A compelling serving worth nibbling on

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.