It’s not every day that a JSE-listed company puts a metaphorical sign on its head office door saying “For sale, make us an offer”.
But that is what mid-cap food producer Libstar did when it released its dismal year-end results to December 2024 on March 18. The R2.2bn diversified food producer has well-known brands, such as Lancewood, Goldcrest and Robertsons baking aids. Its private-label and manufacturing interests are major suppliers to Woolworths and Checkers, making products such as chicken schnitzels, hot cross buns, confectionery and baked goods.
However, listed life has been unkind to Libstar. Deep investor scars remain from the catastrophic IPO in May 2018 at R12.50 a share when a subsequent profit warning resulted in the stock collapsing, and seven years later the counter remains out of favour. At the time of writing, Libstar is bouncing off a 52-week low of 319c.
Looking back at its results since listing, every earnings release has been lacklustre, with a consistent downtrend in headline earnings. Earnings were often accompanied by some accounting restatement, writedown or impairment, which added to investor exasperation.
The year-end results to December 2024 again disappointed. Normalised headline earnings dipped 6.5% to 53.4c a share, with a dividend of 15c. Revenue grew 3% to R11.8bn but challenging conditions trimmed the gross profit margin to 21%. Operating costs rose 7%, leading to a 6% fall in operating profit to R631m.
Libstar has improved its debt ratios, with cuts in capex and lower finance costs aiding the overall balance sheet. Investors have railed at the persistent disappointing operating margins, with return on capital employed in the period a dire 8.8%.
Management has simplified the once sprawling spider’s web of businesses into two categories — ambient and perishables — which have a rough 50:50 share of overall group revenues. Some asset sales — such as personal care business Chet Chemicals — have been completed, and perennial underperformer Denny Mushrooms is also on the chopping block to improve returns.
Despite strong sales of hard and soft cheese and yoghurt, pressures in the dairy sector hit profitability
In the year, ambient products outperformed, with revenue growth of 5.4%, aided by demand for wet and dry condiments. There was a modest 0.1% trim in margin. Perishables faced headwinds. Revenue rose 1.2% with a 0.6% cut in margin. Despite strong sales of hard and soft cheese and yoghurt, pressures in the dairy sector hit profitability. The loss of a major contract in the meat processor and value-added meats business, Finlar Fine Foods, slammed unit profitability.
At this stage, IM readers may wonder why we are writing about a stock many might avoid like a mouldy bun. Our interest harks back to the opening paragraph on possible mergers & acquisitions (M&A) activity.
It was at the start of 2024 when Libstar attracted some interest, and in the year, the stock rallied 51% from 330c to 500c on hopes of some corporate activity. But the counter plummeted on the back of weak interim results, then a softer than expected 11-month trading update. The 2024 financial results compounded investor angst and perpetuated the recent share sell-off.
A long-suffering private equity player, Actis, owns 37% of Libstar and the Public Investment Corp 10%. There are a few institutional shareholders that could easily tip the scales at the right exit offer price. In an M&A-starved food sector, acquiring sizeable chunks of a well-branded portfolio would be appealing to many faster-growing sector competitors.
The crux is that the simplification of Libstar into two categories has inadvertently made a break-up or piecemeal offer for parts of the group more difficult. IM believes institutions would demand closer to 750c a share. Such a premium may be unpalatable to many, especially private equity.
IM does not believe buyers would want all of Libstar — some assets, such as Finlar and Denny, are poison pills; thus a buyout offer needs to be solution driven. However, management has outlined a desire to “unlock shareholder value” with evaluations at an early stage.
Operationally, Libstar may not appeal as a J357 food producer. It’s been underperforming for years. But as an M&A play, the story may be more appetising for those with a greater risk appetite. Libstar has put itself in play and, as such, IM rates the stock a special situation buy.
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