Mid-cap food counter Libstar may be a counterintuitive trade of the month given the rampant soft commodity and food price inflation seen in the JSE food producers sector.
The stock is also unloved by the market, a hangover of its miserable listing in May 2018 when the R12.50 placement price crashed in August 2018 to settle at 550c on a sudden profit warning. That’s usually the kiss of death for any new listing — the market is unforgiving.
For the past three years Libstar has traded in a narrow band between 600c and 700c as an indifferent market ignored the counter. IM has taken a different view for the past 12 months, with this analyst having a contrarian stance.
The stock has slipped from our earlier recommendation, but certainly not has hard as the big food counters such as AVI and Tiger Brands. On a relative basis, in 2021 Libstar outperformed its peers.
With the stock price at 596c, IM believes 2022 could be the year that Libstar starts to perform and is again considered an investment asset class in the food sector by the wider market. Our rationale is based on recent events as well as our reading of the year ahead.
A recent trading update for its year ended December showed positivity in a sector that has not reported much recent good news.
But Libstar delivered.
The company indicated that normalised headline earnings per share (HEPS) were forecast to rise between 16.3% and 21.3%, which gave a mid-point HEPS of 80.4c per share, placing the stock on a p:e of 7.4 times.
IM views this rating as highly undemanding, given the basket of clients and goods Libstar offers. Its major clients are Woolworths and Checkers, as well as many mainline food retailers and quick-service restaurant businesses such as KFC and McDonald’s. Libstar’s convenience foods, ready meals and range of dry goods and groceries are ubiquitous in Woolworths, a significant customer. There would be many empty shelves and unhappy shoppers if Libstar failed to deliver to fast-food outlets and retail stores.
The company has a well-known range of branded goods such as Lancewood dairy products, Denny’s mushrooms and Goldcrest canned products.
Libstar also has a sizable private-label food manufacturing and food service business and operates as a principal brand holder for such family favourites as Laughing Cow cheeses, Lurpak butter, Robertsons baking aids and the original Tabasco sauce range. It’s also contracted to manufacture Pringles.
IM sees a number of touchpoints ahead that should blow away much of the miasma surrounding Libstar in 2022 and into 2023.
In late February, after a torrid nine-year performance period of robust revenue but mediocre profitability, Libstar bit the bullet and exited its household and personal care (HPC) business.
It sold HPC to a private equity business for R217m and booked a R64m loss on the sale.
This may not sound like a great deal, but HPC was a distraction for Libstar, which is predominantly a food business, and the market just wanted it gone.
The market’s relationship with management has also been strained. Management, while successfully building the company, was seen as tarred after the weak 2018 listing.
CFO Robin Smith left at the end of 2021, and IM believes further change could be due in 2022 and a fresh management viewpoint installed.
This, alongside the HPC sale and ongoing development of foods businesses, should lead to sentiment change, supporting and driving the share price.
Further, major shareholder APEF Pacific Mauritius, an offshoot of UK investment firm Actis, holds 37% of Libstar. IM understands that two of its Africa investment funds are under term limits, and this could see the Libstar stake divested before the end of 2023.
Libstar is a business with a slew of well-known food brands and deep symbiotic relationships with major domestic food retailers, so it would be naive not to believe there has been and will be interest in that 37% stake. So, IM sees corporate action as a realistic permutation for the stock over the next two years.
All these touchpoints should resonate with the market should they transpire.
IM believes Libstar is an overlooked special situation and thus recommends it as a buy, with a bold target price of 850c.
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