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OUT THE HEADWINDS
Member of SPW Investment Team
Sep 04, 2020
Almost a year ago, we wrote that Bidvest was on our radar screen, but we were waiting for a better entry point given our appraisal of the share’s value versus its price at the time (around R210). At its 14 times forward price-earnings (P/E) multiple then, Bidvest wasn’t cheap enough to justify inclusion in our clients’ portfolios. A window of opportunity opened in March this year, however, when the share price fell significantly below our assessment of intrinsic value, and we decided to buy into the business.
We argued that Bidvest has:
Since the start of March and the advent of COVID-19, the Bidvest share price has declined by 22%, underperforming the JSE All Share Index by 29%. Over the short term, the group will continue to face headwinds from pandemic-related disruptions, the full impact of which remains largely unknown.
It’s over the long term that prospects look promising for the industrial behemoth. Its strong balance sheet, and the fact that smaller competitors are under immense pressure, mean Bidvest is well placed to take advantage of opportunities.
At Sanlam Private Wealth, we value companies on a through-the-cycle, multi-year view, and we expect that Bidvest’s earnings for the next two or three years will substantially understate the group’s long-term profitability. Our view is that the market has done a good job in its assessment of the next two years, but the impact on the share price has been overstated.
Bidvest’s planned acquisition of PHS, a business hygiene leader in the UK, Spain and Ireland, presents an opportunity for significant growth for the group. The deal became unconditional in April this year. PHS is a neat fit within Bidvest’s existing services business, Steiner, and we don’t foresee any issues with integration into the broader group. It’s a dominant business within its niche, with little capital requirements and a competent management team.
Hygiene businesses such as PHS and Steiner should of course benefit from the increased need for commercial cleaning services both during and post COVID-19, and the much more stringent office hygiene requirements likely to follow in its aftermath.
In our view, Bidvest’s acquisition of PHS makes strategic sense. At around nine times earnings before interest, depreciation and amortisation to enterprise value (EV/EBITDA), the price paid is more than reasonable. The deal will also transform Bidvest from a South Africa-focused giant into a truly global player.
We are confident that Bidvest management will continue in their conservative approach to gearing, disciplined capital allocation and shareholder-focused decisions – leading to superior returns for our clients. Given that the share is currently trading at 10 times its normalised earnings, we’re comfortable with the current holdings of Bidvest in our clients’ portfolios.
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