CFO's report

Peter Meijer     Peter Meijer
Group financial director

Bidvest delivered pleasing results in a tough trading environment. At Group level, trading profit grew 5%; 6% in South Africa. Funds employed was tightly controlled and cash generation was strong. Acquisitions continued to augment and expand our products and services range.

2017 overview

Our first full year post the Bidcorp unbundling has delivered pleasing results, an excellent achievement considering the extremely tough trading environment compounded by political disruption and declining consumer spend. The resilience of the Bidvest operating model ensured that we successfully transitioned through this challenging year.

Our internal succession plans were such that the changed leadership following the unbundling transitioned seamlessly at the corporate level and settled down well. Management at a divisional level continued with business as usual, thus enabling us to retain the focus required at our operations.

The southern African economy continues to deliver negligible growth, which impacted all areas of our business. Over the past year, Group revenue grew modestly and overall trading profit increased, assisted by the Brandcorp and several other less significant acquisitions. Most Bidvest divisions, including Bidvest Properties, delivered improved trading profit results. Our management teams responded well to the current economic climate through a customer-centric approach, and strong cost-containment measures.

The Automotive division performed ahead of expectations considering its very depressed market, while Bidvest Namibia reported a significant decline in trading profit attributable to a weak fishing performance and pressures exerted on the commercial businesses as a result of the recessionary macro-economic environment in that country. Plans are being implemented, which will be communicated in due course. Office and Print was impacted by a volatile foreign exchange rate environment diluting Kolok and Konica Minolta trading margins.

The Brandcorp acquisition, which became effective on 1 October 2016, has delivered results in line with expectations and has integrated well into the Commercial Products division.

Bidvest Corporate benefited from significant mark-to-market fair value adjustments on various investments, an exceptional performance from the Property division, and reduced losses from our operations in the United Kingdom.

Net capital items contributed profits of R1,0 billion in 2017, relative to losses of R1,2 billion in the prior year. This was due to the strong share price performances of Adcock Ingram and Comair, which resulted in a significant reversal of previous impairments, by as much as R1,1 billion. The total carrying value of Bidvest’s associates and investments increased to R8,2 billion (2016: R7,1 billion). Non-core investments amounting to R6,6 billion remain to be monetised at the appropriate time and will contribute to our capacity for debt to support our acquisitive growth strategy. The share of profit from associates increased by R229 million or 152,8%.

Rand volatility continued over the past year, influencing imported inventory pricing in a tough market where market conditions were unforgiving and resistant to price revisions, impacting margins and profitability. Our Group policy is to buy forward cover on all imported goods and while this creates more stability and predictability with regard to our pricing, it can be an advantage or disadvantage compared to competitors who follow a more agile and risky approach.

Following Moody’s Investors Service (Moody’s) downgrade of South Africa’s sovereign rating in June 2017, the rating agency also lowered Bidvest’s global scale long and short-term counterparty credit ratings to Baa3/P-3 from Baa2/P-2, respectively. The outlook is negative. Bidvest’s national scale rating has remained unchanged at Aa1.za/P-1.za.

The unbundling transaction initiated the need to refresh our domestic bond issuer programme. A fixed income investor roadshow was followed up with a successful public auction in June of R750 million in three and five-year bonds. This was four times oversubscribed, confirming the strength of our balance sheet and appetite for our bond paper.

Financial overview

Group revenue increased 4,0% to R71,0 billion (2016: R68,2 billion), including the nine-month contribution from Brandcorp. The disposal of Manica, effective 30 June 2016, reduced revenue in the Freight division in the current year. On a comparable basis, South African revenue (excluding Manica and Brandcorp) increased 3,0%.

The Group’s gross profit margin remained stable at 29,1% (2016: 29,2%). Operating expenses were well controlled, increasing by a modest 3,6%. This result is impressive given the distortions from the Manica and Brandcorp transactions. Excluding the effects of these material transactions, like-for-like expenses were well contained and increased by only 1,7%.

Trading profit grew 4,6% to R6,0 billion (2016: R5,8 billion), with a trading margin of 8,5% (2016: 8,4%).

The Group “clean” tax rate excluding the influence of the capital movements is 28,2% (2016: 27,6%).

Net finance charges were 14,9% higher at R1,1 billion (2016: R0,9 billion), driven by an increase in the weighted average interest rate and increase in net debt due to the Brandcorp acquisition, which at R1,9 billion was fully debt funded.

