support to the high income TMI pays. It is paying dividends at a rate of eight cents per share, equivalent to a yield of 7.1% on the shares at the time of writing.

These shares trade on a substantial discount to NAV of 32.1% at the time of writing. This may reflect some uncertainty around the Grindrod deal and the debt taken on, but in a large part we believe reflects a poor second half of 2022 for global trade and shipping as China, which accounts for 50% of the dry bulk trade on a tonne-mile basis, locked down repeatedly and growth expectations fell. The recent abandonment of the zero-COVID policy by China has led to a sharp rally in charter rates which bodes well for an improving environment for shipping in 2023. Additionally, there are growing indications global growth will be better than previously feared this year which could support trade and therefore, shipping.

TMI looks like it could be a potential beneficiary of China’s reopening and economic stimulus this year, which could lead to rising charter rates and ship values. If global economic activity is stronger than initially anticipated, and any recession is shallower than expected, then TMI could similarly benefit. The shares are on a wide discount at the time of writing, and we think this is a potential route to a re-rating. TMI has taken on substantial amounts of debt to acquire Grindrod, and in our view this may be increasing wariness towards the shares, but again it creates extra potential recovery beta if growth is better than expected and risk aversion falls. Additionally we note there are concrete steps underway to decrease the gearing of the portfolio, having already secured c.$24m in debt reductions through vessel sales. Insurance proceeds recently received for the vessel trapped in Ukraine will also be applied to reduce leverage, so this source of risk should diminish as the year goes on.

The company is generating a highly attractive yield, and to us it looks very well supported by underlying operating profit. Yields on bonds have improved over the past 18 months, and TMI is now yielding something in the region of a high yield dollar bond. However, the shares offer much higher growth potential and greater likelihood of being able to maintain this level of income over the long run, unlike a high yield index which we believe is likely to see yields fall if the economy does improve.