Annual
compound growth rate in headline
earnings per share
in excess of 30% over the past
18 years
►
Revenue
for the year grows 23,0% to
R77,3 billion
►
Operating
profit up 22,3% to R3,7 billion
Peter
Nyman
►
R4,1 billion
generated in cash with wealth
creation of R13,9 billion
Financial
director
►
Income
attributable to shareholders
rises 21,8% to R2,4 billion
►
Headline
earnings per share of 804,6
cents, up 22,6%
►
Total
distributions per share of 369,0
cents per share
►
Successful
transition to IFRS reporting
David
Cleasby Financial
director designate
Introduction
Financial results were pleasing,
with good contributions from Bidvest’s international
businesses, notably the new European acquisitions.
Within South Africa, increased investment in national
infrastructure, construction sector growth and
buoyant consumer spending proved beneficial for
several divisions. However, a stable but strong
rand for much of the period increased international
competition, keeping margins under pressure.
Despite these challenges, all business units maintained
strong cash flows.
Bidvest maintained its record of sustained growth
in shareholder value. The compound annual growth
rate in headline earnings per share over 15 years
is 25,8%. The growth rate is somewhat understated
as headline earnings per share for the early years
were not adjusted for International Financial
Reporting Standards (IFRS).
People often ask why there is a difference between
the 18 years of our existence and our financial
reporting over 15 years. The explanation
is that for the first three years of our existence
Bidvest had a holding company structure and results
for that period are not comparable and therefore
are not included.
In 2006 we adopted IFRS. The effect was a reduction
in the previously reported 2005 profit attributable
to shareholders by R93 million.
Highlights
Revenue grew 23,0% to R 77,3
billion (2005: R62,8 billion) and includes the
contribution of Deli XL for the first time.
Operating profit was up 22,3% at R3,7 billion
(2005: R3,0 billion).
Headline earnings per share of 804,6 cents reflect
growth of 22,6% (2005: 656,4 cents).
Profit attributable to shareholders of the Company
rose 21,8% to R2,4 billion (2005: R2,0 billion).
Cash generated by operations was R4,5 billion
(2005: R4,2 billion) while wealth created rose
to R13,9 billion
(2005: R12,0 billion).
International growth
and disposals
International acquisitions
and offshore disposals are highlighted.
In respect of Lithotech France the most practical
and ethical way of resolving a frustrating situation
was to dispose of the business to a consortium
consisting of management and write off the loss.
To save French jobs, we also agreed to finance
a € 7 million loan to the new owners, secured
by bonds on the business, French properties.
In an unrelated development, another business
based in France – Ontime’s French
national car transport subsidiary, was closed
down. The operation proved unprofitable despite
extensive restructuring.
Debt and deal-making
The Deli XL transaction was
funded through Bidvest’s banking facilities.
The arrangements in no way impair Bidvest’s
ability to carry through major transactions, both
within Africa and offshore.
Bidvest debt is currently at historically high
levels, yet the debt-to-equity ratio remains within
the target level of 40%. The Group has been criticised
by some analysts for its cautious approach to
debt and its “lazy balance sheet”.
We believe our approach is prudent, particularly
in view of the potential for extreme volatility
in South Africa.
Higher gearing was prompted by a particularly
favourable interest rate climate. Within South
Africa, rates were at the lowest level in a generation
until the 0,5% increase by the Reserve Bank in
early June. Bidvest exploited the opportunity
to borrow at extremely competitive rates. The
Group is an acquisitive company and further gearing
will be utilised should favourable opportunities
present themselves.
Our balance sheet remains strong. Bidvest develops
cash-generative businesses to their full potential,
instils a culture of vigorous capital management
at operational level and uses cash from mature
businesses to fund growth businesses and acquisitions.
This pragmatic approach has served us well and
will not be abandoned. Bidvest’s credit
rating has been maintained.
