PICK of the MONTH

“Avis Fleet, the leasing business, has been ruthless in its focus on efficiency

When IM wrote on Barloworld in April 2021, we were impressed with the focused approach taken by the management team in terms of business strategy and balance sheet management.

Our price target was R103, representing 6% upside at the time. After a parabolic spike in late May, it settled down at that level by July.

The company seems to have missed the memo that bulls take the stairs and bears take the lift. The price action is exactly the opposite, with regular spikes and slow corrections. In late September, the price did it again, with a rally from about R95 to R125. That’s a return of more than 30% in just a couple of weeks.

The latest rally came after a trading update that shows how Barloworld’s businesses are in the right place at the right time. Though price history suggests that waiting for a correction of the recent spike before entering a position is probably sensible, there are reasons why the price could keep running.

Barloworld has focused its operations and has done so in industries that benefit from growth in construction and mining, including the coal wave that has gripped the market. A tourism and drinking season in December would also be beneficial for the group. These are all good places to be over the next few months.

For example, Barloworld Equipment Southern Africa is exposed to the mining and construction industries that are showing more life than at any other time in the past decade. Unfortunately, revenue rose only by 1.9% in the 11 months to August, due to machine stock availability challenges in the global supply chain crunch. The strengthening of the rand against the dollar also affected revenue from the rest of Africa.

Importantly, operating profit was up 66.6%. The business has focused on aftermarket revenue at a time when new machines are hard to come by. When combined with strong cost controls, the benefit is clear: a jump in operating margin by 400 basis points (BPS) to 10.3%. With a firm back order book of R3.6bn in August (up 57% since September 2020), Barloworld offers an interesting way for mining and construction bulls to invest.

There’s also good news in the businesses in Russia and Mongolia, where the coal story is playing out in Barloworld’s favour. The group’s customer base is involved in gold, diamonds and diversified commodities as well.

There are a few important points here. The coal bonanza is a feature of a spike in global energy prices. There are operating leverage benefits, with high revenue growth driving even higher operating profit growth. There’s also a hard currency underpin to the group, so a weakening rand is positive for it.

With a record firm order book of $248m (of which $219m is in Russia), this business looks ready to fly when supply chains ease up.

The Consumer Industries segment of the company consists of Ingrain, the starch business acquired from Tongaat on November 1 2020. Sales volumes were affected by the alcohol sales ban, so a welllubricated December would be beneficial to the business.

There are numerous other product categories in the business as well, ranging from paper making to prepared food. Gross margin is up 260BPS and an expectation of the second-largest maize crop on record is promising.

Note that Barloworld has guided a drop in operating margin from the interim period due to seasonal electricity rates and some one-off costs.

After resizing the fleet, the car rental business (Avis) has achieved 77% utilisation. A strong used car market helped; it allowed the fleet to be reduced at excellent prices.

A great tourist season in December will be positive for Barloworld. Avis Fleet, the leasing business, has been ruthless in its focus on efficiency: operating profit is up 12.8% despite revenue declining 13.2%.

Barloworld has indicated that the SMD business, which buys written-off vehicles, has performed ahead of the prior year. But the Logistics division is recognised as a discontinued operation. It sounds like Barloworld will need to sell it off piecemeal, as offers are coming in for portions of the business. This is a good example of Barloworld’s efforts to streamline the group.

With business units that are swimming in the right streams at the moment and a financial position that boasts eight times interest cover and net debt to earnings before interest, tax, depreciation and amortisation at below one, Barloworld has done all the right things in preparation for a big year.

Results for the year to September will be released on November 22. ●