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Barloworld reflects on resilient group performance

28th September 2021

By: Schalk Burger

Creamer Media Senior Deputy Editor

     

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JSE-listed equipment and services company Barloworld says the group achieved a resilient performance for the 11 months to August 31, in what remains a tough operating environment.

The resilient performance was driven by a robust performance from industrial equipment, together with a substantial contribution of new acquisitions during the current financial year.

This was further supported by solid, sustainable cost management and strong free cash flow generation by the group’s core operations, the company said in a trading statement issued on September 28.

"Our board will release [an updated] trading statement once a reasonable degree of certainty exists concerning the group's results for the year ended September 30. We expect to release our annual financial results on or about November 22. Challenges include ongoing effects of Covid-19 and other socioeconomic impacts."

Further, the group reviewed its current facilities, including committed and non-committed facilities, as well as headroom on the existing medium-term note programme and it remained satisfied with the positive state of headroom, gearing and liquidity, Barloworld said.

"The group’s priorities in the short term remain on the integration of and extracting value from our recent acquisitions of Equipment Mongolia and Ingrain, as well as maintaining focus on implementing the various disposals and corporate actions announced to simplify the group’s portfolio.

"The group is mindful of capital allocation as part of its overall strategic objectives. Given the strong balance sheet and various disposals currently under way and resilient trading results, the board resumed dividend payments at interims with the group’s stated pay-out ratio of 2.5 to 3.5 times headline earnings," the company said.

The Equipment Eurasia division maintained a strong start, as reported for the half-year to March, and continued to deliver results above expectations against the backdrop of the Covid-19 pandemic and a challenging geopolitical environment.

"Strong mining sales with good margin realisation and cost containment continue to drive this performance. Activity in the coal sector is recovering strongly in Russia, and Mongolia continues to benefit from increased levels of coal exports to China. The gold and diamond sectors remain important contributors to the increased mining demand in Russia and the addition of Mongolia expanded our existing exposure to a diversified portfolio of commodity sectors," the company said.

Although the inclusion of Mongolia’s revenue contributed to Eurasia’s revenue to August exceeding the prior year by 48.1%, Russia also contributed positively through a 13.9% increase in revenue year-on-year in dollar terms.

Operating profit remains well above the previous year with Russia exceeding the prior year by 18.2% and Mongolia continuing to perform above expectations.

"The division generated a strong operating margin, partly owing to Covid-19-restrictions-related cost savings, as well as other cost containment measures and strong doubtful debt recoveries."

The firm order book for Equipment Eurasia at August 31 reached record levels at $248-million, well above the $177-million in March and $105-million in September 2020. This was driven by a diversified mining order book, with coal the strongest contributor followed by gold, copper, nickel and diamonds. Russia contributed $219-million to the current order book.

Further, Ingrain’s results for the ten months from the November 1, 2020, acquisition date reflect revenue and earnings before interest, taxes, depreciation, and amortisation (Ebitda) well ahead of the comparative preceding period, with good margins and a strong Ebitda to operating cash conversion ratio.

"Sales volumes growth during the second half of the year were curtailed by the impact of the four-week alcohol sales ban affecting offtake from the alcoholic beverages sector.

"However, the sector continues to prove its resilience, with sales significantly ahead of the comparative period. This, and the performance of the coffee creamer and paper converting sectors, partially offset reduced sales to the paper making and prepared food sectors, demonstrating the benefit that Ingrain derives from its diverse customer base," Barloworld said.

Ingrain's gross margins for the period, which are 260 basis points higher than the preceding period, continued to benefit from a combination of higher international agricultural commodity prices, the large maize crop harvested in South Africa in 2020 and expectations of a new season maize crop that is estimated to be 7% higher than the previous season’s crop and is the second largest crop on record.

Operating margins remain above the prior year levels, but are expected to be below those reported in the interim results owing to the impact of seasonal electricity rates and certain one-off costs, the company said.

Meanwhile, Barloworld's Equipment Southern Africa division continues to deliver strong results despite the impact of Covid-19 across its territories, with total revenue increasing by 1.9% for the 11 months to August 31, compared with the previous year. Mining activity levels improved and were supported by strong commodity prices, while construction is also showing some signs of recovery.

Total machine sales and engines were down while aftermarket revenue was up, mainly driven by a double-digit growth in parts sales. The machine order book remains strong, despite the global supply chain challenges and the goods clearing backlog at the ports of entry across our operating regions, which had a negative impact on machine stock availability.

Operating profit was up 66.6% on the back of a continued focus on growing aftersales contribution and operational efficiencies and, as a result, the operating margin at 10.3% was well ahead of the prior financial year by 400 basis points.

However, the Bartrac joint venture in the Democratic Republic of Congo remains under pressure. The reduced trading activity, the one-off restructuring costs and impairment of non-operating capital items resulted in a share of loss from the associate, Barloworld said.

Further, the division’s efforts to optimise invested capital continue to deliver strong free cash, and the outlook for the division remains positive with a 57% increase in the total firm back order book amounting to R3.6-billion at the end of August, up from R2.3-billion in September 2020.

Additionally, while the trading environment was challenging, the car rental industry has seen some positive developments with an upward shift in the rental rates.

The strategy to reposition the business towards off-airport activities that Avis Budget embarked on since the onset of the pandemic has yielded positive results. This is particularly evident in the growth of the subscription products, with longer length rentals and revenue up 3.6%, albeit in the context of 11 months of Covid-19 compared to the first six months of the prior year that did not include any Covid-19 impact, the company said.

"The business has recovered beyond global expectations for the car rental industry, benefiting from the restructuring efforts taken by management in the second half of the 2020 financial year with the operating profit increasing by 290% ahead of the prior year. Fleet utilisation at 77% is more than 16% ahead of the preceding year, aided by the agility in resizing the fleet in response to the change in demand and customer segment mix."

The business has further benefited from a bullish used vehicle market, with results exceeding the 2020 financial year's performance. The global fleet shortage, caused by the semi-conductor deficit and resultant slow new vehicle production, remains a constraint for the car rental industry at large.

Meanwhile, Avis Fleet performed in line with expectations, with revenue declining by 13.2% compared to the prior year mainly as a result of the natural attrition of public sector contracts, which were expected in the current year.

"While the trading environment for the corporate customer base was tough, the business has been able to hold its own in this segment despite the pandemic. Green shoots of growth can be seen in the firm order book and the number of renewed facility approvals that are in the system, however, the global vehicle shortage has also been an impediment to delivery," Barloworld said.

Operating profit is 12.8% ahead of the previous year, attributable to the cost savings from the restructuring efforts of management in the prior financial year and the bullish used vehicle market.

Further, the diversification of revenues into heavy commercial vehicle leasing is off to a good start, with an exceptional performance in the current financial year.

Barloworld's Salvage Management Disposal performed ahead of the prior year owing to the recovery in trading volumes and margin improvement. The business has shown resilience with earnings that outperformed and strong recovery ratios despite the impact of an uncertain trading environment in South Africa.

The group's net debt position has increased to R3.7-billion from R2.6-billion at September 2020 after acquiring Ingrain, and remains well within its target net debt-to-equity ratio.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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