Episode Transcript
The Finance Ghost: Welcome to episode 295 of Magic Markets. I'm very pleased to report that we have the team from Aylett & Co. back with us. Justin Ritchie is a name and a face that we've seen and heard from before.
Go and check out some of the previous shows with Aylett & Co. (specifically, the one on alcohol stocks, which I think was very interesting). You'll find that in the Magic Markets library.
And then Jan Nel joins us for the first time. We’re excited to hear from him.
Moe, you join us for the 295th time.
So, welcome! Quite excited to learn from Aylett & Co. today on Bidcorp, Moe. That's what we're covering.
Mohammed Nalla: Indeed, Ghost, you can't get rid of me. Episode 295.
Just excited to have fresh voices on the show again. The team from Aylett & Co. - your insights on that alcohol show were fantastic for me, as someone who doesn't really look at the alcohol sector.
Bidcorp, though, even more relevant today simply because it's not just a South African company. It's very much a global company. So, I'm really keen to hear your insights.
The Finance Ghost: Justin, Jan, take us away. Tell us what Bidcorp is all about and just how diversified it's become, because it really is a South African export success story (and quite a rare one, at that).
Justin Ritchie: Ghost, Moe, thanks for having us on the show. It's a pleasure to be back. I'm very excited to talk about Bidcorp. It's the best, most boring business in our portfolio, I think.
It's one of those businesses that you see on the side of a truck, but I don't think you really think about what goes on in food logistics.
We're pleased to be back. I'll hand over to Jan and he can give you a brief description of what they do.
Jan Nel: Bidcorp is a food distributor. It sits between restaurants and produce. So, on the one side, you've got the food producers – the guy making mayonnaise, patties, frozen chips – and on the other side, you’ve obviously got restaurants, hotels, canteens, schools. And then Bidcorp obviously connects the two.
Both ends of the chain are massively fragmented, which means that a restaurant may need to order a lot of items per week from a lot of different suppliers. It's got no buying power. It doesn't have a warehouse, doesn't have a truck.
And a supplier also doesn't want to go and deliver to each of his customers who are actually using his produce. So, that's where Bidcorp comes in. They buy volume, consolidate it in a warehouse, put it in a truck, and deliver it to the restaurants.
Justin Ritchie: I thought maybe the best way to illustrate the point would be to talk about a sort of worked example. Let's assume this whole podcast gig doesn't work out for you guys and you decide you're going to open Ghost Burger…
The Finance Ghost: Don't tempt me! I fantasise about a pizza restaurant at least three times a week, so, you know, it could happen.
Justin Ritchie: [laughter] Yeah, let's assume your mates think you make a really good burger and you're going to keep it simple. Let’s say you make a beef patty with a toasted sesame bun, some chips, maybe a cool drink or two, and some ice cream.
If you think about your options now as a restaurant owner and operator, I think option one is to get into your car and off you go to Makro to see if you can find all the ingredients in one place.
Maybe your mate Moe has a bakkie, and Moe and his bakkie have a good connection with a supplier of the buns and maybe the patties, and he can come and deliver them for you. But then you've got to figure out where to get the cool drinks and how to get the ice cream…
Your other option would be to use someone like Bidcorp to come and drop all the stuff off at a time that works for you, delivered right to your door.
Jan Nel: This is exactly the kind of business that Bidcorp wants. They want an independent restaurant, not a chain restaurant like McDonald's. So, if you talk to management, they will tell you that anyone with a head office can procure their own goods and negotiate their own discounts because they're large enough and they've got the scale. So, it makes it a little bit harder for Bidcorp to add value there.
Mohammed Nalla: I mean, it's an interesting business. You say it's the “most boring, but best” business in your portfolio, effectively connecting restaurants to suppliers. But playing devil's advocate here, it sounds like a fancy logistics company. And I know it's more complex than just anyone with a truck entering the market. It's not “Moe and his bakkie” but international names like Sysco that would probably come to mind.
So, my question to you would be: What actually stops competition in terms of some of the core markets or the niche that Bidcorp operates in? What's the moat behind this business? Why is it this exciting to you at Aylett & Co.?
Jan Nel: It's a good question. If we can continue with the Ghost Burger example, let’s say I have a mate called Johannes (not “your highness”, Johannes in Afrikaans), and he's willing to accept quite low margins. You can have a go at the food logistics business. There are quite low barriers to start. But that doesn't mean he can effectively compete with Bidcorp.
In this example, if Johannes can source these goods to our restaurant and deliver them twice a week, you'll be able to make a business. But I think it's important to talk about route density as well.
