Barloworld’s new strategy draws questions

Analysts are uncertain about the prospects for JSE-listed Barloworld under its new strategy.

Barloworld is set to exit its automotive and logistics businesses as it aims to sustainably double its intrinsic value every four years and position the group as an industrial processing, distribution and services company with two focus areas:

• Industrial equipment and services, and
• Consumer industries focusing on food and ingredient solutions.

Barloworld CEO Dominic Sewela said at the group’s most recent financial results presentation late last year the acquisition of Tongaat Hulett Starch and the expansion of its Russian equipment business with the acquisition of Wagner Asia Equipment in Mongolia anchors the group clearly in terms of industrial capital distribution goods and related services, and also anchors it very clearly in terms of the food and ingredient businesses.

“These are going to be the core in terms of business verticals for Barloworld in the medium to long term as we manage the pivoting out of the motor, automotive and logistics businesses,” he said.

Proposed sale

In line with this, Barloworld this month announced the proposed sale of its motor retail business to NMI Durban South Motors (NMI-DSM), a joint venture of the Barloworld Group in which Barloworld holds a 50% interest alongside the Akoo family, for an estimated R947.26 million.

Following the proposed disposal, Barloworld’s entire motor retail interests will be housed within NMI-DSM, with Barloworld retaining its 50% interest in NMI-DSM.

The group reported that the disposal is “in contemplation of the Barloworld Group’s exit from the motor retail business”.

Barloworld in February 2020 also announced the acquisition of Tongaat Hulett Starch Division, now renamed Ingrain South Africa, for R5.35 billion.

However, Barloworld in May 2020 attempted to withdraw from this transaction because it believed the impact of Covid-19 was reasonably likely to cause the earnings before interest, taxes, depreciation and amortisation (Ebitda) of Tongaat Hulett Starch in the financial year to end-March 2021 to be 82.5% or less than in the previous financial year and a material adverse change.

The transaction proceeded after an independent third party declared that a material adverse change had not occurred.

Read: R5.3bn starch unit sale will slash Tongaat’s debt by 40% (Mar 2020)

Marc Ter Mors, the global head equity research at SBG Securities, believes Barloworld continues to regard equipment as a core business and is trying to replace its automotive and logistics interests with more capital-light business-to-business (B2B) orientated defensive business interests to make it even more countercylical to the equipment business.

Ter Mors said Barloworld will struggle at the moment with clarifying its strategy when the group does not yet know what kind of potential assets that fit the group’s desires will come to market and become available at suitable valuations to effect that strategy.

Uncertainties

“While they are going through this uncertainty of what the replacement businesses are going to be, the market will factor that in as uncertainty or a kind of holding discount.

“That is why we suggested that management must, if possible, fast forward the execution process but also to communicate quite clearly what the anticipated time lines will be,” he said.

Ter Mors said there are also several uncertainties about the sale of the automotive business, including whether the NMI-DSM transaction is one step to the sale of all the automotive interests over time, and if so, when and the shape of any transaction.

There are also questions about the level of debt that will move with the acquisition and what will happen to the lease obligations of the properties, which were sold into a black economic empowerment (BEE) vehicle that is mostly owned by black management, and whether those lease obligations will move to the new owners, he said.

However, Ter Mors said the strategic avenues are becoming a bit clearer in that Barloworld wants to sell out of automotive.

“They had a potential buyer pre-Covid-19 for the leasing business, which then fell through, so they have already shown their intent with another asset before,” he said.

Ter Mors believes that if you take a long term view, the dealership model is possibly under pressure from electric vehicles because there will be fewer parts and less maintenance than on an internal combustion-engined vehicle.

Read: Auto industry could take over a year to recover – TransUnion

“All of those trends are rapidly progressing globally but will still take some time to come to fruition in Africa and South Africa.

“But we all know, you need to start selling these assets when it’s not an immediate concern on the time horizon,” he said.

‘Confusing’

Another analyst, who did not want to be named, said Barloworld’s stated strategy is confusing because “it’s a bit of a hotch-potch when you start putting starch with capital equipment”.

“I just can’t see a strategy. You are just trying to make the company big so you can run a slightly bigger company.”

The analyst said four year ago Barloworld said vehicle leasing was non-core and it was shown as discontinued, but it was unable to sell it and it is now core again – with the same happening with the logistics business and “all of a sudden its non-core again because it didn’t do the numbers”.

Is reframing a strategy?

He believes Barloworld’s management panics “a bit with things” and referred to the plan to buy the starch business, but within a month wanting to get out of the deal and then stating that it is a wonderful business when they could not get out of the transaction.

“Is that how you do strategy? It’s a very confusing company to follow and I don’t think the management has the right depth and generally the execution is pretty poor,” he said.

In a voluntary trading update for the three months to end-December 2020 released on Friday, Barloworld said the group is trading well in the current environment, supported by the critical actions taken in the prior year, with the recent acquisitions delivering ahead of expectations.

“Our strategy to sustainably double the group’s intrinsic value every four years remains on track,” it said.

Shares in Barloworld rose 3.6% on Friday to close at R94.39.