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Diversification boosts Bidvest in tough trading environment

Favourable debt levels augur well for capital allocation ahead.

NOMPU SIZIBA: The Bidvest Group released its interim results today [Monday] for the six months ended December 31, 2018. The company reported headline earnings up 10% at R2.1 billion, with headline earnings per share up 9.6% at 629.1 cents. The company is invested in a number of areas that cut across automotive, freight services, commercial products, office and print, financial services and the electrical sectors. The company also has international operations.

Well, to tell us the story behind the numbers I’m joined on the line by Bidvest Group CEO, Lindsay Ralphs. Lindsay, your headline earnings were up 10% to R2.1 billion and your trading profit growth was up 6.3% at R3.3 billion. Are you satisfied with the various metrics you’ve reported to the market today?

LINDSAY RALPHS: Yes, we are, very much so. In this six-month period we’ve had a technical recession. I think the diversity of our group, the wide spread of what we do – certainly in the South African company – really came through. We are 60 to 70% a service business. Our trading businesses also performed reasonably well, considering a pretty weak and frail economy. So we are very happy with the results.

NOMPU SIZIBA: You report that the financial services division was adversely affected by poor returns on your investment portfolios, which knocked your trading profit down by about R75 million – although your profit was still R243 million. Apart from this aspect, what are some of your observations on your finance division, particularly in the area of insurance?

LINDSAY RALPHS: The bank was up about 8%, and that’s mainly vehicle leasing; they got some nice wind there. And on the insurance, the short-term insurance business did okay and we are continuing to develop products there.

On the long-term side we had to put a lot of resources in to grow that business. As one grows the life insurance business, the returns in the short term are negative but they will start to turn around in the new financial year. So we are quite excited about our life business as well.

NOMPU SIZIBA: We learned today from Naamsa [the National Association of Automobile Manufacturers SA] that vehicle sales are under serious pressure for various reasons, and you mention this in your report. You also mention that Bidvest has a strategy under way to try and improve your performance in the auto division. What have the challenges been, and how are you seeking to address them?

LINDSAY RALPHS: The luxury segment is under quite a lot of pressure. I must mention that this is probably the fourth cycle in the automotive industry that I’ve been through, and it is a cyclical business. So there is no doubt that the luxury brands will come back, but when that will happen we are not sure.

So, while we are going through a downward cycle in the auto industry, we do continue to right-size our business. We then look at which of the original equipment manufacturers our team are representing. There are certain of the lower-end manufacturers in the South African auto market that are difficult to represent, and to have the infrastructure required to run dealerships for those brands. So we have exited a number of the lower end of the market dealerships.

And even on the luxury brands, if we feel we’ve got too many dealerships – the Range Rover/Land Rover was one example of that – we’ve had to cut back by one dealership. We are doing that type of re-engineering of that business.

NOMPU SIZIBA: The electrical division, which is heavily related to sectors like construction, mining and infrastructure, registered an 18.6% decline in trading profit. Given its exposure to these currently sensitive sectors, what is it that you guys are doing – in your words – to “future-fit” the business?

LINDSAY RALPHS: We are having to look at alternative energy sources; windmills are an example. We have invested quite heavily into solar energy and prepaid electricity meters, and are adopting a slightly different strategy with regard to the business that we’ve traditionally been in, that of supplying electrical contractors. On the other hand I am convinced that South Africa needs infrastructure growth, and that construction will return one day and we will be very well positioned then to take advantage of it.

NOMPU SIZIBA: Are you optimistic about some of the things that have been said by government or things that have come out of Treasury’s budget around infrastructure investment?

LINDSAY RALPHS: We are indeed. We’d like to see it transfer into action. It’s vital for the country, and I think it’s not just government that needs to be spending money on infrastructure; I think the private sector must as well. We will have to do our part to ensure that there is money spent on infrastructure in the economy in South Africa.

NOMPU SIZIBA: You report that your services division’s trading profit rose by 13% to R1.1 billion. To what to you attribute that?

LINDSAY RALPHS: We did make a very successful international foray into a company called Noonan in Ireland and the UK. That’s been very successful. And in South Africa we did report that the individual earnings of just our services business in South Africa are 80% up. That really is a result of increasing market share, and very good margin management. You’ll notice that our margins increased, even in a difficult time like this.

NOMPU SIZIBA: Indeed. How is your freight business doing in general? I see you’ve benefited from the movement of a number of commodities there.

LINDSAY RALPHS: We are seeing some nice movements. In this particular six months we saw a very good grain movement. We saw the return of commodities like manganese, chrome and iron ore – and we even saw some steel coming out of Arcelor Mittal starting to move. Fertilisers was good, rice was good. So there were some nice positive movements of commodities and grains.

The first two months of this calendar year have been a little quieter, particularly on the agricultural side, so we’ll have to see how that pans out over the next few months.

NOMPU SIZIBA: In terms of your international operations, you did touch on the Noonan acquisition that you made a while back, and you say that’s paying off. But when it comes to your international operations, did you benefit from currency translation in the period under review, and what proportion of your total revenue do your offshore businesses contribute?

LINDSAY RALPHS: Still very small – in the region of 2 to 3%, and there was no big currency fluctuation. We always match our earnings and our debt. We do have foreign debt, so we do have a matching concept there. There was a relatively small, because of its size, impact of the currency on our results.

NOMPU SIZIBA: You bring me nicely to my next question, which is around your debt. Bidvest raised some R1.3 billion on the bond market late last year with what was described as “reasonable” rates. What was that cash raised for, and how is your debt situation?

LINDSAY RALPHS: Our debt is very, very low – 1.1 times our cover, which is low; we have capacity to go to about 2.5 times. So we are very comfortable with our debt levels, which will give us a lot of capital allocation going forward.

With regard to the pricing of our bonds, they were very, very well received. We went to market ready to repay certain of our existing bonds, which matured in some of our pref shares, for cheaper money that we could get on the market at the time.

NOMPU SIZIBA: What is the current status of your liquefied petroleum gas [LPG] project, and is that an area where you see significant growth as South Africa tries to move away from fossil-fuel-based energy?

LINDSAY RALPHS: We are genuinely proud of that project because there is not enough LPG in the country. So we are pioneering a new industry for the country. We get very good returns out of that facility. It’s about a R1.2 billion facility being built in Richards Bay. We’ve currently spent up to about R300 million. It will come online in the 2020/21 financial year and at the moment it is on track for that date.

NOMPU SIZIBA: Lastly, Lindsay, what is your outlook for the balance of the year, particularly for the South African market?

LINDSAY RALPHS: We are still somewhat concerned about the election and the business-confidence level that we face. We’re also concerned about all the corruption issues that are taking place in the country, which don’t augur well for the extent of movement of people spending money and for infrastructure growth while all of these investigations are taking place. So we do expect a tough six months. We are already two months into it, which have been quite tough. We are quite keen for the election to come and go so that we can settle down and look forward to a better future going forward.

Notwithstanding that, Bidvest, due to the diversification of the industry in which we operate, will find good areas of opportunity in this six months and we should be able to produce a reasonable result for the second half of the year.

NOMPU SIZIBA: On that optimistic note we’ll leave it. Thanks to Lindsay Ralphs.

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