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| Financial director’s report continued |
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| Acquisitive freedom |
One reason for our largely conservative attitude to debt is our desire to retain our ability to carry through sizeable acquisitions. We remain an opportunistic and acquisitive company, and freedom to manoeuvre remains important to us.
Philosophical issues also come into play. South African business has gone through periods of high volatility, creating an aversion of heavy debt. Gearing up in the good times may appear to be positive, but can lead to missed opportunities in the bad times. In Bidvest’s experience as an acquisitive company, some of the best opportunities occur during a challenging business environment. We wouldn’t want to miss them. |
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| Interest rates |
Interest rates continued to harden, both in major international markets and in South Africa. By June 2007, increasing inflation and credit extension had prompted the South African Reserve Bank to increase rates by 250 basis points since June 2006. However, our conservative stance on debt ensured we were well positioned to weather these increases in the base rate.
This is not to say we were unaffected. The cost of interest rate increases of 250 basis points over the 14-month period to 30 June 2007 amounted to approximately R40,0 million in added interest. The projected cost of a further increase of 1,0% is approximately R48,0 million. |
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| Capital market funding |
Changes in the interest rate climate spotlight the need for competitively priced funding, including access to the debt capital market where appropriate. In May, we set up a domestic medium-term note programme, enabling us in due course to raise a total of R4,5 billion in corporate debt from the South African capital market.
An initial tranche of R1,5 billion was raised in August. The timing of future bond issues will be determined by the direction of interest rates and liquidity risk in both international and domestic markets.
Our corporate bond issue will also have the effect of further diversifying our borrower base. The DMTN programme is a key element in our strategy of securing optimum funding efficiency and will assist us in repricing certain fixed loans outside of the banking market. |
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| Business risks |
Risks are well managed, both at a corporate and operational level. The economic environment in South Africa is becoming more challenging and the risk of significant credit default is expected to grow. All operational units are showing increased vigilance.
Exchange rate risk is well controlled. We are a trading business and cover our currency exposure on all imported goods as we prefer not to court exchange rate risk. Some risks are unavoidable, however, as currency exposure is inherent in some business models; for example, marine services where all charges are US dollar-denominated. Operational management has many years’ experience of trading within these parameters and the risk is not considered excessive.
Bidvest’s track record indicates that our decentralised business model mitigates business risk. Our managers are accountable for performance in a range of industries in various geographies. Conditions may be challenging in some environments, favourable in others. The result on balance is stable, above-average and sustainable returns.
A moderate rise in inflation does not pose increased business risks as trading activities traditionally benefit in such an environment as customers tend to maintain higher stock levels.
Our sensitivity to fluctuations in interest rates, exchange rates and inflation is not regarded as an area of weakness in view of the broad range of our activities and our wide geographic footprint. |
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| Sustainability |
| We are committed to triple bottom line reporting. All our activities are underpinned by the need to build and maintain our sustainability profile through investments in people, planet and profitability. |
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| Incentivisation |
We have introduced a share purchase scheme as a means of further aligning the interests of shareholders and management. Senior managers who participate in the scheme are obliged to buy shares; it is not an option. The arrangement is an efficient mechanism for long-term management incentivisation.
Our share buy-back programme was launched three years ago to eliminate the danger of any dilution in shareholder value as a result of our empowerment transaction with the Dinatla consortium. No further share buy backs are anticipated unless a pricing opportunity presents itself. |
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