Food Stocks Plummet After Initial Surge on Tel Aviv Stock Exchange
At the end of last year, food sector stocks on the Tel Aviv Stock Exchange (TASE) were hailed as a new market favorite, driven by stability, strong cash flow, and steady growth. The sector gained prominence following several successful IPOs and private deals involving institutional investors and investment funds, prompting the TASE to launch a dedicated food sector index in May. However, in recent months, investor appetite for food stocks has waned, causing the TA Food Index to drop over 18% since its inception, significantly underperforming the broader TA-35 index, which fell about 7% in the same period.
Experts attribute the decline to a market-wide contraction in valuation multiples, especially in the food sector, where companies had been trading at growth stock multiples despite relatively modest real growth. Much of the previous gains were driven by price increases rather than volume growth. Analyst Yuval Gur Aryeh noted that the COVID-19 pandemic and subsequent geopolitical tensions initially boosted food demand and prices, inflating company revenues and profitability, which fueled the sector's hype over the past three years.
Until early last year, food companies were a minor presence on the TASE, with Strauss as the main large player. This changed with the IPOs of major producers like Baladi (meat products), Gad Dairies, and Sugat (rice, sugar, salt, legumes), each valued over one billion shekels. More recently, Rustic Bakery, a baked goods producer and distributor of General Mills brands, went public at a 933 million shekel valuation but has since fallen about 28% to 690 million shekels. Baladi's stock led the declines, losing a quarter of its value due to sentiment shifts, loss of a major client, and import license issues, though it remains the best-performing IPO in the sector with a 130% gain since early last year.
The cooling market has delayed the planned IPO of Kiso, a restaurant chain aiming to raise capital at a valuation initially set at 400 million shekels but recently revised down to 330 million shekels. Market analysts suggest that no new food companies are expected to list on the TASE in the near term due to reduced investor interest.
Despite the downturn, some see opportunity in the sector. Gur Aryeh believes current valuations underestimate the companies' cash flow returns, financial strength, and growth potential, suggesting upside remains. Conversely, Moshik Yosfovitz from Migdal Insurance views valuations as more realistic but acknowledges food stocks may serve as defensive investments during uncertain times, such as conflicts that increase domestic consumption.
Overall, the food sector on the TASE has shifted from a high-growth darling to a more cautiously valued defensive segment, with future growth dependent on market conditions and company performance.
