Not exactly a star performer

ince IM wrote about Libstar in March, the company has had to tackle an operating environment with constrained consumer spending and rising input costs.

This led to the group reporting a recent set of half-year results for the six months ended June 2021 which was worse than the market expected at the profit level. This miss, however, was mainly due to adverse foreign exchange movements due to the rand strength relative to the dollar over the period.

This resulted in the “other income” line in the income statement falling from the R81m reported last year to a scant R13m.

The bulk of Libstar’s revenue (just under 90%) is derived domestically, which is obviously a risk should SA experience a prolonged economic downturn.

On the plus side, the group’s relatively higher exposure to a more resilient higher-income consumer, with generally better job security during times of economic stress, does give Libstar some protection in any challenging operating environment.

It is this exposure that enabled a satisfactory 8.7% growth in group revenue to R5.1bn.

Food — perishables, groceries, snacks and baking — makes up 93% of group revenue and achieved good revenue growth of 10.5%.

The Household & Personal Care (HPC) unit underperformed, however, with negative revenue growth of 9.6%, which dragged group revenue growth down to the 8.7% reported.

SLooking ahead, management’s focus on efficiency and rationalisation in the HPC business, such as reducing the facilities HPC operates in from four to one, is already bearing fruit and should unlock R15mR20m in savings for the group per year.

Another positive sign from the rationalisation is that volumes in this business unit for August are back on budget.

Libstar is small compared to, for instance, Tiger Brands when measured on a market capitalisation basis, but punches way above its weight when it comes to its own brands and exposure to the private-label market.

It may just be that its size is actually a competitive advantage relative to its peers, as its flexibility and nimbleness enables it to quickly meet consumers’ evolving demands and needs for new product innovation.

This is well illustrated by the fact that since 2018 it has introduced more than 1,000 product innovations into its stable of products.

Not only does the relative size of the business enable it to respond quickly to changes in consumer behaviour, such as the trend of plant-based alternatives to meat (for example, its Denny-branded plant-based sausages), but it can also quickly approve capital expenditure to increase production when needed.

A good example of this is its recently approved capex to expand its tortilla wrap facility (the third time in six years) to meet demand for wraps by one of the biggest players in the quick-service restaurant (QSR) space.

Libstar’s broad product range means that some of the group’s products are probably well represented in your pantry or consumed by you.

The group is engaged in the manufacturing, importing and supply of various food and beverages as well as household products under some wellknown brands, including Lancewood, Denny and Tabasco.

It also produces products for possibly your favourite QSRs, as well as the private-label goods in your pantry from well-known retailers such as Woolworths.

Despite a comprehensive basket of goods geared to value-added products, the flexibility and ability to act quickly to consumer trends, a high exposure to the fast-growing private-label market and a quality management team, Libstar’s share price has been disappointing, having lost close to 50% since listing in 2018. Shareholders would have taken some comfort from the 72c a share in total dividends over this period.

Libstar has also underperformed its peers on the JSE food producers index. This underperformance is partly explained by below-par financial performance since listing and possibly low liquidity in trading its shares, making the company less attractive to larger investors.

The trick now for current shareholders and potential investors is to determine if the share price is discounting more than its fair share of negativity.

On the basis of the recently released results, its current valuation is not on the cheap side, but taking into consideration that the full-year earnings are normally split on a 40:60 basis due to the seasonal effect of the second half of the financial year, the current mid-teens p:e ratio is expected to unwind towards a cheaper upper-single-digit ratio on a forward basis.

Management believes there is still upside in the share price, judging by the comment in its recent results presentation that share buybacks are being considered. ●