Research Portal

What’s cooking this week?

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We are in the middle of a busy earnings reporting season.

This week, the following key stocks will be topical.

Bidcorp

This is arguably the most anticipated result of the earnings season. Bidcorp, the foodservices group spun out from Bidvest with effect from 30 May 2016, reports annual maiden results as a stand-alone business on Wednesday.

Post unbundling, shareholders held an equal share in both Bidvest and Bidcorp. There has been tremendous value uplift this past year with the market value of Bidcorp today almost equal to the combined Bidvest group, including the foodservice assets, a year ago.

The cost structure is lean, with a small corporate office, and the business model highly entrepreneurial with decentralised management teams.

I issued a detailed analysis of this corporate action on 30 May (Bidvest...“Splitting in two”) and ascribed a premium valuation to Bidcorp relative to Bidvest.

The share price since unbundling has traded within a range of around 20%. This is partly due to the fact that the stock is finding a new level relative to the implied valuation within Bidvest and also a result of the share register changing shape, with some cashing in on the value uplift and some new shareholders finding appeal in the focus and geographic diversity that the business offers.

Increasingly, institutional investors will benchmark Bidcorp against international listed companies rather than versus South African industrials. This fact alone will underpin the premium rating I ascribed. Sysco,listed on the New York Stock Exchange, would be a natural comparison.

The foodservice assets had a good first six months and there is reason to anticipate a solid set of annual numbers. 

These results will give investors their first opportunity to evaluate the group in its new stand-alone form and assess it future growth potential. 

At R251, Bidcorp is on an estimated forward PE ratio of 20x, which is a competitive rating based on a weighted cost of capital across differing jurisdictions and in relation to peers.

Bidcorp is a Trading Buy and Portfolio Buy.

 

 

 

Imperial

Vehicle retail and logistics group reports annual results on Tuesday. Expect a broadly flat result. This has been a tough year and the weakness of the rand has been a particular challenge, not least for the vehicle import and distribution arm.

Under the guidance of CEO Mark Lamberti, the group is being repositioned and my sense is that we are likely to see an unbundling within two years.

With effect from the 1st July 2016, the logistics operations in South Africa, Africa and International is managed as one division.

Also with effect from the 1st July 2016, all of the vehicle operations - Vehicle Import Distribution and Dealerships, Vehicle Retail Rental and Aftermarket Parts and Motor related Financial Services is managed as one division. Mark Lamberti will be Executive Chairman for a time to steer the integration and then on 1st January 2017, a new CEO takes over.  

Minorities in AMH and Midas have been bought out and selective disposals have been made.

In my modelling, I have broken down the group into each constituent part geographically and then consolidated all of the regional operations in to a single line item. I’ve split my forecast revenue, EBITDA, operating profit, net interest and net income and I’ve apportioned debt to the respective entities.

What we have is a surprisingly neat split with not a huge difference between Logistics and Vehicle Retail and Financial Services.  

I think there is scope for future value unlock. Currently, on what I see as competitive and realistic multiples a fair value of R171 is defendable. On split this breaks down to R77 per share for Logistics and R94 per share for Vehicle Retail and Financial Services.

A possible unbundling won’t happen in a hurry but with the restructuring underway Imperial is well placed to unbundle in a similarly smooth way to Bidvest unbundling Bidcorp.

The current share price of R170 is full given that the earnings outlook is tepid.

Woolworths

Woolworths reports annual results this Thursday. My forecast for normalised EPS has been 447 cents or an increase of 7,5%. The trading update on 14 July indicated that this is a realistic expectation. 

Shareholders need to recall that shares in issue will be higher this year due to the R10 billion renounceable rights offer of 167,8 million new ordinary WHL shares. Weighted shares in issue will thus be 957 million compared with 894 million in 2015.

Corporate activity (both David Jones and acquiring minorities in Country Road, both in Australia) impacts the balance sheet with a substantial growth in equity, total assets and debt.  

Return on average equity therefore has gone down from 45% to an estimated 26% for the year ended June 2016.

However, the debt is comfortably funded with interest paid covered 6,2x by operating profit and 7,6x by EBITDA. Debt should decrease steadily based on likely cash flows. 

Woolies has a divided policy of 1,45x covered on headline earnings (not adjusted) and declared 133 cents for the first half, up 37,8% to 133 cents, with a scrip alternative. For the full year, I estimate a dividend of 311 cents, up from 247 cents in F2015.

In South Africa, Woolies is close to or at its medium term operating return objectives. In David Jones and Country Road in Australia, returns have further scope to grow in line with the acquisition objectives.

Going forward, a 55/45 profit spilt between Africa and Australia is feasible.

Currency will continue to be a wild card on rand translation from Australia.

The target market in South Africa remains receptive to the offering. The David Jones and Country Road footprint is also targeting growth, albeit quite modest. 

The stock remains pricey at R89 with an exit price earnings ratio of 20x. The gross yield of 3,5% yield is reasonable relative to peers. 

My fair value has been R82 for some months whilst the longer term target price is R98. Trading Sell and Portfolio Buy maintained.

Regards, 

Mark N Ingham