Greater flexibility
Increasing flexibility is evident
in Bidvest’s approach to ownership when
examining possible acquisitions. Traditionally,
Bidvest has preferred to take 100% equity ownership
which results in control of the cash flows and
no conflicts of interest between the shareholders
and the business.
There are occasions, however, when Bidvest no
longer strives for 100% control. Greater flexibility
is necessary for various reasons.
Many Bidvest divisions are industry leaders, particularly
in South Africa. A strategic interest rather than
full control of a related business enables Bidvest
to continue to grow.
In South Africa, Bidvest is mindful of its BEE
responsibilities. The Group contributes to enterprise
development by supporting black-owned businesses.
There may be occasions when operational support
and facilitation of a company’s growth strategy
can best be accomplished by buying equity without
affecting the status of the original black owners
as majority shareholders.
In some markets in which Bidvest has little experience,
there are good grounds for limiting one’s
exposure until a better understanding of the region
has been developed. We, therefore, preferred to
take strategic stakes in the initiatives in Dubai
and India.
In areas of Bidvest core competence our focus
is still 100% ownership. In other areas, the Group
will be flexible and judge each case on its merits.
International standards
The current accounts are IFRS
compliant. The 2005 accounts were restated to
permit meaningful comparison. We decided not to
restate 2004 numbers to enable us to present a
three- year picture in the financial statements,
as the effort and cost far outweighed the potential
benefits, particularly in light of the relatively
minor effect of IFRS on the results. The new accounting
approach offers an investor a common base of understanding
across multiple jurisdictions and businesses.
However, after more than a year of work on the
IFRS conversion, we continue to hold reservations.
IFRS helps the experts. A common accounting methodology
is employed by listed companies wherever they
are based. However, the methods can be complex.
Numerous oddities occur and have been thoroughly
debated in professional journals. As a result,
these quirks are understood by the specialist,
but not the layman.
This shortcoming has received relatively little
attention. For several years, the need for transparency
in corporate affairs has been emphasised. Transparency
surely cannot be promoted when some aspects of
the accounts are opaque from a non-specialist’s
perspective.
Without a thorough understanding of the nature
of calculations, the non-specialist is lost. This
situation sits uncomfortably with the overall
intention of corporate reforms; namely, to foster
improved governance by making the workings of
a business understandable to all stakeholders,
not just sophisticated investors and accounting
professionals.
Furthermore, IFRS creates another level of complexity
in trying to manage one’s business. In Bidvest
we manage the business with a returns focus on
actual cash flows rather than by complicated IFRS
standards.
Incentivisation
IFRS requires share-based payments
to be recognised as an expense at the date of
grant and, therefore, introduces an additional
non-cash expense into the financial statements.
The cost of Bidvest share-based payments in 2006
came to R50,1 million (2005: R37,6 million).
Bidvest has a special interest in the application
of share options as a means of enhancing performance.
Over many years, share options have shown themselves
to be an effective tool in leveraging Bidvest
success and rewarding our “owner-managers”
for exceptional efforts.
Bidvest is carrying out a review of its share
option schemes and, notwithstanding the financial
implications of options at this stage, will continue
to use this tool as a motivator for staff and
a reward for exceptional performance.
Share buy-backs
As part of the BEE initiative
with Dinatla in 2003, existing shareholders were
awarded options to acquire shares in Bidvest at
R60 per share. It is anticipated that in December
2006 option-holders will exercise their rights
to the 18 million shares available to them.
In order to minimise the dilution, Bidvest acquired
an additional five million shares on the open
market. The buy-back programme cost R508,8 million
in 2006 (2005: R532,1 million) and the shares
are held as treasury shares.
Applauding government
BEE funding in both listed
and unlisted South African companies may become
easier as a result of government’s proposed
amendment to section 38 of the Companies Act.
This clause currently prevents a company from
providing financial assistance to a third party
to enable the third party to buy equity in the
company.
