No need to panic, Bidvest CEO says

Bidvest’s boss has moved to allay fears about operational performance, saying investors overreacted to a trading update that highlighted challenges facing consumers, a slowdown in renewables energy sales volumes and deterioration in the domestic logistics system.

Shares in the company slumped 10% following the trading update, their biggest one-day drop in 22 years, sparking vague talk about deeper operational issues.

CEO Mpumi Madisa said the reaction was unwarranted because it did not reflect the company’s underlying strength and value. She spoke to Business Day’s deputy editor Tiisetso Motsoeneng this week about the market reaction and the operational health of the businesses.

Bidvest had a rough week in the stock market, was that warranted?

It was more than a rough day. I think there was an overreaction. Our trading update clearly signals that the operating environment for SA Inc. is tougher. I was surprised that the market was surprised by some of the challenges we’re experiencing in SA. We also spoke about the deterioration in the system that we’re all seeing.

Please flesh out what business units are showing strain, and why?

There are three areas that negatively affected our trading statement. The first one is the consumer pressure in SA, which is expected. We’ve had 18 months of incremental interest rate increases, and, rightfully so, the consumer’s disposable income has deteriorated. If you listen to what retailers are saying, we’re all saying the same thing. There’s pressure on consumer disposable income. We can see it and we can feel it. And we’re also very clear that the one area in our business where we’re feeling the crunch is the automotive business.

The second one is logistics inefficiency. Last year, the main conversation around logistics was rail. Year on year, there’s no improvement in rail. But what we’re seeing now is ships that are parked at the harbour, unable to get in and so we can’t handle the product. That’s a new factor that’s coming in.

I must be balanced though and say that, outside of the port inefficiency, in the past four months, there has been inclement weather that challenged handling. In Durban port, there have been long days of rain and long days of wind, and when you’ve got those kinds of weather conditions, there are safety considerations. So there are some days of trade lost from a weather perspective.

The third area is energy. We live with our energy crisis all the time. Renewables have been very big, but we did expect some slowdown in renewable volumes. So if you look at the second half of our previous financial year and the four months of trading, we’re seeing that reduction in volume, but year on year, volumes are still up because consumers and businesses are still trying to de-risk themselves from the grid. That hasn’t gone away, it hasn’t zeroed.

How important are the three areas of consumer, logistics

and energy to your revenue and profit? What is their contribution?

I can’t give you the exact figures because I have to stick to the trading update and not disclose information that is not publicly available. But let me give you some insights into how these areas affect our performance. In our trading update, we said that our business services operations, which make up 65% of the group, were impacted by lower volumes in the energy business and port operations because the freight business is part of this unit. But we also said that our business services operations delivered resilient results and were defensive, as expected. Even though there were some negatives, there were also some positives, such as the growth in the travel and hospitality industries in SA, and the slight increase in office occupancy. We have also extended our contracts and we mentioned some of those in our business services division.

Then, in our trading business, that’s where we feel the pressure on the consumer, especially in our automotive division. We also see a reduction in volume from the renewable energy perspective in our trading business unit. So we face these two challenges in our trading business. However, we also said that private sector infrastructure projects have been good and there is growth in our trading business. That’s what we were trying to communicate to the market, but I think for some reason the downside was amplified more than the mix of what we were saying. Because in the mix, 65% is defensive and 35% is under pressure in two areas, but there is growth.

The third thing that we also mentioned in the mix is that in four months we invested R3.5bn in acquisitions, mainly offshore, in our facilities management and hygiene businesses, which are high-margin, high-return, non-cyclical and defensive. We are executing our strategy, and that 65% will grow over time. So there is no need to panic.

How are you addressing the challenges identified in the update? You mentioned cost efficiencies. You are not talking about job cuts, are you?

No, no job cuts. We are a growing organisation and we are very happy with that. We have managed to keep our costs significantly below inflation. In terms of lower consumer spending, we have found that consumers in difficult times do not necessarily stop spending, but they buy cheaper brands or entry-level brands. In our automotive division, we represent the big OEMs, such as Toyota, Mercedes-Benz, VW, etc. But one of the things that we have done is to bring entry-level brands from India and China. These brands have increased their market share quite significantly over the last 12 to 18 months. Then, in other areas where we have homeware products to take to the market, for example, we distribute Russell Hobbs, Salton, Pineware, Hoover, etc, through the retailers. We have entry-level brands and we are investing in them. We try to make sure that as consumers migrate, we have a product offering for them.

Bidvest is often characterised as the barometer of the SA economy. How do you see the proportion of offshore sales developing over the next 10 years?

Only 20% of our operations are offshore. We are in a growth phase, expanding our global footprint, especially in the hygiene space. For us, it is less about the proportion of the group that is offshore and more about acquiring the right businesses. Our offshore footprint will be more than 20% in 10 years. One of the key indicators is that we are deploying more than 50% of our capital offshore.

Why is that? Are you running away from SA?

This is not because we are afraid of or running away from SA. It is because, after 35 years of Bidvest’s founding, our businesses are big in SA. They are number one or two in their industries and we are unable, due to competition commission regulations, to make acquisitions in most of the sectors. The areas where you will see capital deployment in SA will be smaller bolt-on acquisitions and then you’ll see billions going into our freight division. I am very bullish about our economy. We will continue to invest in our freight division. SA is our home base and we have to protect it. The politics are politics, but as a business, we have to protect our home base. We cannot expect foreign direct investment to come into SA when we, as local businesses, are not deploying capital in SA.

SA is complex, but I think we know how to play in this field as SA businesses. We have been here long enough. Is it getting more complex? I think it is, but so is the global complexity.