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Bidvest shows that cash flow is king

Growth still continues after 30 years.

It must be nice to be on the management team of Bidvest, and especially so on Monday morning when the diversified industrial group announced another set of good results to shareholders and analysts. CEO Lindsay Ralphs said that just about every one of the group’s seven divisions achieved satisfactory, if not excellent, results.

Trading profit increased to R6.7 billion in the year to June and headline earnings to R4.6 billion. In addition, Bidvest was in the enviable position to collect R7.1 billion cash generated from operations to invest, reduce debt, distribute to shareholders or stick in the bank for future use.

Despite heavy investment of more than R3 billion during the last year, Bidvest is still boasting a cash reserve of nearly R7 billion. It has had this nice big cash reserve for the last ten years.

For Bidvest, results such as these has been the norm rather than the exception for the last 30 years. The outcome has been an increase in the group’s assets to R61 billion from just about zero, when Brian Joffe first invited a few analysts and financial reporters to a lunch at Linger Longer in Braamfontein in 1988 to tell them about Bidvest. (For the record, he told us absolutely nothing and the three-sentence press release was totally useless.)

At Monday’s closing market price, Bidvest’s market capitalisation exceeded R62 billion compared with, once again, just about nothing 30 years ago.

Ralphs’ opening statement to the announcement of the results for the year to June, serves as a good summary of the year under review: “It is exceptionally pleasing that Bidvest has managed to increase this year’s trading profit by 3.5% to R6.7 billion and headline earnings per share by 9.8% to R13,52.

“Despite the difficult trading environment in which we are operating, four of our seven divisions recorded commendable increases in trading profit, while there was also strong earnings growth from our associate companies,” said Ralphs.

He said that the results were achieved in an extremely difficult year characterised by weak economic growth, significant business and fiscal uncertainty, and high volatility. Bidvest responded by focussing on costs, client needs and innovation to squeeze growth out of the challenging environment.

The recipe worked in most of the divisions. The services cluster, comprising Steiner, BidAir Services, Protea Coin, Bidvest Lounges and other servicing and outsourcing services companies, reported an increase of 12.5% in trading profit to R2.2 billion, in what management describes as a price sensitive and stagnant market.

Ralphs was also pleased by the freight division’s results, which showed an improved in trading profit of nearly 4% despite fluctuations in the volume of maize exports and wheat imports. Luckily the export of significantly higher volumes of chrome and manganese ore through Bidvest’s operations in ports made up the difference.

Management also reported that Bidvest Tank Terminals delivered an exceptional result and alludes to the prospects of further improvement as a new liquefied petroleum gas facility in the Richards Bay harbour is nearing completion.

The Office and Print businesses also delivered excellent results, says Ralphs, especially considering the challenges facing the sector during the last few years. Trading profits increased 5% on unchanged turnover thanks to better efficiencies.

It is commendable that Bidvest could increase profits in its automotive division, during a year in which new car sales decreased by more than 3% and the used car market showed at least a similar contraction. Bidvest’s figures show that the sales of new passengers cars, especially luxury brands, remained subdued.

The car dealerships in the group (McCarthy) reported a decline of more than 5% in the number of new vehicle sales, while car owners kept their cars longer causing a shortage of used vehicles.

The automotive division nevertheless increased trading profit by 1.1% in trading profit to R609 million.

Unfortunately, subdued car sales washed over to the financial services division, in the absence of any large new contracts for full maintenance leasing. Management reports that a new contract to supply Transnet with new trucks will start in the current financial year.

The biggest headache seems to be the electrical division, with Ralphs describing the situation in the building and construction industry as one of “near decimation”. Revenues fell nearly 6% and trading profit by more than 14% to R258 million – a terrible outcome by Bidvest’s standards.

Overall, Bidvest’s reported increase in headline earnings per share of 10% to R13,48 on a fully-diluted basis will probably be envied by many other businesses. Shareholders seemed to have given it their approval and the share increased by a hefty 2.4% to R183 after the release of the results.

The resultant price/earnings ratio of 13.8 times is somewhat lower than its historic ratings, but probably in line with the current sentiment in the market.

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