Bidcorp is not cheap, but you pay for good growth prospects, quality management
After starting three decades ago as Chipkins, a small food-services company under corporate entrepreneur Brian Joffe, Bidcorp has grown into one of SA ’ s largest companies in the sector.
The company, which employs more than 26,000 people on four continents, has a market capitalisation of R108bn and revenue of R129bn. Because 92% of revenue comes from outside SA, it enjoys significant rand hedge qualities.
The long-term growth trajectory has been largely organic, complemented by small, intelligent acquisitions that cumulatively added scale to the business.
June 2019 full-year results highlight the resilient nature of the group. Stubbornly low food inflation makes trading in this industry tough, as does labour availability and volatile energy prices. But Bidcorp management has managed these and other issues with aplomb, churning out consistent earnings growth since separately listing from Bidvest.
The economic background in Australasia was muted, with cooling consumer spending. “The Australian economy is tough,” CEO Bernard Berson said. “The Reserve Bank of Australia has cut interest rates twice and house prices have slumped. New Zealand ’ s economy is slightly better but still tough.”
Despite difficult trading conditions Bidcorp managed to increase constant currency revenue 1.1% and trading profit 6.7%. Trading margin rose from 6.5% in the previous financial year to 6.9%.
In the UK, the five-year business improvement strategy is bearing fruit, and since 2014 revenue rose by more than a quarter, trading margin grew from 3.1% to 5.1%, and trading profit more than doubled. In 2019, constant currency revenue rose 3.6%, trading profit was up 13.2% and trading margin improved from 4.7% to 5.2%. Contingency measures for Brexit in October have been activated.
In Europe, best performers were the Czech Republic, Slovakia, the Netherlands and Poland. Losses were reported in Iberia and Germany, and the high expenses of the German business necessitated a restructuring and scaling-up. Constant currency revenue in Europe increased 6.8%, trading profit 9% and trading margin improved modestly from 4.2% to 4.3%.
EMERGING MARKETS
The emerging-markets segment was the laggard of the group, with constant currency revenue up 7.7%, trading profit declining 1.4% and trading margin down from 5.5% to 4.9%.
Reasonable performances occurred in Singapore, Malaysia, Chile, Brazil, Middle East and SA. Turkey turned profitable and China was hurt by the loss of a significant dairy concern that decided to go for direct customers sales rather than use Bidcorp ’ s agency. Bidcorp has subsequently managed to substitute the business that was lost from this event, and also has a niche approach by selling high value-add, Western-type food products in that territory.
Protests in Hong Kong have had a noticeable and sudden effect on sales after year-end.
The management is confident in the outlook for 2020 and beyond, capitalising on global trends such as increasing demand for out-ofhome, healthy eating; variety; and value for money. Bidcorp is at the forefront of technological solutions in the food services arena, a feature that should help it maintain a competitive advantage. Its resilience will be tested by potential Brexit disruption in the UK, fires in the Amazon, trade conflict between the US and China and economic disruption in Hong Kong caused by political dissent.
The stock isn ’ t cheap, trading on a price-to-earnings ratio of about 22 times. But investors should be happy to pay up for the high quality of management and good growth fundamentals. It is unlikely to exhibit outstanding earnings growth, but can probably be relied on to show good, consistent growth in earnings and dividends.
While still part of Bidvest, Bidcorp successfully fought off an unwelcome foreign competitor bid, speculated to have been Sodexo.
Now separately listed and considerably larger in size, it is less digestible as an acquisition target.
Its extensive geographic footprint and enviable compound annual growth rate in earnings nevertheless make it an attractive target, especially for a US-based company, as Bidcorp is not represented in that market.
IT CAN PROBABLY BE RELIED ON TO SHOW GOOD, CONSISTENT GROWTH IN EARNINGS AND DIVIDENDS