Our opinion on the current state of BARWORLD(BAW)Barloworld (BAW) is an international supplier of heavy earth-moving equipment and vehicles to the mining, agriculture, infrastructure, power, automotive, and logistics sectors. Its well-known brands include Caterpillar, Avis, Massey-Ferguson, and Challenger. The company operates in 24 countries, focusing on Southern Africa, Russia, and other emerging markets. This wide diversity in operations and geographical reach offers some insulation against economic recessions.
The company has sold its Spanish and Portuguese operations for about R2.5 billion and is now investing in Mongolia with the acquisition of the US-owned Wagner Asia Group. However, the Ukraine crisis has complicated Barloworld’s ability to receive payments from Russian customers and has increased the costs of some commodities. Despite these challenges, the company maintains that it has sufficient funds to navigate the situation, even as its share price has seen a notable decline.
In its financial results for the six months ending 31st March 2024, Barloworld reported an 8% decline in revenue and a similar decrease in headline earnings per share (HEPS). However, the company’s net asset value (NAV) increased by 9% to 9111 cents per share. The drop in revenue was mainly due to declines in its Vehicle Trading (VT) division (24% decrease), Equipment Southern Africa (10% decrease), and Ingrain (3% decrease). These declines were partially offset by a 43% increase in revenue from Barloworld Mongolia, driven by government-led infrastructure projects and mineral demand, primarily from China.
In a trading update for the 11 months ending 31st August 2024, Barloworld reported a 7.4% drop in revenue and a reduction in net debt to R3.5 billion from R6.3 billion in the prior period. The company attributed the revenue decline to challenging trading conditions in Southern Africa, while its operations in Mongolia benefited from a booming infrastructure expansion and increased mineral exports to China.
For the financial year ending 30th September 2024, the company estimated a drop in HEPS of between 20.1% and 21.6%. The company's recent restructuring includes the unbundling and separate listing of its car rental and leasing business, Zeda Limited, on the JSE on 13th December 2022, and the successful disposal of its Logistics business, effective 31st March 2023.
Technically, Barloworld’s share price was hit hard in March 2020 due to COVID-19, leading to a prolonged sideways movement in what is referred to as an "island formation." There was an eventual breakout above the island, with the share price also breaching its long-term downward trendline. On 9th April 2024, a strong on-balance-volume (OBV) buy signal was observed, and the share has been trending upward since then. The stock appears undervalued, trading on a price-to-earnings (P:E) ratio of 7.9, making it attractive at current levels.
However, geopolitical tensions in Russia and Ukraine remain a significant risk for the company. On 13th September 2024, Barloworld disclosed that it might be in violation of US sanctions against Russia due to exports to its Russian subsidiary, which led to a sharp decline in its share price.
