Fitch Affirms Barloworld Limited at 'A+(zaf)'; Outlook Stable
The affirmation is supported by the group's continuing ability to deliver revenue and profitability growth despite difficulties faced in its markets, together with the leading market position it holds in its key operating segments and the growth opportunities identified by management. The group continues to grow acquisitively, however management has followed a conservative funding approach to this and the affirmation and Stable Outlook reflect our expectation that Barloworld will pursue financial policies consistent with the rating.
KEY RATING DRIVERS
Solid Performance Despite Weaker Markets
Given the group's solid performance despite weakness across many of its key geographies we expect Barloworld to continue to deliver mid-single digit turnover growth over the short-term with relatively stable margins. Medium-term potential depends on timing of mining companies' replacement of ageing equipment and the strength of the South African economy and its impact on consumers. Barloworld delivered a solid performance in FY14 with revenues increasing to ZAR62.1bn (FY13:59.5bn) and operating margins increasing to 6.2% (FY13:5.6%), despite weakening fundamentals in the mining sector and a pressurised South African consumer sector with high unemployment rates, labour disputes, rising interest rates and increasing inflation.
Limited Operational & Geographical Diversification
While the group has limited operational diversification across its key mining equipment and automotive sectors, it also has exposure to the infrastructure, agriculture and logistics sectors. The differing drivers and performance of the sectors was evidenced in FY14 with a low single-digit revenue growth for Equipment compared with high single-digit growth for Automotive & Logistics.
Similarly the group's revenue generation capabilities have significant exposure to southern Africa. Nonetheless the performance of this region has mitigated declines in Europe and more recently in Russia. Barloworld's intention is to capitalise on opportunities and increase its exposure in Africa, thereby increasing diversification of revenue generation outside South Africa.
Dominant Equipment Position
Barloworld's leading position in the southern African mining equipment sector has helped the business in the tough mining conditions. The group's relationship with its principal supplier and entrenched position within the sector has allowed it to significantly grow the product support business as new equipment sales decline. The extended mining product range continued to assist revenue growth in FY14.
Emerging Market Automotive & Logistics Opportunities
The automotive and logistics sector is expected to continue to provide solid growth opportunities particularly from the motor retail and supply chain management segments. Following FY14, consumers in the South Africa market have seen some relief with a pause in interest rate increases, reduced petrol prices and lower inflation, which should support growth for the automotive business, with logistics benefiting from supply chain management growth. A weak rand to the major currencies and low GDP growth will limit the positive impact but we expect to see high-single to low-double digit revenue growth for the division in the short to medium term.
Improved Financial Profile
In FY14 Barloworld's funds from operations (FFO) lease adjusted net leverage improved to 1.9x (FY13: 2.1x) benefiting from the lower net debt levels due to the increase in readily available cash in FY14 of ZAR3.7bn (FY13: ZAR2.5bn). Through the short to medium-term cycle, the rating assumes that net leverage will remain around 1.5x-1.8x factoring in sustained capex and dividends.
Fitch's key assumptions within our rating case for the issuer include:
- In aggregate we expect revenue growth to be mid-single digit in the short-term rising to low double-digit or high single digit from FY16 onwards.
- Equipment is expected to benefit from a recovery in new equipment sales from FY16 onwards with Russia a limiting factor due to political and economic conditions.
- Automotive and Logistics is expected to benefit from increases to the group's supply chain management business supported by recent acquisitions and investment as well as a limited positive impact from the introduction of the Budget brand to Barloworld's car rental division.
- Management has been cost focused in FY14 and while we anticipate some margin decline in FY15 it is expected to approach FY14 levels thereafter.
- Capex intensity is expected to remain constant in FY15, with some moderation in FY16-18.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage sustained above 2.0x
- EBIT margin sustained below 4%
- FFO interest cover less than 4.0x
- Evidence of supplier risk
Fitch believes that an upgrade is unlikely in the foreseeable future due to the cyclicality and geographical concentration inherent in the group's business risk profile.
LIQUIDITY AND DEBT STRUCTURE
Liquidity is supported by unrestricted cash balances of ZAR3.7bn at FY14 and by unutilised bank facilities of ZAR8.4bn, of which ZAR6.1bn is committed. Additionally the group has a ZAR10bn DMTN programme (ZAR6.5bn utilised as at 30 September 2014) against which it issues short-term commercial paper and long-term bonds.