BDVSY.PK - Bidvest Group Limited

[Ross812]

I promised a write up on Bidvest a couple months ago and never got around to it. I thought I would throw some information out and start a dialogue about the company. I’ve been invested in this company for a few years and cannot see selling out anytime in the foreseeable future. It is my largest investment at around 30% of my portfolio.

 

A little bit about this company:

 

Bidvest is self described as an international services, trading, and distribution company. They are listed in South Africa on the Johannesburg Stock Exchange and trade in the U.S. on the pink sheets under the symbol BDVSY.PK. The company is based in South Africa and holds a Fitch investment grade debt rating of AA-.  Think of Bidvest as a decentralized group that operates in necessity niches in developing countries. The Bidvest South Africa division runs: Bidvest Automotive, Bidvest Electrical, Bidvest Financial Services, Bidvest Freight, Bidvest Industrial, Bidvest Office, Bidvest Paperplus, Bidvest Rental and Products, Bidvest Services, and Bidvest Travel and Aviation. Their largest (50% of company revenues) and most profitable division is the Bidvest Food Service Group; the division itself is decentralized and operates as 3663 Wholesale – UK, Bidvest Logistics – UK, Seafood Holdings – UK, Deli XL – Belgium, Deli XL – Netherland, Nowaco, Farutex – Poland, Horeca – Dubai, Al Diyafa - Saudi Arabia, Bidvest Australia, Bidvest New Zealand, Angliss – Singapore, Angliss - Greater China, Bidvest Foodservice –South Africa, Bidfood Ingredients- South Africa, and Patleys- South Africa.

 

Every division and subdivision can be looked at individually on their website: bidvest.com.

 

The website has a FAQ section that is pretty helpful to get acquainted with Bidvest. I’ve included the section:

 

Q:  What is the business of Bidvest?

A:  Bidvest companies fall in to the distributive-trades (wholesaling and distribution) and outsourced-services category.           

 

Q:  What business areas do you operate in?

A:  Foodservice and food ingredients, freight management, outsourced soft-service, automotive retailing and fleet management, industrial and commercial products.

     

Q:  What was the rationale more than twenty years ago to create Bidvest and does that hold true today?

A:  Bidvest was founded by chief executive Brian Joffe. The idea was to raise capital to acquire, fix and develop underperforming services business, consolidate what was a highly fragmented support services sector and create the enabling working conditions for people to enjoy their work and flourish. That holds true to this day. Bidvest businesses aim to be top of their game and where new opportunities present themselves within the chosen sphere of business support services we assess on the merits. South Africa is a developing country with a shortage of key skills and the Bidvest structure has proved successful at harnessing and channelling scarce resources optimally.

     

Q:  What about key man risk?

A:  Bidvest may have become synonymous with the name of the founder externally but internally Brian Joffe has inculcated a unique Bidvest way of doing things that is designed to stand the test of time. The CE does not interfere in day to day operational matters and managers are given free reign within defined parameters to do what they think is right. The current CE is certain to be with the business for a number of years to come. However, Bidvest is aware that, given its unique culture and the fact that the founder continues to lead the Group, finding a suitable successor is not straightforward. The nominations committee is tasked with monitoring succession of the Group CE. Bidvest does not believe any corporate structure should be cast in stone and all options will be considered to ensure value is maximised, including demergers.           

 

Q:  At first glance Bidvest appears to be a conglomerate?

A:  Bidvest has never considered itself a conglomerate, the Group it is not structured as such and it is not managed like a conglomerate. There is a substantial degree of similarity between the divisions and individual businesses in the way they do things but this is as a result of the Bidvest culture. As a services Group the techniques necessary to ensure commercial success are similar across the businesses. The business philosophy is the same and the modus operandi differs little. The divisions reach common customers.     

 

Q:  How would you describe the Bidvest culture?

A:  Bidvest has an entrepreneurial, can-do culture. The Group has always believed it should shape its environment, not be hostage to it and if each business gets the basics right and staff are empowered and incentivised, the numbers take care of themselves.     

 

Q:  What is your strategy?

A:  Mastery of our distribution channels, 100% ownership of the cash flows wherever possible, an optimal balance of mature and growth businesses with capital allocated according to rate of return, need and life-cycle stage and a keen eye for exploiting opportunities and ensuring we always have sufficient resources to capitalise thereon.     