The effect of the current legislation is to stop
a business from securing a strategic BEE partner
because the prospective black owners cannot raise
sufficient funding without a “hand-up”
from the company.
Bidvest called for the removal of section 38 in
last year’s annual report because of the
adverse effects on BEE ownership initiatives.
We understand that an amendment is imminent with
the necessary proviso that financial assistance
from the company requires the special approval
of its shareholders and may not be advanced if
it endangers the solvency of the business.
Bidvest applauds government for taking prompt
action to clear this obstacle to wide-ranging
BEE ownership.
The government is also considering the deductibility
of interest for tax purposes in respect of shares
purchased in a BEE transaction. It might also
be appropriate to consider the extension of interest
deductibility to all share purchases.
Government action
Another initiative by the South
African government – abolition of the Regional
Services Council levy – is also welcomed.
The expected saving at Bidvest in 2007 will be
in excess of R50 million. The abolition reduces
the cost of doing business while cutting red tape.
The effects are particularly positive for small
business.
In recent years, South Africa ’s democratic
government has demonstrated that it is both amenable
to suggestion and extremely efficient at revenue
collection. The receipts of the South African
Revenue Service have significantly exceeded expectations,
creating a possible opportunity for further review
and reform of certain aspects of our tax system.
The Group paid R14,7 billion in taxes and duties
of which R12,9 billion was paid to South African
authorities, most of which was collected on behalf
of government.
Business risks
Bidvest is exposed to numerous
financial risks; including interest and exchange
rate risk. Risks cannot be abolished, but they
can be mitigated. The Bidvest structure creates
a balance due to its geographic spread and wide
range of multi-faceted businesses.
To some extent the Group is protected from an
interest rate rise due to our long-term loans
which locked in relatively low interest rates.
The rand’s vulnerability was evident at
the close of the financial year while its ability
to stage a recovery was apparent a few weeks later.
The gyrations underline the prudence of the Bidvest
policy of taking forward cover and conservative
gearing policies.
The contribution of Bidvest’s offshore interests
– already considerable – is enhanced
by a depreciating rand. Some consumer-focused
South African businesses may achieve higher sales
when the price of imports falls. Those engaged
in local manufacture can be adversely affected,
however.
Similarly, the interest rate climate affects different
Bidvest businesses in different ways. Higher rates
inhibit credit extension and can constrain sales
to the consumer. However, higher rates and inflationary
pressures may prove beneficial in business-to-business
trading activities.
Diversification does not make Bidvest risk-neutral.
Bidvest is an opportunistic and acquisitive business;
misreading the potential within an acquisition
is an abiding risk. Tension is evident between
the urge to grow and the need to become more watchful
as scale aggravates the consequences of one false
step. Early in Bidvest’s life, a deal-making
miscalculation involving a small or mid-size transaction
was easily manageable. At a higher level of magnitude,
the consequences could be more severe.
Bidvest’s track record indicates this risk
is well managed, but there is no room for complacency.
Business risk receives intense scrutiny at Bidvest.
To this end, the risk committee is being expanded
to harness fresh opinions and ensure vigorous
debate across a wider forum.
The future
Inflation is expected to trend
higher in the coming year while interest rates
in South Africa – and some international
markets – are moving to higher levels. These
factors suggest that deflationary pricing pressures
may ease to the benefit of many of Bidvest’s
trading businesses.
Bidvest divisions are strongly cash-generative.
Considerable resources are available for continuing
investment in new capacity and infrastructure.
The strong financial base also creates a platform
for further growth, both organic and acquisitive.
Personal note
I have served Bidvest as financial
director for over 15 years. The position has provided
an opportunity to work with stimulating and insightful
executives and directors on four continents; for
which I am most grateful. I am currently working
with my successor, financial director designate
David Cleasby, and have the satisfaction of knowing
that I will be leaving my portfolio and the Group’s
shareholders in good hands.
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