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The Finance Ghost: Fixer-uppers — companies with work to do

The Finance Ghost: Fixer-uppers — companies with work to do
The Finance Ghost
By The Finance Ghost
23 Mar 2025
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The past week of news on the local market unveiled a number of companies that leave some room for improvement.

Whether due to external pressures, internal strategic missteps or a combination of the two, there’s a need for improvement. Of course, this is where stock picking gets really interesting, as the companies that manage to turn the corner can often deliver lucrative returns. Those that don’t get it right tend to see the share price washing away, leaving investors disappointed and frustrated.

Libstar: does anyone still believe?


We may as well start with a fixer-upper that needs more than just a kitchen renovation. Libstar is more like a house that needs to be rebuilt from the ground up, with a share price that has shed half its value over five years. Remember, a five-year view currently has Covid lows as the base, so that really is quite shocking. The market has all but given up hope here.

The problem at Libstar is that there isn’t any obvious glue that holds the thing together. Libstar is the result of extensive dealmaking that cobbled together a food group in the hope that investors would be happy to pay an inflated multiple based on diversification and synergies. There have been many such examples on the JSE and the sad news is that most of them have ended badly. Investors want to see focus and synergies, not an unrelated set of businesses that make it difficult to reliably forecast performance.

Case in point, the latest period saw a terrible outcome in the perishable products segment, where normalised Ebitda (earnings before interest, tax and depreciation) fell 13.7%. This offset the growth in ambient products, such as dry and wet condiments, baked goods, snacks and spreads, where normalised Ebitda took a 12.2% knock. The issue was suffered in one business unit within perishable products, leading to a R400-million impairment.

Now, a focused strategy is all good and well until the focus is put in the wrong place. Where would Libstar currently be if Finlar Fine Foods (the problem child) was the biggest part of the business? This is the argument made in favour of diversification and why investors might be willing to pay up for a diversified group. Unfortunately, this argument tends to address the downside risks rather than the upside potential, which sounds more like a debt flavour than equity to me.

The market has spent years making its opinion known on the Libstar business model and structure, with a vast drop in the share price since the company listed. With the group including generic commentary in the announcement about efforts to unlock stakeholder value and assess strategic options, perhaps we will see some significant changes.

While the market awaits further details, Libstar has appointed ex-Pioneer Foods CEO Tertius Carstens to the board as a non-executive director. This is interesting, as companies that have flagged potential corporate activity often take steps like appointing an ex-banker to the board. The appointment of Carstens points to a need to improve the underlying businesses, not just reshuffle the chairs. In truth, Libstar probably needs to do both.

RFG Holdings: pass the pineapples, please


RFG Holdings is also in the food sector and happens to be another tale of two segments. Before we dig into the latest performance though, it’s important to give some context here. Unlike Libstar, RFG Holdings is up 60% over five years. The recent issues are seen as temporary rather than structural.

So, what were the issues? The domestic market wasn’t the problem, with an 8.7% increase in volumes and a 5.6% increase in revenue for the five months to February 2025. Shift your gaze to the international numbers and you’ll quickly see the problem, with revenue down 19.1% thanks to volumes dropping by 15.4% and other factors like price and forex moves also hurting the story.

The pain stems from deciduous fruit contracts not being honoured by offshore customers, forcing RFG to find other markets at less lucrative prices. These disruptions also led to delayed shipments, a problem exacerbated by shortages in certain products like pineapples after a drought last year. Clearly, it was a very tough time for their international business.

Operating profit margin targets are going to be missed in the interim period thanks to this situation. The company does expect things to improve in the second half of the year though, including a normalisation of inventory levels as they make up for missed shipments.

Old Mutual: Betting on a bank


Sometimes, share prices do the best job of telling a story. Over five years, Sanlam is up more than 60%. Over the same period, Old Mutual has managed just 10%. The businesses may not be exactly the same, but the reality is that they are both financial services giants and they have both made capital allocation decisions that have led to where they find themselves today.

Where Sanlam chases growth opportunities that appear to have legs, Old Mutual seems to drag its feet and take much slower options. For example, with Old Mutual’s results from operations up 10% in the year ended December 2024 before taking into account investment in growth initiatives, you would hope that they are pushing into great opportunities to take that performance a lot higher. After all, once you deduct the cost of those initiatives, operating profit was up just 4%, so profits are being heavily reinvested in the group.

Alas, the money is being poured into projects like Old Mutual’s bank, which they expect to only break even in 2028. Does South Africa really need another bank? Is there any chance whatsoever of Old Mutual capturing even a fraction of the success seen by Capitec? It seems unlikely, especially as Old Mutual doesn’t exactly have a reputation as a hotbed of innovation.

In case you’re reading this and thinking that 10% growth before investment in new initiatives doesn’t sound bad at all, just keep in mind that Sanlam’s net result from financial services over the same period was up 14% excluding the reinsurance capture fee and 25% including it. HEPS at Sanlam was up 37% vs 22% growth at Old Mutual. Last year was great in general for the sector, which means even the laggards were flattered by the trading conditions.

The reality is that Old Mutual underperformed once again and it’s hard to see how an expensive bank project is going to fix it. DM

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