Excellence Investments engages in investment portfolio management, fund management, underwriting, investment banking and financial instruments. Most of the company's seventeen employees have advanced degrees in the exact sciences, economics and business administration.
Excellence is a public company, whose shares are registered for trading on the Tel-Aviv Stock Exchange. It is owned by company managers Ronny Biram and Dr. Gil Deutsch (53.3% jointly), Mizrahi Bank (26.6%), while the balance is held by the public. The company's market value stands at NIS 6.5 million, and its shareholders' equity at NIS 37.5 million.
Possibly more than any other company in the market, Excellence is identified as specialising in investment in the Maof options market, where it acts to extract profits for its nostro account, and also, of course, for its customers.
Conservative investment: Time to switch to linked instruments
Inflation fell in the past year from a level of 7%-8% to a level of 3%-4%. As a result, the real interest rate rose to 7%. The shekel instrument was characterised by a sharp decline in yields, presently standing at an annualised 10%.
Quotations in linked instruments, on the other hand, fell sharply, resulting in attractively high yields for investment. Our working premise is for an inflation rate of 3%-5% in the coming year, with Bank of Israel continuing to lower the interest rate.
One to two-year index-linked bonds are trading at a gross yield of 6%, and will produce, based on our assumed inflation rate, a nominal annual yield of 9%-11%. Of course, if annual inflation proves higher than expected (due to the shekel being devalued against the dollar), the yield will be higher than 10%, whereupon the short-term linked instrument will be preferable to the unlinked.
Long term (11-15 year) index-linked bonds presently embody a 5% gross annual yield level. This is one of the highest obtainable in recent years, and it derives from the high real interest rate and the market shortage of linked sources. We assess that the interest rate will continue to be reduced, followed by a drop in the real interest rate, which will cause yields to fall, producing capital gains. Investors in long-term linked instruments will secure "leverage" and large capital gains.
To sum up, we recommend structuring the conservative portfolio as follows:
- 35% shekel debentures.
- 40% short term (1-3 year) index-linked debentures.
- 25% long term (11-15 years) index-linked debentures.
Stock market: Maof to reach 380 points by year-end
The weighted p/e ratio of Maof shares, based on the 1998 profit forecast, stands at 17. This in itself is liable to worry anyone who expects the stock market to continue to advance, especially in view of the high real yields in linked instruments.
Excellence, however, expect the stock market to go on behaving positively, with a "target price" of 380 points for the Maof index by year end (10% above the current level).
Our optimism is based on the following:
- Companies will continue to streamline, and profitability will go on improving.
- Foreign investors have their own share pricing methods, and what looks costly to us can look inexpensive to them, mainly in comparison with prices on their own domestic stock exchanges.
- We strongly expect the real interest rate to be reduced as Bank of Israel goes on lowering the monetary rate.
- Emergence from the recession is forecast for 1999. The stock exchange, of course, responds earlier…
Agis Industries
The Agis share has taken a severe battering. The government announced its intention of permitting the matching import of pharmaceutics into Israel, the health funds militated for lower prices, Teva posted poor business results on the home market. Yet Agis posted high profitability in 1997 and in the first quarter of 1998.
Agis, we believe, is not resting on its laurels, but is working to better its position on both the domestic market (by including additional drugs in the health funds drugs basket), and on the international market (through the improved sales of subsidiaries Chemagis and Clay Park Laboratories).
The bottom line is that Agis is trading at an expected p/e ratio of 12 for 1998 - certainly a low price.
Solel Boneh
The company operates in three principal sectors: construction (60%), road-laying and infrastructure (20%), the manufacture of construction and road-laying products (15%). The construction sector yields the company the highest rate of operating profit (8%), while the road-laying and infrastructure sector is suffering ongoing erosion of profitability (2% operating profit).
In Q1 1998, Solel Boneh posted a decrease in profit compared to the corresponding quarter last year, but an increase compared to the preceding quarter. We recommend investing in Solel Boneh's shares, since the government plans to channel some resources to infrastructure (mainly roads) in the near future.
The company expects the slowdown to persist in 1998, both in general and in the construction and infrastructure sector in particular. Business results can therefore be expected to post a downturn. But the company has number of major projects in the pipeline: Ben-Gurion 2000 (airport), the Carmel tunnels, the Cross-Israel highway. If these come to fruition in 1998, they will translate into operational stability.
Solel Boneh customarily distributes a dividend (3.25% yield). Its standing as a leading Israeli company for infrastructure and construction works secures it an edge over the competition, especially in complex projects. Lehman Brothers recently gave it an "out-perform" rating, with a target price of NIS 55-60.
