Successful Integration Of WearCheck And Spec Systems Will Pave Way For Future Acquisitions

Key Takeaways

• Bidvest's acquisitions and diversification in key markets drive growth while reducing cyclicality, improving future revenue prospects.
  
• Focus on sustainability and business restructuring aligns with government initiatives, potentially enhancing margins and profitability.
  
• Compressed profitability, high debt, and regulatory risks challenge growth, pressuring Bidvest's revenue, margins, and strategic operations amid uncertainties in key sectors.

Catalysts

An investment holding company, engages in services, trading, and distribution businesses in South Africa and internationally.

• Bidvest's acquisitions, including Dekra, Serco, and others, are diversifying the division's offerings, which may reduce cyclicality and drive future revenue growth, especially in markets like the UK and South Africa.
  
• The focus on business sustainability and achieving a Level 1 B-BBEE rating suggests the potential for improved net margins by aligning with government initiatives, potentially reducing costs linked to social responsibility, and enhancing corporate image.
  
• The strategic decision to exit the banking industry through the sale of Bidvest Bank is expected to free up capital, potentially improving debt ratios and earnings by allowing refocusing on core competencies and more strategic investments.
  
• Ongoing restructuring and rationalization in various divisions may lead to increased operating leverage and margins in the future, boosting overall profitability once these initiatives fully materialize.
  
• The group has robust M&A capacity and a strong pipeline that could lead to revenue growth. Successful integration and performance from recent acquisitions, such as WearCheck and Spec Systems, provide a template for future earnings expansion through strategic buyouts.

Bidvest Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bidvest Group's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 5.7% in 3 years time.
• Analysts expect earnings to reach ZAR 8.5 billion (and earnings per share of ZAR 24.48) by about April 2028, up from ZAR 6.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from 12.0x today. This future PE is greater than the current PE for the ZA Industrials industry at 10.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.1%, as per the Simply Wall St company report.

Bidvest Group Future Earnings Per Share Growth

Risks

• The observed decline in certain key areas such as maize export volumes, lower renewable energy sales, and Adcock's reduced volumes and margins impacts revenue growth and erodes overall organic growth to only 1%, which could put pressure on revenue and net margins.
  
• The trading margin decreased from 10.3% in the previous year to 9.7% in the reporting period, indicating compressed profitability due to changes in product mix, price competition, and increased wage inflation, thereby affecting net margins and overall financial health.
  
• The offshore operations' net debt to EBITDA ratio is relatively high at 5x, which can be concerning as it indicates a heavy debt load, thus impacting the company’s earnings due to increased finance costs and potentially affecting their ability to manage debt while pursuing growth opportunities.
  
• Regulatory risks, particularly in acquiring Citron (pending regulatory approval) and exiting certain financial service operations, along with geopolitical tensions, pose uncertainties in strategic growth, which could impact future earnings and disrupt revenue streams if not managed properly.
  
• The forecasted continuation of high renewable sales base and uncertainties related to maize export volumes present headwinds that could challenge revenue projections and lead to potential missed income projections, affecting the bottom line and shareholder returns.

Valuation

• The analysts have a consensus price target of ZAR322.628 for Bidvest Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR148.2 billion, earnings will come to ZAR8.5 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 19.1%.
• Given the current share price of ZAR222.67, the analyst price target of ZAR322.63 is 31.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.