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Financial director’s review
We are well capitalised and under-geared, creating capacity for further acquisitions. We will explore new geographies and, where appropriate, the resilient, adaptable Bidvest model will be introduced to new national markets.
There is a positive mood across the Group and management is up to the challenge of taking the Group forward.
Bidvest believes in rewarding and retaining talent and incentivising the high level of commitment that drives the Group’s sustained growth.
Macro-conditions and trading environment
Trading conditions in southern Africa have improved overall but certain segments of the market such as construction and consumer spending in the discretionary end of the market remains weak.
Asia Pacific continues to deliver solid results even though Singapore’s performance lags that of the other businesses. Remedial action has been taken to strengthen management and refocus the business direction.
Bidvest Foodservice Europe’s results are up 8,3% in rand terms in spite of the challenging European economic climate these businesses find themselves in.
The Group remains focused on cost control, working capital management and generating acceptable returns on funds employed. Significant focus is being directed at those operations where performance is below the expected levels.
Despite the weak trading conditions in certain industries in South Africa and generally in Europe, the Group has performed reasonably well. There remains a positive mood across the Group and management is up to the challenge of meeting its 2013 budgets.
Financial performance and cash generation
Our 2012 trading results were pleasing and are a tribute to the resilience and focus of Bidvest’s management and the hard work of its teams.
Revenue grew by 12,7% to R133,5 billion (2011: R118,5 billion). Significant growth was evident in Bidvest Europe (where revenue totalled R41,1 billion) and in Bidvest Asia Pacific (R23,5 billion). Revenue increases in these jurisdictions reflected market-share gains and the effects of rand weakness on the translation of offshore earnings.
Gross margin was largely maintained and operating expenses were well controlled across the Group. A 10,8% increase in expenses was distorted by currency effects. Trading margin improved to 5,3% (2011: 5,2%), despite a relative increase in contributions from lower margin activities such as forwarding and clearing and automotive retailing.
The Group achieved improved trading profit, with 14,5% growth to R7,0 billion (2011: R6,1 billion), another strong performance.
Trading results were bolstered by profit of R399,1 million on the partial disposal of the Group’s beneficial holding in Mumbai International Airport Private Limited (MIAL).
Incentivisation remains one of the cornerstones of the Group’s decentralised and entrepreneurial operating model. Share-based payment costs rose from R62,7 million in 2011 to R121,5 million in 2012 due to the issue of share options to staff. Incentivisation is a key mechanism for rewarding and retaining talent and incentivising the high level of commitment that drives the Group’s sustained growth.
An impairment of R98,7 million was recorded against the investment in Comair Limited, more reflective of accounting policies valuation requirements rather than our fundamental view of market value.
International volatility – as witnessed intermittently on equity markets – can be unsettling, but volatility is critical to outcomes for financial market traders rather than the prospects of a diversified services business like Bidvest. The core issue for our Group is the management of cash flows across market cycles.
In 2012, cash generated by operations before working capital changes increased by 12,7% to R8,7 billion (2011: R7,8 billion). From a cash inflow perspective, a significant inflow arose from the disposal of 50% of the Group’s effective economic interest in MIAL.
Despite the growth registered by most of our operations, Bidvest made further reductions in working capital to June 2012, assisted by significant debtors collections in the latter part of the year.
Many of our divisions benefit from largely stable cash flows. This is certainly the case with many of the activities of our foodservice businesses. In other cases – notably automotive retailing – cash flows can be more cyclical.
Credit extension remains a critical focus area of management across the Group. Trading conditions remain difficult in many national markets. The risk of business failures has not receded, even in markets such as South Africa that have put recession behind them.
Diversification across geographies and industries continues to support strong cash flows, enabling the Group to maintain a robust through-the-cycle credit profile.
Offshore earnings and currency risks
Currency movements proved beneficial in the second half of the year as the average rand exchange rate weakened against the major currencies in which Bidvest operates, in particular against the Australian dollar, euro and sterling.
In the case of sterling the average rate against the rand moved from 11,18 in 2011 to 12,34 in 2012. The euro rate moved from 9,56 to 10,41 while the rand rate against the Australian dollar fell from 6,94 in 2011 to 8,03 in 2012.
Despite these shifts, South Africa remains the earnings engine of the Group. Approximately, 65% of profit was earned in South Africa in 2012. For several years, the offshore contribution has fluctuated between 30% and 40%.
To address transactional foreign exchange risk, the Group maintains its longstanding practice of taking forward cover or a derivative equivalent. We do not hedge our international assets. Assets offset liabilities in their local currencies.
The core status of South Africa is unlikely to be challenged in the near future. Internationally, Asia Pacific has become an important contributor, but this rise has been exaggerated to a degree by the decline in relative contribution of the UK market. Profits in western Europe have also been subdued. Exposure to South America is currently very limited.
In comparison with Europe, South Africa has achieved steady growth over many years and further growth is projected, suggesting the local base will entrench its position as the major contributor.
Debt and credit crisis
Continued concerns over levels of sovereign debt in some European jurisdictions, market volatility and wider credit spreads sharpen the challenge of doing business in regions where businesses and consumers are under pressure. These uncertainties are no longer novel. They are part of the ‘new normal’ that successful businesses have adjusted to in recent years.
The international credit crisis has not inhibited us in our approach to debt. We have always been responsible users of debt; this will continue.
We have not become ultra-cautious in response to the international credit crisis. We continue to invest in the future and on occasion in recent years Bidvest has made more use of debt than previously; either through our banking relationships or through access to the capital markets.
