Strauss Group Ltd: Navigating Cost Storms to Harvest Growth Gold

May 26, 2025 — Strauss Group Ltd (XTAE:STRS) has delivered a Q1 2025 earnings report that underscores its strategic resilience in the face of inflationary headwinds and one-time setbacks. While short-term EBIT and net profit figures have drawn scrutiny, the underlying narrative is one of disciplined execution, structural growth in core markets, and bold bets on emerging trends. For investors willing to look past the noise, Strauss presents a compelling buy opportunity as it positions itself to capitalize on margin stabilization and high-potential catalysts.

Headline Results: Growth Amid Grit

Strauss's Q1 revenue surged 15.5% YoY to NIS 2.99 billion, with pro forma growth (excluding divested units) hitting a robust 23%. This outperformance masks near-term pain: EBIT dropped 11.2% to NIS 181 million, driven by a one-time NIS 49 million derivatives loss linked to cocoa prices and rising green coffee costs. Net profit collapsed 54.8% to NIS 73 million, though this was largely attributable to the non-recurring loss and tax adjustments.

The key takeaway? Profitability pressures are temporary, not structural. Excluding the cocoa-related hit, EBIT would have risen, according to management. Gross profit held steady at NIS 781 million (26.1% of sales), while the debt-to-EBITDA ratio remained stable at 2.3x, bolstered by an AA+ credit rating from S&P Maalot.

Core Segments: Anchored in Resilience

1. Israel: Rebuilding Margins Through Focus

The Israeli snacks and confectionery segment posted an operating loss, squeezed by soaring raw material costs. But management is fighting back: closing underperforming SKUs, boosting productivity, and rolling out price hikes (already partially offsetting input inflation). The launch of a NIS 300 million plant-based milk facility by year-end 蕹2025—targeting the booming vegan market—will further diversify revenue streams and reduce reliance on traditional categories.

2. Brazil: A Growth Engine on Overdrive

Strauss Coffee International's Q1 revenue skyrocketed 56.4%, with operating profit surging 133.1%. Price increases and volume gains in Brazil's coffee market are driving this outperformance. Management emphasized that stabilized coffee prices could further lift margins, while M&A opportunities in Brazil's fragmented market are flagged as a key growth lever. This segment's momentum is undeniable, and its 85% contribution to group revenue highlights its strategic centrality.

3. Water: Global Ambitions Take Shape

The water division's 6.9% revenue growth was fueled by the UK launch of a new brand via a partnership with Culligan. This marks a bold step into international expansion, leveraging Strauss's infrastructure investments (e.g., new Israeli logistics centers) to support global scaling.

Strategic Initiatives: Betting on the Future

• Plant-Based Expansion: The new NIS 300 million factory in Northern Israel will produce plant-based milk, yogurts, and desserts—a segment projected to grow at 15%+ annually in Israel. This move positions Strauss to dominate a niche currently underserved by local competitors.
• Portfolio Optimization: Closing low-margin SKUs and divesting non-core assets (e.g., the divested units excluded from pro forma figures) ensures capital is redeployed into high-return areas.
• Brazilian M&A Pipeline: With cash flow challenges addressed (the NIS 0.5 billion cash loss was largely Brazil operations-related), Strauss is primed to acquire complementary Brazilian businesses, further entrenching its market leadership.

Why Buy Now?

• Margin Stabilization Ahead: Cocoa prices have peaked, and green coffee costs are expected to ease as global supply chains normalize.
• Catalysts on the Horizon: The plant-based factory's Q4 2025 launch, Brazil's M&A execution, and margin improvements in Israel's core segments create a clear path to EBIT recovery.
• Valuation Sweet Spot: At current levels, Strauss trades at ~10x forward EBITDA—a discount to its growth peers. Pro forma revenue growth of 23% suggests the market has yet to price in the full potential of its strategic bets.

Risks, But Manageable

• Raw Material Volatility: Coffee and cocoa prices could rebound, though hedging and pricing power in Brazil mitigate this.
• Plant-Based Competition: While the Israeli market is undersupplied, global players like Danone and Oatly are encroaching. Strauss's local manufacturing advantage and brand equity should counterbalance this.

Verdict: Buy with Conviction

Strauss Group is executing a masterclass in resilience. Near-term EBIT pain is a necessary cost of navigating inflation and transitioning to higher-margin growth avenues. With Brazil's dominance, Israel's innovation push, and the water division's global reach, the company is building a multi-decade growth story. Investors who act now can secure a position in a stock poised to rebound sharply as costs normalize and catalysts materialize.

The clock is ticking—act before the market catches up.