Justin Ritchie: Yeah, that's an industry term. It sounds like quite a complex term, but really the idea is: what does it cost for him to drop a package at your restaurant versus someone like Bidcorp?
If you think about Bidcorp, they are going to be running a truck through your neighbourhood every day. They're going to be coming past your restaurant and they're going to be dropping something off at the taco place across the road and the sushi shop around the corner. They're going to have big trucks, lots of scale.
So, if you think about a cost per drop, it's going to be super hard for Jan's mate – what was his name?...
Jan Nel: Johannes!
Justin Ritchie: …to compete. And that's just one part of where scale shows up.
Jan Nel: The other part is, because he's not big enough and doesn't have the scale that Bidcorp has, it's way more difficult for him – like I said earlier, with the independent restaurant versus the chain restaurant – to go and negotiate a discount with the suppliers, which he can then reinvest into his clients and customers and increase his margin. So, just that negotiating power that someone like Bidcorp has versus someone smaller.
And then also it's quite important to understand that we're dealing with a lot of frozen food and cold goods and ambient goods. So, to put all of that at the back of a bakkie… It needs to stay frozen. You've got five restaurants. One is in Paarl and one is in Noordhoek. You need to deliver in February, in Paarl, in the heat – you need to be quite careful. It becomes, then, quite expensive and quite hard.
Justin Ritchie: It's interesting. It's one of these businesses where the more you think about it, the more you realise why they have scale advantage. There's a network effect in there as well, so it's very difficult to compete with them as they get bigger.
The Finance Ghost: Yeah, it's one of those classic stories where the idea is easy and the implementation is really, really hard. There's nothing particularly exciting about, “Oh, we're just going to deliver ingredients to a burger restaurant.”
But, actually, doing that at scale and across all the different menu items – and, as you say, a mix of frozen, fresh, all kinds of different things – it actually is a really, really fascinating business.
And we've looked at Sysco in Magic Markets Premium, so we understand the US equivalent to this. Of course, Bidcorp is a global player that does a very similar food service thing in hospitality as well, not just restaurants. It really is an interesting business.
How does it actually grow its earnings? If you look at the margins, the growth story and the acquisitions, there's a nice mix of organic and inorganic growth in addition to those organic and perhaps inorganic ingredients, as well.
Justin Ritchie: Yeah. So, if we're talking about growing earnings, let's start at the top and think about revenue because, obviously, that's required to grow earnings. The first thing is to say that they have a nice structural tailwind.
As people get wealthier and societies get wealthier, they eat out more – we've seen that across markets over time. And those end customers eating at restaurants, cafés, etcetera, are Bidcorp's customers. That is a natural organic growth vector.
Then, on top of that, you get food inflation. They like a little bit of food inflation because it grows the top line. There are going to be periods where food inflation is faster or slower, but over time food prices go up. That's the second part of the revenue growth.
And then the last bit is a bit of M&A. It is an acquisitive business and every year, typically they buy 1% to 2% revenue growth. So, you add all of that up, it's a slow grower, but a fairly defensive, healthy top-line growth business.
Jan Nel: Talking about the margins, if you start with logistics (which is just taking a product from point A to point B), the restaurant has already picked the supplier, you just go pick it up and drop it off. That's the lowest margin you can get, and it tops out pretty quickly at single-digit operating margins. There's a real ceiling there.
That's kind of a foot in the door for these businesses. And then, from there on, you can move on to distribution and sourcing, where you provide an actual service – you help them to order, you give them a lot of options, you help with the procurement and there's quite a bit of service provided with it. There's someone that helps them order, like I said, and there's quite a bit of handholding. And then from there on, they do their own brand as well.
Say you've got a supplier who's selling mayonnaise and you know they've got some production capacity. You can go and ask them if they can help manufacture some for your own brand, which they'll then sell under your own brand for a higher margin.
And then lastly, you've got light manufacturing. In some of the markets, they're manufacturing some light products as well, which is an additional margin that they capture.
Justin Ritchie: Yeah, and just to emphasise one of Jan's points there, that's another thing that your mate with a bakkie can't do.
Bidcorp can come and look at your menu and say, “You're putting too much mayonnaise on your burgers. We think that if, next to the burger, you can offer a chicken burger as well, that often sells very well in your market. We've got similar markets across the country doing exactly that. And we think your menu pricing is wrong in the following way.” So, they can add a lot of value on top of just the logistics.
Mohammed Nalla: Yeah, I like that. I think there are a couple of things to unpack there. We've discussed the top line. We've discussed the margin and some cross-sell opportunities. That kind of evidences the network effects that I think you mentioned earlier on.