 

Q:  How do you make sure this all comes together every day?

A:  We have a small corporate office responsible for strategic direction. The centre though takes a keen interest in the operations and is well acquainted with their progress. Head office takes care of Group-wide accounting, legal, treasury and other administrative needs. There is a Bidvest “way” but each business has managerial autonomy and accountability within a devolved model. There is only executive intervention if called for or requested or if a particular business opportunity is spotted that could enhance the success of a division or company. The sheer scale of Bidvest’s resources is leveraged for collective benefit. Each business is encouraged to build and retain market leadership and tie customers in.

     

Q:  What is the focus of individual executives?

A:  On the operations, on ensuring financial discipline is maintained, on extracting top quartile returns and on keeping staff motivated and morale high. We want Bidvest people to be Proudly Bidvest. Up and coming staff are encouraged to participate in the Bidvest Academy to further their skills and as part of our management succession plans.

     

Q:  What suggestions would you offer an analyst trying to get to understand your Group for the first time and model it appropriately?

A:  The following points may be helpful. We also encourage you to read our interim and annual investor booklets which provide comprehensive information on our results and the segment performances. The annual report provides appropriate financial disclosure and narrative on the performance of the Group. Our accounting is in compliance with international financial reporting standards:

 

• We suggest at the outset taking a holistic view of the Group and what drives the profits before drilling down into the minutiae of the financials. We are accessible within reason and happy to share with interested parties the philosophy that has served the Group so successfully over two decades and explain how the Group functions practically. Bidvest businesses are not complicated nor high-tech nor glamorous – the services they provide though are essential to everyday human activity and without them much of industry and commerce would grind to a halt. We do not enter activities we do not understand or industries where the Bidvest culture would not translate particularly well. Seeing the wood for trees is paramount for good qualitative and quantitative analysis – and it will make for better forecasting.

 

• An appreciation of the commonality between the various divisions in their business methodologies.

 

• In your modelling simplicity is key and in line with the approach Bidvest adopts internally. There are a number of external variables that influence our results and each business is alert to those variables that directly affect it. Some of our businesses are more prone to cyclicality than others but overall trends in GDP are sufficient for modelling purposes. Bidvest’s performance as a Group is linked to GDP – which means we do not have high highs or low lows and thus there is a certain stability. The growth edge we provide comes from a tried and tested competitive philosophy that has kept group businesses leaders in their field and from a history of successful, well timed and keenly priced acquisitions. Bidvest has a trader’s mindset not a corporate mindset and this makes us adaptable, nimble and anticipatory.

     

Q:  Is Bidvest reaching limits to its growth and set for a mature phase?

A:  In more than twenty years Bidvest has not delivered a shock nor underperformed on its internal benchmarks nor disappointed market expectations. The compound growth rate in revenue, profits and dividends speak for themselves. It is inevitable that the rate of growth will not be what it was in the formative years of the Group but we aspire to expand profitably and achieve earnings growth and rates of return at the forefront of the services sector. We understand business cycles and we manage for all eventualities, good and bad. Bidvest is continually evolving. We will not be quite the same business in five years time. We do not see ourselves as an ex growth mature business and we shall expand our range of services and bring in new businesses to the fold that dovetail well with our business processes and philosophy. An earnings forecast is thus only good enough for what is and Bidvest will always deliver that additional growth kicker by capitalising on opportunities.

     

Q:  What rate of return is considered to be at the forefront of the services sector?

A:  Return on Funds Employed (ROFE) is our key operational measure of performance and we expect to achieve a return in the 40% to 50% range.

     

Q:  What is your policy with regard to acquisitions?

A:  Every acquisition Bidvest has undertaken has boosted earnings per share and we shall only acquire if the timing is right, the price is right, the business is right and the market opportunities warrant it. We describe ourselves as opportunist at times when it comes to deals and more often than not contrarian.

 

The Group is acutely aware that historical evidence worldwide reveals that M&A activity rarely achieves the synergies or additional value that was purported. Bidvest’s philosophy is different in that acquisitions are not integrated (in the true sense of the word) but are left alone as self standing entities with autonomous management teams but are integrated in terms of the Bidvest culture. All acquisitions are expected to deliver to Group return benchmarks over the course of a business cycle. A good example is McCarthy, our automotive business. Despite the sharp deterioration in the vehicle market in 2008 and 2009 McCarthy has generated operating profits of almost R3bn since being acquired for R0,8bn effective January1 2004. This excludes the fleet management and leasing acquisition that was incorporated as of August 2007. The recent purchase of foodservice assets in central Europe we estimate will be immediately EPS accretive to the extent of 4%.

