Unbundling from Bidvest a boon for burgeoning Bidcorp

The unbundling from Bidvest more than two years ago has been a boon for offshoot food service group Bidcorp.

Bidcorp’s success validates the view that the separation from diversified industrial company Bidvest — which had been on the cards since 2012 — was long overdue. It also reinforces Bidvest’s view that, prior to the demerger, Bidcorp assets were undervalued.

Bidcorp, a distributor of wholesale frozen and fresh food and related nonfood products to the food service and catering industry worldwide, has hardly put a foot wrong since its listing on the JSE on May 30, 2016.

The unbundling created two stand-alone groups with separate identities, clear focus and performance goals. Modelled on Bidvest’s entrepreneurial culture and decentralised business model, Bidcorp has wasted no time snapping up bolt-on acquisitions in the two years.

Operating in a fiercely competitive global foods market, the firm needs both scale and agility. In the year ended June 30, Bidcorp spent R965.6m on acquisitions in Australia, the Netherlands, Spain, New Zealand, greater China, SA and Turkey.

The acquisitions boosted Bidcorp’s revenue by R3.3bn and trading profit by R22.5m. With such returns in mind, acquisitions look set to remain at the centre of the company’s growth ambitions as it expands its geographic reach and product ranges.

FOOTPRINT

While it rose from the previous 7.3%, Bidcorp’s net debt to equity is still relatively low at 13.5%, giving the company leeway to go for those acquisitions to expand its footprint. It is partly through acquisitions that Bidcorp has grown into a food conglomerate with a presence in 30 countries. There is scope that such phenomenal growth may attract the interest of bigger corporations such as US food service giant Sysco.

“In our opinion, there is an outside chance that one of those monster US corporations might swoop in and make a very attractive offer to buy Bidcorp, to gain an international footprint,” says Michael Treherne of Vestact Asset Management.

If Bidcorp is poised for further growth, what about Bidvest? While the two firms have distinct identities and are operating in different sectors, it is tempting to make comparisons on how they have fared since the demerger.

Bidcorp’s good run in the past few years takes little from former parent company Bidvest, which remains solid from an operational and financial point of view. The unbundling allowed the two companies to chart their own paths.

Analysts’ consensus has Bidvest as a hold, with the opinions fairly evenly split between buy, sell and hold recommendations, says Gary Booysen, a portfolio manager at Rand Swiss. On the other hand, Bidcorp is rated a sell, he says.

“But, as with any stock call, the underlying premise or investment thesis is key to understanding the outlook, predicted earnings profile and valuation of the company. I would argue that, if you are pro- SA and believe the pessimism around domestic investment could lift, the valuation and quality of a business such as Bidvest does represent a potential opportunity at these levels,” says Booysen.

Bidvest is a well-run company, with good cash flow. Its net debt of R6.3bn could fall dramatically as the company sells off some key assets, such as the minority stake in Mumbai International Airport in India. Booysen says this could result in excess cash being returned to shareholders, but also gives the company the ability to do further value-accretive deals.

But, unlike Bidcorp, Bidvest is still very much an SA company exposed to low economic growth locally.

Booysen says any improvement in the local operating environment could see a significant lift to the Bidvest share price.

But in the absence of any meaningful economic growth in SA, chances of a significant Bidvest upside are slim.

Amelia Morgenrood of PSG Wealth is less optimistic. “There is nothing about Bidvest that makes me particularly excited. The share seems to be fully priced and I cannot find any reason why it should have a higher valuation.”

QUALITY COMPANY

She agrees that Bidvest remains a solid quality company, but the market will expect at least close to double-digit growth. Can it deliver that? She says Bidvest’s prospects will brighten once the local economy recovers.

“I consider the share a hold — purely because it is a solid quality business and it will perform well again if the local economy picks up. If the SA economy picks up and the rand strengthens, Bidvest will most probably perform better going forward,” says Morgenrood.