I want to zoom out a little bit and look at this from a slightly more macro perspective. Looking at something like the broader capital allocation (because when you look at Bidcorp, they're known for their bolt-on acquisitions and that's really what's taken their platform worldwide), I want to understand how you rate management's track record of acquisitions.
The reason I'm asking this is I saw some concerns recently around the deals that they've done in China, maybe looking at a bit of a divestment coming through there. But more importantly, for you as a shareholder, what are the types of deals you would want to see this company doing versus allocating capital towards things like share buybacks or maybe higher dividends? Where are you seeing that value, in terms of capital deployment?
Justin Ritchie: For us, a lot of M&A often is something we're not keen on in a target company. I'd say Bidcorp is one of the exceptions in that we think the M&A that they do makes a lot of sense. Very rarely do we see them do big transformational deals. It's mostly small bolt-ons that they do.
And you can see a disciplined history of capital allocation from Bidcorp. So, there are years where they buy a lot and there are years where they buy almost nothing, which is a good sign. It means that they're being selective about what they buy.
And we always look at the returns on capital. So, return on invested capital (ROIC) is one measure. Over time, if you're adding value with M&A, you should see your ROIC either go sideways or grow, which tells you that you're not detracting by doing these deals.
If you go and look at Bidcorp's ROIC, it's been up and to the right for a number of years now, which is a good indication that what they are doing makes sense and works, and that they're integrating it properly.
They have the typical corporate framework in terms of capital allocation, which we think makes sense. But what I like is that, in years where there's not much to buy, they'll either give the money back just as a dividend or you'll start to see them do buybacks, which is where we are at the moment.
Also, what I like with Bidcorp is the pretty robust balance sheet. They run it near cash. I think it's got a little bit of debt at the moment, but it's certainly nowhere near as geared as someone like Sysco that you mentioned earlier or Performance Food Group in the States. These are highly geared businesses and Bidcorp's got a lot more dry powder, which we like.
Jan Nel: That's a good point, especially with regard to a little bit of countercyclicality. The fact that they've got a very strong balance sheet and most of the M&A bolt-ons that they acquire are around 5x to 7x earnings whilst they're sitting at 16x earnings. So, it is quite naturally accretive.
And they're very disciplined with that. They don't pay up, and when their multiples start to come down, they apply that same decrease to the target companies. They're very disciplined. If they can't buy, they don't, and then they buy back shares.
But also, because they’ve got a very strong balance sheet, when times get quite tough, the smaller competitors struggle and their balance sheets aren't as strong as Bidcorp's, which means that they can buy them a little bit cheaper, which is quite accretive for them then as well.
Justin Ritchie: Nice countercyclicality part of the business.
The Finance Ghost: Yeah, it's amazing how you can actually see elements of the old Bidvest DNA coming through in Bidcorp, right? It's lots of little bolt-on deals, it's nice and disciplined and it's all of that kind of thing. They never seem to bet the farm.
Whenever I read Bidcorp's reports, you can always see this beautiful diversification, both geographically and in terms of this mix of nice, small bolt-ons. And like you say, some years they sit back, they don't do as much. Other years, they really accelerate the deals that they can do. It's quite nice to see that coming through. It just gives that additional push to the growth rate.
But, even as good as that is, and as interesting as the business is, there's a risk of disruption, right? There's always a risk that something gets disrupted. I'm not sure if it's perhaps because they are the middleman and so they might be disintermediated. I wonder what that might look like.
Or it could be something like just, I suppose, a slowdown in consumer spending and then suddenly you just have overcapacity on the supply side versus the number of restaurants. How do you guys think about it in terms of the risk of something perhaps going wrong? Who eats their lunch here? Where can this go south?
Justin Ritchie: We always worry about that. We spend a lot of time trying to figure out what can go wrong in a business. The nice thing about Bidcorp is it's very diversified. More than 90% is outside of South Africa. They're in many, many markets. They have thousands of suppliers and tens of thousands of customers, so that in itself is a bit of a risk diversifier.
Obviously for a business where your ultimate end consumer is the person eating out, in a general recession where discretionary income is pressured, discretionary spending is pressured, there is potential for volumes and revenue to decline or to struggle. But, you know, that's a very difficult risk a) to forecast and b) to mitigate.
The other thing that we think about is competition. They're in many, many different markets and they're competing against big and small players. Crucially, they don't play in the US, which is a very big competitive market. You know, you can always have local competition, but as I say, the diversification is a big risk mitigator there.