     

Q:  And what is your policy on disposals?

A:  Bidvest has disposed of or closed a number of operations and/or investments over the years, either as a means of improving efficiencies through rationalisation or because return thresholds were unable to meet internal benchmarks longer term or investment returns warrant such. Bidvest reviews its portfolio of assets regularly and would also consider demerging certain assets if there were value to be gained.     

 

Q:  What sectors of the South African economy am I exposed to through Bidvest?

A:  Bidvest has reach into every sector of the South African economy – households, commerce, government, industry and mining or to put it another way primary, secondary and tertiary sectors. No other listed JSE company is more representative of the South African economy than Bidvest. When one buys a Bidvest share you are buying a snapshot of South Africa plus exposure to selected additional geographies but with an international foodservice concentration.     

 

Q:  What strategy does Bidvest have towards international expansion?

A:  Bidvest is not fixated on a particular geography. The Group’s roots are South African but it has expanded with great success internationally, to the extent that approximately one-third of trading profits are generated from foreign operations. Foodservice has been the focus abroad and will continue to be as it a business we understand well and in which we have developed globally competitive skills. Foodservice offers tremendous scope for growth as the world urbanises and grows richer in time but we shall also be alert to other support services opportunities on a case by case basis. Creation of Bidvest Namibia and its successful recent listing further enhances Bidvest’s southern African presence.

     

Q:  How does Bidvest cope with currency volatility?

A:  Bidvest manages companies in their home currencies and foreign earnings are simply a translation to ZAR. The ZAR particularly is a volatile and highly traded currency but we do not countenance speculation or hedging and forward cover is taken on all product imports. Managers are expected to be able to realise an acceptable margin whatever the prevailing rate in whatever territory and one can expect that there will be both positive and negative short term effects but typically neutral over time.     

 

Q:  Does Bidvest have a gearing target?

A:  Bidvest will typically be geared but will prudently optimise debt and fresh equity when we acquire – as was the case recently with the foodservice acquisition in central Europe which was partially funded through the issue of new shares. An EBITDA interest cover ratio approximately 7x and an EBIT interest cover of 5 to 6x is considered a prudent level.     

 

Q:  What is Group policy on capital expenditure?

A:  On capital expenditure we have no firm target other than to ensure the assets we have are appropriately maintained to ensure their productivity and replaced as and when necessary. We believe the Group is well capitalised as a result of having spent R13,5 bn on capex and investments over the five years to June 2009. Expansion capex is on case by case basis and subject to meeting return criteria over time. Capex is part and parcel of our Group wide asset management, including working capital.     

 

Q:  Why is Bidvest a good investment proposition?

A:  A number of reasons:

 

• Overwhelming market leadership in South Africa in freight management, outsourced soft-services, foodservice and food ingredients, and industrial and commercial products and a top three position in automotive retailing and fleet management.

 

• Exposure to above average growth markets ie

 

    o Growing trend of eating out of home in foodservice

    o Consumer spending ( Automotive )

    o GDFI and infrastructural spend ( Voltex )

    o GlobaI trade via imports/exports ( Bidfreight )

    o Trends to outsourcing ( Bidserv / Bidpaper Plus / others )

    o Emerging middle class

    o Hospitality, tourism and leisure ( SA Foodservice / Bidserv / travel)

    o FIFA World Cup 2010

 

• A strong and well established international foodservice presence in Britain, Benelux, Australia and New Zealand and a growing presence in the high growth urbanising markets of Asia-Pacific (including China) and now eastern Europe.

 

• A proven entrepreneurial business model and a history of well chosen, well timed and well priced acquisitions that added value and adapted well to the Bidvest philosophy.

     

Q:  How do you expect to perform in the medium term?

