Debt Reduction And Efficiency Focus Will Stabilize Future Earnings

Key Takeaways

• Reducing interest-bearing obligations and optimizing equipment segments are key to improving net margins and stabilizing earnings.
  
• Strong Eurasia performance, particularly in Mongolia, and Ingrain's supply chain efficiency are expected to drive future revenue and profit growth.
  
• Cyclical market volatility, geopolitical instability, and export control issues threaten Barloworld's revenue growth and financial stability across its key business segments.

Catalysts

Operates as an industrial processing, distribution, and services company in Southern Africa, the United Kingdom, Australia, Russia, and Mongolia.

• Barloworld's strategy includes a focus on reducing interest-bearing obligations and debt, which could improve net margins and stabilize earnings by decreasing finance costs.
• Strong performance and revenue growth in the Eurasia segment, particularly in Mongolia, highlighted by increased machine sales and aftermarket growth, is expected to drive revenue growth in 2025.
• The continued focus on optimizing equipment segments, especially through the growth of aftermarket services, is likely to improve revenue stability and operating margins in their Southern Africa operations.
• Efforts to improve supply chain efficiencies and plant efficiencies in Ingrain are expected to bolster margins and profit growth, contributing positively to earnings.
• Continued execution of the fixed and optimized growth strategy and continued diversification in operations and geography could alleviate the impact of cyclicality in mining, potentially stabilizing revenue and supporting long-term growth.

Barloworld Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Barloworld's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 5.7% in 3 years time.
• Analysts expect earnings to reach ZAR 2.5 billion (and earnings per share of ZAR 13.11) by about February 2028, up from ZAR 1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 10.6x today. This future PE is greater than the current PE for the GB Trade Distributors industry at 10.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.16%, as per the Simply Wall St company report.

Barloworld Future Earnings Per Share Growth

Risks

• Revenue from Equipment Southern Africa declined by 12.7% due to a reduction in equipment sales, particularly impacted by the subdued mining industry and low coal prices. Weak sales volumes amid a weak global economy and mining activities could continue to put pressure on revenue.
  
• Potential export control violations in the VT division could lead to financial penalties, legal costs, and reputational damage, adversely affecting earnings and net margins.
  
• Revenue in Russia decreased by 22% due to prolonged sanctions and export control regimes, which have reduced the addressable market and may continue to constrain trading activities and revenues.
  
• While Mongolia's performance was strong, the introduction of new sovereign wealth fund laws could create uncertainty regarding the ownership of strategic commodities, potentially deterring future investments and slowing down revenue and profit growth.
  
• The cyclical volatility in core markets such as mining and the challenges affecting the consumer business due to geopolitical instabilities and inflationary pressures may undermine future revenue growth across Barloworld's business segments.

Valuation

• The analysts have a consensus price target of ZAR99.25 for Barloworld based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR120.0, and the most bearish reporting a price target of just ZAR87.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR43.3 billion, earnings will come to ZAR2.5 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 21.2%.
  
• Given the current share price of ZAR107.89, the analyst price target of ZAR99.25 is 8.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.