The improved performance by Gilat Satellite Networks Ltd. (Nasdaq: GILT; TASE: GILT) is drawing the attention of investment houses. Cowen & Company began covering Gilat ten weeks ago, with an “Outperform” recommendation. Today, Prisma Capital Markets Ltd. initiated coverage with a “Hold” recommendation.
Gilat Satellite develops and manufactures very small aperture terminals (VSAT) for satellite communications, and provides related services. Prisma analyst Gilad Alper says Gilat has three business units: Gilat Network Systems Inc., which sells satellite communications equipment and generates 40% of the company’s sales and half its profits; Spacenet, which provides satellite communications services in the US and generates 41% of the company’s sales, but only negligible profits; and Spacenet Rural Communications, which supplies telephony equipment and services in developing countries, and generates 19% of sales and almost half of its profits.
Alper says Gilat Satellite operates in a tough and competitive market. The company is not the market leader in the US; Prisma estimates that it has a 25% share of the market, in second place after Hughes Network Systems LLC. Prisma believes that the tough competition will prevent Gilat from improving its gross profit margins beyond their current level of 36% of sales. Since the company has announced that it will not make more cutbacks, Prisma believes that the company’s operating costs will not fall. Consequently, its net profit can only be expected to grow by boosting sales, and from the mid-2006 switch from financing costs to revenue from financing.
On the positive side, Alper says that Gilat successfully carried out restructuring and was the clear market leader for telephony satellite communications equipment in emerging markets. He also notes York Capital Management’s conversion of the company’s debt to shares, which cut Gilat’s debt by $46 million. As a result, Gilat will report revenue from financing for the third quarter.
Prisma set a target price of $11 for Gilat, 9.8% above its current market price. The share has risen 74% since January to give the company a current market cap of $230 million. The company posted a net profit of $3.3 million on $119.6 million revenue in the first half of the year.
Published by Globes [online], Israel business news - www.globes.co.il - on October 15, 2006
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