A:  Bidvest is budgeting for real growth in HEPS in F2010 – a combination of organic growth and foodservice acquisitions in eastern Europe. Restructuring costs are now largely out of the system, further assisting profitability. Bidvest increased EBITDA in F2009 and will come through this economic crisis in good shape. The run up to the 2010 FIFA World Cup™ will be supportive of economic activity in South Africa and affect all our businesses but benefits are likely to be recurring. We expect GDP growth in most territories to be rather weaker than was the case up to 2007, the peak of the business cycle, and it will not be business as usual but we continue to see infinite possibilities. In F2010 Bidvest will have met its objective of doubling its size in five years and will then review what future target is appropriate.

 

Why I like Bidvest:

 

Their compound rate since inception (1988) has been 32% per annum.

 

The management, lead by founder and CEO Brian Joffe, is conservative with an employee and shareholder friendly culture.

 

Their website is the most complete website I have ever looked at for a company. It makes keeping up with their progress easy.

 

There P/E ratio bounces between 13 and 15 which I feel is justified given their growth and highly predictable earnings.

 

Bidvest earns money across many different currencies; none of them denominated in U.S. Dollars. If inflation becomes a problem in the U.S., the South African Rand, Bidvest’s base currency, is issued by a commodity driven country.

 

Bidvest focuses on providing necessities to developing economies. They achieve high growth in developing markets by following a proven system. I can’t find a better way to invest in emerging markets.

 

Valuing the company:

 

Pegging the intrinsic value of a company as multi faceted as Bidvest is extremely difficult. Last summer the company received an unsolicited offer for their food service group in the neighborhood of 4 billion dollars which was rejected by management because they felt the group was an integral part of their forward looking growth and business model. This group accounts for roughly 50% of their revenue. Even at today’s high price (15x P/E ratio) the entire company is valued at 7.22 billion dollars.

 

BDVSY.PK shares represent two shares of Bidvest (symbol: BVT on the JSE). BVT is quoted in ZAR cents on the JSE. To convert the BVT share price to BDSY.PK this formula can be used:

 

$ BDVSY.PK = 2*($ BVT)/(100*USD:ZAR)

 

I add shares when the P/E ratio is <13.0 and when the USD:ZAR is favorable. I peg my long term exchange rate USD:ZAR at ~7.2 so, given their present earnings, I believe BDVSY.PK is a buy  at or below:

 

BDVSY.PK = 11.574 (BVT EPS ZAR) * 2 (shares BVT to pink sheet)/7.2 (exchange)* 13 (P/E) = 11.574*(2/7.2)*13 = $41.80 USD

 

I realize this is a long and fragmented post. I just wanted to get a discussion going. Thanks all!

 

Regards,

 

Ross

[Shane]

Thanks for the post - You've brought this to my radar!

[Partner24]

I've been a shareholder of this company since a few years and I'm happy. I'm surprised that this company is still not well known in the value investors community, because Brian Joffe is the best  fundamental value investor that I know. It's track record is stellar!

 

Bidvest is one of the closest thing with Berkshire Hathaway that I can think of, except it is smaller and doesn't invest a lot in stocks.

- Buy good businesses.

- Buy them at a good price.

- Culture of decentralized operations.

 

But they have invested internationaly at an earliest stage than Berkshire and they give shareholders a dividend. Already  have businesses in South Africa, Europe, Asia, etc. Nearly 50% of it's revenues come from abroad.

 

Shareholder friendly and creative management. Brian Joffe, it's CEO, have been there since a long time and have created tremendous amount of long term value for it's shareholders. He's convervative when companies are too expensive, and opportunistic when they get cheap. 

 

I remember when the panic was there and Bidvest was quite cheap. Brian Joffe decided that instead of giving a dividend, he would buy back 2% or so of the stocks of all shareholders this time.  Unfortunately, some were somewhat upset and Brian told us that he would not do that again. But that was a smart and fair move for long term shareholders.

 

The only problem with Bidvest actually is it's price. I would wait for a better margin of safety before buying some. With these kind of one of a kind businesses, I use the Shelby Davis way and wait for having a 30% discount of intrinsic value before buying some shares.

 

But it's a company that every one here should study.

 

Cheers!

 

 

[MrB]

Get a proper perspective - see attached.

Conglomerate_discount.pdf

[Ross812]

Partner24,

 

What is your range of intrinsic value for Bidvest? I agree that waiting for a 30% discount to intrinsic value is prudent. Bidvest is priced in the South African Rand so its price swings have been pretty wide lately as I'm sure you have observed. When estimating intrinsic value do you pick a long term exchange rate? For instance, in late November the USD peaked against the ZAR at ~8.5:1 and market pressures compressed the P/E of Bidvest to 12.8; pink sheet shares could be bought for <$35 USD.

