Working the assets

The challenge is to optimise our unimpaired asset-base. At Bidvest, the overall financial strategy is to secure continuing improvements in working capital management while pursuing increased incremental returns from recent investments.

Correct utilisation of available capital is paramount and is a focus area for our management teams. To achieve a proper return, assets have to be properly deployed or sold. Under-performing assets are a luxury no business can afford in today’s economic climate.

Cash flows

At a time of liquidity constraints within the international banking industry, cash flow becomes crucial and Bidvest cash flows remain resilient. Cash generated by operations as a function of Group trading actively increased to 141% compared with 11,4% in 2008. Some divisions have achieved significant improvements following energetic measures to reduce costs and achieve better working capital management.

Every business unit must deliver, irrespective of geography or industry. Membership of a large organisation is no justification for under-performance in what has become an absolutely crucial area of business.

Credit risk

Heightened credit risk has prompted a rigorous approach to debtors’ management. As a trading business we inevitably become a credit-provider to our customers. There is leverage throughout the system, from the producer to the warehouse door and the shopkeeper’s till. But a sale is only concluded when the cash is in the bank.

Our managers are paying close attention to the credit cycle to ensure payment periods do not lengthen unduly and are shortened wherever possible. We are ethical suppliers and we value long-term relationships, but we are not a de facto lender of last resort when all other avenues are closed.

Financial institutions have become extremely alert of credit risk. So are we.

Governance

Another consequence of the international financial crisis is the renewed focus on corporate governance and regulation. When major international institutions collapse and huge losses accrue, it is natural to review safeguards and seek mechanisms for limiting risk exposure.

As the clamour rises for better controls it is important not to forget that a lot of the behaviour that contributed to catastrophe was questionable under existing rules. In fact, some major losses were the result of flagrant criminality. It may be that we don’t need further rafts of regulation, but the proper monitoring of existing regulation, with better understanding of associated risks. Over-regulation stifles creativity and entrepreneurship, thereby limiting innovation and progress.

Alerts should have been sounded under current safeguards. In retrospect, the warning signs seem clear enough. Vigilance is a state of mind first and foremost; the state of legislation is poor defence when those at the helm are negligent.

In South Africa, the trend to stricter regulation takes the form of changes to the Companies Act that increase the liability and responsibility of directors, while anti-competitive behaviour is being closely scrutinised.

Reasonable regulation

No one can criticise legislation demanding reasonable and professional behaviour by business. But care should be taken to ensure regulatory trends also remain reasonable.

Today, simple compliance is not enough; time-consuming efforts are necessary to prove it. Record-keeping must be meticulous and adherence to prescribed procedure has to be strict. In an economy strapped for skills, it is vital that demands on executive time do not become too onerous.

Bidvest entrepreneurs have businesses to run and returns to pursue. In the process, there are jobs to be created. For us, honesty and integrity are standard operating procedure rather than a compliance issue.

Ethical companies will continue to conduct themselves in a principled and reasonable manner. Their executives are driven by high personal and professional standards.

Those undeterred by the criminal law on theft, fraud and misrepresentation will not be deterred by a new wave of compliance requirements.

Costs

Our headline earnings were impacted by the expensing of R118,3 million in closure and reorganisation costs in certain operations within motor retail and the UK foodservice and Ontime Automotive businesses. These costs were deliberately undertaken as prompt action was necessary to align the business base with contracting markets.

Early action removed uncertainty and created a platform for performance improvements. We look forward to better results at all three businesses.

Disposals

We sold our stake in Enviroserv Holdings Limited with effect from November 3 2008, for a pre-tax profit of R391,8 million. The value of the Group’s listed equity-accounted investments was impaired by a pre-tax R200 million adjustment in terms of IFRS listed market value requirements.

We are preparing to reduce our stake in Bidvest Namibia from 89% to 55% as that business seeks increased local ownership through a listing on the Namibian Stock Exchange.

Debt position

Debt levels show an improvement on last year. Net debt stands at R4,1 billion (June 2008: R5,6 billion) as a result of lower working capital demands and tighter asset management. The net position is well within the parameters set out in our financial covenants.

At 28,5%, net debt to equity reflects a significant improvement on the prior year’s 40,3%.

Net finance charges increased 10,5% to R1 029,2 million, reflecting higher average interest rates. Net interest paid declined significantly in the last quarter as the Group benefited from short-term funding exposure. Bidvest’s conservative attitude to debt remains appropriate in the current climate. Interest cover at five times reflects adequate borrowing capacity.

Should significant acquisition opportunities present themselves, we will not be afraid to draw on our resources. Bidvest’s balance sheet remains strong and is appropriately capitalised. An increase in debt is unlikely to cause distress.