After losing about a third of its value on the Tel Aviv Stock Exchange over the past six months, wet wipes maker Albaad Massuot Yitzhak (TASE:ALBA) has been facing a growing risk of being demoted from the Tel Aviv 100 Index list at the next revision date. The revision will take place on January 1, 2005, on the basis of the companies' market caps on December 15.
The decline in Albaad's value led Moshav Massuot Yitzhak, which controls the company with a 58.2% stake, to take action to bolster it. Albaad announced today that the management of the moshav (cooperative agricultural village) had decided on a program of share purchases to the tune of several million shekels. The first step was taken yesterday, when the Moshav bought about NIS 1.9 million worth of Albaad shares.
At Massuot Yitzhak, they hope that the expression of confidence in Albaad by the Moshav members will not take long to percolate through to the stock market, and that this will lead to a rise in the stock price and to Albaad remaining on the Tel Aviv 100 list. Inclusion in the list is very important for companies, as many investment institutions restrict themselves to investing only in Tel Aviv 100 stocks.
Albaad, which has been on the Tel Aviv 100 list for the past few years, gained high popularity among portfolio managers thanks to its excellent results over that period. However, the company started to "sing off tune" in its results, reporting slow sales growth (in the third quarter this year, sales were at a standstill in comparison with the corresponding quarter in 2003), along with considerable erosion of its gross, operating, and net profit figures.
The deterioration in its results sent Albaad sliding to third bottom place among the Tel Aviv 100 companies, with a market cap of just NIS 406 million. Only Ma'ariv Holdings (TASE:MARV), with a market cap of NIS 383 million, and Israel Land Development Company (Nasdaq:ILDCY; TASE:ILDC), with a market cap of NIS 316 million, rank below it.
These figures mean that Albaad can be expected to be removed from the Tel Aviv 100 list at the beginning of January, as there are several stocks on the Yeter (small cap index) list that have market caps that exceed Albaad's by 20% (the criterion for replacing it on the Tel Aviv 100 list). Such stocks include First International Mortgage Bank (TASE:FIMG), real estate company Nitsba Holdings (TASE:NTBA), semiconductor design company LanOptics (Nasdaq:LNOP), and Jewish Colonial Trust (JCT).
Albaad Massuot Yitzhak CEO Amnon Brodie denies any connection between the Moshav members' share purchase and the company's fears that it may be demoted from the Tel Aviv 100 list. According to him, there are several companies liable to be removed from the list because of failure to meet the stock exchange's criteria, such as the proportion of shares held by the public. These, he says, will be demoted before Albaad, to be replaced by the larger Yeter stocks, so that Albaad's place on the list is assured.
Brodie says that what led the moshav to buy Albaad shares was conversations with other investors in the company, who expressed anxiety about the future given the deterioration in Albaad's results. According to him, the moshav members wanted to demonstrate their faith in Albaad, and so decided to buy shares as a display of confidence.
The investors' fears that Brodie mentions are well founded, as can be seen in the company's results. For the third quarter, Albaad reported a net profit of just NIS 6 million, about half the profit it reported for the corresponding quarter of 2003. Its sales, as mentioned, remained at a standstill, at NIS 131.5 million, and its gross profit fell by 12.4%, to NIS 30.5 million.
Albaad explains the stagnant sales by the loss of two important customers in Germany, and a fall in orders from three other customers. The company's gross profit margin fell from 26.5% to 23.2% in the quarter. This, the company explains, was because of a fall in prices caused by competition in the industry, and because of dearer raw materials. The ports strike in the summer set the company back some NIS 700 million, mainly because of storage and haulage costs.
The company incurred further expenses in setting up its factory in the US, which was recently completed. Albaad expects the US factory to reach operating breakeven within the coming year.
Albaad inaugurated the AFG Wipes factory in North Carolina recently. The investment totaled $17 million. The factory is meant to employ about 180 people within four years. At present, its main customer is the Wal-Mart retail chain. Albaad estimates the US wet wipes market at $1.7 billion at retail prices.
In March, Albaad signed a strategic agreement with PPW, which owns and markets Wal-Mart's independent White Cloud brand. Albaad invested some $3 million in buying a 15% stake in PPW. The agreement gives exclusive production and supply rights to the WC brand for an indefinite period. Total sales to the Wal-Mart chain of toilet paper, diapers, and baby wet wipes under the White Cloud brand name are estimated at $400-500 million.
Apart from developing its US activity, two months ago, Albaad started manufacturing using its new Spunlace production line at its Israeli site. The production line was upgraded at an investment of $10 million. "Opening new production lines entails depreciation charges and financing expenses that adversely affect the company's profitability," Brodie says, "Therefore, anyone looking at the company needs stamina and patience, because the results will improve in the coming quarters."
Globes: You admit that the situation in the market is not easy, given the competition and the erosion of prices
Brodie:"There's no doubt that there's very tough competition and price erosion is a worry. Nevertheless, we see several factors that will lead to improvement in our results in the coming year, such as our size advantage, and the launch of the Spunlace production line, which will reduce raw materials costs. The entire market is undergoing consolidation, and just this morning, one of our competitors announced that it was going into receivership. In a world like this, size is an important advantage, and Albaad is currently considered the third largest player worldwide, which plays to our adavantage."
Folowing Massuot Yitzhak's share purchase, Albaad rose 2.3% yesterday, and another 4.2% today.
Published by Globes [online] - www.globes.co.il - on December 8, 2004