Despite muted economic growth and consumer demand, South Africa’s biggest product and services company, Bidvest, delivered a solid set of financial results for the year to June.
Revenue grew by 8.4% to R77 billion and trading profit was up 8.2% to R6.5 billion on the back of good performances from the services and freight businesses, and improved performances from office and print solutions, while commercial products, electrical, and financial services performed in line with expectations.
Source: Bidvest annual results presentation, September 2018
“We think this is one of our best operating results, given the limited economic activity in infrastructure and construction in particular,” CEO Lindsay Ralphs told analysts and the media at the presentation of the annual results. He ascribes some of the success to the diversified nature of the group. “There are seven pillars to this business and our portfolio spans the broad economic spectrum of SA. About 37% of turnover is generated by trading and 63% from services, which we think is a good balance. But our key – and it has been since Brian [Joffe] started the business – is that we remain decentralised and entrepreneurial.”
Normalised headline earnings per share (Heps) was up by 12.5% to 1 254.9 cents, and the group declared a final dividend of 301 cents per share, bringing the total dividend for the year to 556 cents, up 13.2%.
Mergers, acquisitions and the disposal of non-core and non-performing assets were very much a feature in a group that prides itself on not sitting still. For instance, the services division grew revenue by 44% to R18.9 billion and trading profit by 26% to R1.9 billion. Of this, 8% was organic growth and the balance was boosted by the acquisition of Noonan, which provides facilities management services in the UK and Ireland, and Ultimate Security Services (USS).
The Namibian fishing operation, which has been a drag on Bidvest Namibia for years, was sold. “This business was a thorn in our side, a business that we were always making excuses for,” says Ralphs. The final straw was when the Namibian department of fishing reduced the quota allocated to the company. It was sold at net asset value.
Bidvest also plans to sell its stakes in Adcock Ingram, Comair and Mumbai International Airport – all strong contributors to profit – because they are deemed ‘non-core’.
In particular, it is attempting to sell its 38% stake in Adcock, worth about R4.5 billion, and its majority stake in Comair, worth R800 million, to new black entrants in the pharmaceutical and aviation sectors respectively.
“We think this would be fantastic for the country. In particular, our stake in Adcock, which is a good company with great brands, is a controlling stake. But finding the funding is proving to be a stumbling block for potential investors.
“We have had enquiries from international investors and private equity, but we have resisted this to date. We want to give it one more shot and are thinking of appointing a black financial services company to open the sale up – until now we have engaged with potential investors on an individual basis.”
The Comair stake, valued at R800 million to R1 billion, will hopefully be easier to sell. “This is a well-run business with multiple revenue sources including its slow lounges, travel businesses, and the Lufthansa maintenance business,” says Ralphs. “This business is going from strength to strength but we have had little positive response. I may just put it in the drawer for now.”
Bidvest has a conservative approach to gearing, and net debt levels are considered acceptable at R6.3 billion (2017: R5.6 billion). A stable net-debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortisation) metric at 0.8 times, and Ebitda interest cover of 8 times, are both comfortably above the group’s conservative targets, providing ample capacity for further expansion. “Our strong financial position is a Bidvest strength,” says Ralphs.
Right now acquisitions are on the radar. “As a South African company we are looking locally, but we may find better opportunities offshore. We would like one bigger acquisition and one bolt-on, but we will be cautious.”
Cash generated by operations at R9.4 billion was higher than the R6.9 billion generated in the prior year.
Return on funds employed (Rofe) improved from 22.3% to 22.9% as asset management remains a core focus, particularly in these challenging times.
“The balance sheet is strong and cash conversion is strong,” says Brian Pyle, equity analyst at Old Mutual Investment Group. “Clearly this is a business that is being well managed. But times are tough and that is evident in the numbers. This result was boosted by the acquisition of Noonan and potentially the sale of the Namibian fishing business too. Other divisions, such as financial services or automotive, have not fared as well.”
Ralphs is under no illusions as to how tough the local environment is. “It would be naïve not to expect lacklustre growth and consumer demand up to [the] national elections. The steps that are being taken to clean up corruption [are] positive but will create short-term pain. For instance, the lack of management at the top of parastatals like Transnet is delaying decision making.”
He adds that government needs to align and settle its BEE policies. “We are getting different demands from different sources; in one instance we need to be 51% black-owned, in others we need regional partners, in others it’s black women; the latest is war veterans. It’s all for good causes but it’s just not aligned and we do not know how to structure our businesses to accommodate these different needs. We need an alignment between government and the corporate sector – that is the only way it is going to work.”
Trading off a PE (price-earnings ratio) of 18.47, Bidvest is hardly cheap. However it is a company that is difficult to ignore for SA investors, says Pyle. “Management has a proven track record. I think investors can trust them to allocate capital well and add value through smart manoeuvering and acquisitions.
“The company is defensive, a little less risky and is not a bad place to put some SA-focused money,” he adds. “In their favour is the fact that they are still investing in SA – so if the cycle turns they should get the uplift.”