South African food producers under pressure

South African food producers are under pressure from the country’s high interest rates, high inflation and the electricity crisis.

This is according to Rand Swiss’ Gary Booysen, who told Moneyweb Now that South Africa’s food producers are “sandwiched” between everything in the sector’s supply chain.

This means the producers are under a lot of pressure from increased input costs. 

“When you have load-shedding and diesel costs and your soft commodity prices, which have come back a little bit, are elevated, your inputs are expensive,” he said.

This comes after a trading update last week from Libstar, which informed shareholders that it expects its half-year headline earnings per share to be between 54.9% to 59.8% lower than in H1 2022. 

The producer cited persistently high inflation levels, interest rate hikes and ongoing load-shedding as constraining consumer demand. 

In its most recent results, Tiger Brands also noted the increased costs associated with load-shedding, with the producer’s costs having grown by more than 500% in the six months ended 31 March 2023 compared to the previous period.

Booysen explained that – in a high interest rate, high inflation environment – food producers cannot pass the associated costs onto consumers, “so your margin just gets obliterated”.

However, he said these companies hold intrinsic value because “people have to eat”.

Investment case

When asked about the investment case for these companies, Booysen said it comes down to valuation.

However, this becomes more complicated in the case of Libstar, a company that has been struggling for a while.

“It listed in 2018, and it’s been a horrible ride for shareholders,” Booysen said.

“It’s difficult to see what the catalyst is going to be for a rerating. There are a lot of rumours going around that this could be a potential takeover target.”

While Libstar’s management committed to a value unlock in the company’s most recent trading update, it is still unclear what this could be.

“If you’re going to invest in this, you’ve got to be optimistic about South Africa, and you’ve got to be a deep value investor because I think there is value here,” Booysen said.

However, unless there is a buyout, Booysen said he struggles to identify what the catalyst for Libstar could be.