The Bidvest Group Limited

Bidvest is a leading business-to-business trading, distribution and services group, operating through seven divisions: Services, Freight, Automotive, Office and Print, Commercial Products, Financial Services and Electrical. The Group owns 52.0% of Bidvest Namibia and a significant Bidvest property portfolio, occupied largely by Bidvest companies. Bidvest continues to hold investments in Adcock Ingram (38.5%), Comair (27.2%) and Mumbai Airport (6.75%), as well as other listed and unlisted investments.

Bidvest delivered a strong result in a volatile market characterised by weak economic growth and consumer spend, as well as significant business and political uncertainty. The value of a diversified portfolio and the quality of the underlying businesses continues to manifest in the performance of the South African trading operations. Five of Bidvest’s seven divisions, as well as Bidvest Properties, delivered growth in trading profit. Exceptional cost and capital disciplines, as well as good cash generation, were highlights against a volatile trading backdrop.

The trading operations delivered an improved result with trading profit increasing by 10.8% against revenue growth of 8.9%. The results were bolstered by a strong focus on clients and solutions, as well as the successful maiden offshore acquisitions of Noonan (effective September 2017) and Ultimate Security Services (USS) (effective October 2017) in the Services division and smaller bolt-on acquisitions in the Office and Print and Financial Services divisions. Bidvest Namibia continued to be impacted by a virtual collapse of the fishing industry and a recessionary macroeconomic environment in that country. The fishing operations have been sold. Bidvest Corporate benefited from a strong performance in the property division, a turnaround in the UK operations of Mansfield and Ontime and mark-to-market fair value adjustments on its various investments.

Strong profitability gains were achieved at Adcock Ingram and Comair, which increased Bidvest’s share of profits from these associate companies. The profitability did not translate into higher market values for these investments.

Bidvest’s headline earnings per share (HEPS) increased by 11.1% to 1 231.6 cents (2017: 1 108.2 cents). Normalised HEPS (HEPS excluding acquisition costs and amortisation of acquired customer contracts), a metric used by management to assess the underlying business performance, grew by 12.5%. The Group declared a final dividend of 301 cents per share, bringing the total dividend for the year to 556 cents, up 13.2%.

Group revenue increased by 8.4% to R77.0 billion (2017: R71.0 billion), with R5.2 billion of the increase attributable to the acquired international services businesses. On a comparable basis, revenue was flat.

Gross profit margin was broadly stable at 28.9% (2017: 29.1%). The inclusion of the lower margin Noonan reset the overall margin lower. The distribution-type businesses maintained margin, despite input cost volatility and fierce competition.

Operating expenses increased by 7.1%. Continued, strong focus on cost containment increased like-for-like expenses by a modest 3.4%.

The trading result was higher by 9.6%. Freight delivered a record result on higher volumes handled through South Africa’s ports. Office and Print’s result was particularly pleasing given the structural decline in the industry and a significant contract handed over to a new operator. A good organic result was delivered by Services while the Commercial Products division posted a mixed result. Financial Services faced the headwinds of fleet contracts rolling off. The Electrical division, while not growing profits, managed to perform ahead of a very challenging market. Automotive results were disappointing mainly due to Bidvest Car Rental and Bidvest Namibia again suffered a decline. Acquisitions performed to expectation.

Income from investments decreased by R68.0 million to R142.8 million. This was the result of a range of realised and unrealised gains and losses during the year in both the listed and unlisted investments. The insurance investment portfolio yielded strong growth.

Group trading profit grew 8.2% to R6.5 billion (2017: R6.0 billion), with a stable trading margin of 8.5%.

Net capital items contributed losses of R352.0 million in 2018, relative to profits of R1.0 billion in the prior year. This included net negative adjustments of R248.7 million to the investment values of mainly Adcock Ingram and Comair compared to positive adjustments of R1.2 billion for the 2017 financial year. The balance of the charge relates to the insurance receipts on damaged Freight assets as well as the losses on the disposal and closure of businesses, including the fishing operations in Namibia.

