Road to recovery will be long

Investors relish buying dependable and defensive stocks, and the food sector could be a natural for portfolios. But an initial public offering (IPO) is often not as successful initially as one would imagine.

Over the past decade I have covered the four most recent listings of food counters on the JSE: Pioneer Foods in 2008, Clover Industries in 2010,

Rhodes Food Group in 2014 and, most recently, Libstar, which listed in May 2018.

Of these IPOS, only Pioneer Foods was an initial listing success. The listings of Clover and Rhodes failed to impress the market, and subsequently traded below listing price. Investors would have done better buying the shares more cheaply in the after market.

For Libstar, there was a wide initial guidance offer to investors of R12.50-R16 a share, with a minimum capital raise of R1.5bn. The listing price was eventually set at the lowest level of R12.50.

Libstar could easily have been seen as a glittering star in the sector. Brands such as Denny Mushrooms, Lancewood dairy products, Goldcrest canned foods and a wide range of leading private label clients anchored by sales to Woolworths of more than R2bn would ordinarily have drawn interest. But there were shadows over the listing.

Libstar’s largest shareholder was a Middle Eastern private equity business called Abraaj Group. Investors became uneasy that a R800m special dividend was paid out to existing investors before the IPO. Press reports on problems at Abraaj were also starting to surface.

Libstar traded down 1.3% on its listing in May and closed below its R12.50 listing price.

This is normally the kiss of death for an IPO.

By mid-june the stock was trading 20% below its listing price, hitting R10.00. By the end of July bullishness, for some unfathomable reason, made the stock surge back to R12.50. But on August 17 Libstar issued a shock profit warning for its June interim results period, and the stock was mauled.

At the time of writing Libstar was trading at R8.60, down 29% from its May 2018 listing price.

Is there any hope for Libstar? Having met management recently for interim results, I’d answer yes. But the road to recovery will be long.

Interim results showed good top-line sales growth of 14.2%R4.5bn, but operating profit fell 13.8% to R223m. However, discussions about results with management made it clear that there were many one-off factors. Many issues had simply caught the management unawares. A factory strike went on far longer than envisaged, resulting in lost sales of R130m. Products and line items were delayed due to packaging or production problems, and there was an oversupply of mushrooms that caused profits to dive at Denny.

Libstar also reported a fat forex loss after the rand tanked against most major currencies in June.

Libstar’s management is well aware that it has disappointed the market. It is pulling out the stops to try to regain ground in the second half, perhaps clawing back towards achieving the prelistening earnings guidance.

There is an active pipeline of new products and investment in brands, and innovation is strong. The private-label market remains a choice sector for growth, augmented by new products and maybe the odd acquisition.

But the market won’t give Libstar management the benefit of the doubt until the company starts to show meaningful recovery in margin and earnings.

Unfortunately Libstar, unlike most food listings on the JSE, is a December year-end company, so it does not catch the full push from festive season sales.

Clearly, the time to bargain hunt Libstar is not yet at hand. But it has good management and some great brands. I would certainly put the stock on my watch list if second-half results start to show management being true to its word.