A couple of reasons why Libstar is a good investment case: it is going through a consolidation phase of rationalising business lines and growing businesses organically; the balance sheet is being degeared; cash flows are attractive; it has a strong and diverse customer base and should continue to pay dividends since declaring a maiden dividend after its 2018 full-year earnings. Indications are that these should be paid out on a ratio of between three to four times cover.
Of the seven product categories, four are considered core and these drove the results. The noncore categories, which make up 12% of revenue and 5% of normalised earnings before interest, tax, depreciation and amortisation (ebitda) comprise strategic legacy businesses, not necessarily held for sale.
Overall group turnover growth was 4.6%. The organic core business top-line growth was an encouraging 5.3% completely comprising volume growth, an indicator of market-share gains, while the core normalised ebitda grew by 8.5%.
The demand for private label, which is a substantial portion of Libstar’s business, is ever improving and outstripping growth in named brands. SA is still behind global standards when it comes to private-label penetration levels at more than 21% while the UK, for instance, has penetration levels above 46%. All indicators point to growth in private-label demand which is influenced by down trading, improved private label quality, demographic changes, changes in shopping patterns such as convenience and wellness and the retailers’ ever-increasing need to protect and increase margins in the face of stiff competition.
Private label products are now considered tried and trusted by local shoppers with 49% of SA consumers indicating that they would not shift back to national brands if their financial situation improved.
With sizeable capex projects being largely complete, not much scope for sizeable acquisitions, market-share gains and price mix in check, management is going to focus its efforts on cost controls which will unlock considerable value.
Cartrack
Cartrack is a leading SA telematics company. It is still founder managed and run with an entrepreneurial flair. It has a presence in more than 23 countries on five continents. The majority of revenue and operating profit are, however, dominated by SA, which contributes 75% and 82% to revenues and ebitdas respectively. The rest of Africa has been going through trying times with its contribution to revenue slashed to 7% from 15% between 2015 and 2019.
The slack has been picked up by Asia Pacific and Middle East and the recent US business. What makes this business attractive is its strong annuity revenue stream that stands at 90%. It is also one of the few SA companies that seem to be making inroads in international markets (outside Africa). Having returned more than 35% since the beginning of 2019 makes it stand out relative to its Alsi peers.
Though now cash generative, its expansion comes with a capex burden, increasing debt, and working capital pressure. Investors need to pay attention to its newly adopted accounting policy that came into effect in 2019. Instead of capitalising all initiation costs of the units and depreciating them over three years it now capitalises some of the costs and depreciates the capitalised contract over 60 months, which has an enhancing effect on profits.
Not to take away from the gains achieved thus far by the management team but on a current price:earnings of almost two standard deviations above the market since its listing one needs to be vigilant in assessing the counter and not be taken in by the hype.
• Molelekoa is a portfolio manager at Umthombo Wealth. Her views do not necessarily reflect those of Umthombo Wealth.
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