OREANDA-NEWS. Fitch Ratings has affirmed The Bidvest Group Limited's (Bidvest) National Long-term Rating at 'AA(zaf)' with a Stable Outlook and National Short-term Rating at 'F1+(zaf)'. Fitch has also affirmed Bidvestco Limited's senior unsecured debt rating at 'AA(zaf)'.

The affirmation is supported by the diversified and balanced operational profile and geographically-spread revenue stream. Bidvest's rating benefits from the group's continuing strong performance and its ability to maintain a stable operating and financial profile. The affirmation is supported by the group's resilient business model with the defensive food services division counterbalancing the more cyclical automotive and freight segments. Despite the slight deterioration in credit metrics in FY14 (ending June 2014), largely driven by M&A, the affirmation and Stable Outlook reflects our expectation that Bidvest will pursue financial policies consistent with the rating.

The continuation of an aggressively-funded M&A strategy, despite the benefits for the business risk profile, could lead to negative rating action, if leverage metrics depart from the group's through the cycle financial profile. Bidvest has a satisfactory corporate governance structure with strong financial and operational management moderating the key-man risk around the founding CEO.

KEY RATING DRIVERS
Continued Strong Performance
Given the group's satisfactory performance and acquisition activity in FY14, we expect Bidvest to continue to deliver growth in turnover and profitability albeit at a more measured pace. Our expectations assume a mid-high single digit turnover growth over the short to medium term with relatively stable margins supported by stable capital expenditure (as a percentage of sales). Bidvest delivered a solid set of results for FY14 despite adverse conditions in many of the group's markets with turnover and profitability growing faster than expected due to both organic and acquisitive growth, helped by positive currency translation effect from its exposure to developed markets (around 50% of group sales).

Well Diversified Operational Model
Although we acknowledge Bidvest's presence in primarily distribution-related businesses, the affirmation is supported by the diversified and balanced operational profile with the defensive food service segment countering cyclical impact from the automotive retailing and freight segments. The limited individual sector concentration also helps mitigate adverse developments in any particular segments as illustrated in the limited effect expected from the recent changes to the car rental business.

High Geographical Diversification
The rating remains supported by the high diversification from a geographical perspective and our expectation that any future acquisitions or divestments will maintain this profile. The geographical diversity between developed and emerging markets also enables the group to deliver solid performances despite regional economic conditions.

Sound Financial Profile
In FY14 Bidvest's funds from operations (FFO) lease adjusted gross and net leverage increased to 2.8x (FY13: 2.7x) and 1.9x (FY13: 1.7x) with an increase in debt largely due to acquisitions undertaken during the year, mainly Adcock Ingram. Through the short to medium-term cycle the rating assumes net leverage metrics would remain around 1.4x-1.7x factoring in sustained capex and dividends.

Moderate Acquisition Risk
While Fitch treats acquisitions as event risks, we note that Bidvest is an acquisitive group. Due to acquisitions we expect leverage metrics will deviate temporarily from the threshold considered appropriate for the rating. However, Bidvest has demonstrated a good track record in making strategic bolt-on acquisitions and integrating them.

Fitch would view it negatively if management were to pursue a more aggressively-funded M&A strategy or if large scale acquisitions do not perform as anticipated (in this regard we note the write-downs to the Adcock Ingram investment that Bidvest has made). There is limited headroom within the rating for new acquisitions in FY15, albeit potentially increasing to ZAR4bn in FY16.

Group Structural Features
The consolidated risk profile is reflected in the 'AA(zaf)' rating. Bonds issued by Bidvest's wholly owned subsidiary, Bidvestco Limited, are unconditionally and irrevocably guaranteed by Bidvest. In addition, the DMTN programme includes a cross default clause between the issuer (Bidvestco), the guarantor (Bidvest Group Ltd) and any material subsidiary representing more than 8% of the gross assets of the guarantor. This cross default relates to indebtedness having an aggregate outstanding amount of at least ZAR50m. This feature, together with centralised funding and cash pooling (on a semi-annual basis), justify the consolidated approach.

Fitch notes that only 34% of the group's debt is raised at the subsidiary level to match foreign currency denominated debt with cash flows from subsidiaries in the region.

RATING SENSITIVITIES
Negative: Future developments that could lead to negative rating action:
- FFO adjusted net leverage sustained at a level above 2.25x, or FFO adjusted gross leverage sustained above 2.75x.
- Weakening EBITDA margins below 5% reflecting weak pricing power or contract losses.
- Evidence of relaxation in acquisition policy reflected in either entering new sectors increasing the risk profile of the group, being aggressively funded or carrying significant execution/integration risks.

Positive: Future developments that could lead to positive rating action:
- Fund from operations (FFO) adjusted net leverage sustained at a level below 1.5x, or FFO adjusted gross leverage sustained below 1.75x.
- EBITDA margins above 7% and sustained positive free cash flow.