Baran Group
Despite the decrease in investments in the domestic economy, Baran is not only maintaining, but actually increasing, its activity volume and profits. This is due to its securing, at the expense of the competition, more and more local projects, while the subsidiary, Tefen, is posting a considerable upturn on activity.
The most positive influence in 1998 will come from the "Partner" project (commencing Q2 '98), and also from the Intel project (if it gets off the ground), and a possible decrease in the losses of the technology and industry division, which chipped NIS 4.5 million off Baran's 1997 profits.
Past experience indicates that the most positive influence on the behaviour of the share is being awarded new projects, which is expected to happen this year. A favourable mention must be made of the salaries paid to Baran's managers and controlling shareholders (starting with chairman Meir Dor). They are significantly lower than average, a fact which explains the generous dividend distribution policy, from which all shareholders benefit.
Arit Industries
As already reported, we hold large parcels of Arit shares for our customers, on expectation of material developments in Telegate (24% invested by Arit and 31% by ECI Telecom). Telegate has developed a technology permitting telephony services to be transmitted on cable TV infrastructure, and this field is expected to show tremendous growth over the next few years.
By "material developments", we mean winning more large contracts or even taking Telegate to market at a high value, which will expose the true value of the Arit share.
Minrav
Minrav is active in the initiation and execution of projects, contract construction, industry and trade and ecology. In speculative construction, the company has a backlog with an anticipated revenue volume of over a billion shekels. Minrav posts steady profitability from one quarter to the next, and notes, in its financial statements, that it intends to use liquidity reserves so as to seize business opportunities deriving from the state of the economy.
Technoplast
The activity of Technoplast is two-fold: industrial activity by a sub-contractor in the fields of plastic products and maintenance in a number of start ups, such as Friendly Machines, Tiltan and Afik.
In principle, the company has decided to sell its 15.2% holding in Zag, at a capital gain of NIS 44 million. Zag, it should be noted, is the company's principal customer, but the manufacturing agreement between them provides for continued co-operation until 2001. A business breakthrough could come in the form of more corporate acquisitions such as Zag (in an attempt to recapitulate the success), and from the success or one or more of the start up companies.
Nothing herein contained constitutes a buy or sell recommendation on securities. Anyone either buying or selling accordingly does so entirely at his/her own discretion.
| Excellence Investments: List of Recommended Shares |
| |
Company |
Current quotation |
Market value |
1998 p/e ratio |
1998 profit forecast |
| |
|
|
|
|
|
| 1 |
Agis Industries |
2560 |
747 |
12 |
65 |
| 2 |
American-Israeli Paper Mills |
14300 |
546 |
12 |
45 |
| 3 |
Applicom Software |
3000 |
128 |
13 |
10 |
| 4 |
Arit Industries |
166 |
44 |
NR |
|
| 5 |
Baran Group |
2890 |
203 |
13 |
16 |
| 6 |
Bezeq |
1182 |
8,802 |
13 |
700 |
| 7 |
Clal Electronics |
55900 |
2,060 |
NR |
100 |
| 8 |
Cvalim |
1380 |
246 |
NR |
|
| 9 |
Danel (Adir Yehoshua) |
2250 |
102 |
7 |
15 |
| 10 |
Delta Galil 1 |
3480 |
522 |
10 |
50 |
| 11 |
Elbit Systems |
5050 |
1,242 |
13 |
94 |
| 12 |
Feuchtwanger 5 |
57300 |
340 |
9 |
40 |
| 13 |
Gan Shmuel Food Industries |
1782 |
144 |
6 |
25.5 |
| 14 |
Leumi |
736 |
10,408 |
12 |
850 |
| 15 |
MA Industries |
1348 |
4,044 |
15 |
265 |
| 16 |
Minrav Holdings |
15150 |
142 |
6 |
24 |
| 17 |
Mishkan Hapoalim Mortgage Bank |
65900 |
898 |
8 |
115 |
| 18 |
Solel Boneh |
4470 |
447 |
7 |
65 |
| 19 |
Technoplast |
500 |
127 |
13 |
10 |
| 20 |
United Mizrahi Bank |
870 |
1,900 |
10 |
200 |
Figures are in millions of shekels.
The Cvalim share recommendation is subject to the company’s activity being sold.
Trading in Mizrahi Bank has not yet commenced.
Published by Israel's Business Arena June 4, 1998
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