A com­pelling serv­ing worth nib­bling on

Financial Mail - Investors Monthly - - Analysis - Marc Hasen­fuss

Lib­star* — which has spent the best part of a decade bulk­ing up its brand of­fer­ing by reg­u­lar ac­qui­si­tions — broke the car­di­nal rule for a new­comer to the JSE by is­su­ing an early warn­ing that its pre-list­ing fore­casts for its maiden re­sults would not be met. Sen­ti­ment quickly turned, and not long after list­ing the Lib­star shares had plunged to un­der 600c.

To their credit, Lib­star ex­ec­u­tives — headed by the expe

ri­enced An­dries van Rens­burg — did not shirk from clearly com­mu­ni­cat­ing the ini­tial set­backs. The mar­ket seemed to ap­pre­ci­ate the frank­ness, and was the more grate­ful to see ev­i­dence that Lib­star was find­ing growth trac­tion (in a lean mar­ket) in the sec­ond half of the financial year.

A maiden cash div­i­dend of 22c a share sug­gests ex­ec­u­tives are con­fi­dent that their ef­forts to bulk up capacity will pay off over the medium term.

Food play­ers on the JSE gen­er­ally are hardly the flavour of the month, and there may even be a con­tention that riska­verse in­vestors should stick to the well-es­tab­lished big brands busi­nesses such as AVI and Tiger Brands.

But IM be­lieves Lib­star may be of­fer­ing a com­pelling serv­ing of spe­cial­ist brands that cater for vi­able mar­ket niches. IM would not be sur­prised to see Lib­star out­per­form other JSE-listed food coun­ters in the short term.

What be­came clear from en­gag­ing with ex­ec­u­tives is that Lib­star does not have to pur­sue ac­qui­si­tions to se­cure growth. The com­pany has plenty on its plate — in­clud­ing key pushes in pro­duc­tion capacity (and man­u­fac­tur­ing ef­fi­cien­cies). Ex­ec­u­tives stress the ben­e­fits of new man­u­fac­tur­ing fa­cil­i­ties and added capacity should pro­vide a kicker to the 2019 financial re­sults.

In the financial year ahead de­vel­op­ments should in­clude a new tea plant for the lo­cal and ex­port mar­ket, a new Pringles plant to man­u­fac­ture this pop­u­lar crisp for a third party, an ex­pan­sion of the pre­pared­meal capacity to tap into the grow­ing con­ve­nience mar­ket and a new soft-cheese val­ueadding and pack­ag­ing fa­cil­ity.

For the record, Lib­star targets to­tal cap­i­tal ex­pen­di­ture of 2.5%-3% of rev­enue, with 25%40% ear­marked for re­place­ment cap­i­tal ex­pen­di­ture and 60%-65% for ex­pan­sion cap­i­tal ex­pen­di­ture.

More im­me­di­ately, it’s worth not­ing that Lib­star’s per­ish­ables seg­ment — which ac­counted for 46% of rev­enue and 43% of nor­malised earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion — will ben­e­fit in the financial year ahead from the Lance­wood and Son­nen­dal dairy busi­nesses op­er­at­ing as a sin­gle unit. A fat­ten­ing of mar­gins seems a rea­son­able ex­pec­ta­tion, while the top line should be boosted by the launch of a range of yo­ghurts by Lance­wood.

Per­haps a more important ini­tia­tive in financial 2019 will be fur­ther growth in the dealer-own brands and pri­vate la­bel with lo­cal re­tail gi­ants op­er­a­tions. This al­ready rep­re­sents a chunk of Lib­star’s busi

ness, and is likely to grow as su­per­mar­kets in­creas­ingly look to putting their “own” brands on the shelf.

Kag­iso As­set Man­age­ment as­so­ciate port­fo­lio man­ager Dirk van Vlaan­deren es­ti­mates that dealer-owned brands and pri­vate la­bel rep­re­sents 45% of Lib­star’s rev­enue, the largest cus­tomers be­ing Wool­worths, Shoprite and Pick n Pay.

The wide diversity of Lib­star’s brand spread might raise a few con­cerns for in­vestors wary that in com­pa­nies built through rapid ac­qui­si­tions the cen­tre does not of­ten hold.

How­ever, Van Vlaan­deren stresses that Lib­star runs a de­cen­tralised busi­ness model that gives its un­der­ly­ing busi­nesses sig­nif­i­cant au­ton­omy to de­liver on strat­egy and in-mar­ket ex­e­cu­tion.

Not­with­stand­ing the dour con­sumer en­vi­ron­ment, IM be­lieves Lib­star is worth nib­bling on at these lev­els.

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