Net finance charges were 3.7% lower at R1.0 billion (2017: R1.1 billion). Good operational cash generation offset the additional borrowing to fund acquisitions. There was also a cumulative 50-basis point reduction in the South African prime lending rate. The Group’s average cost of funding is now 6.7%.

Share of profit from associates increased by 11.7%, due to the substantially improved performances in Adcock Ingram and Comair.

Bidvest’s headline earnings increased by 11.9% to R4.1 billion (2017: R3.7 billion) and HEPS by 11.1% to 1 231.6 cents per share, due to the increased number of weighted average shares in issue. Organic HEPS growth was 8.0%. Basic earnings per share decreased by 20.5% to 1 137.3 cents (2017: 1 430.3 cents) mainly due to the contraction in the share prices of our associates compared to material share price increases in the prior year.

Bidvest continues to maintain a conservative approach to gearing and net debt levels are considered acceptable at R6.3 billion (2017: R5.6 billion). A stable net debt to EBITDA metric at 0.8 times (2017: 0.7 times) and EBITDA interest cover of 8.0 times (2017: 7.2 times), are both comfortably above the Group’s conservative targets, providing ample capacity for further expansion.

Cash generated by operations at R9.4 billion was higher than the R6.9 billion generated in the prior year. The Group released R1.5 billion of working capital in the current year compared to an absorption of R368 million in the prior year. Non-financial services had strong and improved cash conversion and Bidvest Bank was successful in raising deposits.

Return on funds employed (ROFE) improved from 22.3% to 22.9% as asset management remains a core focus, particularly in these challenging times.

Bidvest’s EUR175 million acquisition of Noonan became effective 1 September 2017. The bolt-on acquisition of USS followed shortly thereafter. Both these businesses traded in line with expectations.

The Group also concluded bolt-on acquisitions in Office and Print and Financial Services. Several opportunities were assessed during the year, some of which are still being considered. We remain steadfast in our disciplines when evaluating and responding to opportunities. Buying into the wrong business and management team or the right business at the wrong price is not in the best interest of our stakeholders.

Over the last year, Bidvest’s divisional management critically evaluated all businesses and discontinued various smaller operations in a portfolio clean-up exercise. The fishing and related operations in Namibia were sold. Security businesses in West-Africa and the Middle-east were sold, Zonke was closed after the national contract for the monitoring of limited pay-out machines was handed over to a new operator and some industrial service businesses exited.

Management remains committed to the disposal of non-core assets, but only at fair value.

The core competencies and drivers of Bidvest remain firmly intact and we expect that continued growth will be achieved. There is, however, an expectation that economic growth and a return to more robust consumer spending in the current financial year will be lacklustre until policy and political certainty emerges post the national election in 2019. The main concern remains government’s ability to drive infrastructural spending and the ongoing maintenance at certain key entities and facilities. It is incumbent on the State to initiate larger programmes of development to kick-start the South African economy.

Bidvest is actively advancing its various infrastructural development projects, specifically in liquid gas storage. Pockets of activity and opportunities exist across the economy and the Group will participate in these. The overall projection is for continued growth in trading profit, cash generation and the dividend.

Sufficient headroom exists to advance the Group’s strategy of growth in its existing markets, as well as continuing to acquire divisional bolt-on businesses, and to pursue larger, value adding opportunities locally. Internationally, we target expansion in the chosen niche areas of Services and Commercial Products.

On November 1st, we will be celebrating Bidvest’s 30th birthday. Since formation, the objective has been to invest in South African trading, services and distribution businesses and deliver above-average shareholder returns on an annual basis. Through the ups and downs of economic life, the Bidvest people have transformed a group of homegrown South African businesses into industry leaders. This is South African resolve at its best and has served stakeholders well. We remain committed to this course whilst being Proudly Bidvest and proudly South African.