 

I agree with you that Bidvest is not a buy at the current price, but I think it deserves to be on a watch list and bought when it becomes attractive. I looked at BDVSY.PK at $35 in the same light as BRK.B at $68. What is the right price? And how do you price in a minimum of 10% growth going forward?

 

Regards,

 

Ross

[Ross812]

MrB,

 

Great article! It appears Bidvest is a great model of how to run a successful conglomerate. They’re decentralized model is an excellent example of a financial rather than operating vision. I would take the Bidvest approach one step further; the company instills an entrepreneurial attitude and culture in all of their subsidiaries. For instance, the automotive group created a rental fleet, and the food distribution group now operates grocery stores. Bidvest’s focus on vertical integration of subsidiary groups allows for organic growth and cost reduction that is unavailable to more traditional business models. Bidvest uses an improved Berkshire model (minus the insurance float) in more rapidly developing parts of the world. 

[Partner24]

Ross, you know that intrinsic value estimates are always...estimates! But personnaly I think that headlines earnings per share at 18x or so is a fair value for a solid, growing and diversified company like that. So 12 to 13 times heps is sufficient margin of safety to me. I give value, and ask less discounts to companies I might be able to keep a decade or more in a portfolio (if the price stay at decent levels). And one other thing to consider about Bidvest is that they've been able to grow their intrinsic value per share over the last decades at a stellar rate even if they gave a significant part of the cash they have generated to shareholders.

 

Mr. B, I did get to know Bidvest when I red this study few years ago. It's a very good read! By the way, if somebody know about other conglomerates that are managed this way and have decent track records, please let me know.

 

Cheers!

 

[Ross812]

Partner,

 

Danaher DHR.

[Ross812]

Bidvest reported today and had some great results.

 

Normalized earnings per share were up 16.8% to 13.52 ZAR. At today's exchange rate (8.4 USD:ZAR) this is $3.22 per share of the ADR BDVSY.PK. The ADR is trading at a P/E of 15.4. The annual report can be found at:

 

http://bidvest.com/ar/bidvest_ar2011/downloads.php

[Ross812]

This is one of those currency fluctuations I'm talking about:

 

http://af.reuters.com/article/southAfricaNews/idAFL6E8L5J7220121005

 

I added today at 46, an implied  p/e of 12.5 at a long term exchange rate of 7.3 USD:ZAR.

[rjstc]

Ross812/Partner24; any updates/thoughts currently? Thanks, Ron

[Ross812]

The USD to ZAR exchange rate has deteriorated to 8.7 ZAR/USD. The exchange rate cuts both ways because Bidvest gets roughly half of their revenue outside of South Africa and are converted at the favorable exchange rate which gives EPS growth in ZAR a boost while making shares cheaper for foreign investors. BDVSY.PK is up 26% this year while BVTJ.J is up 38% ytd. Bidvest just raised $165 million through a bond offering and bought the remaining shares of South African appliance maker Amalgamated Appliance Holdings for $61 million. It looks like business as usual for them which is 15%+ growth. Right now they are expected to earn $3.58 per share of BDVSY.PK. I'd expect them to beat the analyst estimates as usual and earn somewhere around $3.80. At a PE of 13.5 this gives them a fair value of  ~$51. If the USD:ZAR falls back to a more typical $1:R7.3 BDVSY shares will benefit from a favorable ~20% currency correction.

 

I'm not selling and Bidvest makes up almost 30% of my portfolio.

[rjstc]

Great. Thanks Ross

[giofranchi]

Ross812,

I really like Bidvest and Mr. Brian Joffe! Still I have got some doubts: on a P/E basis, with a 6.74% earnings yield and a 3,21% dividend yield, it clearly doesn’t seem to be overvalued. But on the AR2012 you can find that net tangible asset value per share is 4,270 cents, while the stock last close was 21,876 cents. It seems to be trading at 5 times net tangible asset value per share… Is it correct? If so, how do you justify it? HEPS growth seems to have declined from a 21.3% CAGR during the last 21 years to a 13% CAGR during the last 10 years. Also the growth in net tangible asset value per share seems to have declined from a 19% CAGR during the last 21 years to a 10.5% CAGR during the last 10 years.

