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.
We can assist you with
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Sanlam Private Wealth (Pty) Ltd, registration number 2000/023234/07, is a licensed Financial Services Provider (FSP 37473), a registered Credit Provider (NCRCP1867) and a member of the Johannesburg Stock Exchange (‘SPW’).
All reasonable steps have been taken to ensure that the information on this website is accurate. The information does not constitute financial advice as contemplated in terms of FAIS. Professional financial advice should always be sought before making an investment decision.
Participation in Sanlam Private Wealth Portfolios is a medium to long-term investment. The value of portfolios is subject to fluctuation and past performance is not a guide to future performance. Calculations are based on a lump sum investment with gross income reinvested on the ex-dividend date. The net of fee calculation assumes a 1.15% annual management charge and total trading costs of 1% (both inclusive of VAT) on the actual portfolio turnover. Actual investment performance will differ based on the fees applicable, the actual investment date and the date of reinvestment of income. A schedule of fees and maximum commissions is available upon request.
COLLECTIVE INVESTMENT SCHEMES
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium to long-term investments. Past performance is not a guide to future performance, and the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available on request from the manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved manager in collective investment schemes in securities (‘Manager’).
Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The manager does not provide any guarantee either with respect to the capital or the return of a portfolio. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in a portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of a portfolio and an investor will differ depending on the initial fees applicable, the actual investment date, date of reinvestment of income and dividend withholding tax. Forward pricing is used.
The performance of portfolios depend on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-dividend date. Portfolios may invest in other unit trusts which levy their own fees and may result is a higher fee structure for Sanlam Private Wealth’s portfolios.
All portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No. 45 of 2002. Funds may from time to time invest in foreign countries and may have risks regarding liquidity, the repatriation of funds, political and macroeconomic situations, foreign exchange, tax, settlement, and the availability of information. The manager may close any portfolio to new investors in order to ensure efficient management according to applicable mandates.
The management of portfolios may be outsourced to financial services providers authorised in terms of FAIS.
TREATING CUSTOMERS FAIRLY (TCF)
As a business, Sanlam Private Wealth is committed to the principles of TCF, practicing a specific business philosophy that is based on client-centricity and treating customers fairly. Clients can be confident that TCF is central to what Sanlam Private Wealth does and can be reassured that Sanlam Private Wealth has a holistic wealth management product offering that is tailored to clients’ needs, and service that is of a professional standard.