Food stocks were the stock market's hit. Now they are plummeting by tens of percent
The food sector was one of the hottest on the stock market this year with a wave of IPOs and even an industry index. However, in recent months the trend seems to have faded, sector stocks are plunging by tens of percent, and Globes has learned that the IPO planned for Kiso is being delayed again. Is the decline actually an investment opportunity?
At the end of last year, it seemed that investors in Tel Aviv had crowned a new hit — shares of companies operating in the food sector that provide stability, profits, strong cash flow, and growth over time. The food sector, which until then had not attracted much attention, jumped to center stage with a number of successful IPOs and a series of private deals involving institutional entities and investment funds. This trend did not escape the notice of the Tel Aviv Stock Exchange managers, who launched an index last May tracking companies operating in the field.
However, in recent months, investors' appetite for stocks in the sector has decreased, which has led to the 'TA Food' industry index losing over 18% since its launch — one of the indices with the weakest performance in that period. For comparison, at the same time, the local flagship index, 'TA 35', fell by about 7%. This raises the question: has the food sector lost its charm in the eyes of investors?
"We are witnessing a contraction of multiples across the market, which is particularly felt in the food sector as well," explains Moshik Yosefovich, manager of Israel stocks at Migdal Insurance and Finance. "Retailers and food companies reached quite high multiples, which also require a certain growth that companies in the sector could not provide. The companies' shares in the sector were traded at multiples of growth companies, even though the growth in it is relatively low, and in the end, a significant part of it came from price increases and not from real quantitative growth. So in the end, it aligned to multiples that are more reasonable today."
Similar things are said by Yuval Gur Aryeh, retail analyst at IBI. According to her, "Since 2020, we have been in a sequence of events that have affected the food sector. It started with the coronavirus, which increased the demand for food and left many of us at home, and if not at home, then at least in the country. The coronavirus ended, and the war began, which led to a decrease in flights, and at certain stages to prolonged stays at home, which greatly increased the demand for food."
To this, she adds the price increases, which stemmed from the rise in transport costs, the rise in raw material prices, and inflation, which contributed to the companies' performance. "The coronavirus and the war, alongside the price increases for the consumer, increased the top line of the companies and allowed them some flexibility to also make strategic changes that affected profitability indices. Which in turn created the hype that was here in the last three years in terms of returns in the capital market."
"Old economy investment"
Until the beginning of last year, the food sector was traded to some extent on the margins of the local capital market. Apart from the food giant Strauss, a single-digit number of local food manufacturers were traded on the local stock exchange, most of them of medium-small size, which did not arouse much interest from investors. As mentioned, last year all this changed with the joining of three large food manufacturers — Baladi (meat products), Gad Dairies, and Sugat (rice, sugar, salt, and legumes), to which local investors gave a value of over 1 billion shekels each.
About three months ago, Rustic Bakery, a manufacturer of baked goods and distributor of General Mills brands (including the popular Nature Valley cereal bar and Haagen-Dazs ice cream), joined them after issuing its shares at a value of 933 million shekels. However, since then, the stock has plummeted by about 28% to a value of about 690 million shekels.
Rustic is not alone; a look at the performance of the companies' stocks indicates the fading appetite for the sector. The declines in the sector were led by the Baladi stock, which lost about a quarter of its value, while alongside the change in sentiment, it also suffered from the loss of a significant client (Shufersal) and the cancellation of a chicken import license from Brazil. Despite the declines, Baladi, controlled by Erez Dahabani, is still the best IPO among the stocks in the sector, after the stock jumped by 130% since the IPO at the beginning of last year to a value of over 2 billion shekels.
The Gad Dairies stock is also trading in positive territory since the IPO, with a positive return of 38%. This is despite a decline of about 10% in the last three months, which brought its value to about 1.3 billion shekels. On the other hand, Sugat, controlled by the Fortissimo fund, which went public towards the end of last year, recorded a decline of about 14% in the last three months, which brought it to a value of about 1 billion shekels.
"These are excellent companies with excellent management, the problem is that some of them went public in a period when the risk appetite of institutional investors was high and they paid high prices for them," explains Kobi Segev, managing partner at the Accord investment house. "After the declines, I think that Rustic, Gad Dairies, and Sugat are now trading at reasonable prices, and are very suitable for a long-term 'old economy' investment. Baladi, although managed excellently, suffers from external events."
The cooling in the IPO market and in investors' attitude towards food stocks put to the test what was supposed to be the next IPO in the sector — the Kiso restaurant chain. The chain already filed a prospectus last May, with the goal of raising capital at a value of 400 million shekels (pre-money), a move that would have made it the first restaurant chain on the local stock exchange. But in the meantime, the IPO has been delayed, for the time being to next month, according to those close to the process. The market situation even forced the chain to compromise on the requested value, when in the updated prospectus published by Kiso about two weeks ago, its value stood at about 330 million shekels (pre-money).
In this context, Yosefovich from Migdal estimates that at least in the near term, another wave of food companies joining the local stock exchange is not expected. "I think that now the interest around IPOs has generally decreased a bit, and among other things, also in the food sector. I assume that the relevant companies will eventually find a way to reach the market, but I don't see it happening in the short term."
"There is upside in the sector"
Looking ahead, there are those who identify an opportunity in food stocks in light of the recent price declines. "The companies are trading today at multiples lower than the historical average," estimates Gur Aryeh from IBI. "The market is very nervous, and any small mistake or one quarter that is not exactly as expected, then some of the investors get disappointed and exit the stock. But looking only at one quarter is less correct in the case of food companies and chains."
"I think that the current pricing does not reflect the cash flow return, financial strength, and business potential inherent in the companies. They have many more growth engines that are not yet reflected in the current results, and therefore I completely still see upside in companies in the sector," estimates Gur Aryeh.
In contrast to her, Yosefovich from Migdal is slightly more reserved, and estimates that "the food sector is priced within realistic ranges." However, he notes that the stocks in the sector "can occupy the slot of defensive stocks that are at slightly more reasonable multiples, which will protect you or be less affected in a decline. Certainly in the case of a war or another event that will cause us to be more at home and less abroad. So there is some upside."
