Turnaround stories - It may be time to drop the EO-eish label

2 Apr 2023

Sometimes, there’s a bottom. Sometimes there isn’t. Steinhoff still looks to be a bottomless pit and Nampak is looking more dire by the day. Turnaround stories are tough and shareholders can easily end up in a riches-to-rags situation.

At EOH, it seems as though the worst might be behind the technology services company. Goodness knows the fall from grace was a gruesome financial outcome, but those who buy at the right time can still make money from it.

In a trading statement for the six months ended January 2023, EOH reported revenue growth and steady gross margins. It generated an operating profit of between R100-million and R120-million.

The net profit for that period doesn’t reflect the benefit of the improved balance sheet, with a sharp decrease in debt after the end of the period. EOH has now been through the rights offer and seems to have steadied the ship. It might be time for me to stop calling it EO-eish.

As for Steinhoff, though, that name is still well deserved.

Industrial machinery is doing the heavy lifting

Local investors are spoilt for choice when it comes to listed companies supplying the mining industry. Based on recent updates from the likes of Bell Equipment, Master Drilling and Barloworld, the good times in that space aren’t over yet.

At Master Drilling, revenue for the year ended December increased by 31.7% in US dollars and headline earnings per share increased by 10.1%. The order book and pipeline are both looking strong.

In this space, you need to keep a close eye on the balance sheet. Master Drilling is investing practically all the cash generated from operations into capital expenditure, of which 63% is on expansion and 37% is on sustaining the existing business. Alongside a higher dividend, this has driven an increase in gearing. In other words, the group is confident enough to take on more debt.

When it comes to balance sheet management, Barloworld delivered a masterclass over the pandemic. It’s just as well, because Russia’s invasion of Ukraine put the share price under immense pressure, as Russia has been a key market for Barloworld.

The company didn’t withdraw from Russia, choosing instead to try to manage the business in a way that works for the local employees.

With the Zeda mobility business no longer in the group, Barloworld is focused on the equipment and consumer industries businesses. The former has been growing strongly (excluding Russia) and, although there has been some margin pressure, the equipment southern Africa segment has been the primary driver of Barloworld’s revenue growth of 14.9% and earnings before interest, taxes, depreciation and amortisation (Ebitda) growth of 11%.

Consumer Industries, the Ingrain business acquired from Tongaat, grew revenue by 23.2% but suffered an ugly drop in margins as Ebitda fell by 12.4%.

Flurry of disposals

In tricky economic conditions when balance sheets are feeling the pressure, management teams tend to take a long, hard look at the asset portfolio. Non-core businesses that don’t make strategic sense need to go.

RCL Foods’ sale of Vector Logistics has been a long time coming, as RCL Foods initiated a strategic review back in 2020. This is South Africa’s leading frozen food logistics operator, servicing not only RCL’s own integrated supply chain but multiple third-party customers as well.

The buyer is an entity that is ultimately part of a Danish investment group, with the money coming from an emerging markets infrastructure fund within that group. This is a decent example of foreign investment in our economy, with a purchase price of R1.25-billion.

We also saw PBT Group shareholders rejoicing, with the company selling the Payapps business in Australia and due to receive proceeds that work out to R1.51 per PBT share.

Although there has not been a special dividend declaration yet, the company has made it pretty clear that shareholders can look forward to one.

Sticking with Australia, Woolworths is finally rid of David Jones, with that deal now being implemented. Proceeds will be received by the end of June and Woolworths will retain the flagship property in Melbourne, which will be leased to David Jones.

In another example of a failed Australian strategy, we find Murray & Roberts trying to cling to the RUC Cementation business as part of the broader negotiations around the voluntary administration of Clough.

Our track record in Australia really hasn’t been great, which is partly why the market is feeling nervous about Thungela’s expansion Down Under. It will hopefully do a lot better than some of our other local corporates, but mining houses making acquisitions at the top of the cycle have a well-deserved reputation for hurting shareholders. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.

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Industrial machinery is doing the heavy lifting

Flurry of disposals