Ratings agency Moody’s has warned that Barloworld's exposure to Russia and the group's operational concentration in SA which exposes it to the socioeconomic, political, and regulatory environment of the country are risks to its ratings.
This is as the ratings agency kept Barloworld’s long-term rating unchanged at Ba2 with a stable outlook.
However, the agency cautioned that Barloworld’s credit metrics were expected to weaken in 2023 due to disruptions to its Russian business — where the group generates just over a fifth of revenue — but would stay at adequate levels.
Moody’s said the stable outlook “reflects our expectation that in case of prolonged or permanent severe disruptions to Barloworld’s Russian operations, Barloworld’s credit metrics will remain commensurate with the current rating level.”
“While we expect credit ratios will remain adequate, an upgrade is unlikely as long as there remains uncertainty over the full financial effect on the Barloworld group of the changed operating environment of its Russian business.”
Russia is an important market for the R16.6bn JSE-listed group but the Kremlin's invasion of Ukraine in 2022 and the subsequent sanctions against Moscow led Barloworld to write down the value of its assets by R1.03bn in the six months to end-March 2022.
Additionally, sales more than halved in Russia for the five months to end-February as the war in Ukraine continues, but Barloworld has said demand for parts remains strong and it expects an improved cash generation position over the remainder of the 2023 financial year, adding that the local Russian business continues to be self-sufficient in terms of its funding requirements.
The Johannesburg-based industrial group supplies industrial gear such as earth-moving equipment and power systems to customers in the mining and construction sectors across Southern Africa, Russia and Mongolia.
With 72% of revenue derived from Southern Africa, which is primarily driven by revenue from SA, Barloworld is intrinsically linked to the macroeconomic environment of the country.
Noting that the growth of the SA economy remains structurally weak despite some recovery from the pandemic in 2021, Moody's said it anticipated medium-term growth of only about 1.5% due to constraints from a malfunctioning labour market, decaying infrastructure and slow progress on economic and social reforms.
As the industrial group's ratings closely mirror the SA government bond rating — where it actually generates the majority of its revenue and cash flow — Moody’s said a downgrade or upgrade would be unlikely in the absence of a movement in the rating of the sovereign bond rating.
In April SA’s Ba2 rating was reaffirmed by the ratings agency and though SA remains a couple of notches below the coveted investment grade status, its outlook was changed from negative to stable.
On Thursday, Barloworld told shareholders in a statement that the rating action is a direct consequence of the rating action on the SA sovereign and reflects Barloworld’s operational concentration in SA.
Despite highlighting the group’s high exposure and the multitude of risks Barloworld faces in the regions it operates, the ratings agency said as of September 2022, Barloworld had sufficient liquidity sources to meet its upcoming debt maturities, dividends, investments and operating expenses for the next 12 months.
Over the last two financial years, the firm has completed a number of noncore business disposals in line with its portfolio realignment strategy which aims to become less asset intensive, more cash flow generative and less exposed to earnings cyclicality.
The group also established a consumer products division in 2021 after the acquisition of starch and glucose producer Ingrain from Tongaat Huletts.
In December 2022, Barloworld unbundled and listed its Car Rental and Leasing business (Avis) on the Main Board of the JSE. It also successfully divested its automotive and logistics businesses.
Moody’s said it had during 2022 changed the primary rating methodology applied to Barloworld to Business and Consumer Services from Retail to reflect the changing business mix of Barloworld and the fact that the Equipment business now contributes the greatest share of revenue and cash flow.
Upbeat on that growing equipment demand, the sole dealer for Cat earth-moving machines and related mining and construction equipment in SA said in February that it has increased investment in working capital in its local equipment division amid rising demand for machinery from a buoyant mining sector.
Barloworld shares were down 2% to R85.95 on Thursday.
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