Shares of household brands distributor Libstar slipped below their prelisting price of R12.50 on its first day of trade on Wednesday, signalling market concerns about the company’s expensive shares and a payout bonanza to existing investors ahead of its JSE debut.
The market enthusiasm for Libstar – whose brands include Goldcrest (honey), Cape Herb and Spice, Lancewood (cheese) and Denny (mushrooms and sauces) – was dented as its shares fell by 7.9% during intraday trade, but ended the day 1.6% lower to R12.30.
Libstar’s market debut, which valued the company at R8.1 billion, sees it join much-larger JSE food counters RCL Foods, Tiger Brands, AVI and smaller competitor Rhodes Food Group.
The market has taken umbrage to two factors about Libstar’s listing: the pitching of shares at R12.50 and the prelisting raise of R1.5 billion that would be used to reduce its debt and pay existing shareholders.
Listen to the podcast: Food and household goods producer Libstar lists on the JSE
Libstar successfully raised R1.5 billion in a private placement by placing 243.5-million shares at R12.50 each – a lower range as it pitched shares at between R12.50 per share and R16 per share.
The offer also included the issuing of 120 million new shares and an offer to sell 123 million shares owned by existing shareholders, mainly private equity Abraaj (with a holding of 61.55%) and the Public Investment Corporation (16.8%).
Of the proceeds raised, R700 million was earmarked for reducing long-term debt in the business and the remaining R800 million funded a special dividend to existing shareholders.
“Kicking back money to a private equity investor and repaying debt is not the right way to do a listing. You raise money for capital expansion, growth acquisitions and not paying someone a special dividend or to repay debt,” said Anthony Clark, a Vunani Securities analyst. “The listing was done for non-traditional listing reasons and the market doesn’t like that.”
Supporting Clark’s views is that Libstar didn’t allocate a portion of the capital raised to growth or expansion opportunities. Instead, management has maintained that reducing debt would provide the company with room to pursue acquisitions.
Clark added the fact that Libstar raising fresh capital at a lower range price of R12.50 was the strongest indication that the market was sceptical about its listing. He believes the listing should have been priced between R10.50 per share and R12.50 per share.
“The fact that they misallocated R1.5 billion to dividend payments and debt and without any capital allocation in the business was just wrong. It was a big fundamental mistake by JP Morgan and Standard Bank [the appointed book runners] and Libstar.”
As an analyst who has helped to list 35 companies during his career, Clark said Libstar becomes the fourth major listing in ten years to fall below its offer price, after Rhodes Foods in 2014, Clover Industries in 2010 and Pioneer Foods in 2008.
Investors have been jittery about share valuations after glass packaging giant Consol aborted its listing in April after failing to convince investors that the pricing of its shares during the private placement process was justified.
“In a bull market like in 2006, you could list anything and at probably any price. But the market is now more skittish,” says Simon Brown, founder of JustOneLap.
Brown was nervous about Libstar’s share price relative to its earnings potential, as he penciled in a 26xPE to its shares “which is expensive”. At a 26xPE, Brown said Libstar’s headline earnings per share (Heps) should be growing at least 25%. “There’s no way I could see that happening. Heps growth will likely be in the low teens or low double-digits,” he said.
According to Libstar’s prelisting statement, it generated an operating profit of R594 million for the year to December 2017, on the back of R8.8 billion in revenue. Cash flow from operations came in at R573 million.
In addition to its household brands, Libstar holds the rights to manufacture and distribute local and international brands including Laughing Cow, Tabasco, and Lurpak. It also has agreements to supply private-label brands to grocers Woolworths, Shoprite Checkers, Pick n Pay and Spar.
“I don’t think Libstar is a bad business. It has good brands but the business is not terribly exciting,” says Wayne McCurrie, the senior portfolio manager at Ashburton Investments.