In a review of the effects of the situation in the territories on the food sector, Bank Hapoalim states that “the separation of the Israeli and Palestinian Authority economies, which we have tasted this past month, greatly damages the food and drinks sector, but has a relatively minor effect on the two listed companies Osem and Elite, in different ways.”
Bank Hapoalim believes that revenues of most major and small food companies will be affected in the event that the two economies are separated, but not substantially harmed. Small companies with specific niches are liable to be more “fatally” harmed. There exists today a stronger desire than ever before in the Palestinians economy to sever itself from dependence on the Israeli economy, by relying on imports from other Arab countries and Europe.
Bank Hapoalim believes that this situation is another layer in a series of “measures” recently taking place, which harm mostly small food companies and wipe out their profits:
- The slowdown in the population growth rate, due to smaller numbers of new immigrants.
- The recession, from which we emerged only in the past year.
- The stronger bargaining power of the marketing chains vis-a-vis food companies, as a result of their continued market share growth.
- The weakening of the euro and the dollar against the shekel, which on one hand makes exporting less worthwhile, and on the other hand encourages local companies to increase imports that compete with local manufacture.
Regarding Elite, Bank Hapoalim estimates that the company’s upcoming quarterly financial reports will be harmed again by the continued weakening of the euro against the shekel (7.9% in real terms in the quarter, compared with the corresponding quarter last year, in which it strengthened by 1.5% in real terms). Moreover, if the partnership deal for a coffee plant in Brazil is not signed, the company will write down a high and significant one-time expense in the current quarter for the feasibility study conducted over the deal. Bank Hapoalim estimates that sales in Europe will indicate moderate growth, despite the expected depreciation stemming from the weakening of the euro and that sales in Israel will also increase, mainly due to increased private demand posted in the quarter.
The bank is leaving its “Buy” recommendation intact, but due to the drop in multiples in all sectors of the economy, it is lowering the company’s representative multiple and updating the target price of share 5 to NIS 248, compared with the market price of NIS 184.
Regarding Osem, the bank estimates that the weakening of the euro against the shekel is having a slightly negative effect on the company’s performance, due to conflicting influences which offset each other. On one hand, the weaker euro negatively affects manufacture in Israel (competing imports become more attractive) and especially exports. On the other hand, it positively affects imports. Osem manufactures 70-80% of its sales in Israel and the remainder is imported from Europe, the US and the Far East. It should be noted that even the products manufactured in Israel have a relatively high component of imported raw material.
The weakening of the euro will negatively affect exports of the company’s products to Europe (e.g. Tivol products, profits of which have dwindled). On the other hand, products imported by the company will be positively affected (e.g. coffee, breakfast cereals, pasta, pet food and industry raw materials). The bank also notes that the company’s revenues will grow in the coming quarter, compared to the corresponding quarter last year, albeit by a relatively low rate. The company’s gross profit margins will remain at the same level as in the corresponding quarter, in contrast to operating profit, which is likely to improve. The bottom line profit will grow.
Bank Hapoalim is raising the Osem recommendation from “Sell” to “Hold” and, similar to Elite, is lowering the representative multiple, updating the target share price to NIS 26, compared to NIS 22.7.
Published by Israel's Business Arena on 1 November, 2000