Leader Capital Markets Ltd. and IBI Investment House Ltd. have initiated coverage of Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL), a day after it dual-listed for trading on the Tel Aviv Stock Exchange (TASE). Leader gives the company an “Outperform” rating with a target price of NIS 122, calling it a “cash cow”, IBI is more cautious, giving the company a “Neutral” rating, but with a higher target price of NIS 123.
Leader Capital Markets notes the support that Cellcom gets from IDB Holding Corp. Ltd. (TASE:IDBH) through Discount Investment Corporation (TASE: DISI), which owns 59% of the company. “We believe that it sees in Cellcom a company that will incorporate under it a telecommunications group that will compete against Bezeq The Israeli Telecommunication Co. Ltd. (TASE: BEZQ).”
The investment house adds that Cellcom enjoys a stable business environment with an almost equal division of market share among the players in the sector, but warns about the regulator. “2006 demonstrated that the cellular companies can overcome most edicts, especially by raising rates.”
Leader believes that numbers portability is both a threat and opportunity. It does not expect that Cellcom’s market share will be threatened, but that the company’s spending on customer retention will go up. Leader also calls 3G a growth opportunity that will boost average revenue per user (ARPU). As for dividends, it says, “We believe that since the disposable cash flow is significantly higher than the net profit, we can expect special dividends over the coming years.”
IBI says, “Israel’s largest cellular company has been able to preserve its position in recent years through steady growth in sales and improvement in its profit margins.” The investment house notes the sharp increase in monthly minutes of use per user and the drop in subsidies on one hand, but warns, “We cannot ignore regulatory intervention, which has been growing in recent years in tandem with the growth of the companies in the sector.”
IBI says that Cellcom’s 34% market share means, “During the first quarter, the company was able to strengthen the Cellcom brand and reduce its churn rate to 3.8%, well below the churn rate for Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR; LSE:PCCD).” This figure is important given the pending introduction of number portability.
IBI believes that Cellcom’s delayed entry into 3G worked in the company’s favor because it benefited from lower prices for handsets.
IBI also notes that Cellcom has a NIS 460 million surplus available for distribution as a dividend, and believes that the company will distribute this money over the coming years, which means that it will distribute 95% of its net profit.
IBI is skeptical about the entry of mobile virtual network operators (MVNO) because the low price per minute for calls and low profit margins are major entry barriers.
Published by Globes [online], Israel business news - www.globes.co.il - on July 2, 2007
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