Investment vindicated
Investment to maintain long-term competitive advantage is justified and we are confident the
Viamax and Angliss transactions will be value enhancing in a relatively short period. The first fullyear
performance by Angliss supports this view and provides early vindication of our expansion
into this region. Viamax proved to be a major profit contributor to Bid Auto as a core element
of its new-look Fleet Services division. We are also confident that divisional capital expenditure
programmes will deliver the anticipated gains.
Working capital management is being stepped up and stock levels are being adjusted. That
said, inventory build-up is necessary in an inflationary environment if trading opportunities are
to be exploited. Industry-specific developments also have to be considered. Inventory levels at
Bid Auto were affected by the suddenness of the change in consumer behaviour and the long
lead times of original equipment manufacturers.
Management is sensitive to rating agency opinion and appropriate corrective action is being
taken. However, a growth-minded Group such as Bidvest cannot shape its business decisions
simply to win rating agency approval. An annual “snapshot” can be illuminating, but it should
not detract from a long-term view.
Debt appropriate
We believe our debt exposure is appropriate at the current stage of our growth strategy. Cash
generation remains strong and the benefit of recent investment will become increasingly
evident.
Our debt-to-equity ratio is now higher than the 40% ceiling that traditionally applied at Bidvest.
However, Bidvest cannot be considered over-geared. Our interest cover ratio remains within our
forecast range of five to six times, notwithstanding the effects of interest rate increases over the
past 24 months. However, the cost of debt is fast approaching the cost of equity and consideration
needs to be given to the benefits of raising equity.
An area of focus is the liquidity profile of the Group’s debt. Management is undertaking an
exercise to determine the most optimum funding profile for the Group.
You don’t achieve more than 20 years of uninterrupted growth by taking short-term decisions.
The business has to be run optimally, with recourse to all available tools. Debt is one such tool.
Its utilisation depends on cost and the needs of the business.
Bidvest bonds
We maintained our wait-and-see posture on further Bidvest bonds. After raising the initial
tranche of R1,5 billion from the debt capital market in August 2007 we indicated that the timing
of future issues would be determined by interest rates and liquidity risk. Since the crisis in the
US subprime mortgage market, credit spreads and liquidity risks have exploded. It was therefore
no surprise that Bidvest decided not to re-enter the debt market in the 2008 financial year.
It is our intention to further reposition some of our debt, but timing will be determined by
market demand and cost.
Bidvest DNA
Aversion for high costs and excessive valuations is deeply embedded in Bidvest’s corporate
DNA, demonstrated a little over a year ago when we withdrew from an attempt to buy a major
north American foodservice company. At the time, banks hoping to fund the transaction made
ample debt available. However, we regarded the valuations as unreasonably high and were
suspicious of an environment in which the deal-flow hunger of private equity investors was
having a material effect on pricing.
We believe subsequent events have justified our cautious stance. Certainly, we are confirmed in
our belief that acquisitive activity should be value directed.
Incentivisation
Bidvest has not formally adopted a share buy-back plan, yet we have repurchased shares where
pricing opportunities have arisen as a result of market weakness. At the time of the conclusion
of our BEE deal with Dinatla, management undertook, as far as possible, to limit any dilution as a
result of that BEE transaction, which was achieved. In May 2008 Bidvest repurchased 5,6 million
shares by a scheme of arrangement in lieu of a distribution.
To retain skills and objectively motivate management, we have undertaken a review of our
current incentive schemes to ensure alignment with shareholder aspirations. The scheme
incorporates the setting of management targets for achievement of profit growth combined
with returns criteria while measuring total shareholder returns.
The new scheme will be implemented in the 2009 financial year subject to shareholder approval
at the annual general meeting.
The year ahead
The focus will be on the achievement of appropriate returns on recent investments while
applying the credit controls and internal disciplines that will ensure improved management of
working capital. The management of credit risk has received critical focus, which will continue
while deteriorating economic conditions persist.
A key objective is to manage the current levels of gearing without damaging the growth
opportunities that present themselves within our businesses.
Bidvest has gone through material expansion over the last three years. The business has grown,
but the core philosophy remains intact. The Bidvest model is driven by a disciplined approach
to business by hands-on managers who seek the optimum return on funds employed. This
tradition will be reinforced in the year ahead. |
