Expansion In South America, Europe, And Asia Will Drive Future Profitability

Key Takeaways

• Strategic acquisitions and expansion across continents position Bidcorp for revenue growth and improved profitability through diversified revenue streams.
  
• Focus on cost management and ESG initiatives aims to improve margins and boost bottom-line earnings despite external pressures.
  
• Challenging macro conditions and cost pressures risk squeezing margins, with currency volatility and strategic market exits impacting earnings and capital allocation.

Catalysts

Engages in the provision of foodservice solutions in Australasia, New Zealand, the United Kingdom, Europe, Africa, South America, Asia, the Middle East, and internationally.

• Bidcorp's focus on volume growth and market share improvement, even in flat markets with no food inflation, indicates potential for significant revenue growth through increased market share, which could lead to higher earnings.
  
• Expansion and strategic acquisitions in regions like South America, Europe, and Asia demonstrate Bidcorp's aim to scale and diversify revenue streams, positioning the company for potential revenue boost and improved profitability.
  
• The company’s strategic cost management has led to improved margins despite external inflationary pressures, which suggests potential future increases in net margins as economic conditions normalize.
  
• Commitment to ESG initiatives and investment in efficient infrastructure and fleet could lead to cost savings and operational efficiencies, potentially improving net margins and bottom-line earnings.
  
• Successful execution of growth strategies in key markets and turnaround initiatives in underperforming regions like the U.K. and Spain could drive significant improvements in trading profit and overall earnings in the future.

Bid Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bid's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.5% today to 3.8% in 3 years time.
• Analysts expect earnings to reach ZAR 10.5 billion (and earnings per share of ZAR 31.16) by about March 2028, up from ZAR 7.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.3x on those 2028 earnings, up from 18.3x today. This future PE is greater than the current PE for the ZA Consumer Retailing industry at 20.7x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.42%, as per the Simply Wall St company report.

Bid Future Earnings Per Share Growth

Risks

• The macro environment across many of Bidcorp’s operating geographies is challenging, with headwinds such as recessionary trends in New Zealand and economic pressure in the UK and Greater China, potentially impacting revenue and profit margins.
  
• Despite the company's revenue growth, there are significant pressures on margins in value-conscious markets like Australasia, where customer price sensitivity is high and Bidcorp is more of a price taker rather than a price maker, which might squeeze net margins.
  
• The strengthening of the South African rand against other currencies has negatively impacted earnings (91% non-rand denominated), which could continue to affect reported earnings in the future due to currency volatility.
  
• With food inflation at or below 0%, external cost pressures such as labor and energy costs are rising faster than food prices, which could strain net margins and profitability if not offset by volume growth or procurement efficiencies.
  
• Exit from the German market involved a capital loss, and with potential acquisition risks in scaling up in new markets like Brazil, this points to potential challenges in capital allocation and return on investment impacting future revenue and earnings.

Valuation

• The analysts have a consensus price target of ZAR502.143 for Bid based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR560.0, and the most bearish reporting a price target of just ZAR439.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR278.5 billion, earnings will come to ZAR10.5 billion, and it would be trading on a PE ratio of 25.3x, assuming you use a discount rate of 16.4%.
• Given the current share price of ZAR433.01, the analyst price target of ZAR502.14 is 13.8% 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.