Artwell Dlamini
10 July 2009
Johannesburg — LISTED leasing and capital equipment firms, including Eqstra , look set to incur losses amid weak demand, ballooning inventory and order cancellations, say analysts.
John Thompson, an analyst at Investec Asset Management, said yesterday the slowdown in capital equipment sales had been abrupt and the results extremely harsh.
Capital equipment sales, including mining and construction equipment and forklifts, were down by between 45% and 65%, he said.
Eqstra said last week it expected earnings and headline earnings per share for the year to June to be 85% to 95% lower.
Its rival, Bell Equipment , reported a loss of R74,6m for four months to April, compared with a profit after tax of R168,4m in the same period last year.
These dismal results highlight the challenges stalking capital equipment firms, which are battling with too much inventory that tends to raise financial costs and increase the likelihood of the impairment of excess stock.
Thompson said share prices were discounting most of this bad news, although earnings downgrades for most of the capital equipment firms had likely not yet reached their natural conclusion.
Bell Equipment's share price has fallen the hardest, down 80% over 12 months. Barloworld has shed 50% and Eqstra almost 60%.
Thompson said given the high inventory levels and soft demand, his biggest worry was the potential this might have to negatively affect prices and profitability.
Cavan Osborne, an analyst at Old Mutual Investment Group (SA), said capital equipment companies might have to write off the value of their stock or inventory. These impairments were likely to be significant in the case of Eqstra.
Osborne said the build-up in inventory was due to the cancellation of orders for capital equipment. Capital equipment distributors such as Eqstra were still receiving orders, said Osborne, noting that they ordered some of this equipment two years in advance. T hey now faced rising funding costs.
The demand for capital equipment had suffered as miners and construction firms reduced capital investment. For instance, Anglo American has slashed its capital expenditure budget 50% to 4,5bn.
Even Barloworld, which has more than R22bn in revenue, admitted some of its orders had been cancelled in the mining sector, but it had countered these by cancelling orders with the supplier.
Sibani Mngomezulu, Barloworld's group executive for governance and corporate affairs, said there were high levels of inventory, and the group had seen some of the players getting rid of inventory at the expense of margins.
"We have had better success in moving inventory on the construction side; on the mining side we are delivering on back orders," he said.
Dirk Kotze, asset manager at Coronation Fund Managers , said Barloworld was still fulfilling some orders. The firm was still working off an existing order book, which was placed before the downturn. The economic downturn would hit Barloworld somewhat later than other companies.
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