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Author: Patrick Cairns|

09 November 2010 20:48

The Investment Case – The Bidvest Group Limited

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The success of entrepreneurship.

ORAPA - By generally accepted modern business theory, Bidvest (JSE:BVT) should not be a success. It is, at its worst, an unfocused conglomerate containing over 200 diverse businesses, between which only tentative synergy exists.

When most analysts are calling for businesses to pare down, unbundle and focus on their core competencies, this kind of company should not work. Yet it does. For, at its best, Bidvest is a collection of entrepreneurial businesses operating in industries in which the group has extensive experience and knowledge.

Candidates for unbundling are those companies where the underlying businesses may already be separately listed and the parent trades at a discount to its net asset value (the combined worth of its assets). Separating these assets therefore creates value for investors.

However, Bidvest believes it has actually created value by bundling businesses together. There is a common thread too, it contends, in that all the businesses are in the service, distribution and trading fields, encompassing light manufacturing.

In almost all instances, Bidvest owns 100% of its underlying companies. However, in most cases, the original entrepreneur has remained in charge of the purchased entity. This arrangement succeeds because Bidvest is able to provide business, financing and strategic support to grow an organisation to levels it could not achieve on its own.

History

Entrepreneur Brian Joffe began what would become the Bidvest empire with the acquisition of Chipkins Catering Supplies in 1988. The purchase of Sea World frozen foods followed shortly thereafter. The company listed on the JSE (JSE:JSE) that same year and its appetite for acquisitions has been insatiable ever since.

Over the next 22 years, Bidvest acquired a range of companies in sectors from hygiene services to sports marketing to logistics to stationery. The group's decentralised management structure means that each business continued to run as a stand-alone entity.

The group's international expansion began in 1995 when it acquired 50.1% of Australian stock exchange listed Manettas. This business was renamed to Bidvest Australia.

Bidvest currently operates eight divisions - Bidvest Freight, Bidvest Services, Bidvest Food Services, Bidvest Industrial and Commercial, Bidvest Paperplus, Bidvest Automotive, Bidvest Namibia, and Bidvest Corporate. Its businesses span four continents - Africa, Asia, Europe and Oceania.

Dividends

For the financial year ended June 30 2010, Bidvest declared a total dividend (interim plus final dividend) of R4.32 per share. This was up from the R3.80 per share paid out in 2009, but still below the pre-recessionary dividends of R4.95 in 2008 and R4.46 in 2007.

The group's dividend yield is currently in the region of 3%.

Which funds hold this stock?

Bidvest is held fairly widely by South Africa's leading unit trust managers. Both of the top large cap equity funds over the last three to five years - The Coronation Top 20 Fund and the Absa Rand Protector Fund - hold around 4.5% of their funds in the counter. In addition, it is a top ten holding in both of the best-performing equity industrial funds - the Stanlib Industrial Fund and the Coronation Industrial Fund. All four of these funds are in the top overall 20 performers over the last five years.

It is also held by all four of country's the leading value funds. The Nedgroup Investments Value Fund assigns it a weighting of 4.4%, the RMB Value Fund 3.4%, the Prudential Dividend Maximiser Fund 2.2%, and the SIM Value Fund 1.1%.

Three of the top five general equity funds - the Absa Select Equity Fund, the Coronation Equity Fund and the Absa Select Equity Fund - also hold the stock, but to smaller degrees.

To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.

Why would an individual consider investing in this company?

Bidvest has achieved exceptional growth over the years, based on the performance of its underlying companies. The group believes that this is a symptom of its decentralised business model.

"Entrepreneurs in the different business units have stayed with the company over many years," Notes Sanlam Investment Management Equity Analyst Andrew Kingston. "They are quick to react to a changing environment and are generally the number one operators in their activities."

Even though the barriers to entry in many of the businesses in which Bidvest operates are low, it has established such dominance and efficiency in operation that it is difficult to challenge.

The group is also highly debt-averse - a position it is able to maintain through its ability to generate cash.

"Bidvest has a good track record in capital management," Kingston says. "And they generally operate in industries where the business model is attractive from a cash generation point of view, such as port operations and food and general services."

What risks does this company face?

While Bidvest's aggressive acquisition path has been the basis of the group's growth, it is a strategy with built-in hazards. There is always a risk that the group will overpay for targets or that they will fail to assimilate into the business.

Perhaps ironically, the group also faces difficulties resulting from its own success.

"To some extent, Bidvest is also hostage to the markets in which it operates," explains Kingston. "The group has developed to the point where it is difficult to grow through taking market share, as it generally already has a market-leading position."

There are also question marks around what will happen to the group when its founder retires. Joffe turns 65 in 2012.

Where does this company's growth potential lie?

"Generally the food service interests have good growth in markets which are relatively undeveloped - Asia, Australia, South Africa and Eastern Europe," Kingston says. "The UK and Western Europe are however, likely to see steady growth."

Kingston believes that the port assets should also continue to grow well, as will the South African service-based operations. The more mature local businesses should however, grow more in line with the overall South African economy.

Staying with company tradition, Bidvest is also never really out of the market for making acquisitions locally or abroad. Its strong cash position means that when the right asset presents itself, the group will be sure to act.

As Joffe noted in presenting the group's latest results: "There is a world of possibilities open to us."

For more, visit Moneyweb's click-a-company profile on The Bidvest Group Limited.

Topics: Bidvest, Brian Joffe, Chipkins Catering Supplies, Sea World frozen foods, Manettas, Bidvest Freight, Bidvest Services, Bidvest Food Services, Bidvest Industrial and Commercial, Bidvest Paperplus, Bidvest Automotive, Bidvest Namibia, Bidvest Corporate




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