Barloworld on the hunt
Diversified industrial company Barloworld is on the lookout for acquisitions.
The group is seeking to grow its Equipment Southern Africa and Ingrain businesses organically amid high demand.
CEO Dominic Sewela says the now leaner company, backed by a strong balance sheet, is well placed to take advantage of opportunities in the market.
Sewela said this as the multinational group, which still has operations in Russia, reported stable aftermarket demand in Russia despite grappling with sanctions there.
He said that having completed a strategic optimisation, which included exiting noncore businesses, Barloworld is now focusing on an organic and acquisitive growth strategy that will shore up its market share in its two verticals.
“As interest costs rise we are going to see a lot of private equity companies coming under pressure, and that will present an opportunity for us to get a business that we like to assimilate into the two verticals,” Sewela told Business Day.
“Our balance sheet is mainly working capital-based, therefore for acquisitive growth we are well placed to find businesses that are well priced that we find lucrative and in line with our strategy.”
Results for the six months to end-March showed group headline earnings per share from continuing operations, a common profit measure in SA that excludes certain items, increased 29.3% to 578c. The R16.3bn JSE-listed company reported that its net profit from continuing operations went from a loss of R164m a year ago to a profit of R1.1bn as revenue from continuing operations rose 12.9% to R20.8bn.
Operating in two verticals, the Johannesburg-based diversified industrial group supplies industrial gear such as earthmoving equipment and power systems to customers in the mining and construction sectors.
The group’s second segment, which it calls consumer industries, focuses on providing large enterprises with ingredients such as those that are essential for manufacturing food and beverages, paper, pharmaceuticals, building materials and adhesives.
Sewela said that as part of a deliberate strategy to drive exports for the consumer industries vertical where Ingrain sits, Barloworld started during the reporting period to explore the possibility of opening channels in Australasia and some parts of Asia. He said that trend is likely to continue.
“The demand for starch in Asia is huge, and when you look at our yields in SA in terms of maize production [which] has performed better than normal, and from a pricing point of view with a weakening rand we are actually able to sell to those markets more competitively as well,” said the CEO.
Highlighting the strong growth of machinery sales in Equipment Southern Africa, attributed to an uptick in demand from the mining and construction sectors, Sewela said that its total order book was strong at R5.7bn compared with R4.8bn at September 30 “with activity levels expected to be sustained”.
However, equipment sold to the construction sector was, unfortunately, not an indication of government expenditure but rather that of private sector construction.
“We are seeing a lot of private construction taking place in property development space,” said Sewela. Activity levels in this area are expected to be sustained, he said.
The aftermarket growth trajectory experienced in the six months is also expected to continue in the second half of the financial year.
Russia is an important market for the group — generating more than a fifth of operating profit — but Moscow’s invasion of Ukraine in 2022 and the subsequent sanctions against Moscow led Barloworld to write down the value of its assets by R1.03bn in the six months to end-March 2022.
However, outgoing Equipment Eurasia CEO Quinton McGeer emphasised that aftermarket demand was stable in Russia, and the business was continuing to respond to increased opportunities.
“[The] Russian environment remains fluid and business will constantly be aligned to new sanctions regimes and opportunities,” said McGeer.
Acknowledging the concern that ratings agency Moody’s Investors Service’s expressed recently about Barloworld’s exposure to Russia and the group’s operational concentration in SA, which exposes it to the socioeconomic, political and regulatory environment of the countries, Sewela said compliance with all sanctions was a tough juggling act.
“And here you’ve got several jurisdictions to comply with — the US, UK [and] EU, as well as Russian laws themselves,” he said. Barloworld had tried to indicate to the market that it does not have “too many assets in Russia” and its diversification strategy was kicking in.
“What makes Barloworld resilient, and a lot of people don’t catch it, is how diversified we are across geographies, so if one geography gets affected, the other geographies are able to pick up,” said Sewela.
“But, notwithstanding, if you look at the core business excluding Russia, the core business is delivering exceptionally.”