I am surely missing something here! Could you please explain?

Thank you!

 

giofranchi

[jay21]

Ross812,

I really like Bidvest and Mr. Brian Joffe! Still I have got some doubts: on a P/E basis, with a 6.74% earnings yield and a 3,21% dividend yield, it clearly doesn’t seem to be overvalued. But on the AR2012 you can find that net tangible asset value per share is 4,270 cents, while the stock last close was 21,876 cents. It seems to be trading at 5 times net tangible asset value per share… Is it correct? If so, how do you justify it? HEPS growth seems to have declined from a 21.3% CAGR during the last 21 years to a 13% CAGR during the last 10 years. Also the growth in net tangible asset value per share seems to have declined from a 19% CAGR during the last 21 years to a 10.5% CAGR during the last 10 years.

I am surely missing something here! Could you please explain?

Thank you!

 

giofranchi

 

Gio, have you ever looked at NICK?  That's a company that may fit your criteria and is pretty cheap (although its facing a few headwinds).

 

Also, this company seems interesting and I'll add it to the companies I want to look at further.

[giofranchi]

Gio, have you ever looked at NICK?  That's a company that may fit your criteria and is pretty cheap (although its facing a few headwinds).

 

jay21,

actually no! I don’t know NICK… why don’t you start an investment idea thread on that company? I am always curious, when great people to partner with could be found, and when their abilities are temporarily disregarded by the market! :)

Now I will check it out!

Thank you,

 

giofranchi

[Ross812]

Ross812,

I really like Bidvest and Mr. Brian Joffe! Still I have got some doubts: on a P/E basis, with a 6.74% earnings yield and a 3,21% dividend yield, it clearly doesn’t seem to be overvalued. But on the AR2012 you can find that net tangible asset value per share is 4,270 cents, while the stock last close was 21,876 cents. It seems to be trading at 5 times net tangible asset value per share… Is it correct? If so, how do you justify it? HEPS growth seems to have declined from a 21.3% CAGR during the last 21 years to a 13% CAGR during the last 10 years. Also the growth in net tangible asset value per share seems to have declined from a 19% CAGR during the last 21 years to a 10.5% CAGR during the last 10 years.

I am surely missing something here! Could you please explain?

Thank you!

 

giofranchi

 

Gio,

 

I get comfortable with the P/TBV when I compare Bidvest to it's food service peers. I just did a quick and dirty look on reuters comparing price to BV and TBV . Here is what I found (P/BV) (P/TBV):

 

Bidvest-  3.15x  5.38x 

Sysco-    3.81x  6.13x

Nestle-    3.37x  11.3x

 

Food service companies are not going to have high TBV numbers like insurance, banks, oil and gas, and holding companies. Make no mistake, Bidvest is a food service company; the company started to vertically integrate their food service business and has since expanded into new lines of business, but new lines of business and ~50% of their revenue comes from the food service business proper. Bidvest should be valued at P/E (I choose 13.5x) or P/Cash Flow (I choose 10x).

 

A good indicator of the Bidvests intrinsic value may come from the unsolicited bid they received (and rejected) last year for their food services unit of 4 Billion US. Remember the food service unit makes up only 50% of their revenue. At the time Bidvest was trading for 6.2 Billion for the entire company. Since then their food service revenue is up 18% and the majority of their food service revenue comes from Europe:

 

http://bidvest.com/ar/bidvest_ar2012/images/pg38_2.png

 

What is going to happen when Europe begins to grow again?

 

CAGR of declining from 21.3% in the last 21 years to 13% for the last 10 years is something to consider. I don't expect to make 21% for the next 20 years, but I am confident they can maintain a long term growth rate of 15%. Keep in mind the last five years were the worst economic climate for Bidvest since they were founded:

 

http://financialresults.co.za/2012/bidvest_audited2012/images/charts.jpg

 

Bidvest still managed to grow HEPS at 10.2% which means the preceding five years they where growing at approximately 16% which I expect. By the way, the 3 year eps growth rate is 15.6% so if you exclude 2008 and 09 (negative growth) they maintained an ~16% growth rate over the last decade. Bidvest is my largest investment because the company has a clear path to continue to compound at 15%. Their focus is on the recession resistant food service business, and they have proven to be experts at entering new markets. Bidvest is expanding around the world doing what they know best, food services, then adding organic growth to EPS through vertical integration and cutting costs.

