Barloworld
Barloworld reported a blockbuster set of results that ticked all the boxes as the group recovered from the low point of the global downturn caused by the Covid -19 pandemic. Barloworld has over the past few years undergone major restructuring which, in addition, has been responsible for the turnaround in the company’s fortunes.
The Caterpillar equipment operations surged due to the strong demand for commodities in SA, Russia and Mongolia, contributing approximately 70% of group operating profits in excess of R4 bn. This division has high margin parts and services revenues, which was a major profit driver in the current year.
A strong order book for equipment in the region of R4 bn for 2022 is already secured, and should be a positive catalyst for the next financial year. The turnaround in the car rental and leasing segment, previously battered by the falloff in tourism, reflected an operating profit of R850m, compared to a loss of R302m in the previous reporting period. This was also a function of downscaling of the AVIS fleet. This division’s operating margins jumped by 340%, with FCF up by 223%, on a rise in revenue of only 3.5%. It benefited from the leverage of a lower cost base and stronger pricing on the back of buoyant demand.
The Avis operations have been earmarked for disposal, with the sale closing in 2022, and is part of the strategy of selling low margin capital intensive businesses. It was the same strategy followed in the exiting of the loss-making logistics division.
The grain, food and starch operations purchased from Tongaat made an operating profit of R534m, and is part of the strategy to double the services contribution to the group by 2026.
Group operating margins grew by 450bps, with FCF conversion of 92% vs that of 69% in the previous year. EPS was 1391c compared to the previous loss of 1236c, which enabled the group to pay a special dividend of R11.50 per share. This special dividend reflects the strengths of the balance sheet, and the good capital allocation investment strategy (and good execution of acquisitions).
The equipment division, with its geographic and commodity diversification, are a sound long term theme, which should be positive for Barloworld, as well as growing rand hedge income. Barloworld’s forward PE rating of 12x, does not appear to be onerous given proactive management results.