Jan Nel: On competition, I would just add cash-and-carries, which are becoming quite big in the US. You probably saw Sysco buying a cash-and-carry. You could see in the US that it's been growing quite a bit there. But even though you saw that growth, the broadliners kept growing until a certain point.
You see less cash-and-carry outside of the US, especially in the European markets where they are playing. It is there, but they've been there for decades and they've managed to grow for decades without being disrupted by them.
Justin Ritchie: You can also go through periods where your big cost inputs like wages are growing faster than food inflation. But another natural risk mitigant there is the fact that wages are a big part of what food costs to produce. So, the two can't diverge for too long. There's often a period of catch-up when they separate. You may get short-term periods where that's a problem, but long term I don't think that's going to be an issue.
Jan Nel: Another risk we talked about is if there's a big shift to chain restaurants (restaurants with a head office), it might hurt them because, as we explained, it's lower margin. We've looked at the data, and in the US, they've basically flatlined the chains. There are very low barriers to entry for a restauranteur opening a restaurant. There are always independents popping up…
Justin Ritchie: Yeah, the data is not clear on that. You're getting some markets where chains are growing in share and there are some where independents are growing. It happens quite slowly, when there is a shift. So again, that's a risk, but I don't think a massive one.
And then the last one I would say is a food safety incident – one of their suppliers does something wrong, makes people sick. But they've got, as I said, tens of thousands of suppliers and hundreds of thousands of customers, so it’s fairly low risk that that becomes a massive problem.
Mohammed Nalla: I think those are all very solid points. Obviously, the risk of disruption does exist in any business. It looks as though Bidcorp's really chosen where they operate in the value chain quite nicely.
I want to try to bring this to a close by looking at the share-price performance, because it was quite volatile at first and then it kind of went sideways, and since 2023 it's really been range-bound. So, my question to you directly is: are you accumulating at the bottom of the sideways range or are you just sticking to your current position?
And more importantly, what do you believe could actually catalyse the next move higher? Where are you seeing the value unlock? How are you reading the share-price performance and some of those catalysts for growth as you position this in your investment portfolio?
Justin Ritchie: It's always very dangerous to say that we're at the bottom, so I would never say that. But what I would say is that all we ask (and what the investment case is built on), is that they keep doing what they're doing. So, consistent delivery.
Part of the issue with Bidcorp is that it's South African listed – it doesn't have a dual listing; you can only buy the shares on the JSE – and I think, to a certain extent, it's lesser known than its large global competitors.
It reports earnings in rands, so when you've got a currency disconnect, your earnings may look a bit pedestrian or go sideways for a few years, and the market doesn't like that. A little bit of rand weakness would help the rand earnings growth. We never know what catalyses the change (if I did, then I would be in the day before), but we think, with solid delivery and patience, you get a very good total return over time.
As for whether we're accumulating or not, we don't really talk about what we're doing day to day in the portfolios. But I would say to you that when Bidcorp has been a buyer of its own shares, it has usually been a good indication of when the share price is attractive. They are currently in the market buying their own shares, so that gives you a hint as to what we think.
The Finance Ghost: Yeah, I quite enjoyed the comments about being in the day before. Absolutely. We all wish we had the crystal ball. But like you said, I think patience and consistent delivery is probably a good way to sum up what I've certainly seen from the Bidcorp story. And it seems to be a very similar view to what you hold on the stock.
Thank you for walking us through not just the business model but also the moat it has, how they allocate capital and how they think about growing. It is a particularly interesting business and, for me, one of the very few examples of a South African corporate that has expanded internationally.
Justin, Jan, it's been really cool to dig into the stock. I will obviously include in the show notes how people can reach you and, where they want to find out more about Aylett & Co., how they can go about doing that.
I'd certainly encourage our listeners to go back and listen to the show on alcohol stocks as well that we did with the Aylett & Co. team. It's as relevant today as it was then. Still very, very interesting.
Mohammed Nalla: This was very insightful. I'm so glad we could actually unpack a particular stock that's in your portfolio and that investment thesis.
To our listeners, let us know what you thought of the show. Hit us up on social media. It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X, or go find us on LinkedIn. Pop us a note on there.
Until next week – same time, same place. Thanks, and cheers.
Jan Nel: Thanks, Ghost. Thanks, Moe.
Justin Ritchie: Thanks for having us.
The opinions provided on this show are those of the person who shared them and none of it should be taken as financial advice or a recommendation. Aylett & Co. (Pty) Ltd is an authorised Financial Service Provider, FSP no. 20513. Visit Aylett.co.za for more information.
