ENTREPRENEURIAL CULTURE
The management team overseeing Bidvest is formidable. They come across as clear thinkers with an eye for opportunity and a solid handle on their strategy. The business operates a decentralised model with standalone underlying clusters, fostering a great entrepreneurial culture within the group. The evidence of this is in its earnings delivery and track record.
Since unbundling Bidcorp in 2017, Bidvest has closed the earnings gap that remained. However, it has not fetched the same rating by the market. This subtlety creates an opportunity from a valuation point of view, for several reasons.
The quality of Bidvest’s earnings stream has steadily improved, buoyed by its internationalisation strategy, with contributions from offshore now exceeding 25%. In the fullness of time, this should contribute roughly half of Bidvest’s earnings. The offshore pillars are in niche and somewhat nascent categories, such as facilities management and hygiene. These are high-margin businesses that are very scalable with the right execution, new contract wins and bolt-on acquisition opportunities.
CASH GENERATION
The above-mentioned business pillars are capital light. This naturally drives returns higher, but also allows for more cash generation as less capital is encumbered. As the business scales up, earnings delivery will continue to improve – and the quality of earnings will provide even more of a cash underpinning. This will improve on an already impressive cash generation ability compared to the average JSE-listed industrial company. As the strategy plays out, the market is likely to rerate Bidvest higher, as it resembles its 2017 earnings base in both quantum and quality in real terms.
A sceptic could rightfully ask whether there is some risk in making the wrong acquisition on the basis of both size and fit. This has led to many a struggle for South African-listed companies that fail to internationalise appropriately. Bidvest successfully bedded down its last big acquisition, UK hygiene business PHS, exceeding the initial expectations of both management and the market.
SCALABLE BUSINESS
Management have pointed out that another acquisition of this size is very unlikely due to the lack of comparable opportunities and, more importantly, the guardrails of their mergers and acquisitions strategy. Focusing on smaller, easily integrated bolt-on acquisitions enables the business to scale and achieve steady growth over time.
The balance sheet management is also notable – before gearing covenants are breached, there are internal covenants that Bidvest holds itself to. This serves as a buffer and helps to preserve a reasonably fortressed balance sheet as the group rolls out its strategy. Bidvest is a leader in chosen markets, with attractive returns and margins, good growth and a runway of opportunities. The group targets healthy revenue growth and scope for margin enhancements.
COMPELLING UPSIDE
In terms of how the industrial titan compares to other opportunities in our market, our investment case at Sanlam Private Wealth for Bidvest holds up very well, particularly on a risk-adjusted basis. The upside in this share is compelling, and we see ourselves as long-term holders.
This is a counter that has outperformed over the long term but is still trading lower than its own long-term average on a forward price-earnings basis. This highlights two important points: the earnings delivery being produced and the rerating that is likely to follow as Bidvest’s offshore pillar strategy manifests a more inherent earnings quality.