 

I like to keep an eye on the stock price and buy at 13x or below. Last fall the price touched $36 (P/E of 10x). There are opportunities to pick up shares at great prices when the stars align and the Rand falls to the dollar at the same time BVTJ.J comes under pressure on the JSE. In October I added twice at 46 then 44 and change. 

[jay21]

Gio, have you ever looked at NICK?  That's a company that may fit your criteria and is pretty cheap (although its facing a few headwinds).

 

jay21,

actually no! I don’t know NICK… why don’t you start an investment idea thread on that company? I am always curious, when great people to partner with could be found, and when their abilities are temporarily disregarded by the market! :)

Now I will check it out!

Thank you,

 

giofranchi

 

There already is one: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/nicholas-financial-%28nick%29-6897/msg92725/#msg92725

[twacowfca]

Gio, have you ever looked at NICK?  That's a company that may fit your criteria and is pretty cheap (although its facing a few headwinds).

 

jay21,

actually no! I don’t know NICK… why don’t you start an investment idea thread on that company? I am always curious, when great people to partner with could be found, and when their abilities are temporarily disregarded by the market! :)

Now I will check it out!

Thank you,

 

giofranchi

 

 

I think  Nick has been described well on VIC and perhaps in Tilson's writings or presentations.  They are good operators in a difficult business.  The main question I have had about them is would they put other shareholders on equal footing with the controlling family.  Their big special div answers that question with a resounding YES!  :)

[giofranchi]

Ross812,

I really like Bidvest and Mr. Brian Joffe! Still I have got some doubts: on a P/E basis, with a 6.74% earnings yield and a 3,21% dividend yield, it clearly doesn’t seem to be overvalued. But on the AR2012 you can find that net tangible asset value per share is 4,270 cents, while the stock last close was 21,876 cents. It seems to be trading at 5 times net tangible asset value per share… Is it correct? If so, how do you justify it? HEPS growth seems to have declined from a 21.3% CAGR during the last 21 years to a 13% CAGR during the last 10 years. Also the growth in net tangible asset value per share seems to have declined from a 19% CAGR during the last 21 years to a 10.5% CAGR during the last 10 years.

I am surely missing something here! Could you please explain?

Thank you!

 

giofranchi

 

Gio,

 

I get comfortable with the P/TBV when I compare Bidvest to it's food service peers. I just did a quick and dirty look on reuters comparing price to BV and TBV . Here is what I found (P/BV) (P/TBV):

 

Bidvest-  3.15x  5.38x 

Sysco-    3.81x  6.13x

Nestle-    3.37x  11.3x

 

Food service companies are not going to have high TBV numbers like insurance, banks, oil and gas, and holding companies. Make no mistake, Bidvest is a food service company; the company started to vertically integrate their food service business and has since expanded into new lines of business, but new lines of business and ~50% of their revenue comes from the food service business proper. Bidvest should be valued at P/E (I choose 13.5x) or P/Cash Flow (I choose 10x).

 

A good indicator of the Bidvests intrinsic value may come from the unsolicited bid they received (and rejected) last year for their food services unit of 4 Billion US. Remember the food service unit makes up only 50% of their revenue. At the time Bidvest was trading for 6.2 Billion for the entire company. Since then their food service revenue is up 18% and the majority of their food service revenue comes from Europe:

 

http://bidvest.com/ar/bidvest_ar2012/images/pg38_2.png

 

What is going to happen when Europe begins to grow again?

 

CAGR of declining from 21.3% in the last 21 years to 13% for the last 10 years is something to consider. I don't expect to make 21% for the next 20 years, but I am confident they can maintain a long term growth rate of 15%. Keep in mind the last five years were the worst economic climate for Bidvest since they were founded:

 

http://financialresults.co.za/2012/bidvest_audited2012/images/charts.jpg

 

Bidvest still managed to grow HEPS at 10.2% which means the preceding five years they where growing at approximately 16% which I expect. By the way, the 3 year eps growth rate is 15.6% so if you exclude 2008 and 09 (negative growth) they maintained an ~16% growth rate over the last decade. Bidvest is my largest investment because the company has a clear path to continue to compound at 15%. Their focus is on the recession resistant food service business, and they have proven to be experts at entering new markets. Bidvest is expanding around the world doing what they know best, food services, then adding organic growth to EPS through vertical integration and cutting costs.

