When international food services group Bidcorp unbundled from trading and distribution conglomerate Bidvest in 2016, we acquired a holding in Bidcorp and sold Bidvest out of our clients’ portfolios. Bidcorp is an exceptional business and has consistently outperformed the JSE All Share Index (ALSI) since the demerger. While we still have a strong investment case for the group, we’ve been reducing our exposure to the share on valuation grounds. At the same time, we believe it may be prudent to reconsider adding to Bidvest – when the price is right.
Industrial giant Bidvest – a diversified group with interests in trading, distribution and services – is undeniably one of the true success stories on the JSE, and founder Brian Joffe’s leadership wizardry is often cited as the main reason shareholders have enjoyed a spectacular ride since the group was listed in 1990. While we certainly don’t wish to deny Joffe his place among the ‘immortals’ of South African business leaders, in our view, the business model and culture at Bidvest – known as the ‘Bidvest Way’ – have been just as crucial to the group’s success.
What is the ‘Bidvest Way’? Among other things, it refers to a decentralised business model and a lean corporate office – with a strong emphasis on entrepreneurship. The group’s acquisition strategy has always been simple: buy good businesses (usually small) with good management teams, don’t overpay and, once they’re part of the Bidvest stable, let these businesses continue with very little interference from head office.
UNBUNDLING THE BEHEMOTH
In May 2016, Bidvest decided to list its international food services assets separately, and Bidcorp was born. At Sanlam Private Wealth, we opted to hold Bidcorp in our house view portfolios – and we increased its weight in our clients’ portfolios in June 2018. In our view, besides providing additional exposure to an offshore earnings stream for our clients, Bidcorp had (and still has) excellent long-term growth prospects.
Bidcorp is a geographically diversified group of companies with operations across 35 countries and five continents (except North America and the rest of Africa). It operates in both developed and emerging markets, but more than 80% of its profits come from Australasia, Europe and the UK. Within the food services sector, Bidcorp is mostly a wholesale and distribution business with processing and manufacturing capabilities.
Given that food consumption habits and food services market structures vary between countries, Bidcorp uses a decentralised operating model, with the corporate office as a support function. Most decisions are taken by the in-country management teams – the group clearly believes in the importance of remaining close to its clients.
High industry fragmentation should provide ample consolidation opportunities going forward, resulting in increased profits. The relatively low market share in most markets should provide sufficient opportunity for small acquisitions. We therefore continue to view Bidcorp’s future growth prospects favourably.
Shareholders who opted for Bidcorp after its unbundling from Bidvest have certainly been rewarded. Both shares have beaten the ALSI since then. However, since June 2018, when we increased our exposure to the share, Bidcorp has outperformed the index by a significant 25% compared to Bidvest’s 4%.
PRICE AND VALUATION
It should be remembered, however, that at Sanlam Private Wealth we focus on the price associated with the investment thesis. We believe it is the dominant factor driving performance over the longer term. We seek out investments we consider to be cheap, and use them to replace those in our portfolios that our research has indicated as being expensive. With this in mind, and given our assessment of fair value and with Bidcorp trading at a 20 times forward price-earnings (P/E) multiple, we’ve seen fit to reduce our holding in the group.
At the same time, we’ve been debating the grounds for including Bidvest in our clients’ portfolios. With the South African equity market under severe pressure, opportunities are starting to emerge to selectively add quality local shares – and Bidvest is one of those on our radar.
The group has diverse sources of revenue – its operations include commercial products, and automotive, electrical, printing and office, services and freight businesses. Although Bidvest is significantly exposed to the fortunes of the South African economy, it is also defensive, since around 64% of its revenue is derived from annuity income.
In addition, Bidvest’s future prospects will be linked to local macroeconomic realities to a lesser extent given the group’s plan to internationalise its services division. The move has been met with much excitement – we’d like to remind investors, however, of the difficulties often encountered in expanding offshore. Operating in new geographies brings with it a fresh set of challenges, as the chequered record of South African companies that have gone this route clearly shows.
At its current 14 times forward P/E multiple, Bidvest is, in our view, not yet cheap enough to justify inclusion in our clients’ portfolios. However, we’re keeping a close eye on it – we believe it may yet decrease in price, at which point we’ll certainly consider buying into this excellent business.
