Industrial Group Barloworld reported a mixed performance across its business units, with a decline in Equipment Southern Africa and strong growth in Mongolia. In terms of outlook, Barloworld CEO Dominic Sewela told investors that geopolitical risk had overtaken inflation as the primary risk factor looking ahead into 2025. He joins CNBC Africa for more.
Industrial Group Barloworld reported a mixed performance across its business units, with a decline in Equipment Southern Africa and strong growth in Mongolia. In terms of outlook, Barloworld CEO Dominic Sewela told investors that geopolitical risk had overtaken inflation as the primary risk factor looking ahead into 2025. He joins me for more on the detail. Dominic, thanks so much for your time. I mean, one can argue that Barloworld has demonstrated a certain level of resilience when it does come to navigating geopolitical risks. I mean, we're talking about the current ongoing Russia-Ukraine war, which is not without its scars, of course, but also prior to that there was the annexation by Russia of Crimea and also some of the disruptions to the supply chain with activity in the Red Sea region. I'm interested in the factors that led you to upgrade geopolitical risk on your radar for the year ahead, but perhaps more importantly, how the group is planning to navigate the uncertainties. Yeah, I guess, you know, it's in multiple front, because I think if you think about, you know, you know, the president elected United States, you know, coming into office, you know, the relationship between US and China, if, you know, he proceeds to, you know, you know, put tariffs against China, that could affect, you know, global economic environment, where commodity demands out of China could be challenged. And in that regard, it could worsen the situation. You know, I think the other issues in the Middle East, you know, Angola is a it's one of a country operate in is very dependent on oil. And if you know, there's a bit of instability in terms of oil prices that could affect that market. But if you look closer to home in Mozambique, we have, you know, political riots in that part of the world, you know, and we are able to serve our customers and I'm making sure that our employees are safe in doing so. And those are the challenges. Whereas if you look at inflation overall, is coming down in most markets, including South Africa, you've seen, you know, that is Reserve Bank, you know, decreasing interest rates, and the outlook in the medium term looks like, you know, we like to see more decreasing interest rates next year. So those are the issues that really made us to upgrade. But having said so, we don't have control over those. The things that we focus on, you know, running the business is to make sure what are the levers that we can pull in making sure that we've got a strong balance sheet, our costs, you know, are in line, and therefore are well placed to make sure that we don't run out of cash as we do so. And that's really fundamentally what we try and focus on to weather the storm. Sure. And your balance sheet has strengthened in this period, we do note the effect that your debt has come down by about a third, and perhaps we'll get to that a little bit later. But I want to dial back to the mention of the US President Elect, Donald Trump. I mean, he said that when he comes into office, he plans to put an end to some of those geopolitical tensions, the war in the Middle East, as well as that in between Russia and Ukraine. And I wonder whether statements like that provide confidence for you as a group, or whether it will depend on how these tensions are ended. Yeah, I think it's on the how at the end of the day. I mean, if you look at, you know, we will work out welcome a situation where the war between Russia and Ukraine is ended, you know, and subsequently leading to the lifting of sanctions against Russia. So that for us would be a good outcome. You know, you know, similarly with the war in the Middle East, if it's ended in a way where there is, you know, long term peace in the region, it also is also gives a better outlook for us. You know, I guess the issue for us is the relationship between China, you know, because, you know, South Africa is dependent on exporting a lot of commodities to China. You know, you know, similarly, when you look at our Mongolian operations, you know, it has, you know, really done well at the back of demands of commodities out of Mongolia to China, given the close proximity. Okay. One last question then on Russia. Trading under sanctions hasn't been easy, and we see it reflected in your numbers. But also prior to the release of these numbers, you did flag to the market that there could be a potential violation of those sanctions by your entity over there. We're speaking to a market analyst and he was saying that perhaps this is also has a bit of an overhang on your stock performance for today that is. Can you update us regarding those investigations, Dominic, and where things currently stand? Currently, we appointed an independent investigator in, you know, ENS, you know, forensic investigators. And, you know, the timeline that we're working towards is that they should have concluded their investigation for us to submit, you know, to BIS, you know, the report of that investigation by the 2nd of March. But having said so, I mean, one of the key issues of us self-reporting is to try to mitigate, you know, that, you know, we cannot have adverse, you know, sanction, you know, or levies or penalties against us, you know, by being transparent and putting all remedial action to make sure that there isn't further breach, you know, in that environment. You've seen us making impairments and quarantining parts that are impacted by export control. It is against that backdrop that in my view, I hope that, you know, with all our actions, and if, you know, what the forensic, you know, investigators could only just confirm what we've already ascertained, you know, this is something that I think, you know, could be manageable. Okay, so you've also appointed an independent board to investigate a potential deal that could see Barlow World bought out by yourself and the family entity that you've created, as well as your second largest shareholder and an entity that belongs to them as well. Can you give us the history of how and when this deal came to potentially be and who approached who? Yeah, as you can appreciate, you know, Fifi, you know, things like this are very, very regulated. And I think if you look at the cautionary, you know, the appointment of the independent board, you know, and the whole governance structures around, you know, the