Lacklustre economy will hurt margins, Bidvest warns
● Diversified group Bidvest expects margins to come under pressure as companies jostle for contract renewals against a lack of new growth opportunities in a lacklustre economy.
Stats SA said this week that GDP grew 0.1% in the fourth quarter of last year from a 0.2% decline in the third quarter. The economy is expected to grow by just over 1% this year.
Bidvest CEO Mpumi Madisa, who was the winner of the 2023 Sunday Times Top 100 Companies Business Leader of the Year award, warned that margins will come down as companies compete for the same contracts.
“We don’t have economic growth, there are no new opportunities that are being created. Contracts are being moved from one competitor to another, we are recycling the same businesses that are moving around. It’s really how long you can keep it and how competitive you can be to take it from competitors. That’s how the market looks in South Africa.”
This week Bidvest, an industrial group with more than 250 individual businesses in South Africa, the UK, Ireland, Spain and Singapore, reported a rise in earnings and revenue against a “pedestrian trading backdrop characterised by stubbornly high inflation, peak interest rates and minimal underlying economic growth”.
Bidvest operates in a range of industries, from facilities management to motoring, hygiene and health care and financial services. Its other services include hospitality and catering, security, distribution of kitchenware brands such as Pineware, Russell Hobbs and Salton, and office products including stationery and furniture. It also owns 63% of JSE-listed pharmaceutical group Adcock.
Group revenue for the six months to December grew 8.8% to R62.2bn, with acquisitions boosting the growth rate by 2.8%. In largely stagnant markets, price inflation, a weaker rand against major currencies as well as new business gains were the key growth drivers. Five of the seven divisions reported double-digit profit growth. Bidvest’s biggest unit, service, was boosted by acquisitions, demand for hygiene products and facilities management services, both locally and internationally.
The second-largest unit, freight terminal operations, benefited from a positive price mix and robust demand for bulk commodities, as well as strong oil and gas activity in Namibia.
In other business clusters, its office unit recorded a sharp rise in demand for its products and services in the Western Cape.
“There is a big migration of corporate clients, either moving their head offices to the Western Cape or opening up more branches in the Western Cape. Our branches there are seeing increased activities and demand,” Madisa said.
Performance in the automotive division, Bidvest McCarthy, was in line with industry trends, where new-vehicle sales volumes contracted as consumers experienced considerable disposable income strain. Bidvest is adding car brands to its portfolio “as there is a clear shift towards more affordable nontraditional brands”.
Madisa expects the rest of the year will remain tough, with trading in areas such as automotive and renewables expected to continue to be challenging. Volumes in the renewables business, which is in the commercial production division, have tapered down from the previous financial year as competition intensifies.
“It will be back to basics because there aren’t any significant industry opportunities for growth. We will focus on taking market share from competitors and managing expenses, which were at 3.6%, significantly below inflation. So we want that cost discipline to continue in the businesses,” she said.
Jan Meintjes, portfolio manager at Denker Capital, said the second half of Bidvest’s 2024 financial year could be more challenging for earnings growth as they “cycle into higher comparative bases — renewable energy is one of these. This is a high-quality business where diversification protects them from any one business doing badly for a short period of time.
“We need the economy to grow if businesses are going to grow top-line consistently. If growth remains elusive, the inflation in the cost base will eventually squeeze your margin.”
In the half year to December, Bidvest spent R3.2bn buying nine companies in South Africa, Australia, the UK and Singapore. It added to its geographic footprint in hygiene services, enhanced its geographic scale in facilities management and augmented its product and service offering.