SUMMARY
Position: LONG
Upside target: R351.00
Reward / risk ratio: 2.6
Recommended stop-loss: R292.00
Recommendation: BUY
ANALYSTS:
Peet Serfontein, Pritu Makan
Bidcorp is a market-leading food service product distributor across several geographies including the United Kingdom, Europe, Middle East, South America, the Asia-Pacific region, and South Africa. The company’s business units operate across the food and ingredient manufacturing sectors, such as catering, hospitality, leisure, baked products, poultry, meat, seafood and processing.
Bidcorp remains financially strong with relatively low levels of gearing and a robust business model with solid diversification and defensive characteristics. The group has seen recovery in trading conditions, which bodes well for its short-term growth prospects.
Technically, the price is approaching major resistance (black dotted trendline on the main chart) which makes the share attractive as an investment option. The more times this resistance level is tested, the higher the likelihood for a breakthrough.
The stock remains above its 200-day simple moving average, showing that the long-term is bullish.
Relative Strength Index (RSI) forward calculations suggest that the share will be in overbought territory around R360, which classifies our target price of R351 as realistic.
TECHNICAL ANALYSIS
The recent upward trajectory of the on-balance volume (OBV)—which uses volume flow to predict stock price changes—indicates that money is flowing into the stock.
The lower panel represents the duration of the bullish trend in weeks. The upwards trajectory of this indicator suggests that the bullish trend will last longer with further price appreciation.
Our entry range is around R292 to R309 or as close as possible to the current reference price of R308.49. A fall below the suggested entry range suggests that a structural change in the trend is occurring and provides reason to negate the trade idea.
Our upside target is set at R351 (~13.8% upside potential from current levels) which is close to the recent high. Profits can be harvested around these levels.
Time to exit is at the beginning of September 2021, with the option of extending for a longer period.
A price below R292 (~5.3% downside potential from current levels) remains a major concern and is recommended as a stop-loss.
LONG-TERM FUNDAMENTAL VIEW
Bidcorp has a well-diversified client base with businesses at different life cycles across developed and emerging geographies.
The group’s dual strategy of targeting organic and acquisitive growth also spreads risk with the flexible balance sheet providing room for bolt-on acquisitions or major transactions in new markets.
The consistent profit growth generation in constant currency terms, while operating in relatively low inflation environments, is reflective of the company’s ability to sustain profits.
Margins also remained steady despite the impact of trading restrictions in certain jurisdictions, with cost containment measures also lending support. Cash generation remains positive, which was one of the key takeaways from the update.
In addition, management does not expect any major long-term fundamental shifts in consumer behaviour away from eating-out-of-home; however, aspects of the business model are continually being modified to meet changing requirements.
In terms of downside risks, Bidcorp is exposed to ongoing competition (possible margin pressure), further restrictions in food services trading, and significant currency risk given that the bulk of earnings are derived offshore.
