British investment bank Flemings, one of the most prominent of the investment banks covering the Israeli market, has recently started to cover the Elron group. They first looked at Elbit Medical Imaging, and have now come out with a recommendation on the civilian Elbit company.
Flemings awarded Elbit Medical Imaging a "strong buy" recommendation, on the basis of their estimate that it is trading at a 35.2% discount in relation to the value of its assets.
Steven Levy and Avrom Gilbert of Flemings believe the management of Elron, which holds 40% of the shares in Elbit Medical Imaging, will take steps in the next few months to create value for investors and close the discount in Elbit Imaging.
They assess that Elron’s management is faced with two main possible ways of achieving this aim. The two most likely possibilities are entering new medical fields, or, alternatively, selling off the medical activity entirely.
Levy and Gilbert say Elron is likely to use the $190 million cash it received from the sale of Diasonics (Elbit Ultrasound) to General Electric to enter new areas of medical technology, and, at the same time, to take action to raise the value of its holding in Elscint. They estimate that, in this event, Elbit Imaging’s share will reach a price of $12.6, which compares with a current price of $8.25.
The second possibility they mention is that Elron’s management will decide to sell all the medical activity in which it is currently invested, carried out through Elscint and Elbit Medical Centers. Flemings estimates that Elron would be willing to sell Elscint, but not at current market prices. They say that it is reasonable to suppose that Elron will demand a price of at least $9.5 per share, which is 15% higher than the price at which Elbit Imaging is currently trading.
Such a step, they say, would leave Elbit Imaging as a public company with cash in hand, trading at per share price they estimate at $13.5. Weighing up Elron’s alternatives, Flemings gives a target price range for Elbit Medical Imaging of $11-13.5.
As for Elscint, Gilbert and Levy’s assessment is that the company will recover in 1998, mainly because of the improvement in the performance of the Medical Resonance Imaging division, which has posted heavy losses in the last couple of years.
Gilbert and Levy say Elscint’s net profit will grow from $709,000 in 1997 to some $4.7 million this year. They estimate that Elscint will make a profit of $6.5 million in 1999.
As mentioned, Flemings has published a buy recommendation for the civilian Elbit company. They say the market has not read events in the company correctly, and is still punishing it for things that happened in the past, such as the television factory adventure.
Gilbert and Levy say this approach ignores Elbit’s transition to focusing on telecommunications, as seen in its joining the Partner consortium, which won the tender for the third cellular telephone operator. Elbit has a 16.5% stake in Partner.
They estimate that Elbit is currently trading at a 56.7% discount in relation to its asset value. Their medium term target price for the share is $4.5, which compares with a current price of $2.8.
Published by Israel's Business Arena on June 16, 1998