Strong balance sheet makes a difference

arloworld has historically been a share for trading rather than longterm investing, with significant peaks and troughs.

This is partly due to a general lack of focus from the group on its strategic direction. The overly diversified nature of the conglomerate is starting to change, as Barloworld has been on a dealmaking spree to tighten up its portfolio exposures.

Barloworld’s best quality over the past year was its powerful balance sheet, which allowed it to execute strategic acquisitions at a time when many businesses were begging shareholders for money.

Despite recent acquisitions of more than R8bn, the latest trading update confirms net debt to earnings before interest, tax, depreciation and amortisation (ebitda) below two times and ebitda interest cover above four times. Barloworld is highly experienced in mergers & acquisitions and balance sheet management, raising a bond at R1bn in February 2021 at favourable pricing. A R3bn debt syndication process has also been followed.

Further cash inflow came from the disposal of a large portion of the motor retail businesses to the joint venture that Barloworld has with NMI Durban South Motors. The deal was concluded in January and brought in nearly R950m in cash, with up to R3bn in debt moving off the balance sheet. Any recourse on the R1.1bn floor plan facilities still needs to be confirmed.

The cash price was funded by raising debt against the properties in the joint venture — 50% of the income from this business will continue to be

Brecognised by Barloworld in the income from associates line. This is ultimately a partial sell-down of exposure in return for a cleaner balance sheet — though investors shouldn’t ignore the underlying leverage introduced into the joint venture. This could put pressure on cash flows.

In January, management noted that the motor retail business unit has historically contributed about R500m operating profit. About R300m of this has essentially been sold to NMI, with about R100m retained in Barloworld and contributed mainly by the SMD business. The rest was generated by the businesses in NMI.

Overall, this looks like a decent piece of dealmaking and a step in the right direction for the group as it focuses on yellow goods (specifically Caterpillar products) and agriculture.

The completed recent acquisitions include Tongaat Hulett’s starch business, which went through a further due diligence process as Barloworld exercised its rights under a material adverse change clause (because of the pandemic). Satisfied with the outcome, Barloworld finalised the acquisition and moved into the attractive agroprocessing industry.

Prior to Covid, Barloworld made a play for a Mongolian equipment business that distributes Caterpillar products. The pandemic offered a chance to renegotiate the deal, resulting in the purchase price falling from $217m to $198m, of which $30m is deferred.

After a busy period of deals, the net result is a balance sheet with R7.5bn in cash in February 2021 vs R6.7bn in September 2020. That’s impressive against this economic backdrop.

The acquisitions are performing ahead of expectations, so it’s unsurprising that this robust capital structure has allowed Barloworld to guide the market that dividends will be back soon — encouraging news for shareholders.

However, there are still downward pressures.

Though the commodities boom has been helpful for the equipment division, the downturn in the construction sector dragged overall revenue down 4.9% for the five months to February 2021 in Southern Africa and down 9.3% in Russia. Eurasia as a unit is up 23.4% but interpret this with caution, as the Mongolian acquisition is included in this number but not in the comparable period.

And Barloworld needs to exit the problematic automotive and logistics businesses. The rental fleet has been halved from 27,000 vehicles and there has been interest in the logistics business on a piecemeal basis, which means 189 job losses are likely.

At the time of writing, the share price is at pre-pandemic levels and testing another break upwards. Investors who missed the frenzy in early December (a 27% jump in two days) could take heart from the price action since the trading update was published on March 31. Interim results are due on May 24. A strong result could see a break above R100 a share, with a mediocre result likely to see share price consolidation around current levels.

The real story here is that Barloworld is showing strategic focus, with the balance sheet to back it up. That’s a powerful combination. ●

“The completed recent acquisitions include Tongaat Hulett’s starch business