Dairy producers: Time to butter me up, baby
Food groups Libstar and Sea Harvest are creaming it with their dairy operations, and investors may be missing a trick
Specialist dairy operations are proving to be valuable cash cows for Libstar and Sea Harvest, two of the smaller food-producing businesses on the JSE.
Local investors have never been terribly enamoured of dairy businesses. Short-lived endeavours like Bonnita and Milkworx probably did their bit to sour sentiment.
Investor interest in Clover, which recently delisted, ironically seemed to increase when it shifted its product mix away from its traditional dairy offering. Older readers might also recall Tiger Brands hiving off Dairybelle about a dozen years ago.
In fact, none of the larger JSE-listed food companies has any meaningful dairy exposure — which might suggest the niche is too competitive and cyclical.
When Libstar listed in 2018 there was much more market interest in the group’s thrust into supermarket in-house brands than in the large Lancewood dairy segment.
And when seafood producer Sea Harvest bought Ladismith Cheese for R527m in August 2018, most market observers dismissed this as a costly (and desperate) diversification effort.
Right now, however, Libstar and Sea Harvest appear to have their bums firmly in the butter.
Sea Harvest CEO Felix Ratheb says the market probably did not realise the Ladismith deal had been long in the making.
"We’d been looking at the business for a few years," he says. "There was some scepticism when we announced the deal, but I think we have done better with the business than people thought we would."
Ladismith is best known for its broad range of cheeses, but has now broadened its product range into butter, as well as tea and coffee creamer.
Small Talk Daily analyst Anthony Clark says that according to data from the Bureau for Food & Agricultural Policy (BFAP), dairy is the SA food industry’s fastest-growing category.
In its latest report the BFAP projected that the two fastest-growing dairy categories will be cheese and butter, which are expected to grow consumer volumes by 44% and 34% respectively over the next 10 years.
Clark says Ladismith is unlikely to enter the highly competitive yoghurt and custard markets — but will rather focus on core competences in cheese and butter.
He says Ladismith will use the Sea Harvest network to get more point of presence, nationwide: "Sea Harvest has invested in both the retail and wholesale side and plans to add new products to the cheese categories using the expertise Ladismith already has … with feta and mozzarella possible new categories."
Ratheb says Ladismith’s integration into the group has been seamless, with a good performance in a very tough local environment — showing volume growth across all categories.
In the year to end-December, Ladismith already accounted for a chunky 23% of Sea Harvest’s revenue line.
Turnover was R990m, with gross profit and operating profit R193m and R96m respectively.
Ratheb says Ladismith was purchased on an eight-times earnings multiple — but that the recent performance by the business would put the original purchase price at a multiple of six. "It’s been very earnings-accretive for us. On the value-added side the dairy segment is in a good space."
Libstar has owned Lancewood since 2008, and in 2017 bolstered the business with the acquisition of Sonnendal Dairies.
Lancewood now appears to be the growth engine in Libstar’s "perishables" division — which saw a 2.6% increase in revenue to R4.7bn turned into a 12.3% gain at normalised earnings before interest, tax, depreciation and amortisation (ebitda) level at R510m for the year to end-December.
Libstar’s presentation shows that Lancewood was responsible for over 10% of the ebitda growth from the perishables division.
Libstar CEO Andries van Rensburg says Lancewood’s strong performance was driven by its higher-margin specialised cheeses and the recent foray into yoghurt.
The yoghurt thrust looks promising at this stage. Van Rensburg indicates product launches delivered exceptional growth of more than 200% and Lancewood’s eating-yoghurt market share moved from zero in the third quarter of 2018 to 4%.
Element Investment Managers portfolio manager Andrew Bishop says Libstar’s dairy successes are driven by its entrepreneurial culture. "Lancewood has been marketed more creatively than those of the dairy sector incumbents — especially in pack sizes," he says.
Van Rensburg believes Lancewood will chalk up further successes in the financial year ahead.
He says there will be a positive margin impact on the cheese side with the Bel cheese production facility coming on stream.
Further market-share yoghurt gains are being pencilled in, with Van Rensburg noting new product launches for consumers keen on sugar-free, low-fat and high-protein options.