Published Date: 2021-06-10 | Source: INCE|Community | Author: The Finance Ghost
Last week, we saw an update from Bidvest
that gave us insight into a number of industries. Now, we have a trading update from Bidcorp, the food service business that Bidvest unbundled in 2016.
When reading about these companies, it's critical to remember which one you are looking at. This isn't made any easier by the names being so similar!
The Emerging Markets segment in Bidcorp (which includes South Africa amongst others) is the smallest, only contributing around 16.5% of group revenue. The largest contributor is Europe (33%) followed by the United Kingdom (26%) and Australasia (24%).
This is an excellent example of a JSE-listed company that offers genuine geographic diversification to investors.
One can only imagine how tough the past year has been for Bidcorp. In the countries in which it operates, the restrictions change on a moment's notice and the restaurant industry scrambles as a result. The impact flows up the value chain, hitting companies like Bidcorp which need to manage their own inventory levels to avoid as much wastage as possible.
On the plus side, dealing with a crisis can force a company to totally rethink its operating procedures. It's not unreasonable to assume that innovation and improvements will stick long after the pandemic.
To make it even more interesting, Bidcorp's customers are not affected equally. Restaurants are busy again but the hospitality sector remains a shadow of its former self. Events and functions are almost non-existent. The aviation and cruise line industries are far from being back to normal.
As a useful underpin, Bidcorp also supplies customers like hospitals and prisons, which need to buy food regardless of economic conditions.
The trend of working from home has also had a major impact. I live in Cape Town and a walk up Bree Street is one of mixed emotions, with many "to let" signs where my favourite coffee shops used to be.
The SENS announcement includes interesting analysis around constant currency sales in each segment by month, rebased to the period just before the start of the pandemic. In other words, a sales performance of 80% in a given month means sales were 80% of what they were in that segment before the pandemic.
The March to May 2020 period was crazy for Bidcorp and the world as a whole, with sales running as low as 45% of pre-pandemic levels in April 2020. Things picked up quickly in Europe during their summer, with other segments still muted in the middle of 2020. As the year went on, emerging markets did well and Europe fell away.
The point is that Bidcorp is a lesson in diversification. At group level, sales ran in the 70% - 80% range for many months, with only a handful below that. In May 2021, group sales were at 94% of pre-pandemic levels.
As is so often the case in business, being the diversified supplier into a consumer-facing industry can be a more attractive place to play than facing the consumers yourself. This is also a great example of why SMMEs continue to struggle to survive, as the Bree Street coffee shops sit empty and Bidcorp reports a resilient performance.
For the ten months to April 2021 (a strange period, I know) Bidcorp managed to maintain its gross margin at similar levels to the comparable period in the prior year. That's a fascinating outcome when you consider the change in product mix over this period.
35% to 40% of the operating expenses base is fixed, so maintaining gross margin doesn't make up for the lower levels of revenue overall.
EBITDA margin is therefore running at 4.8% of net revenue, a full 100bps lower than the 5.8% achieved pre-pandemic. Still, that's a decent performance when you consider what the industry has been through.
Thanks to a number of initiatives, including sale and leaseback transactions (selling group properties and then renting them back), the balance sheet is healthy and the debt levels are well within acceptable ranges.
Bidcorp traded at around R350 per share at the start of 2020. The current share price is around R300 per share. If ever there was a company that benefits directly from vaccine roll-outs, this is the one.