Services

This is a large and diverse division operating in numerous areas of service. Trading profit rose by 26.3% to R2.0 billion. The South African businesses delivered an increase of 8.3% in trading profit. The offshore businesses, Noonan and USS, performed in line with expectations with good volumes of new business secured in the last quarter. The core annuity income businesses delivered good results with a strong performance from Facilities Management, BidAir, Allied Services, Steiner and Protea Coin. Both Protea Coin and Prestige have noted some insourcing and margin pressures, signs of the challenging economy. Management is responding with a sharp focus on expenses and service innovation. Our travel cluster had another tough year of lower rebate rates and numerous system changes. The project-based industrial business, TMS, had a poor year and the potential sale of the business is being negotiated.

Freight

The Freight division had an excellent performance with trading profit up 21.8% on revenue growth of 14.6%. Higher agricultural, bulk commodity and liquid volumes drove greater utilisation and therefore operating leverage. The investment in liquid fuel and multi-purpose tanks during 2017 and 2018 contributed to the growth. Grain import and export volumes were exceptional and mineral export flow was steady. Despite three debilitating incidents to berths and equipment, Bulk Connections performed well. Airfreight volumes remained depressed. Bidvest Panalpina Logistics (BPL) secured new contracts which resulted in a better second half. Project related work was significantly reduced in BPL and Bidfreight Port Operations. ROFE remains healthy despite considerable long-dated capital expenditure in Bidvest Tank Terminals.

Commercial Products

The division produced a satisfactory result with an increase in revenue of 11.2% and a resultant trading profit increase of 3.2%. The results include twelve months’ trading from Brandcorp vs nine months in the prior year. Excluding Brandcorp, revenue increased by 5.9% and trading profit by a commendable 7.8%, in a tough trading environment. Industrial activities represent approximately two-thirds of the trading profit. Excellent results were achieved by Berzacks, Plumblink, Bidvest Materials Handling (BMH), Academy Brushware and Vulcan. Yamaha operated in a constrained consumer environment and Renttech’s trading profit was significantly down due to reduced project work. Whilst pricing pressure in the consumer division was relentless, much work was done on sourcing and price relevance in the market place which ensured the trading margin within the consumer business was steady. Capex was spent within the industrial businesses to ensure future growth prospects would be met and will also result in efficiencies going forward.

Office and Print

Revenue declined by 3.8% while trading profit grew by 6.5%. Year-on-year comparisons are distorted by the non-recurrence of the Tanzanian voter registration project, the closure of Zonke in December 2017 and the net result of some corporate action. Pressure on the top line was evident, particularly, in office products. Initiatives to simplify businesses, improve efficiencies and tight cost control were the main contributors to this very pleasing result. Konica Minolta had a record year while data, print and packaging held its own despite no election work, ongoing migration from print to post to electronic products and pricing pressure in packaging. After a slow start, Kolok finished the year stronger and Silveray delivered a good result, driven by innovation and further factory efficiencies. Tough trading conditions continued at Waltons but ongoing management actions are bearing fruit. Cecil Nurse delivered another good result. Operating cash generation and asset management was excellent.

Financial Services

Bidvest Bank and the Insurance cluster reported a flat result with trading profit up by 1.0%. Fleet contract roll-off, the termination of a major short-term rental contract and the negative new business drag from the fast growing life insurance activities were material headwinds to both revenue and trading profit. The investment portfolio performed strongly.

No big public sector fleet contracts were secured during the year despite a promising pipeline as decision-making was postponed. Merchant acquiring, business banking, trade finance and treasury related businesses delivered growth. The Bank’s corporate advances increased by 13% and deposits grew by 27%. The leased assets declined by 1%. The Bank also delivered improvements in key banking ratios, with the Credit Loss ratio improving by 40 basis points to negative 0.2%, the Capital Adequacy ratio increasing by 70 basis points to 20.7% and the Net Stable Funding ratio improving from 102% to 141%. The cost to income ratio deteriorated somewhat to 64.9%.