 

I like to keep an eye on the stock price and buy at 13x or below. Last fall the price touched $36 (P/E of 10x). There are opportunities to pick up shares at great prices when the stars align and the Rand falls to the dollar at the same time BVTJ.J comes under pressure on the JSE. In October I added twice at 46 then 44 and change.

 

Ross,

great answer! I knew I was looking at Bidvest from the wrong perspective! And I will surely invest and partner with Mr. Joffe: I am reading his letters to shareholders and they are great! I just want to make sure that I won’t overpay.

Among the metrics they emphasize in the Group financial history there is cash generated by operations, but I could not find free cash flow. I will look for it, but do you know which percentage of earnings generally translates into fcf? In other words, is Bidvest a capital intensive business or not? I can see that in 2012 Earnings yield has been 8.1%: can it be said that also fcf yield has been around 8%? With a distribution yield of almost 4%, that would leave still a lot of money for Mr. Joffe to invest in acquisitive growth.

Thank you again,

 

giofranchi

[Ross812]

Ross,

great answer! I knew I was looking at Bidvest from the wrong perspective! And I will surely invest and partner with Mr. Joffe: I am reading his letters to shareholders and they are great! I just want to make sure that I won’t overpay.

Among the metrics they emphasize in the Group financial history there is cash generated by operations, but I could not find free cash flow. I will look for it, but do you know which percentage of earnings generally translates into fcf? In other words, is Bidvest a capital intensive business or not? I can see that in 2012 Earnings yield has been 8.1%: can it be said that also fcf yield has been around 8%? With a distribution yield of almost 4%, that would leave still a lot of money for Mr. Joffe to invest in acquisitive growth.

Thank you again,

 

giofranchi

 

Gio,

 

I use Reuters to find information on foreign companies. Bidvest information can be found here:

 

http://www.reuters.com/finance/stocks/overview?symbol=BVTJ.J

 

Bidvest, like any distribution company, is going to be capital intensive. They fund a lot of their acquisitions with debt which they like to keep very low. Joffe has commented that he would like to increase their leverage, but so far they have not increased it meaningfully. Debt is not a bad thing and you tend to pay it off quickly when your ROI is 18%. Joffe has plenty of access to cheap capital with their AA- debt rating if he needs it.

 

 

[giofranchi]

Gio,

 

I use Reuters to find information on foreign companies. Bidvest information can be found here:

 

http://www.reuters.com/finance/stocks/overview?symbol=BVTJ.J

 

Bidvest, like any distribution company, is going to be capital intensive. They fund a lot of their acquisitions with debt which they like to keep very low. Joffe has commented that he would like to increase their leverage, but so far they have not increased it meaningfully. Debt is not a bad thing and you tend to pay it off quickly when your ROI is 18%. Joffe has plenty of access to cheap capital with their AA- debt rating if he needs it.

 

Ross,

thank you very much again! Useful and much needed information!

 

giofranchi

[Partner24]

Bidvest has done a very good job over the last few years. We were in a very tough economical climate. Joffe has been able to grow the business while returning back a lot of capital to it's shareholders. When you take a look at the long term growth, you have to factor in the dividend they pay, wich is more or less 50% of the earnings.

 

They didn't leverage a lot because they haven't found businesses to buy at a price level they want. Joffe is the kind of investor that can be patient and convervative, but opportunistic when needed.

 

Given the context, I'm very satisfied with it's performance and his attitude.

 

Regarding the price, sure it could be better, but a good business like that deserve a higher valuation than that.

 

I'm surprised that this business is not more followed by the investment community. Maybe because it comes from Africa?  I put Joffe in the same league as the other great investors that we follow.

[Sunrider]

As someone spending a lot of time in South Africa, I find it humorous that they actually list " ... exposure to [..] the 2010 world cup" on their site - and worse, that's years after the actual event!

 

Oh well, I guess it is a thing of national pride ... for what's its worth, one certainly can't drive around Joburg without seeing Bidvest this and Bidvest that.

 

C.

 

[Ross812]

The Rand has been down lately and Bidvest following. It's now down in the $47 dollar range which is under 13.5x the earnings projected for this year ($3.58) which will be reported early in February.