Investors on the Tel Aviv stock market have been seized by something of an anxiety attack in relation to food company Strauss Group (TASE: STRS) over the past couple of days. The share price hasn't collapsed, but it has taken a sharp downturn in response to the salmonella scare at the company's Elite chocolate factory. Some analysts see this reaction as more than a stomach ache.
Within two days, more than half a billion shekels have been wiped off Strauss's market cap, with the share price dropping about 5%. Anyone who bought Strauss Group shares a year ago now shows zero return on the investment. The main casualty is of course the Strauss family (siblings Ofra, Irit, and Adi Strauss) which holds 57% of the company.
The trigger to the slide in Strauss's share price is of course the salmonella discovered at the factory at Nof Hagalil. It looks, however, as though investors have been responding to other events at Strauss Group as well, with its international food business.
The salmonella episode has caught Strauss Group at a problematic business juncture, and follows other events of the past few months that have cast doubt on the company's future performance.
Troubles at US unity Sabra too
Strauss Group is active in twenty countries, employs some 17,000 people around the world, and has a strong business base in Israel. According to Storenext, Strauss is the second largest food and beverages group in Israel in sales turnover terms, with 12.4% of the local market in 2021.
Subsidiary Strauss Coffee, Strauss Group states in its financials, is among the ten leading coffee companies in the world for market share. In 2021, the group's consolidated sales turnover was NIS 8.7 billion, and since 2016 it has recorded 5.5% average annual sales growth.
Despite the good looking numbers, however, the current crisis at Strauss is one more in a series of events that cloud the picture. According to one market analyst who covers the company, the salmonella incident has the signs of a temporary glitch. The analyst, who prefers not to be named, says that the affair "could have an adverse effect on the company's sales after production returns to normal, but incidents of this kind are passing episodes. Even if we bring to mind a much more serious event, such as the affair of the silicon in Tnuva milk in the 1990s, in the end, who stopped drinking milk? It didn't really happen."
Nevertheless, he says, "This crisis has caught Strauss in a challenging period, not just in its activity in Israel. The Sabra subsidiary (the US hummus and dips producer held in equal shares by Strauss and PepsiCo, H.S.) is in a weak period, and there too contaminants similar to salmonella were found by the US Food and Drug Administration, and not for the first time, at the end of 2021. Strauss halted hummus production at Sabra and entered upon a program of adjustments to the production process, which in any case since the outbreak of the coronavirus pandemic has suffered from supply chain problems."
Strauss recently announced that it expected to end the first quarter of 2022 with a substantial loss at Sabra, estimated at NIS 26-45 million. It subsequently announced that the impact of the event would be more severe than it had estimated, because of the expense of implementing the adjustments program.
6% of sales to Russia and Ukraine
The war between Russia and Ukraine adds another negative influence on Strauss's business. "The company is active in the coffee business in both Russia and Ukraine. That too has come to some kind of a halt because of the fighting," the analyst says. In its annual financial statements for 2021, the company put sales to Russia and Ukraine at NIS 525 million, representing 6% of the group's total sales.
"Of the sales to those two countries, most is to Russia (72%). The operating profit on the company's business in both countries totaled NIS 37 million, representing 3.8% of the group total. The conflict, the volatility of ruble exchange rates and other factors have made it difficult for the company to estimate how events there will develop. But since we are only talking about a small fraction of the company's business, the consequences will be limited."
The analyst says that the salmonella incident, coupled with the crisis in Ukraine and Russia and what happened to the Sabra business in the US, has created a combined picture that appears to be the factor weighing on the stock. "Strauss is in a weak period at present. In the long term, the company is made up of such a wide range of activity that in my view it will be able to regain stability and overcome all the hits. But it looks as though in the end 2022 will be a weak year."
Published by Globes, Israel business news - en.globes.co.il - on April 27, 2022.
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