The share price of Alrov (Israel) Ltd. (TASE: ALRO) climbed 5% today, after the company reported that it was considering an offering in Switzerland on the Zurich Stock Exchange. The plan under consideration includes merging two of its subsidiaries that handle the firm's business in Switzerland into a special company whose shares will be issued to the public.
Alrov holds 142,500 sq.m. (236,000 sq.m. counting space held jointly with partners) in commercial and office space in Switzerland, amounting to 61% of the of the company's income-producing real estate properties for investment. The company's share of the value of properties in Switzerland amounted to NIS 3.2 billion at the end of the 2015 (NIS 4.1 billion including properties held jointly with partners), and produced NIS 139.5 million in net operating income (NOI). The offering in Switzerland will thus be at a higher capital multiple than the one at which it is traded on the Tel Aviv Stock Exchange (TASE), and is therefore likely to increase the value for the investors.
At the same time, Alrov today published its results for the second quarter of 2016, with net profit down to only NIS 4.5 million, compared with NIS 36 million in the corresponding quarter last year. The decline for the first half of the year was more moderate, with net profit slipping NIS 7 million to NIS 50.5 million, but this was because of a high NIS 59.4 million in tax income in the first quarter, due to lower corporate taxes in Israel and in a canton in western Switzerland.
Alrov is active in income-producing real estate and hotels in Israel, Switzerland, the UK, France, and the Netherlands. In total profit, which also includes the changes in the funds items in equity (which have not yet been recognized as expenses), the company reported a NIS 9.1 million loss for the second quarter, and a total profit of only NIS 9.9 million in the first half of the year, compared with a total profit of NIS 44.6 million in the second quarter and NIS 100.6 million in the first half of 2015.
Alrov attributed the steep decline in total profit to a NIS 22 million drop in foreign currency conversion differences resulting for overseas business. This drop was mainly a result of the UK vote in the referendum to leave the European Union, which caused the shekel to strengthen 4.7% against the pound sterling in the second quarter. This trend has continued since the end of the second quarter, with the shekel gaining a further 4.6% against the pound sterling, which is expected to further drag down the company's profit.
Alrov said that its total profit in the first half of 2016 had been affected by a NIS 9 million loss due to changes in the fair value of financial assets available for sale, and by a NIS 15 million drop in the value of net fixed assets. Businessman Alfred Akirov controls Alrov with a 66% stake, worth NIS 1.45 billion. The company's market cap is NIS 2.2 billion, reflecting a 0.67 multiple on equity.
A look at the company's various sectors shows that its hotel sector holdings in Israel, consisting mostly of the David's Citadel and Mamilla Hotels in Jerusalem, reported an 11% drop in revenue to NIS 79.5 million in the first half of 2016 and a 58% plunge to NIS 5.7 million in pre-depreciation profit caused by the prolonged security events and the decline in incoming tourism in Israel. These factors caused the company to reduce its projected operational surplus for the year from its previous estimate of NIS 47 million (the same as in 2015), based on its operational surplus in 2014, to NIS 32 million.
Revenue from overseas hotels remained stable at NIS 117 million, with a pre-depreciation profit of NIS 1 million, while revenue from overseas income-producing real estate for investment, consisting mainly of properties in Switzerland, was down 6% to NIS 178.7 million.
Alrov's securities portfolio totaled NIS 597 million at the end of the second quarter, consisting mostly of a 3% stake in Bank Leumi (TASE: LUMI), worth NIS 576 million as of the end of June. Between that time and last Thursday, the fair value of the Bank Leumi shares in the company's portfolio grew by NIS 28 million, boosting the value of Alrov's securities portfolio to NIS 625 million. The offering in Switzerland at a higher equity multiple than the one at which it is currently traded on the TASE is likely to generate value for the investors.
Published by Globes [online], Israel business news - www.globes-online.com - on August 21, 2016
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