We continue to maintain a conservative approach to gearing. Net debt amounted to R5,6 billion (2016: R5,1 billion).

Net debt to EBITDA remains stable at 0,7 times, and the EBITDA interest cover of 7,2 times (2016: 8,0 times) is comfortably above the Group’s conservative targets, providing ample headroom to fund organic or acquisitive expansion.

Cash generated by operations was R6,9 billion, marginally lower than the R7,0 billion in the prior year. Our post-capex cash conversion metric at 80% (2016: 75%) remains an excellent measure of performance as the divisions continued to show a strong ability for converting profits to cash.

This performance was achieved after the Group absorbed R368 million working capital in the current year compared to a release of R297 million in the prior year. This was mainly due to substantial project deliveries in the fourth quarter of the 2017 financial year.

The Group’s capital expenditure in South Africa has not abated. We remain one of the larger investors in the country and firmly believe that infrastructural development spending requirements are becoming more urgent than ever.

Asset management

Return on funds employed (ROFE) remains our primary metric of performance and operational efficiency that inevitably also translates and measures the conversion of profits to cash. Each business’s ROFE is compared to its peers and best performers inside our divisions. It is an uncomplicated, highly effective measurement, which all our managers understand and apply. The key benefit to this measurement metric is it quickly identifies “lazy” underperforming assets, and enables management to deal with them decisively.

The Group’s total ROFE performance includes assets such as our investment in associates and other investments largely defined as non-core to the Group. Average funds employed for Bidvest South Africa excluding our associates, was R17,6 billion (2016: R16,0 billion), up 9,6%, and a ROFE of 32,3% (2016: 33,2%) was achieved.

Bidvest Namibia’s ROFE deteriorated to 5,6% (2016: 17,8%), as profits reflect a declining market price and reduced fishing quotas.

Inventory and accounts receivable, which are significant components of the ROFE measurement, continued to be well managed with the latter receiving a focus on collections and credit extensions.

Acquisitions and disposals

During the year, the Group acquired 100% of Brandcorp, which is a value-added distributor of niche industrial and consumer products. The acquisition has enabled the Commercial Products division to expand its range of complementary products and services.

Bidvest also announced the acquisition of 100% of Noonan for EUR175 million in July 2017. South African Reserve Bank approval has been obtained and the transaction has therefore become unconditional. The transaction was effective 1 September 2017 and is fully debt funded in foreign currency at favourable interest rates.

The acquisition of Noonan is in line with Bidvest’s stated strategic intent to expand its presence beyond South Africa in niche, asset-light businesses that will benefit from Bidvest’s capabilities and expertise. The Noonan management team is highly regarded and one of the main reasons we found this acquisition attractive. The team will remain at Noonan and will work with Bidvest’s existing Services division team to drive future growth.

Non-core investments to the value of R773 million were disposed of in the current year.

Bidvest Namibia

Bidvest Namibia, in which the Group has a 52% share, experienced difficult country-specific macro-economic factors, which contributed to a disappointing overall performance and a decline in trading profit of 70,9%. For the Bidfish division, limited quota allocations, a significant decline in prices, and higher quota buy-in prices affected profitability.

All the other Bidvest Namibia divisions experienced pressure on revenues due to the recessionary climate in Namibia and the tough trading conditions are not expected to ease in the short term. Various cost initiatives have been implemented to improve operating performances.

On 18 August 2017, shareholders were advised that Bidvest Namibia has entered into discussions, which if successfully concluded, may have a material effect on the price of the Company’s securities. These discussions are ongoing.

Dividend declaration

The directors have declared a final gross cash dividend of 264 cents per ordinary share for the year ended 30 June 2017. This brings the total dividend for the year to 491 cents per share (2016: 714 cents). The total dividend is not comparable to the prior year’s total dividend, which was declared as part of the larger Bidvest Group, before the unbundling of the foodservice businesses.

Looking forward

Bidvest remains optimistic as we navigate political uncertainties and slow economic activity. We are seeing green shoots of activity emerging within certain of the South African divisions, supported by higher commodity prices and improving consumer confidence.

Internally, we maintain a steady focus on expense control and asset management to ensure continued performance through the business cycles.

Our intention remains to explore selective local and foreign acquisitive opportunities to complement existing product and service offerings whilst maintaining a strong balance sheet and introducing an element of rand hedge to our financial performance.

Peter Meijer
Group financial director

Financial strength enables growth strategy