Barloworld suffers from Russia exposure
Barloworld’s share price has been a torrid underperformer of late and, at the time of writing, has underperformed the JSE all share index by an uncomfortable margin year to date. On face of it, using most valuation metrics, the share now appears cheap.
So why is the share price reflecting so much negative sentiment towards this JSE stalwart, and is this perception warranted?
Listed on the JSE in 1941, Barloworld (affectionately know as Barlows) has a rich 120-year history in SA. It was founded in 1902 as a trader in woollen blankets and coats. The company has diversified over the years by becoming a seller of industrial equipment and a producer of cement, paint, food, IT and even — at one point — TV sets. This diversification meant that it once dominated many sectors of the SA economy.
After conquering SA, it expanded, mainly through acquisitions, into other African countries as well as globally. This expansion included countries such as the UK, with Barlows even listing on the London Stock Exchange in 1969, then into the US and a host of other countries.
In 1994 the company, then known as Barlow Rand, started a more than decadelong process of unbundling noncore and underperforming operations to become a more focused and streamlined business. It rebranded first as Barlow Ltd and then in 2000 as Barloworld.
Today, the group is structured into two primary areas of focus. The first is industrial equipment and services (known as
Equipment Southern Africa and Equipment Eurasia, partnering with brands such as Caterpillar). The second is consumer industries, trading under Ingrain, Africa’s largest producer of unmodified and modified starch and glucose and related products.
The group has also partnered with strong brands such as Avis and Budget in the car rental and leasing space. The car rental and fleet business is now considered as an “asset held for sale”, with management indicating that the group is considering options which could lead to an outright sale or even an unbundling to shareholders and a potential separate listing (Avis was previously listed on the JSE). The timing for this is good as this business unit has recovered substantially and has returned to pre-Covid levels on an operating profit basis, meaning better leverage for a higher valuation for the group and some upside for shareholders.
With Barloworld’s strong exposure to the mining and construction sector as well as oil and gas as part of its diversified offering, why has the market taken a disliking to the group as reflected in its dismal share price performance?
The answer may lie in the fact that Barloworld holds, through Vostochnaya
Technica UK, dealership rights to distribute Caterpillar equipment and other original equipment manufacturer equipment in Russia. The group used to generate about 20% of its revenue from its Russian operations.
Barloworld’s Russian business has suffered as sanctions imposed on its customers have resulted in product sale restrictions, which, together with supply chain disruptions, have made life for its customers in this region very challenging and resulted in cancellation of orders.
Add to fallen sales a high fixed cost component, which is the nature of this type of business, and you can see why the shine has been taken off the group for now. With no clear resolution to the Russia/ Ukraine war in sight, it’s unlikely the Russian business will contribute any profit over the next year or so.
Despite the pressure on the Russian operations, Barloworld has, for now, stated it does not plan to exit Russia. The Russian business was impaired by just over R1bn in the group’s latest set of financials for the first half of 2022 (which ended in March). Time will tell if this impairment is sufficient.
Is the share price now appropriately discounting all this negativity and will Barloworld’s other businesses have enough fire power to offset the drag from the Russian business?
Despite the negative Russian sentiment weighing heavily on the share price, there are some positives, such as the SA and Mongolian equipment businesses continuing to benefit from a commodity cycle which, for now, is holding up.
On top of this, the starch and glucose business showed strong volume growth in its latest set of interim results and this performance is expected to continue, especially in sectors which were previously affected by Covid restrictions, such as the alcoholic beverage sector. Another positive for shareholders is the potential windfall from a disposal of the car rental and fleet business.
So even if you heavily discount the overhang of negativity brought on by its Russian exposure, the current valuation for Barlows may now just be offering an opportunity for long-term investors prepared to invest through economic cycles.
Barloworld has stated it does not plan to exit Russia