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Bidvest’s fight to emerge stronger

Management took strategic steps to counteract the pandemic and is positive going forward – but the knocks were significant.
CEO Lindsay Ralphs says the group implemented numerous measures in ‘rapid response to demand changes’ arising from the pandemic. Image: Moneyweb

Bidvest adopted the slogan #EmergeStronger in its fight against Covid-19, and figures presented during the discussion of the results covering this difficult period show that the group seems to have achieved this objective.

“I am patting my team on the back,” remarked CEO Lindsay Ralphs during the results presentation on Monday, for the year to June 2020.

It is remarkable that revenues increased compared with the previous year, admittedly due to an enlarged stake in Adcock Ingram and the inclusion of the newly-acquired PHS Group (a large hygiene service provider operating in Britain and Spain) for a few months.

Read: Adcock Ingram scraps dividend

The gross operating margin also improved slightly, while operating costs were largely unchanged, except for additional Covid-19 costs of R1.6 billion.

It was largely the extra costs due to the pandemic that lie behind the 23% decline in normalised headline earnings per share.

Ralphs pointed out that revenues from several of Bidvest’s divisions recovered sharply from the low levels of April when the economy was in a state of total shutdown.

Clear run

The hygiene services businesses in particular recovered quickly, with Ralphs listing cleaning services as one of the group’s opportunities. The figures show that revenue from these businesses was well above that of the previous year during the months of June, July and August.

Management expects an acceleration in the development and maturity of this industry, and looks forward to widening the scope of cleaning services. Described rather fancifully as ‘wash room, healthcare and floor care’ services in Bidvest’s annual reports, the cleaning of public bathrooms and such delivers good margins.

“The pandemic increased the awareness of out-of-home hygiene. It is now central to the new normal,” says Ralphs.

The good results show the mettle of the diversified group and give insight into the tough decisions management had to take, as well as the outcome of the decisions.

Ralphs reflected on the difficulties caused by the pandemic, writing in his overview of the results that the past financial year has been unprecedented. “Never has the world, our country, group and our people been tested to such an extent.

“But the true Bidvest spirit shone through,” he added.

“Numerous cost containment, liquidity preservation and strategic steps were implemented in rapid response to considerable demand changes,” said Ralphs.

These steps included:

  • Implementing measures to lessen Covid-19’s impact on employees, communities and operations. Prevention and treatment interventions were rolled out across the group to manage the health and safety of employees and customers, as well as the recovery of people who fell sick. This included a R400 million programme to support employees and other stakeholders who could not work, donations to the Solidarity Fund, and supporting around 3 000 schools throughout SA.
  • Improving the liquidity position. Bidvest secured R4.5 billion worth of additional credit facilities with its bankers to bolster liquidity. Ralphs reported that none of the extra credit has been necessary as yet.
  • Focusing on reducing costs and improving cash generation. The success of this focus can be seen in the improvement of gross margins from 29.6% to 30.6%, with management reporting that like-for-like costs decreased by some 6% compared with a year ago. Operating cash flow increased 38% to R9.2 billion, resulting in an increase in free cash flow to R3.7 billion compared with R2.3 billion in the previous financial year. “As a consequence, the group had no need to access the additional credit facilities secured – a truly remarkable result and testament to Bidvest’s long-standing cash generation focus,” Ralphs reported to stakeholders.
  • Starting a process to further right-size operations a few weeks ago. This is to ensure that businesses remain lean and competitive in a business environment that management believes will stay difficult.
  • Taking the immediate decision to exit the businesses most affected by the pandemic. This included BidAir Services, which supplies support services to airlines and airports, and Bidvest Car Rental, which suffered from what Ralphs says was the complete “devastation of the hospitality and tourism industry”. Bidvest will look at more restructuring of its interests in tourism.

Read: International tourism numbers could plunge 80%

The flip side

However, there was quite a bit of bad news for Bidvest shareholders.

Ralphs says the new phenomenon of empty-building syndrome, with people working from home, has impacted on some services businesses. “We have a lot,” says Ralphs. “Contracts have been suspended for a while.”

Then there are the problems at Comair. Bidvest’s stake in the airline was worth a few billion rands a couple of years ago; this year prompted further write-downs.

Net negative adjustments of R485.7 million were made to the investment values of Adcock and Comair prior to the former becoming a subsidiary and the latter being put into business rescue, reported management.

Read: Comair needs R1.2bn and to cut 400 jobs: administrators

In total, Bidvest charged nearly R2 billion worth of capital items to the income statement, and another R1.3 billion of impairments, acquisitions costs, losses by associates, and adjustments to the value of long-term contracts with clients, to eventually report a loss of R186 million compared with a profit of R3.8 billion in the 2019 financial year.

CFO Mark Steyn commented that of the net capital items of R2 billion that were recognised, R1.1 billion can be directly attributed to the Covid-19 pandemic.

Property, plant and equipment, and goodwill and intangible assets (such as automotive dealerships) were impaired as a result of lower forecast cash flows.

Debt

Bidvest’s net debt increased from R7.8 billion a year ago to R19.2 billion, largely due to the acquisition of PHS for £495 million. Management had to quickly look at new financing options when the original plan to replace the temporary bridging finance with bonds became too expensive as a result of SA’s deteriorating credit rating.

Foreign cash reserves, future cash flows, and proceeds of the disposal of foreign businesses will now be used to settle the pound sterling-denominated debt.

Management also reported that the geographic mix of debt is misaligned relative to trading profit and said the capital structure will be re-evaluated.

Cautious optimism

While Bidvest decided to pass its final dividend – quoting extraordinary levels of uncertainty in the global economy and the restructuring actions in progress – management seems cautiously optimistic about the future.

Investors seemed to share the optimism with the share price increasing almost 6% on Monday to above R152, while the JSE struggled to hold onto last week’s gains.

But the share is still way below the R215 levels of January.

Bidvest shares over 12 months

“Bidvest’s basic-need services and everyday essential product ranges should stand it in good stead, especially when coupled with an innovative, value-adding mindset,” according to the report.

“Bidvest will continue to invest strategically to generate sustainable profits for the long term.”

Listen to Ryk van Niekerk’s interview with Bidvest CEO Lindsay Ralphs:

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