Despite mounting international criticism of and sanctions imposed on Russia, logistics and equipment group Barloworld is still committed to investments in the country.
Barloworld – which sells mining and construction equipment in Russia – is still upbeat about the country’s prospects, even as it continues to see macroeconomic and geopolitical issues hit company operations.
Group CEO Clive Thomson says out of Barloworld’s business divisions – spanning equipment and handling, automotive and logistics – the equipment business in Russia is particularly concerning.
“Russia is not only exposed to the global mining cycle but a big percentage of [Barloworld’s] equipment was sold to nickel, coal and gold miners in Russia,” Thomson told Moneyweb on Monday.
No doubt the country is top of mind on the list of worries, given that the company’s revenue stream was knocked by $55 million (R651 million) to $129 million (R1.5 billion) for the six months to March 31. Furthermore, operating profit reached $8.6 million (R101 million), which was $6 million or 41% below last year.
Russia’s economy is dependent on oil reserves meaning that the country was hit by the significant slump in the international price of oil. Thomson says the oil price decline will reduce government’s revenue and subsequently the investment in infrastructure. This may possibly see demand for Barloworld’s construction and mining equipment wane.
In March 2014 sanctions were approved by the United States, the European Union (EU) and other countries and international organisations. They are likely to remain in place least until the end of the year and probably until Russia agrees to fully implement the Minsk peace agreement.
“We are very much committed to the Russian market for the long term,” Thomson says. “There are still significant mineral deposits on the territory, proven reserves where feasibility studies have been conducted.
“While the exportation of those deposits has been pushed out in terms of time lines, we very much believe over time they will materialise and therefore in the long-term outlook it is still very solid for us in Russia,” says Thomson.
There is a bright side in the midst of turmoil. Although Russian operations are under pressure, Barloworld sees the resilience of the aftersales market as “strong”. Its order book for equipment for the period under review stood at $16 million (R189 million). Barloworld is also betting the growth of the region’s division on opportunities in Russia’s Power of Siberia, a natural gas pipeline project under construction.
Barloworld, with a market capitalisation of R22.6 billion, managed to report an overall rise in revenue of 3% to R30.7 billion. The company also saw headline earnings per share increase by 16% to 367 cents, compared with 316 cents a year earlier. An interim dividend of 115 cents per share was declared during the period.
Avior Research industrial analyst Mark Hodgson says the company posted a solid set of results.
“But the company continues to operate in a pretty challenging environment. They are trying to manage a tight ship and some of the issues they are facing are beyond their control. In the short term, Russia is pretty tough. They have to ride it out and be patient,” Hodgson says.
Another business unit which might offset losses in Russia is Barloworld’s equipment business division in Iberia, Spain.
The division reported an operating profit of €0.8 million (R10 million), compared with a loss of €2 million (R32 million) last year. It trades in a country where the economic recovery has been two years in the making following the 2007/8 global economic crisis. Thomson says its Caterpillar business came under pressure during the crisis, as Spain’s construction industry plummeted.
“I am convinced that as the economy starts to grow we will see an uplift in the yellow nickel market in Spain and that will go straight to the bottom line and make a nice profit contribution to the company in the future,” says Thomson.