Though tactical opportunities may exist in South Africa’s low-interest rate environment, we remain strategic, rather than opportunistic, in our use of debt and the management of liquidity and pricing risk.
In 2012, Bidvest’s net debt fell to R3,6 billion (2011: R5,0 billion) while interest cover remained high at 8,9 times. The Group retains adequate borrowing capacity and our attitude to gearing remains conservative and appropriate in the current economic climate.
In December 2011, Fitch Ratings upgraded the Group’s national long-term rating to ‘AA-(zaf)’ from ‘A+(zaf)’ and national short-term rating to ‘F1+(zaf)’ from ‘F1(zaf)’. Fitch ratings simultaneously upgraded Bidvest’s senior unsecured rating to ‘AA-(zaf)’ with a stable outlook. This was seen in a positive light by the market.
Moody’s have retained the Group rating of A1 (national long-term scale) and P1 (short-term rating) – which remains the highest rating available reflecting the large short-term liquidity available to the Group.
The credit agency commented favourably on the Group’s “proven and stable financial profile compared with its national peers”.
Rates and credit access
Historically low interest rates prevailed in South Africa and many other markets in which our businesses operate. Low rates and credit availability are supposed to translate into higher levels of business activity as companies large and small have access to affordable lines of credit. Following the global financial crisis, however, a disconnect has become evident between low rates and business activity.
The principal effect of low rates in some international markets is to give banks an opportunity to recover and rebuild their balance sheets. The benefit is hardly felt by the wider economy, or at least the effects are not felt at any great pace.
In the post-financial crisis era, banks have adopted stricter lending criteria. Loans are advanced, but primarily to larger businesses that may already be well capitalised. A company such as Bidvest can therefore obtain funding at competitive rates. Yet a small business may be starved of credit.
Policymakers should make it a priority to develop mechanisms that will allow small, well-run businesses to obtain access to growth capital. After all, these businesses drive economies and create jobs.
It is not enough for monetary policy committees and central banks to cut rates. Government has a responsibility to ensure the benefits flow into the real economy. Small business deserves the chance to become big business.
Good regulation is simple, understandable regulation.
Internationally, regulatory lapses have led to calls for more stringent regulation. It was noticeable, however, that corporate and banking shortcomings were most apparent in developed markets that already have complex regulations in place. This suggests that lawmakers alone cannot control executive behaviour and business practice. Outcomes are determined by corporate culture, not complex compliance procedures.
If a business, its directors, executives and people operate honestly and openly, overt regulation shouldn’t be necessary. Honest behaviour predominates because the culture drives honesty. This observation applies in all markets, both in developed and developing economies.
The policy environment should make it as easy as possible to open and run a business. Red tape should be kept to a minimum. Regulation should be straightforward and easily understood. Complexity has to be avoided.
Regulation is becoming increasingly complex in Bidvest’s home market of South Africa. Locally, businesses have experienced the introduction of the Consumer Protection Act and a new Companies Act, while the Competition Act has been extensively revised. The Financial Service Board rulings and regularly revised JSE rulings are now regarded as law.
The cost of compliance rises every year, not only in monetary terms, but in terms of the management time that has to be devoted to these issues.
Entrepreneurs may think out the box, but they readily work within the rules when the reason and benefit of those rules are plain to see and understood – as well as practical to implement. The principal rule for policymakers in South Africa must surely be ‘Let’s make life easier for our entrepreneurs’.
Stakeholder engagement is continual. Operationally, each business engages a wide range of its stakeholders. Group focus falls on regular and detailed reporting to the public, shareholders, investment analysts and customers, suppliers, employees and the media.
Multiple channels are used: face-to-face meetings between senior executives and various interest groups, web pages, newsletters, press releases and e-mails. Staff communication is translated into various languages. The quality of Bidvest communication has been widely recognised.
Significant transactions: Share buy-backs
A R1,6 billion buy-back of 12 million shares from our empowerment partners at Dinatla was completed in May 2011. The full effects of this transaction were borne in 2012.
The buy-back from Dinatla showcased the beneficial aspects of share repurchase mechanisms as the transaction gave Dinatla constituents the certainty of early cash realisation and facilitated the repayment of Dinatla’s funding arrangements well ahead of settlement date.
The share-repurchase unlocked value for Dinatla and ensured our partner’s remaining equity in Bidvest is totally unencumbered.
Bidvest has had an authorised share buy-back programme in place for several years. Where appropriate, share buy-backs will be carried out in future.
Significant transactions: Investments
The Group acquired 26,4% of the equity in Mvelaserve Limited for R424,2 million. Mvelaserve is a leading black-empowered provider of outsourced business support services. The company is active across southern Africa in areas such as facilities management, catering, cleaning and security.
Although less material, a notable acquisition this year was Deli Meals in Santiago, Chile, Bidvest’s first entry into South America: and with it, the continued internationalisation of the foodservices business.
Bidvest is a future-focused business and continually invests in people, infrastructure and growth.
Working capital levels in parts of the Group were too high for the major part of the year, however, we made a significant effort to reduce these levels in the last quarter. There remains a critical focus on the management of working capital. A challenge being to manage this better throughout the financial year as just opposed to at the balance sheet dates. But as growth returns to our operations, we expect to see further utilisation going forward.
We continually review the Group’s debt maturity and liquidity profile with the view of ensuring an adequate spread of funding maturities. We continue to retain the strategic funding fire power to react quickly to opportunities, particularly in the international markets.
The Group’s balance sheet remains strong and well-capitalised creating capacity for further acquisitions. In pursuit of our real growth objective, we will explore new opportunities and acquisitions, across all geographies and, where appropriate, invest.
Financial director’s review