The upheavals in Israel's communications market in the past few years and the changing rules of competition have greatly affected the ability to forecast developments in it for the coming years. The extent of difficulty is seen in the recommendations by Israeli analysts covering Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ). Israeli analysts give Bezeq "Sell", "Hold" or "Market perform" recommendations - even as the share price has jumped 85% since the beginning of the year.
The Israeli analysts blew it, missing Bezeq's rally and probably costing the investment institutions and funds that are influenced by their recommendations heavily. In contrast, foreign analysts read the map far more accurately, and unreservedly recommended Bezeq. It is difficult to obtain the precise data about transactions in the share and know how many shares have been sold by Israeli institutions and bought by foreign institutions this year, but they probably amount to hundreds of millions of shekels.
Group think
A comparison of the foreign and Israeli recommendations for Bezeq shows that the average target price of the foreign analysts is NIS 6.20 and the Israeli analysts' target price is NIS 4.60. Bezeq's share price closed at NIS 6.69 on Monday.
In addition, most foreign analysts raised their target price for Bezeq during the third quarter. Conversely, the rise in the share price coupled with the Israeli analysts' pessimism has resulted in their target prices being 30-40% below the current share price.
Bezeq is just a representative example of how foreign analysts and investors saw changes and opportunities in Israeli shares that Israeli analysts completely missed. First of all, it should be noted that foreign analysts are not immune from mistakes, and some of them have completely misread the mobile sector this year.
For example, Citi Capital Markets gives Orange franchisee Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) a target price of NIS 100, when the share was traded at NIS 84. After the mobile market was opened to competition, Citi cut its target price to NIS 17. Partner's share closed on Monday of NIS 29.58. Misses and mistakes are part and parcel of the game, but the reasons may have to be sought elsewhere, as analysts are willing to say off the record.
An Israeli analyst made the following harsh comments to "Globes". "There is no range of opinions here. There's no independent thinking. I am sure that if you look at the facts, you'll see that none of my colleagues carried out real research. They go with the crowd. In the mobile sector, too, many analysts cut target prices; they said it was going to be awful, but meanwhile the shares have rallied. Why did this happen? Because they don’t do real research, and no one carried out an in-depth examination. They look at what Golan Telecom Ltd. did and where the industry is headed, and they set a price. They multiplied it for Bezeq because of its mobile business. They saw what happened to the mobile carriers and they were scared that competition in the landline market would be the same, so they slashed their recommendations for Bezeq, even though had they done their work and seen what was happening in the markets that were opened to competition, they could have reached a completely different conclusion.
"The Israeli analysts simply did not do thorough work, and caused their clients immense damage. The wholesale market might harm Bezeq, but it could also a huge opportunity for the company. The world sees this; everything is open, so why not learn from cumulative experience of the world's big banks which understand that Bezeq with a 10% dividend yield is a share that you want in your portfolio."
The analyst repeated what "Globes" has stated many times. The missed predictions by Israeli analysts were due to their inability to assess Bezeq's strength in the business market. By the way, the Ministry of Communications also does not understand this, which is why its regulation is distorted, but Bezeq is a great power in the business market and will have no rivals. When considering competition against Bezeq, mostly the household market is taken into account, where Bezeq beats it main rival, Hot Telecommunication Systems Ltd. (TASE: HOT.B1), but they don’t realize that Bezeq is only getting stronger in the business market.
Not enamored of a share
How do foreign analysts see Bezeq? While they are not immune from mistakes, they are quick to correct them. In contrast to Israeli analysts, they do not fall in love with a share, says one foreign analyst who saw Bezeq correctly and gave it a "Buy" recommendation.
"When you're in Israel, and I see this in my work in the global market, you're fixated on the news every day, and you miss the big picture. In the communications market in particular, you must lift up your head and look at the big picture. If you focus on the performance of YouPhone, you'll miss. Foreign analysts see a market that has undergone upheaval whose peak has passed. Bezeq distributes a lot of dividends, it has strong cash flow, and is still strong. Foreigners see that competition in infrastructures is complicated and takes time, but the analysts in Israel are simply drawn into the black and bitter mire.
"They meet with Israel Electric Corporation (IEC) (TASE: ELEC.B22) and are persuaded. When you see what happened in Europe, you see a different picture, and you see that a veteran teleco takes blows, but ultimately knows how to deal with this. This is where the big mistake happened, in my opinion. It's very easy to become preoccupied with the daily news."
Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2013
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