The Bidvest Group Limited
Annual report 2009

Commentary

Financial director's report

“Respectable trading results in extremely challenging economic conditions.”

David Cleasby, financial director

   Highlights
 
     Trading profit margin and return on funds employed are down but are considered to be good in the circumstances     
     Cash generated by operations 140% of trading profit
(2008: 114%)   		  
     Group resources well managed during a testing financial year     
     Working capital has improved     
     Net debt down by R1,5 billion, gearing at 29%, EBITDA interest cover 6,7 times     
     Significant costs of restructuring and re-organisation, some of which have negatively impacted headline earnings     
     Balance sheet reflects corrective actions – lower capex, more effective working capital management and lower levels of debt     
     Lower interest rate cycle will benefit Group into 2010     

Introduction

The impact of the global financial crisis affected all geographies in which Bidvest has an interest. The principal causes of the catastrophe appear to be too much debt in the world financial system and the over-leveraging of assets that had little real value.

The crisis was several years in the making and it may take several years for problems to be resolved and impacts to be absorbed. Easy credit conditions in the first half of the present decade promoted increasingly complex financial innovation and led to an unprecedented credit bubble. The bursting of that bubble has contributed to extreme risk aversion and a fundamental re-pricing of risk.

The impact of the crisis is still unfolding, but one prediction can be safely made – a return to ready credit availability on the pattern of five years ago is extremely unlikely in the short or medium term, and might never recur. The increased cost of funding will be a fact of business life and strategic planning for some time to come.

Strength in prudence

Liquidity is slowly being returned to the international banking system, but the flow of credit to the real economy has been meagre.

This has major implications for a trading and services group such as Bidvest that operates in a largely business-to-business environment. Credit risk grows, but so does the prospect of acquisitions at acceptable prices.

The knock-on effects of the crisis are so widespread and so severe they have tended in recent months to obscure an important fact – at the outset, the banks failed, not businesses engaged in the real economy.

Sound business models based on prudent use of debt remain fit for purpose. In fact, the future appears secure for those who use common sense to run a business and prefer simplicity to complexity.

Access to capital

We secured our lines of credit, withstanding the crisis. From the perspective of access to capital, recent capital market activity has reaffirmed that our room for acquisitive manoeuvre and capacity are unimpaired.

However, as a consequence of the general re-pricing of risk, some Bidvest facilities have been re-priced in negotiation with the banks.

Afro-caution

There is broad awareness that South African banks avoided toxic assets and have emerged relatively strong from the international crisis. It should also be pointed out that South African corporations have also done relatively well.

Our major corporates did not make extravagant use of debt, an omission that was sometimes seen as a failing. For example, Bidvest was regarded by some as a strong but unadventurous company with a “lazy balance sheet”, ie under-geared.

South African corporate experience over several decades built a predisposition to prudence. Local business has rarely had a smooth ride. High inflation, volatile exchange rates, elevated interest rates, skills shortages and structural weakness in the economy made long-term planning more complex.

In contrast, the USA and Europe enjoyed low interest rates for many years. Steady growth, low inflation, rising prosperity and low unemployment created an environment where risk led to reward, not loss. Business was comfortable with gearing levels that seemed quite aggressive to South Africans. Our balance sheets were under-leveraged in comparison; a situation for which we now can be thankful.