IBI works mainly with major clients, specialising in the management of solid investments, as can clearly be seen from its list of recommended shares. The IBI investment portfolio consists exclusively of Tel-Aviv Stock Exchange shares of the first water, most of them listed on the Maof index. IBI, too, start constructing their portfolio from the recommended sectors, choosing the best shares from each sector. IBI's most recommended sectors are banking and communications.
The Banking Sector
1998-1999 - A story of big dividends and slow profitability growth. Weight in share portfolio - very high.
Bank Hapoalim
This is Israel's biggest bank, combining commercial banking and significant non-financial holdings, such as Koor, Clal, Poalim Investments and others. Based on its long-term cash flow forecast and the value of its non-financial holdings, the bank is being traded at a 40% discount. In light of expected profitability for the next two years, Bank Hapoalim is trading at a future p/e ratio of 9. In view of its size and efficiency, and since its transition to private ownership, the bank is excellently positioned for the start of the next millennium, years which will be characterised by high computerisation expenses and world-wide trade blocs, while economy of scale plays a critical role. These factors point to the advent of foreign banks as partners to Israeli banks.
Private bank management ensures greater flexibility in future in terms of decision-making and also high dividends.
Share quotation when recommended - 827
Market value to equity: 1.09
1997 Yield: 70.6%
Bank Leumi
This is Israel's second biggest bank, combining commercial banking with non-financial holdings such as Leumi Insurance, Africa Israel etc.
Based on its long-term cash flow forecast and the value of its non-financial holdings, the bank is being traded at a discount of 38%, and, in view of expected profitability in the next two years, is being traded at a future p/e ratio of 9.3. Both banks have a focused management, and Bank Leumi has a significant relative advantage over Bank Hapoalim in terms of the quality of its public credit portfolio. Its principal drawback is low operating efficiency.
Bank Leumi is a candidate for privatisation in 1998, and the transition to private ownership is expected to accelerate social processes such as streamlining and innovation, which will consist mainly of increasing secondary and reducing primary capital. These processes should give rise to an increase in future dividends.
Share quotation when recommended - 583
Market value to equity: 0.96
1997 Yield: 41.3%
Communications
Weight in share portfolio - very high
Bezeq - Israel Telecommunications Corporation
Israel's biggest telecommunications company, Bezeq engages primarily in inland, international and cellular telephony. The company is presently in transition from monopoly status to the status of a company operating in a competitive market. Company management no longer seems to be engaged in efforts to postpone the denouement, but rather, is aware that it is entering into a competitive era.
The company's revenues in the next two years are not expected to show any significant increase, but the over inflated expense structure is expected to be pared down. Some significant savings should find expression starting in 1998. As to future competition, there exists a medium term risk, especially in the cellular sector, but after the interim period, the company will be able to offer nation-wide service using the preferred CDMA technology. As regards international calls, competition over subscribers is in full swing, but the competitors are in a dismal position, unable to earn profits at the present level of tariffs.
In 1998, the international calls market is expected to grow another 50%, improving the position of Bezeq International at the expense of its competitors.
In the uneconomic inland calls sector, not much is to be expected by way of competition, except in the margins.
The company's per share price is NIS 12, representing a 41% discount off its market price. Even taking expected profitability into account, the company is trading at a future p/e ratio for 1998 of 14.5. The company's full privatisation is expected to make a significant business contribution to it, and especially to contribute to its per share price.
Share quotation when recommended - 858
Market value to equity: 1.11
1997 Yield: 27.0%
Tadiran
The company is active in telecommunications, communications, electronic systems, consumer goods and batteries, and software.
In the past, the leading growth sector was telecommunications, which still possess great growth potential. Telecommunications, managed by the subsidiary Tadiran Telecommunications (80%), recently ran into difficulties due to the fact that a material customer in south Korea suspended purchases. We estimate that, despite the slowdown, business with that customer will not come to a complete halt in 1998. Accordingly, despite the difficulties in east Asia, Tadiran Telecommunications will continue to post an increase in sales and profit.
In our estimation, per share profit in 1997 will be $3, reaching $3.2 in 1998, and $4.7 in 1999. We assess that the company is trading at a future p/e ratio of 10.
Share quotation when recommended - 12490
Market value to equity: 1.84
1997 Yield: 39.4%
Holding Companies
Weight in share portfolio: medium
Discount Investments
This is a holding company that focuses on three fields: Telecommunications, non-bank financing and infrastructure. Discount Investments is one of the capital market's most focused holding companies. The focus finds expression in the choice of future activities and the sale of holdings in companies not meeting criteria. The company recently sold its holding in Clal Israel and most of its direct holdings in IDB Holdings.
The company's outstanding advantage lies in the fact that it focuses on the telecommunications sector (Cellcom, Tevel and others), making investments in high-tech companies in their early stages (mainly with partners), assuring an interesting future for Discount Investments. Unlike other holding companies, Discount Investments invests in non-public companies, and this is, in practise, what its added value consists of.
Based on its holdings model, the company is trading at a discount of 25%.
Share quotation when recommended - 8740
Market value to equity: 1.03
1997 Yield: 44.3%
Pharmacology
Weight in share portfolio: high
Teva
In the next few years, the generic drugs field is expected to post material growth, due to the relatively large number of drugs whose patent period expires. The company is expected to prosper in this field, both in the United States and, by virtue of the subsidiaries it has acquired there, in Europe.
Share quotation when recommended - 16850
Market value to equity: 4.79
1997 Yield: 3.7%
Printing
Weight in share portfolio: medium
Scitex
This company is a world leader in equipment for the printing and pre-printing market. In recent years, the company, like other manufacturers in the field, has run into difficulties. Reshuffles in the senior echelons, comprehensive streamlining, co-operation and research and development efforts, all these have enabled the company to revert to profitability and to present a promising growth plan.
The new product lines are attractive in terms of their innovative technology and their ability to contribute to streamlining and to the improvement of the output of printing firms. Per share profit anticipated for the fourth quarter of 1997 is $0.08-0.09. The company is expected, in that quarter, to write off a number of failed investments, in a volume of $7 million. In the event that such write off takes place, per share profit will be lower than expected. In our estimation, per share profit in 1998 will be $0.66, increasing in 1999, mainly by virtue of the sale of state-of-the-art printing machines, to some $1.24 per share.
Share quotation when recommended - $10.06
Market value to equity: 0.87
1997 Yield: 7.2%
Note:
IBI holds, for its customers and for itself, shares of all or part of these companies, operates therein on a daily basis and may from time to time act, recommendation notwithstanding, to sell all or part of such shares. The making of the recommendation should not be taken as a substitute for consultation taking into account the particular circumstances and requirements of each individual.
IBI may serve as joint principal consortium manager of the issuance of Bank Hapoalim, and as advisor to the issuance of Bezeq, both due to take place shortly.
Published by Israel's Business Arena February 12, 1998