Tadiran Communications (TASE:TDCM) president and CEO Hezi Hermoni is convinced his company’s success is no flash in the pan, solely dependent on global war on terrorism. Since he is so certain of Tadiran Communications’ long-term success, Hermoni is promising that the dividend distributed on the basis of the company’s 2002 results won't be a one-time event.
Tadiran Communications distributed a NIS 12 million dividend in January, and plans to distribute more in the future, based on profits. “We’ll continue distributing $3-4 million in dividends a year, so long as we have no alternative use for the money. An average $4 million dividend for a company valued at $180 million is a good return on capital. Besides, there aren't a lot of bonds that bring in a return like this,” says Hermoni.
Tadiran Communications’ profit, especially in recent quarters, and its consequent cash flow, greatly expanded the company’s cash reserves to $105 million as of September 30, 2002. Demonstrating self-assurance, Hermoni has no plans to hold onto the money in case of future hard times, but intends to acquire a company in the sector for between $500 million and $1 billion. For this purpose, Tadiran Communications hired former IDF Signals and Electronics and Computers Corps Commander Brig.-Gen. (res.) Moshe Markovitz as VP business development. One of Markovitz’s main jobs will be to look at sectors and companies for Tadiran Communications to invest in.
“We have to do something with the company’s cash reserves. They can’t be left as they are. Our shareholders want the company to develop. With a $100 million lever, we can buy a company for up to $1 billion, and we want to do it. Our financial capacity, combined with our intentions, will ultimately be fruitful. The goal is quite clear and focused. Acquisition is a very good means for company growth, and we’re looking for acquisition opportunities in the communications and command sector. However, we’re very cautious and conservative. We won’t approach a company we don’t know. We have no specific target in the field yet,” says Hermoni.
Tadiran Communications’ excellent standing belies its turbulent history. The company was originally a division within Tadiran, a fully-owned subsidiary of Koor Industries (NYSE: KOR; TASE:KOR). Following heavy losses, Tadiran was on the brink of bankruptcy in 1988. As part of its recovery, Tadiran wrote off $80 million from its balance sheet and gradually laid off 3,500 of 4,500 employees. Tadiran Communications is still writing off $12.5 million in goodwill each year. Only $6 million is left to complete the amortization.
In 1996, Tadiran Communications was spun off as an independent company under Koor. In 1999, Koor sold Tadiran Communication to Tadiran Wireless Communications Industries, controlled by Shamrock Holdings (56%) and First Israel Mezzanine Investors (FIMI) (34%) for $155 million. The sale included a management buyout by Tadiran Communications managers, who acquired 10% of the company.
Tadiran Communications held an IPO on the Tel Aviv Stock Exchange in 2000. Tadiran Wireless Communications Industries and Tadiran Communications were merged in March 2002. Tadiran Communications’ shareholders are currently Shamrock (42%), FIMI (22%), managers (8%), and the public (28%). The company’s managers have benefited from the risk they took in 1999, when the future of Tadiran Communications was in doubt.
Tadiran Communications develops military and civilian communications systems. Tactical military communications systems account for 75% of sales, high command and strategic military communications systems account for 15%, and civilian systems 10%. This sales breakdown demonstrations the company’s dependence on the global security situation. In 2002, the company rode the wave of increased defense spending in the wake of September 11, 2001, and other terrorist attacks. Hermoni says terrorism has not yet had a significant impact on contracts and sales by companies in the sector, but he expects a change in the coming quarters.
Tadiran Communications’ sales breakdown by region are as follows: Asia (especially India) and the Pacific, including Australia - 51%; Israel - 19%; South America - 18%; Europe - 8%; and the US - 4%.
Last month, Gmul Sahar Securities Brokerage Services analyst Shachar Brener published a survey on Tadiran Communications, that stated Asia and South American will be Tadiran Communications’ main markets in the near future. Strategic military and civilian communications, which currently account for only a smaller part of the company’s business, are expected to be its growth engines, at the expense of tactical communications systems. Brener wrote that Tadiran Communications suffers from a lack of growth because it is smaller than its competitors, including Thales Group (Paris:TCFP), British Aerospace, Siemens (NYSE:SI; XETRA:SIE) and Ericsson (Nasdaq:ERICY). On the other hand, Tadiran Communications’ smaller size gives it flexibility to adapt to customers’ needs.
