Last week, my twin sons went on a school camp. It was a three-day trip to Labrador Park, with playgrounds, hiking paths and a sea breeze.
My brats had to sleep in a tent and eat canned food. My wife was not worried about the food and accommodation. It was the heat that kept her up at night.
Singapore is experiencing a savage heat wave. The temperature hit 36 degrees last week in Paya Lebar. In Sentosa, people were trying to fry eggs on the tarmac. It has been so hot that schools are not requiring kids to wear uniforms.
The heat is unlikely to relent. It is linked to El Nino, a climatic condition that causes dry weather. The meteorological board warns that it is about to get hotter.
My boys came back from the camping trip without suffering too much discomfort. They were lucky to be given generous portions of ice cream.
Ice cream may be a winner in this heat wave. Ice cream is cool and refreshing on a blazing day. It can provide a sugary burst of energy.
See also: Bitcoin’s Trump-inspired rally is bad news for Korean small-caps
Heat waves have been kind to ice cream sales in Asia. In India, ice cream demand has surged. The top brands expect a 15% to 20% rise in sales.
Betting on ice cream
Ice cream requires massive quantities of dairy and sugar. Most ice cream brands, like Cornetto, require chocolate toppings.
The problem is that sales are set to rise when input prices have peaked. Sugar has been up 50% since the last El Nino. Cocoa, which is used for chocolate, is up 98% ytd. Cocoa is now at a record price of US$9,766 ($13,199) a tonne. This is nearly five times the price in 2019.
See also: That's what friends are for
The severe drought in West Africa, which produces more than half of the world’s cocoa, has caused a cocoa shortage.
Investors should bet on brands to absorb the higher input costs. Unilever is the big daddy of the world’s ice cream trade. It controls at least one-fifth of the world’s ice cream sales and produces expensive brands such as Magnum, Cornetto and Ben & Jerry’s.
Premium brands like Magnum can pass on the input price increases to the customers. Also, the breadth of Unilever’s ice cream means its cheaper brands can make a difference.
Unilever Indonesia’s ice cream sales volumes rose 15% in 2019 during the previous El Nino. Ice cream volumes have been stagnant since then. The lockdown did not encourage ice cream consumption.
In fact, Unilever is about to spin off its ice cream business. It wants to provide direct exposure to ice cream sales. As part of this exercise, it would cut 7,500 workers.
Investors may scoop ice cream helpings if they invest in Unilever’s subsidiaries. The parent company listed in the Netherlands has ice cream exposure, but is diluted. Ice creams represent 15% of its sales. Overseas subsidiaries, such as Hindustan Lever and Unilever Indonesia, have higher ice cream exposure. They also operate in the epicentre of the heat wave.
According to consensus, Unilever Indonesia is trading at 21 times FY2024 P/E. This may seem like a nosebleed valuation. Actually, it is half the 10-year P/E average of 41 times. The market expects 10% ebitda growth in FY2025. The stock offers a 5% dividend yield, which is an enticing topping as interest rates fall.
Sink your teeth into in-depth insights from our contributors, and dive into financial and economic trends
Unilever is not the only ice cream player in the market. General Mills is one of the most important companies that hardly anyone has heard of. The Minneapolis-based company is obscure, but its brands are famous. It controls the Häagen-Dazs brand outside the US.
Häagen-Dazs ice creams are priced at $5 a cup. Its fans justify this indulgence because of its outstanding natural ingredients. Its shops are expertly placed like the one on Orchard Road near the former Hilton.
Investors may get a better sugar boost if they buy General Mills instead. The stock generates a dividend yield of 3% and an FCF yield of 7%. Its ebitda has been steadily 10% over the last decade. Consistency can be mouth-watering, given the fickleness of the market. Investing in ice cream may be the way out of the savage heat.
Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era
