Wednesday, January 26

Barloworld Shares Increase on Strong Financial Results and Special Dividend

Barloworld shares rose 7.54% to close at 145.18 rand on Monday after the JSE-listed industrial processing, distribution and services company reported strong financial results and declared an ordinary and special dividend.

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Barloworld Group Chief Executive Dominic Sewela said Monday that the company had delivered impressive results despite the challenging environment.

“I am pleased that the decisions we made in the past have created shareholder value and positioned us to remain agile in the changing operating environment,” he said.

The group’s revenue from continuing operations grew 22.5% to R41.6 billion in the year to the end of September 2021.

Sewela attributed this to the turnaround at Avis Rent A Car and the acquisition of the Equipment Mongolia and Ingrain starch businesses.

Read: Tongaat sells its starch business to Barloworld unit for 5.26 billion rand

Operating profit from continuing operations improved 119% to R4.3 billion, as the operating margin improved 450 basis points to 10.3%.

Strong margin growth resulted in an improvement in earnings for the year to R2.8 billion.

Barloworld CFO Nopasika Lila said that when you compare this to the group’s loss of R2 billion last year, “this has been a phenomenal performance.”

He said the Equipment Southern Africa and Eurasia divisions accounted for 70% of Barloworld’s total revenue.

“New acquisition [activity] it exceeded our expectations by R6.6 billion and therefore contributed 16% of the group’s 23% growth in the financial year, ”added Lila.

The group’s net debt after the Ingrain acquisition fell to R2.3 billion from R2.7 billion the previous year.

A sea change was achieved in the group’s earnings per share, with earnings of 1,195 cents per share, compared to losses of 268 cents per share the previous year.

A final ordinary dividend of 300 cents per share was declared plus a special dividend of 1,150 cents per share.

This increased the total final ordinary dividend for the year to 437 cents per share and the total final special dividend for the year to 1,350 cents per share.

Where do we go from here?

Sewela said Barloworld needs to make sure it produces financial results like this in a sustainable way and the group’s active shareholder model is paying dividends.

Read: Barloworld’s New Strategy Raises Questions

“We integrated two new businesses into the group, Equipment Mongolia and Ingrain, and both have done much better than we anticipated; sold our retail engine assets in our quest to move into relatively light and defensive businesses; and it started with the sale of the logistics business, ”he said.

Sewela indicated that Barloworld plans to sell Avis’ car rental and leasing business by the end of calendar year 2022.

He said the group will also drive acquisitions in businesses adjacent to the existing portfolio.

Sewela reiterated that the group’s strategy is based on a clear and ambitious result of doubling the group’s intrinsic value every four years, which directly translates into the need for Barloworld to look to the future in the way it approaches its business.

In line with the group’s focus on optimally deploying capital within the group and exiting certain businesses, Sewela said the Barloworld board approved a formal readiness process to exit the logistics business after various expressions of interest.

Read: Barloworld will sell its logistics business before the end of the year

“This is already underway and we are negotiating the phase out of various logistics sections in response to high levels of interest from smaller business units. The focus remains on sales transactions that continue to support our clients’ requirements and protect value to the group.

“In light of this approach, the group has entered into sale agreements with respect to its majority stake in Aspen Logistics and the shares in subsidiaries owned by Manline Energy, Manline Freight and Timber 24,” he said.

Sewela said these two deals cover most of the assets within Barloworld Transport’s business, but remain subject to regulatory approval.

He said Barloworld will also sell its supply chain business “in the not too distant future” and has “resorted to taking a piecemeal approach as the crisis in July led some of the buyers to abandon that process.”

This is the reference to the riots and riots in KwaZulu-Natal and parts of Gauteng in July this year.

Sewela said that Barloworld’s prospects for its fiscal year 2022 remain positive and that they are encouraged by the performance of their Industrial Equipment and Services businesses and the opportunities for this business in the coming year.

An analyst who did not want to be named said that while Barloworld has produced a robust set of results, he is skeptical about the group’s future performance.

The analyst no longer believes that Barloworld is a cyclical business or that the business has structurally changed and has structurally reduced its working capital requirements.

He said Barloworld has freed up a lot of capital, but suggested this is typical of engineering companies in South Africa now where there are supply shortages, relatively short supply chains and “trouble getting things done.”

“You have an almost unique situation where you have fairly tight markets and therefore you have good prices, which have been reflected in the margin, and almost artificially low working capital requirements at the moment because there are quite a few stocks that have been backed up.

“It’s a pretty nice situation for Barloworld, but the question is how long it will last. It’s certainly not sustainable throughout the cycle, but I can’t say if it continues for six months or two or three years, but cyclically the margins are close to peaking.

“I don’t think they can have a structurally low working capital,” he said.

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