Potential for value to be unlocked at Libstar
Libstar, the consumer packaged goods business that manufactures own brands, principal brands and privatelabel products, gave a respectable interim result.
Normalised headline earnings per share were 30.9c, signifying 12.4% growth.
Some reasons why Libstar is a good investment case: it is going through a consolidation phase of rationalising business lines and growing businesses organically; the balance sheet is being degeared; cash flows are attractive; and it has a strong and diverse customer base.
It should continue to pay dividends since declaring a maiden dividend after its 2018 full-year earnings. Indications are that these should be paid out on a ratio of between three and four times cover.
Overall group turnover growth was 4.6%. The organic core business top-line growth was an encouraging 5.3% completely comprising volume growth, an indicator of marketshare gains. The core normalised earnings before interest, tax, depreciation and amortisation (ebitda) grew by 8.5%.
The demand for private labels, which is a substantial portion of Libstar’s business, is outstripping growth in named brands. SA is still behind global standards when it comes to private-label penetration at more than 21% while the UK, for instance, has penetration levels above 46%.
All indicators point to growth in private-label demand, which is influenced by down trading, improved quality, demographic changes and the retailers’ need to protect and increase margins.
Private label products are now considered tried and trusted by local shoppers, with 49% of SA consumers indicating that they would not shift back to national brands if their financial situation improved.
With sizeable capex projects largely complete and not much scope for sizeable acquisitions, management is going to focus its efforts on cost controls, which will unlock considerable value.
CARTRACK
Cartrack is a leading SA telematics company. It is founder-managed and run with entrepreneurial flair.
It has a presence in more than 23 countries. But revenue and operating profit is dominated by SA, which contributes 75% and 82% to revenues and ebitda, respectively. The rest of Africa has been going through trying times, with its contribution to revenue slashed to 7% from 15% between 2015 and 2019.
The slack has been picked up by Asia Pacific and Middle East and the recent US business.
What makes this business attractive is its strong annuity revenue stream at 90%. It is also one of the few SA companies that seem to be making inroads in international markets outside Africa.
Though cash generative, its expansion comes with a capex burden, increasing debt and working capital pressure.
Investors need to pay attention to its newly adopted accounting policy, which came into effect in 2019. Instead of capitalising all initiation costs of the units and depreciating them over three years, it now capitalises some of the costs and depreciates the capitalised contract over 60 months, which has an enhancing effect on profits.
Not to take away from the management team’s gains, but on a current price:earnings of almost two standard deviations above the market since its listing one needs to be vigilant and not be taken in by the hype.