transaction, the best time for us, you know, is when there is progress, that we can be able to give more colour, you know, you know, for our sense, you know, to make sure that, you know, we can talk about something that we're all certain about. But we can't say more than what is in the sense. Okay, a difficult question for me to ask you, Dominic, but an important one, from a corporate governance point of view, as well, you did mention the independent board, in which you, of course, have stepped aside, while they do their investigations to manage conflict, except some would say that your continuation as CEO of a group that you could potentially be buying out still represents some conflict. What would your response be to that, sir? And has there ever been discussions around you potentially stepping down while, while the investigations take place? Like I say, you know, Fifi, I mean, you know, it's everybody would like me to comment. And part of that, you know, governance framework is that I continue to run the business as a CEO, you know, and making sure that I look after the interests of all, you know, our stakeholders, you know, and the independent board handle those other issues, you know, without, you know, you know, creating, you know, divergent, you know, focus to the business. Okay, last question, in terms of outlook, pressure in the South African markets, but we do know that the new government is committed to making South Africa a construction site could potentially bode well for your entity. What are the plans in the year ahead? And just going back to your stronger balance sheet right now, given the reduction of debt, how do you plan to deploy it in the coming months? I guess one of the key issues was reducing the debt. I think we're fairly comfortable where we are with the debt, you know, because if you look at our net debt, it rose largely because we have settled the pension fund. My view is that we can now allocate the capital, you know, in ways that we're saying, you know, within the framework of our capital, you know, strategy, look at more organic growth, you know, to an extent, you know, that I have an M&A team that continuously, you know, is looking for potential transactions to close, you know, following which, you know, you know, returning the capital back to shareholders, you know, who could do something because it's not a bad thing to return capital to shareholders. I think over the last seven years, we've been able to retain 16.5 billion of capital back to shareholders, which is equivalent to the current market cap. You know, therefore, we'll continue to make sure that we do that in the medium to long term. But I think, you know, what we've seen, which is pleasing is to see a construction, you know, order book increasing, particularly post, you know, at the year end, you know, we've seen about 800 million worth of orders being added to a book from about 1.6 billion to 2.4 billion. And I think if we see government committing more capital on the infrastructure side, we're likely to see the benefit because construction companies, you know, order book are rising and they're replacing orders on us. I think overall, it'll be good for South Africa, because we've got a backlog of infrastructure. Okay, fantastic. And it will make for more conversations between us in future. So thanks so much for your time and fielding all the uncomfortable perhaps questions. Dominic Soella, CEO at the Barlow World Group.
Theme: Navigating Geopolitical Risks and Financial Resilience
Barloworld, the Industrial Group, recently reported a mixed performance across its business units, with a decline in Equipment Southern Africa and strong growth in Mongolia. The company's CEO, Dominic Sewela, highlighted the increasing geopolitical risks as a primary concern moving forward into 2025. In a recent interview with CNBC Africa, Sewela addressed the challenges posed by geopolitical uncertainties and provided insights into the group's strategies to navigate these risks. Sewela acknowledged the complex geopolitical landscape, citing factors such as the relationship between the US and China, potential tariffs, and the impact on global commodity demand. He also pointed out regional challenges in areas like Angola and Mozambique, where political unrest and oil market instability could affect business operations. Despite these risks, Sewela emphasized the importance of focusing on key business fundamentals, such as maintaining a strong balance sheet and managing costs effectively. The CEO highlighted the company's efforts to strengthen its balance sheet, with a significant reduction in debt and a focus on operational efficiency. He discussed the impact of geopolitical tensions on Barloworld's operations, particularly in regions like Russia, where sanctions have posed challenges. Sewela noted that the company had initiated an independent investigation into potential sanctions violations and emphasized the importance of transparency and compliance in addressing the issue. Regarding a potential buyout deal involving Barlow World, Sewela remained cautious in his response, citing regulatory constraints and governance requirements. He confirmed the appointment of an independent board to oversee the process and pledged to provide further updates as the situation progressed. Sewela also addressed concerns about potential conflicts of interest as the CEO of a company involved in a buyout discussion, emphasizing his commitment to upholding governance standards. Looking ahead, Sewela discussed the company's plans for deploying capital, including a focus on organic growth, potential M&A opportunities, and returning capital to shareholders. He expressed optimism about the construction sector in South Africa and highlighted the government's infrastructure projects as a potential growth opportunity for Barloworld. The CEO cited an increase in the construction order book and noted the positive impact of government investment on the industry. In conclusion, Dominic Sewela's insights shed light on Barloworld's approach to managing geopolitical risks, enhancing financial resilience, and pursuing growth opportunities amidst a challenging global environment. The company's strategic focus on operational efficiency and prudent capital allocation positions it well for future growth and value creation.
"I think if you look at, you know, we will work out welcome a situation where the war between Russia and Ukraine is ended, you know, and subsequently leading to the lifting of sanctions against Russia."
['Barloworld', 'Dominic Sewela', 'geopolitical risks', 'financial resilience', 'M&A opportunities', 'construction sector', 'South Africa']