CAPE TOWN – Heavy equipment and automotive group Barloworld’s share price has surged nicely since August and shareholders were no doubt pleased with the special dividend it declared with its annual results that were published last week.
Considering the low economic growth markets that it is operating in globally and in South Africa, the 14 percent increase in normalised headline earnings a share represented a strong performance.
Management have taken a strongly defensive position and gearing is negligible. They have taken note of criticism that the capital on its balance sheet should be put to more productive use and intend to push up gearing by 2022, helped by the conclusion of the heavy equipment acquisition in Mongolia.
Going forward in the short term, it needs to show that it can turn around the under-performing logistics operations, it needs to bed down the acquisition in Mongolia and it needs to start showing some efficiency improvements.
Given the forecasts of continuing low global and local economic growth, particularly in South Africa, and the capital intensive nature of its operations, it is as well they don't overextend the balance sheet.
The share price has held relatively steady this year, and rose to R127 last week on the day its results were published, before slipping more than 7 percent again, and trading 0.99 percent higher on Friday at R117.83, at a reasonable p/e of 10.8. On August 26 this year it was trading at around R108, which represents a gain of almost nine percent since then.
Barloworld could be the share to buy to broaden the defensive aspect of one's portfolio next year.
Mr Price on Thursday reported a lacklustre 7.9 percent decline in headline earnings a share in its 26-week interim period, partly from overstocking, and the share was trading 1.9 percent lower at R180.03 on Friday morning. Total revenue was up only 2.6 percent to R10.8 billion. The cash balance was strong at R4.2 billion.
The share price trend over a year has been downward – on November 23, 2018, it was trading at R248, meaning a more than 27 percent decline over a year.
A rebound in the fortunes of local consumers seems unlikely during the group's second half in spite of the traditional uplift in sales over the festive period.
Mr Price’s balance sheet is also well positioned defensively to rise out the tough trading environment, but it will need to pull something out of the hat to grow the top line in double digit figures again.
The share was trading on a p/e of 16, fairly valued considering the JSE All Share was trading on a p/e of 14.9.
More bad earnings news last week in the form of Investec’s underwhelming 1.7 percent decline in operating profit to £373.6 million (R7.055 billion), and a 17.2 percent decline in profit in the six months to September, as the group readies to list its asset management operations in the first three months of 2020.
Asset management generated strong net inflows, boding well for its listing.
The group blamed the weak performance of the UK banking market, Brexit uncertainties and the weak local economy for the decline in headline earnings.
The weak performance of the UK operations was not unexpected.
The cost to income ratio was 67.3 percent, up from 67.2 percent the previous interim period. They are different banks, but Standard Bank, essentially a retail bank, has a far lower cost to income ratio at 57 percent.
Investec’s share price was trading at 0.84 percent lower at R82.43 on Friday, on a relatively low p/e of 8.7. Lowering the cost-to-income ratio, as pledged by management, would certainly benefit that rating.
Doing well last week was South African focused diversified Reit Dipula Income Fund, which lifted its property income fund 19 percent in the 12 months to August, mainly off the back of a 20 percent reduction in vacancies. Its net property cost-to-income ratio declined by 8 percent to 17 percent. Gearing was sound at 40 percent.
These are results Dipula’s much bigger property REIT peers can only dream of in this market.
Dipula B shares were down 1.32 percent to R3.75 on Friday, and the shares are trading just over half the price they were a year ago. The p/e is low at around 3.7.
The small but certainly brightly burning light on the JSE last week was Stor-Age REIT, which owns 66 self-storage properties in South Africa and the UK and eight in the pipeline,
It lifted headline earnings 18.6 percent to 43.50c, and revenue a whopping 46.6 percent to R330.86m in the six months to September, with a repeat performance likely in the second half.
Again, these are numbers other companies in the property Reit sector can only dream of. And with plenty of single property operators in South Africa and the UK, there is certainly scope to continue growing.
The thinly traded, low volumes of shares traded in the company fell 0.34 percent to R14.85 on Friday, off a p/e of 24.21. On November 23, 2018, the share price was R12.53.