The dim­ming of Lib­star

It’s not time to bar­gain hunt Lib­star yet … But it has good man­age­ment and some great brands

Financial Mail - Investors Monthly - - Front Page - AN­THONY CLARK

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.

There is an ac­tive pipe­line of new prod­ucts and in­vest­ment in brands, and in­no­va­tion is strong

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