As consumers, we see clearly the increasing costs of daily life. It’s everywhere — in fuel, electricity and especially food.
Food price inflation is a fickle friend, depending on which side of the fence you’re on. Elevated input costs, as detailed in my article on page 14 on soft commodities, can work in farmers’ favour but can be crippling for many food producers when a margin squeeze occurs as they are unable to recover higher costs fully.
When you’re reliant on using basic soft commodities to convert into, say, eggs or poultry, you are far more sensitive to input increases and the ability to recover higher costs from the mass market. The poultry sector is testament to this trend.
Branded groceries often fare better, as consumers loyal to a brand will shrug but accept price increases or shrinkflation, when products cost more but customers get less.
Food retailers often use food price inflation to book stock profits, filling their warehouses with goods ahead of price increases and cashing in and keeping the differential when firmer prices hit shelves.
For 2022, the JSE food producer sector has been a place to lose money. The five main sector stocks — Libstar, RFG, Tiger Brands, RCL Foods and AVI — are all in the red. Underlying earnings growth has been weak. Competition is intense, and eking out core revenue growth in an inflationary environment is tough. Earnings have been dire.
Tiger’s interim results to March showed a 2% decline in revenue and a 2% fall in headline EPS (HEPS). AVI, in its June year-end trading update, guided revenue growth of 4.3% and HEPS growth of 5%-7%. Hardly good news for shareholders.
A counter I have recommended as a special situation for all of 2022 has been Libstar. The share has a market capitalisation of R3.7bn. In the year to date it is down 17% and trading at 555c. It is hardly a stock market darling.
Its May 2018 IPO at R12.50 was at the lower end of guidance. The market welcomed a mid-cap food business with inroads to supply certain groceries and speciality convenience foods to the likes of Checkers and Woolworths.
All turned south in August 2018, when the company issued a shock profit warning — practically the kiss of death for any new listing. The stock was hammered and has never recovered, despite its admirable results performance. So why have I been positive about Libstar and pretty much the lone wolf analyst sell-side recommending the stock?
The stock has bounced off its recent lows at about 500c. I was early in my call, but the market has now cottoned on to what I saw in December 2021. I expected that the loss-making household and personal care (HPC) business would be sold. It was; but then the buyers wanted too much upside protection, so the deal fell apart. HPC is doing better and remains an asset held for sale.
Libstar is in partnership with its largest clients and often supplies exclusive lines, many of them imported. I believed Libstar had a greater ability to pass on rising inflationary costs, as much of the market it services consists of middle- to higher-income consumers, who are somewhat more resilient than the mass market. I also believed that at some stage management change would occur at Libstar, perhaps even the appointment of an outsider. If instigated by the board, this would reinvigorate interest and cause sentiment change from jaded institutional investors.
I was also upbeat about results prospects when the market was of the mood that Libstar earnings would sour. An interim results trading update in mid-August shocked the market. It was good — in fact, very good. The stock rallied 6.3% on the news. Unlike its peers, Libstar reported revenue growth of 9.6% and HEPS guidance higher at 11.5%-16.7%.
With 2021 financial year earnings of 80c I’ve pencilled in 93c for the 2022 financial year (+16%) which is a standout in the food sector. At 555c, unloved but now glistening Libstar has a solid trading update under its belt. The market should start looking into the stock, especially given its derisory p:e rating of 6 based on my forecast. That is a sector steal, and Libstar’s special-situation mantle remains intact.
It is interesting to note that vaunted value investor John Biccard of Ninety One recently became a very large shareholder. Much of my crystal ball prediction is materialising — there may even be some corporate activity in 2023 as Libstar’s private equity shareholder has to exit.
I may have been too early to the Libstar party, but it now deserves a toast. I maintain my “buy” rating, with a target value of 750c (+35%).
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.