For Bidvest, the global services, trading and distribution company, the coronavirus is the new number one risk facing the company, replacing the list of usual suspects - strikes, electricity black-outs, community unrest and political uncertainty.
“There is no doubt that coronavirus is now number one on our risk profile,” CEO Lindsay Ralphs told media after the release of the company’s results for the six months ended December 31, 2019. “Many of our products are imported internationally; if it’s not finished product then its components and raw materials. This virus could have a serious impact on trade flows around the world.”
Bidvest is primarily a SA-based company with Noonan its outsourced services, facilities management, cleaning and security business in the UK contributing 9% of revenue and 6% of trading profit. It is also primarily a services business, generating 65% of trading profit from services and 35% from trading and distribution activities.
In South Africa the company owns just over 50% of Adcock Ingram, which imports medicines from India; it runs motor dealerships and fitment centres, which, import tyres and other vehicle components; its freight businesses handle the import and export of fertilisers, minerals, cement and general cargo; and its travel businesses like Rennies Travel and the Bidvest Lounges, may be impacted if travel slows down.
“We are monitoring the situation closely,” says Ralphs. “On the pharmaceutical side, Adcock and its suppliers have significant stock in hand, so there will be no short-term inventory challenges, but we don’t know when the Chinese will go back to work.”
At this point, the impact of the virus on global supply chains and economic growth is a complete unknown, but markets are very jittery, with one trader noting that the swiftness and severity of the sell-off last week was unprecedented.
However, investors can take comfort from the fact that Bidvest is well placed to ride out any unforeseen headwinds.
The company has a strong balance sheet. Net debt stands at R10-billion, but this is well within its covenant levels and interest repayments are affordable. Post working capital, cash generated from operations in this six-month period increased almost three-fold to R3.8 billion.
Bidvest is also making its invested capital work admirably well. Its return on funds employed (ROFE) improved from 22.8% to 24.8% in the period and its return on invested capital of 16.3% is well above the group’s weighted cost of capital.
Earnings in the six month period were strong, despite the economic climate. Group revenue grew 9.2% to R43.7-billion and trading profit grew by 19.8% to R4-billion, supported by strong margin growth and the consolidation of Adcock Ingram into the accounts. (Bidvest increased its stake in the health products company to 52.3% last year.)
In particular, the offshore business Noonan performed very well, while in SA
results were mixed. For instance, the freight business handled increased bulk and liquid commodity volumes but this was offset by lower agricultural exports, yellow maize in particular, and reduced cargo volumes resulting in a 9.3% contraction in trading profit to R645.6 million.
The automotive business, its largest by revenue but not by trading profit, grew trading profits by 16.5% to R379.0-million under tough conditions.
Bidvest owns a 27% in Comair and has impaired its share of the settlement still owing to Comair after the competition authorities found SAA guilty of anti-competitive business behaviour and imposed a R1.1-billion penalty. As of December R790-million was still outstanding and may not be recovered given that SAA is in business rescue.
“Bidvest results showed resilience in a tough trading environment,” says Thabang Modise an equity analyst with Benguela Global. “Despite normalised HEPS being down 3.9%, operationally, the results were decent with the services business expanding margins on the back of strong performance from Noonan, Protea Coin and good cost control.”
Normalised headline earnings per share, which excludes acquisition costs, amortisation of acquired customer contracts and includes an adjustment for the impairment above, is a measurement used by Bidvest’s management to assess the underlying business performance. On this basis, the Group delivered a slightly improved result, as reflected in pro forma normalised HEPS of 636.5 cents.
Bidvest has made a number of interesting acquisitions in the period, both abroad and locally in SA. In particular, its R10-billion acquisition of UK company PHS Group could prove to be spectacularly well-timed given the heightened awareness of hygiene caused by the coronavirus.
“We have wanted to enter this market for some time and have now secured the number one player in the UK,” says Ralphs. “Hygiene is a large sector but is very fragmented. With this platform, we could move into other geographies. Corona has been devastating but it has highlighted the need for better hygiene around the world.”
Bidvest management has a reputation for not overpaying for acquisitions, notes Asief Mohamed, chief investment officer of Aeon Investment Management. “Hopefully they maintain this discipline.”
While the UK economy still faces some risks, its hygiene market is very resilient as a result of the safety standards and level of urbanisation, adds Modise. “PHS estimates the hygiene market in the UK to be worth around £480 to £500 million pounds with the expected growth multiple of 1.5-2 times GDP.
In South Africa, most acquisitions were bolt-on to support existing businesses. For instance, it added a drone business its Protea Coin operations “disrupt and innovate” in the security industry and increased its investment in water business Aquazania.
The construction of the group’s flagship R1-billion liquid petroleum gas (LPG) storage facility, the largest in the world, is proceeding on time and on budget at Richards Bay.
“The strategic investments in the LPG storage facility in Richards Bay and the acquisition of PHS and Eqstra will potentially provide further growth opportunities should the South African GDP and infrastructure investment gain momentum in the second half of the calendar year,” adds Mohamed.
In addition, the group has secured a site in Gauteng and will build an inland storage facility there. “You need a hub and spoke network to create an industry,” says Ralphs. “We are building the import hub, Gauteng is our first spoke, but we will very likely expand the network. We want to make LPG available at scale throughout South Africa, particularly rural communities where it can be used as an alternative to wood and paraffin.”
The recent market correction provides investors with an opportunity to buy a well run, quality company that is highly cash generative at an attractive price, says Modise. “The current macroeconomic environment might not be favourable as the company is correlated to the South African economy but for long-term investors, it’s a buying opportunity.”
The Group declared an interim dividend of 282 cents per share, in line with the prior period. BM