CFO's report

Mark Steyn (Chief financial officer)

Mark Steyn (Chief financial officer)

The Bidvest Group produced a resilient financial performance in a difficult macroeconomic environment. The second half of the financial year was certainly more challenging than the first, but we remain pleased with the results achieved.

Group trading profit grew by 3.5% to R6.7 billion

Headline earnings increased 10.3% to R4.6 billion

Gross margins rose from 28.9% to 29.8%

Operating expenses increased by 4.6%

Bidvest’s highly diversified portfolio continues to enable a balance between the high and the low performers. We’ve seen that the Group’s services-related businesses have helped overcome the exposures to the South African industrial and construction sectors, which are under considerable strain.

There has been acceptable growth in earnings, cash generation has been good and we have maintained a very strong balance sheet, while we enhanced the majority of our key metrics.

Revenue of R77.1 billion was 0.2% higher than last year. This was impacted by the slowdown in the Automotive division, following the change in the Mercedes Benz agency model and the general slow-down in luxury vehicle sales, weak trading in the Electrical division and disposal of the Namibian fishing business (effective 30 June 2018). Group trading profit grew by 3.5% to R6.7 billion (R6.5 billion).

Headline earnings increased 10.3% to R4.6 billion (R4.1 billion), which was enhanced by the revaluation of the Mumbai International Airport (MIAL) investment and growth in income from associates. Headline earnings per share (HEPS) increased by 9.8% to 1 352.1 cents (1 231.6 cents) with a 0.5% increase in the weighted average number of shares in issue. Basic earnings per share (EPS) decreased by 1.6% to 1 119.4 cents (1 137.3 cents) following net capital losses of R787.1 million (R352.0 million losses), particularly on the Adcock Ingram and Comair investments.

Gross profit increased by 3.4% to R23.0 billion (R22.2 billion). Gross margins rose from 28.9% to 29.8%, which is particularly pleasing. There was an increased contribution from the Irish and United Kingdom businesses, that operate at lower margins compared to South Africa, which means the local operations certainly held their own in terms of margin management. Operating expenses were well controlled, and increased by 4.6%, in line with inflation.

From an associate income perspective, the contribution was up 37%, essentially from Adcock Ingram, which had a good year, and Comair, which recognised its successful R1.1 billion South African Airways claim, and Bidvest has accounted for its share.

Acquisitions in the 2019 financial year include Aquazania (effective 1 February 2019), UAV and Drone Solutions (UDS) (1 March 2019), an additional 10.6 million Adcock Ingram shares (June 2019) and the minority stake of Bidvest Namibia (June 2019).

Disposals include TMS (1 November 2018) and 1.3 million Bidcorp shares (August 2018). At year-end, an agreement was signed by Bidvest to acquire 100% of Eqstra Fleet Management and Logistics for an enterprise value consideration of R3.1 billion. Once concluded, this should prove to be an important acquisition that will contribute positively to both the Financial Services and Automotive divisions revenue and profits.

Investment income benefited from realised gains on the disposal of the Bidcorp shares and the revaluation of MIAL to $86 million ($72 million), which is based on a signed sale agreement.

Other income decreased by 2.9% to R310.2 million (R319.6 million) and income from investments increased to R368.2 million (R142.8 million), up 157.9% year on year. The effective tax rate at 27.1% is as a result of the non-taxable MIAL revaluation and the lower corporate tax rates of foreign operations.

Bidvest has always been fairly conservative in terms of its balance sheet approach and the managing of debt. It is therefore pleasing that the Group has again maintained a strong balance sheet with a conservative funding structure. The net debt position increased from June 2018 by R1.5 billion to R7.8 billion, mainly due to a negative working capital movement in the year together with outflows to purchase additional Adcock Ingram shares and the acquisition of the minority stake in Bidvest Namibia. Net debt to EBITDA of 0.9 times (0.8 times) and EBITDA interest cover of 7.9 times (8.0 times) are both comfortably above the Group’s self-imposed target.

ROFE improved from 22.9% to 23.3%, and the Group ROIC was 18.4% compared to a WACC of 11.7%.The Group therefore produced a return of 6.7% above cost of capital.

Balanced debt profile

The Group long-term debt is now 49% of the gross position, and we aim to maintain this balance going forward.

We have now turned our attention to renegotiating our term facility in the United Kingdom. This was originally used for the acquisition of Noonan and subsequently, Ultimate Security Services (or USS). There certainly seems a significant appetite for Bidvest debt in the region, and the rates being shown are lower than our current borrowings.

This is exciting, and together with the lending appetite from local South African banks, provides Bidvest with significant funding growth flexibility and headroom. Our targeted capital allocation in the medium-term is to invest 50% locally, within South Africa, and 50% offshore.

The South African Prime interest rate ended the year at 10.25% after having increased by 25bps on 23 November 2018. The average across the year was 10.15% vs 10.20% during the prior year. Short-term interest rates on the overnight loan market in the first five months of the financial year averaged around 7.7% and increased to 7.9% during the last seven months to June 2019. Comparative rates for the prior year averaged around 8.0%.

Moody’s Investors Service published a Credit Opinion on 2 April 2019 leaving South Africa’s local and foreign currency rating unchanged at Baa3 with a stable outlook. Moodys is due to issue its ratings report at the beginning of November. Any change to the sovereign rating could likewise affect Bidvest’s ratings outlook.

Continued Investment

Net capital expenditure amounted to R2.6 billion (R2.2 billion), reflecting continued investment across the Group to sustain and improve various Group businesses. Other material cash flow movements include acquisitions of R3.0 billion (R3.7 billion), disposals of R1.6 billion (R65.6 million).

Bidvest successfully concluded two bond programmes during the past year. The second, issued in mid-June 2019 amounting to R1.3 billion in three- and five-year tenures, was 4.4 times over-subscribed at favourable rates. The aggregate issuances for the year therefore totalled R2.6 billion after an additional R1.3 billion was raised in mid-November 2018.

The weighted average shares in issue are 0.5% higher at 337.2 million (335.7 million) as a result of an increase in net shares in issue of 0.5% to 338.4 million (336.8 million).

An important event that occurred over the last year, was the change of external auditor to PwC. While never a simple process, it has been a successful transition resulting in a thorough and robust, interactive audit process. My personal thanks are extended to everyone involved. I would also like to express an appreciation to the outgoing auditors, Deloitte for their assistance in the smooth handover and the considerable input provided over the last 11 years to the Bidvest Group.

Cash returned

In line with the Group policy, a final gross cash dividend of 318 cents per ordinary share has been declared for the year ended 30 June 2019. This brings the total dividend for the year to 600 cents per share (556 cents).

Cautiously optimistic

Given the continued weak state of the South African economy, it is expected that the trading environment will remain extremely competitive over the next six months. Any business growth will depend on economic performance and if the government can restore policy certainty and business confidence.

Nevertheless, the Group remains highly cash generative and continues to pursue the key growth objective of exploring all acquisition opportunities, both locally and internationally, that meet the Group’s strategic requirements and create shareholder value. Cost savings initiatives and asset management focus are continuing in the new financial year.

Mark Steyn

Chief financial officer

Cash generated by Group operations was robust at R7.1 billion (R9.8 billion). The decline over last year was largely due to the outflow of working capital, specifically payables which were abnormally high in the corresponding period.