In a review of Israeli telecommunications companies Deutsche Bank has raised its recommendation for Bezeq (TASE: BZEQ) to "Buy", but has downgraded Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) to "Hold" and maintained rival wireless carrier Partner Communications (Nasdaq: PTNR; TASE: PTNR; LSE:PCCD) at the same level.
Analyst Richard Gussow sees the upside in Bezeq from forthcoming technological upgrades. " While Bezeq has shown impressive margin expansion, mainly due to efficiency measures, we believe the current round of cost cutting has largely played itself out. We see the next phase coming in 2011 from NGN, which would allow the company to sell about 100 properties, generating cost savings and capital gains. At the same time, we expect Pelephone to make gains in ARPU and market share following the launch of its HSPA network earlier this year," he writes.
According to Gussow, another advantage for Bezeq is the promotion of Israel to developed market status. "With Israel upgraded to developed market status, we expect to see some shift of Israel’s investor base from emerging market investors to developed market investors. The upgrade is to take effect in May 2010. We believe the Israeli telecom sector is more comparable to developed market telecoms than their emerging market peers due to the market saturation and more limited growth prospects. While we see the entire sector as potentially attractive to these investors, developed market investors are likely to be seeking larger, more liquid stocks. With its larger market value and growing free float, Bezeq would appear to be the most suitable stock for these investors."
Gussow notes that all three companies have attractive dividend payout policies. "The key investment case for the sector is dividend yield. Bezeq recently implemented a 100% dividend policy, Cellcom has a 75% payout policy but in essence pays out about 95%, and we expect Partner’s new owners to raise its payout to 100%. On top of the ordinary dividend payout, we expect both Bezeq and Partner to pay out large one-time dividends over the next 12 months."
Bezeq's share price has risen about 60% in the past year, and currently stands at NIS 8.27, which compares with a price target of NIS 9 from Deutsche Bank.
Published by Globes [online], Israel business news - www.globes-online.com - on October 19, 2009
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