Tadiran Communications published excellent financial reports in the first three quarters of 2002. Sales were $160.7 million, 49% higher than in the corresponding period in 2001; operating profit was $15.4 million and net profit was $7.2 million. Since the company is still amortizing goodwill, at $28.6 million, its EBITDA is particularly impressive, enabling Tadiran Communications to expand its cash reserves. The best figure in its third quarter report was its almost $500 million backlog of orders.
Most of Tadiran Communications’ sales growth was due to the recent 10% growth in defense spending in many countries, compared with the earlier 2% growth rate. Gmul Sahar believes this growth will moderate and Tadiran Communications will not post 10% in the long term. They also predict Tadiran Communications’ revenue will total $207 million in 2002, and grow 10% to $228 million in 2003. 2004 growth will revert to the normal 2-3%. The company’s market is $800 million a year.
Hermoni disagrees with Gmul Sahar, and says the company’s growth rates will not fall, nor are they very strongly correlated with the present growth rate of global defense budgets. “The increased spending in military communications systems after September 11 [2001] certainly contributed to the company’s growth, but that was not the only reason. Another key factor was that military data communications increased in importance, and became a priority investment. Communications systems are also becoming more sophisticated, and many armies are upgrading their systems to be able to change frequencies and encrypt signals. The market is changing and we haven’t yet replaced more than 10% of equipment with advanced devices. The potential is huge,” he says.
“Demand is now growing for communications systems capable of communicating between ground and air forces. Our market is therefore naturally growing to include new markets. That is why we established the systems division, which is responsible for 15% of our revenue. I expect that will double in 2-3 years. Technological progress is also occurring in devices’ size and life span, which are in themselves sufficient reason for militaries to chase after added capabilities. Furthermore, there is now demand for sophisticated devices for data as well as voice communications, such as sending video maps. This demand suddenly exploded, and because the market is an institutional one, it took place five years after the civilian high-tech breakthrough. The final key factor is that the life cycle of communications systems has fallen from an average of 30 years to 7-8, which naturally increases sales.”
“Globes”: Who are your military customers?
Hermoni: “We have 50 foreign military customers, including 15 who buy operating systems, which ties them to us. 70-80% of our customers are in South-East Asia and South America. These are major customers with whom we usually have longstanding relations at the general staff level.”
You acquired your US subsidiary Talla-Com Industries from Koor in 1998. Has it become an growth engine?
“Talla-Com was responsible for the company’s surge in growth. It had $19 million in sales in 2000, $33 million in 2001, and $53 million in 2002. Sales will be even higher in 2003. Talla-Com is also participating in very interesting classified projects in the US, including the Joint Strike Fighter program and helicopter communications systems. I estimate US sales will reach $200 million within 3-5 years. Life isn’t easy in the US, but we’re doing quite well.”
What about developments in the civilian sector?
“In this sector, we mainly sell to US government agencies. The systems are mainly intended as back-ups in case of airport disasters and the like. Sales have grown from $6 million to $10 million. In general, the civilian communications market got an especially strong push in the wireless communications field. We are well aware of this and we’re investing in R&D. We spent $15 million last year and we’ll spend $18 million in 2003. We’ll be ready for the next bubble.”
Can you maintain your impressive orders backlog in the long term?
“The orders backlog won’t continue to grow; to the contrary. We’ll take care of orders and the backlog will stabilize at some point. We’re currently focusing on shortening delivery times, so backlog may decline, but sales won’t be affected. In any case, the current backlog of almost $500 million covers 2003 and 2004. A backlog of this size isn't characteristic of a normal company. We’ll become a normal company and the backlog will shrink. We can already deliver equipment within 30-60 days, which our competitors can't do. In the corporate culture that we've created, we don't grant credit on sales, which means we get paid before the deal, not afterwards. Naturally, that helps our liquidity a great deal.”
Hermoni claims Tadiran Communications is actually an old fashioned company operating in an advanced field. “We are really a traditional company like a cement factory; we just work in high tech,” he says, and admits, “My fantasy was to turn Tadiran Communications into a private company, but the public currently owns 28% of our shares. In truth, the more the company prospers and its market cap rises, the dream of turning it into a private company becomes harder to achieve. We have no plans at this time to buy back shares from the public.”
Published by Globes [online] - www.globes.co.il - on January 29, 2003