Shareholders fret over Barloworld’s exposure to sanctioned Russia amid geopolitical tension

Although Barloworld’s share price staged a slow recovery on Monday after crashing by nearly 13% over the affairs of its Russian operations, the investment community is still nervous about the fortunes of the industrial and consumer giant.

About R2.2-billion was wiped off the value of Barloworld’s shares, which fell by 12.5% on Friday after the company informed shareholders that it had alerted US authorities of possible export control violations involving its Russian operations.

On Monday, its shares started to recover and finished nearly 2% higher at R81.76 — still below the high of R92.73 before it made the voluntary disclosure to US authorities.

Late on Friday, Barloworld spooked shareholders by informing them that it had submitted an initial notification of voluntary self-disclosure to the US Department of Commerce’s Bureau of Industry and Security over potential export control violations related to its Russian operations.

Barloworld supplies equipment to the mining, manufacturing and industrial industries, and is the official supplier of Caterpillar machinery in several African countries and Russia.

Barloworld’s Russian operations — under a subsidiary called Vostochnaya Technica — is the official Caterpillar dealer in some parts of Russia. Barloworld has been in Russia since 1998. Last year, Barloworld’s Russian operation contributed about 12% to the group revenue of R45-billion. Historically, the operation has accounted for 23% of group revenue.

In a short statement to shareholders, Barloworld said it had not yet been determined whether there had been violations.

“The company has engaged the services of independent firms with the necessary expertise in connection with the internal investigation and the voluntary self-disclosure,” it said.

This prompted one Johannesburg-based analyst to quip to Daily Maverick that “where there is smoke there is usually fire”.

The investment community has been nervous about Barloworld’s Russian operations, more so since the Kremlin invaded Ukraine in 2022. Several countries have imposed sanctions against Russia, closing it off to the global banking system, which has made it difficult for companies in Russia to do business or exchange cash.

Barloworld’s Russian operations have not been unscathed. The invasion and subsequent sanctions led Barloworld to write down the value of its Russian assets by R1.03-billion during the six months ending March 2022.

Despite shareholder concerns, Barloworld said it would continue to operate in Russia. It said its Russian operations (Vostochnaya Technica) were stable and continued to be self-sufficient in terms of funding requirements amid strong demand for parts and construction machines.

Barloworld expects an improvement in the financial affairs of Vostochnaya Technica during its 2024 financial year after the Russian operations saw revenue fall by 40% to R5.3-billion in 2023 compared to 2022. This was due to, among other factors, supply chain constraints and sanctions against Russia.

Ron Klipin, a portfolio manager at Cratos Capital and veteran money manager, raised concerns about Barloworld’s Russian operations.

“Answers to detailed questions asked during presentations about Barloworld’s Russian operations seem opaque. Details of support for these operations such as providing servicing, parts, and/or original equipment seemed too unclear, with the company operating in a challenging environment,” Klipin told Daily Maverick.

Credit rating agency Moody’s Ratings said Barloworld’s exposure to Russia was a risk that might lead to operational disruptions and uncertainty.

Moody’s also raised concerns about Barloworld’s exposure to South Africa, where it generates most of its revenue and cash flow, saying the company was vulnerable to the country’s challenging political and regulatory environment. DM