Back in March, Libstar CEO Charl de Villiers warned investors it might be 18 to 24 months before the food producer would start to see the benefits of a slew of restructuring activities undertaken by his management team.
Despite steady progress with that restructuring since then, it’s hard to imagine that target can still be met. It’s been a torrid time for food manufacturers and there seems little prospect of improvement in the short to medium term.
Take Libstar’s interim numbers: while management did well to hold gross margins at 21.5%, basic headline earnings per share slumped 29% to 12.9c. If you strip out non-recurring, non-trading and non-cash items, the picture looks more flattering with normalized headline earnings per share down just 2.4% to 24.2c.
But it’s hardly surprising the share price dipped 7% in the days after the results were announced. It’s now down 14.5% on the past 12 months.
Sean Culverwell, investment analyst at Anchor Capital says Libstar’s weak first half was disappointing but roughly in line with his expectations. “Management had guided for an incremental seasonality shift more towards the second half, so we were expecting a soft result,” he says.
Much of the non-recurring, non-trading and non-cash items are about trimming the group’s range of products which are considered too diverse and thinly spread.
Libstar’s activities are spread between ambient products and perishable products. The former includes a clutch of dry condiments, wet condiments, select products and baking. Perishable products is home to dairy through brands like Lancewood, value-added meats and convenience meals.
On the ambient products side, the group had to deal with the disruptive effects of the integration of Dickon Hall Foods into Montagu Foods. This followed the loss of the contract to manufacture Mrs Balls Chutney, which Tiger Foods brought in-house last year. That integration was successfully completed in August.
Cape Herb & Spice was also a drag on earnings as its sites were consolidated and its export markets struggled with the stronger rand.
Grim times
The good news is this means a chunk of the earnings challenges was specific to Libstar and have largely been addressed in the first half. But that still leaves a devastatingly tough operating environment to navigate through.
It’s not just wars (Iran and Ukraine) that have added to food manufacturers’ woes by increasing diesel, packaging and fertilizer costs. So too have weather patterns (el Nino), interest rates and the ever-increasing costs of municipal services. For Libstar even the strengthening of the rand, so often regarded as a positive, was bad news. It aggravated the impact of weak international markets and knocked export revenue growth by 9.6%.
Sadly it’s not only supply side factors. On the demand side, things look even grimmer. As Small Talk’s Anthony Clark says, if Libstar was facing a strong consumer that would have be one thing. It isn’t, not by a long chalk.
“For the past 12-18 months the economy has been slip-sliding downwards,” says Clark. No surprise given that consumers, many of whom have seen no real wage increases in years, are also facing cost pressures. Increases in interest rates, petrol, electricity, water and taxis have squeezed them so badly food manufacturers almost dare not pile on further increases. And it’s not as though they could even if they wanted.
Clark says unlike previous periods of consumer stress, there’s a crucial difference this time around. With Pick n Pay and Spar floundering so badly, Shoprite is now such a singularly dominant player in the food retail market that it can dictate terms to suppliers. “Any food manufacturer wanting to increase food prices has to go through Engelbrecht (Pieter, Shoprite CEO),” says Clark who believes he won’t want to push any significant increases onto consumers before next year after the back-to-school period.
Necessary, but far from thriving
Libstar is not alone in having to deal with these challenges. Every food manufacturer is facing the same crippling pressures on the supply and demand fronts — a disturbingly stark situation for a sector long thought so necessary as to be resilient.
Clark tells the FM that even AVI, long regarded as the star performer of the food sector, is struggling to eke out any growth. Its share price has dropped 17% over the past 12 months. That puts Libstar’s 14.7% fall into context.
Mind you, a year ago the Libstar share price had been bumped up by expectations of a deal that would have changed control or taken the group private. Last September the group issued a cautionary, alerting investors to the receipt of indicative expressions of interest. Last May the board withdrew the cautionary. It now seems intent on growing the business organically and through investment to ensure it’s an attractive standalone proposition for long-terms investors.
Fortunately, Libstar management doesn’t seem overwhelmed by the challenges facing it. At the results announcement, management said it remained focused on growing market share “through value-led offerings, private label growth, innovation and disciplined pricing”.
Culverwell says the second half should deliver a pickup due to seasonality, completed capital spending and related benefits. Post-period commentary was also reassuring, says Culverwell. But, he adds, Libstar does operate at margins below its peer set, “so any additional volume loss or incremental input cost pressure present downside risk.”