Food counter’s potential stays intact

Mid-cap food counter Libstar has been an IM favourite for some time. Its market prospects appear sound and management is trying hard to rebuild trust following its disastrous May 2018 listing and subsequent profit warning, which saw the stock halve from its initial 1,250c listing price.

Management has continued to refine the business model and extend relationships with key clients allied to a rapid rollout of new products under well-known brands such as Lancewood and Denny.

The stock responded well to these moves in 2019, recovering to a high of 950c. As the weakening economy and softness in consumer demand started to envelop the food sector in late 2019, the entire sector derated and Libstar’s share price retreated.

Libstar, to its December food service sales fell of a cliff during the lockdown as demand for products such as cheese, meat patties and tortilla wraps dived. In the second quarter food service sales fell 63.2% and exports 26.3%.

But the pandemic also resulted in changing food sales as consumers had to cook more at home, and the baking trend took off.

The retail and wholesale division recorded growth in the Covid period of 14.2%. Libstar had products at hand and consumers stocked up on favourites at Woolworths and Checkers. Libstar also landed some new lines inside Spar.

With schools being closed, children’s favourites — such as Kiri and Laughing Cow cheese — saw weaker demand, but this was offset by the home cooking trend, which saw a surge in demand for pasta. The baking trend saw demand for pricey imported Lurpak butter double.

Mushroom sales via Denny exceeded expectations and the in-home snacking boom aided Libstar’s range of nuts as well as its Pringles manufacturing arm.

Management indicated that the second half of the financial year has started strongly. The weak rand and the reopening of export channels have resulted in surging demand for Libstar’s range of spices and wet condiments from the US, Japan and Australia. Even new listings in the UK were secured.

Retail channels are recovering as consumers and businesses are able to operate in a new normal environment. Sales in the first two months of the second half have been good and Libstar is more than satisfied with progress — though there’s uncertainty over a second Covid-19 wave and the festive trading period.

Despite these encouraging statements by Libstar on a second-half recovery, the stock has yet to respond, with the counter holding steady at 673c.

On a year-to-date basis Libstar’s stock is down 11% — slightly outperforming sector competitor Rhodes Foods. IM believes Libstar’s potential remains intact, and has a “buy” recommendation with a target price of 850c.