Bidvest Insurance delivered a strong result after cleaning up some of the product lines. The balance of the financial services businesses delivered a reasonable result, boosted by bolt-on acquisitions to broaden the product offering.

Automotive

Bidvest Automotive delivered a disappointing result. Revenue grew by 2.1% but trading profit declined by R61.2 million to R602.1 million. New vehicles sold by McCarthy outpaced the industry but margins were under strain. Significant pressure in the luxury segment, in which McCarthy has a leading market share, and reduced parts activity was largely neutralised by good fleet business, solid activity in the volume brands and the benefit from closing non-performing dealers in the previous year. The used vehicle segment softened recently as aggressive new vehicle incentives pose a challenge. Bidvest Car Rental revenue, cost control and fleet management have been disappointing, resulting in a significant decline in trading profit. This business is currently being reviewed.

Electrical

Considering the challenging conditions in the building and construction industry and the severe downturn that the larger construction companies are experiencing, Electrical performed commendably. Project-type businesses were depressed as key programmes stalled. Revenue was broadly flat while trading profit contracted by 14.3%. Voltex held its own while further entrenching its position as the pre-eminent electrical distributor in South Africa. Voltex MV LV and Cabstrut delivered strong results while Solid State Power, Electech and the lighting businesses had a slow year. Initiatives to improve efficiencies and consolidate the solution activities should deliver benefits for the division. The very significant Waco relocation to a state of the art facility will bring many additional efficiencies and strategic value to this critical business in our supply chain. Management remains steadfast in its vision to broaden Bidvest’s electrical offering into niche markets which will add value going forward.

Bidvest Namibia (52% share)

Namibia delivered a disappointing result with revenue and trading profit 10.9% and 12.9% lower, respectively. Bidfish recorded an operating loss on a reduction in volumes, poor size mixes, a significant decline in prices, increased taxes and levies as well as forex losses. The disposal of various parts of the business cloud this year’s result. The food distribution business performed poorly amidst a complete business shakeup and Automotive trading profit declined sharply as the vehicle market contracted 14%. Freight and Logistics activities delivered a good result while Industrial and Commercial Products and Services held their own. The trading conditions are not expected to ease in the short term. The bulk of the corporate action in Fishing is now complete.

Bidvest Corporate

Bidvest Properties performed well with an 11.0% increase in trading profit. A negative mark-to-market adjustment in Bidcorp, no change to the Mumbai International Airport Limited USD valuation (refer to Fair value of financial instruments on page 17 for further detail) and good improvement in the UK businesses of Mansfield and Ontime impacted the result. The weaker Rand against the major currencies also played a role.

Ms Renosi Denise Mokate and Mr Norman William Thomson joined the board on 1 May 2018 as non-executive directors. Mr Mark John Steyn was appointed Chief Financial Officer effective 1 March 2018 and joined the board as an executive director.

Ms Xoliswa Makasi joined Bidvest as group company secretary effective 1 July 2018, replacing Ms Ilze Roux, who was acting in this role.

For and on behalf of the board

Johannesburg
31 August 2018

In line with the Group dividend policy, the directors have declared a final gross cash dividend of 301 cents (240.8000 cents net of dividend withholding tax, where applicable) per ordinary share for the year ended 30 June 2018 to those members registered on the record date, being Friday, 21 September 2018. This brings the total dividend for the year to 556 cents per share (2017: 491 cents).

The dividend has been declared from income reserves. A dividend withholding tax of 20% will be applicable to all shareholders who are not exempt.

Share certificates may not be dematerialised or rematerialised between Wednesday, 19 September 2018, and Friday, 21 September 2018, both days inclusive.

For and on behalf of the board

Xoliswa Makasi
Company Secretary