Barloworld impairs Equipment Eurasia business following Russia’s invasion of Ukraine

Impact of conflict and sanctions on the business expected to limit the group’s medium-term top line growth.
The group says it will still be able to deliver equipment valued at close to R100m into Russia within the next four months unless new sanctions are imposed. Image: Luke Sharrett/Bloomberg

JSE-listed Barloworld has put through a R1 billion impairment of its Equipment Eurasia business because of the constrained outlook following the Russian invasion of Ukraine despite it producing strong results in the six months to end-March.

The impairment was based on lower estimated cash flows together with higher discount rates.

Read: Barloworld ‘to hunker down in Russia’ – CEO

Barloworld group CEO Dominic Sewela said on Monday they expect this trend to limit the group’s medium-term top line growth.

The group warned shortly before the end of this reporting period that it would have to look at an impairment in the Eurasia equipment business because the longer the conflict and the sanctions remain in place, the more difficult it will be for the group’s business to trade.

Shares in Barloworld fell almost 7% on Monday to close at R97.34.

Equipment Eurasia grew revenue by 11.8% to R5.7 billion on the back of strong mining activity and excellent growth in Russian aftermarket revenue in the six months to end-March.

However, Barloworld warned on Tuesday that trading in Russia is becoming increasingly difficult as the full effect of sanctions are beginning to be felt.

Sewela said the group will be able to write back some of the impairment, such as the asset value of property, if the environment improves in Russia.

“My view is it’s not going to get worse in terms of impairment so in the short term we, at an operating level, we will be okay until September and it will start to bite in 2022, 2023 and 2024 because even if the war ends at the end of this year, the sanctions themselves are not going to go away immediately and the effects of it are going to be felt for longer,” he said.

Read: More multinationals look to distance themselves from Russia

Sewela said that unless new sanctions are imposed, the group will still be able to deliver certain equipment into Russia valued at close to R100 million within the next four months.

Other units doing well

Apart from the financial performance of the Eurasia Equipment business, Barloworld benefitted from a robust performance of Equipment Southern Africa, the resilience of its Ingrain businesses, and exceptionally strong results from the car rental and leasing business in the period.

Group revenue from continuing operations rose by 13.6% to R18.4 billion while operating profit increased by 34.7% to R2.8 billion as the operating margin improved to 12.2% from 7.3%.

Group headline earnings per share increased by 109% to 756 cents from 362 cents in the prior period.

The group’s return on invested capital (ROIC) improved to 14.1% from 3.8%.

An interim ordinary dividend of 165 cents per share was declared.

Equipment Southern Africa’s revenue grew by 7.7% to R9.4 billion driven largely by machine sales and rentals and exceptional growth in greater African territories.

Ingrain, Barloworld’s consumer industries business, grew revenue 45.7% to R2.9 billion compared to the prior period, which was only for the five months since Ingrain’s incorporation from November 1 2020.

Read: Tongaat sells starch business to Barloworld unit for R5.26bn

The revenue of the car rental and leasing business declined by 5.8% to R3.9 billion from R4.17 billion but operating profit improved by 88% to R709 million from R378 million.

Sewela said Barloworld’s exit from the logistics business is largely complete and it has concluded the sale of most of the businesses within the transport division while discussions are progressing with an interested party for the sale of the supply chain solutions (SCS) business.

Update on exit from car rental and leasing

Barloworld’s board previously approved the group’s exit from its car rental and leasing business through a sale or unbundling and separate listing.

Sewela said significant progress has been made in preparing the business to operate on a standalone basis and the separation remains on track to be completed this calendar year.

He said Barloworld has only received one serious offer for the car rental leasing business, which it entertained for a while until it fell through “because of challenges the serious trade buyer has in their jurisdiction” with other expressions of interest by “chance-takers”.

Analyst’s view

Rowan Goeller, an analyst at Chronux Research, said the Russian business has had to deal with sanctions but all the other group businesses have done really well.

“They are not exiting Russia and have not impaired the business fully but are battening down the hatches for everything to pass,” said Goeller.

“It was growing strongly and was a fairly significant contributor to Barloworld overall and they think they can keep the business ticking over without making losses.

“Elements of the business can continue, even under the current sanctions regime, but at a level of probably less than 50% of what they had before. In that scenario, to make a profit out of a business there is going to be difficult,” he said.

Goeller said the Equipment Southern Africa business is doing well and there is a lot of interest in minerals that flow into the renewable energy value chain.

He said the car rental and leasing business has unusual market conditions, which are very favourable, and the business is doing well now but is not sustainable.

“The likely exit looks like an unbundling and separate listing like Motus from Imperial so that doesn’t give Barloworld cash necessarily.

“But their current balance sheet can support further acquisitions in the consumer industries business that is focused on food and food ingredients,” he said.

Listen as Dudu Ramela chats to Sewela on Barloworld’s latest results: 

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