Only Libstar's cheese is laughing


Only Libstar's cheese is laughing


Published Date: 2021-09-09 | Source: INCE|Community | Author: The Finance Ghost

Only Libstar's cheese is laughing

Libstar has an interesting business that might make you feel hungry as you read through it. 93% of group revenue is generated from food products, with the remainder from household and personal care products.

A major part of the business is based on providing private label solutions to leading retailers. Private label products are e.g. Pick n Pay cheese or Woolworths yoghurt. Retailers win because they don't have to negotiate with leading brands and consumers win because the products are inevitably slightly cheaper (and just as good as the branded stuff).

There are only a handful of consumer brands that I believe can stand the test of time against the private label trend. That's right All Gold Tomato Sauce, I'm looking at you.

The next largest contributor is the Libstar Brands division - brands that Libstar has developed and marketed, like Denny mushrooms and Lancewood cheese. This gives Libstar at least some negotiating power in the market, which would otherwise sit firmly in favour of the retailers if Libstar only produced private label products.

A smaller but important division is the Principal Brands division, in which Libstar imports and distributes brands like Tabasco sauce and The Laughing Cow cheese (which I would put on the same pedestal as All Gold's finest jars of red calories).

Speaking of All Gold, that's one of the brands that Libstar services in the Outsourced Manufactured Solutions division. Libstar manufactures products that brand operators on-sell to retailers. Libstar also operates a Food Service Solutions business, in which Libstar manufactures and supplies products for leading quick service restaurant chains.

That all sounds very exciting, but the share price hasn't quite had that Laughing Cow flavour. Shareholders certainly aren't laughing, down nearly 30% over 3 years and not even 1.5% up year-to-date.

In the six months to June 2021, the food businesses grew revenue 10.5% but saw a 80bps drop in gross profit margin to 23%. Normalised EBITDA, which excludes allocations of head office costs, increased 10.1%.

Household and personal care saw revenue fall -9.6%. This division may be far smaller than the food division, but that's still an unpleasant outcome. It gets much uglier further down the income statement, with gross profit margin down drastically from 19.2% to 9.2%. Unsurprisingly, normalised EBITDA came in at a loss of R15m vs a R37m profit in the comparable period.

This ruined the group result, with even normalised headline earnings per share (HEPS) down -0.8%.

The exceptionally poor result in the household and personal care division has been attributed to input cost inflation of raw materials like steel, foam, PVC and tallow (no, I also don't know what that is). What I do know is that this isn't good news for shareholders at all, as I was hoping to read about a once-off production nightmare or some other non-recurring event.

If Libstar can't pass price increases on to consumers, the only thing laughing in this group will be the cow on the cheese wrapper.


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