Barclays: Interest picking up in Israel's upside potential

Tavy Rosner credit: Barclays
Tavy Rosner credit: Barclays

Barclays head of Israel equities research Tavy Rosner says global investors will re-enter the Israel market when there is a clear sense of when the war will end.

For over a year now, foreign investors have been making headlines in Israel. Amid judicial reforms, public protests, and the war that broke out on October 7, the upheavals affecting Israel have unsettled foreign investments in the country. But if you ask Barclays Investment Bank, foreign investors are simply sitting on the fence, waiting for the right timing to return and invest in stocks on the Tel Aviv Stock Exchange (TASE).

"We are seeing more and more foreign investors"

Barclays head of Israel equities research Tavy Rosner notes that foreign investors are interested in Israeli stocks and appreciate their quality. Still, due to the 'noise' created by last year's judicial reforms followed by the war, they prefer to wait. Rosner covers stocks of major banks, telecoms, and companies in the energy, real estate, and food sectors. (He also covers several Israeli stocks traded on Wall Street). Interviewed by "Globes", he discusses the sentiments he hears from investors overseas and the opportunities in the Israeli market.

In your estimation, is today a good time to invest in Israeli stocks?

Rosner: "Yes, absolutely. Overall we see upside potential across all the companies in our coverage universe. When we look at stocks we focus on fundamentals, and we notice that despite the judicial reform from last year and the ongoing war, the impact on companies' fundamentals has either been negligible or not present at all. We haven't seen any single company that has been impacted in a meaningful way."

"At the same time, we've seen valuation decrease across every sector we cover. This has been most significant across banks, but we've seen an impact also in telecoms and energy companies. With the quality of the companies remaining solid, we see this situation as a great entry point. This message is received well by foreign investors."

What are you hearing from them?

"I differentiate between two types of investors: equity investors and debt investors. I speak to both, though my specialty is obviously equity. In general, our clients are global stock pickers, so they can invest in any country in the world. With Israel not being in any major equity index, there's no foreign investor that needs to be invested in Israel. They come when they see an opportunity and as a rule investors don't like 'noise'. The judicial reform has been massively detrimental in terms of noise: nobody likes to have Bloomberg Alerts pop up every two seconds when a politician publishes a tweet or says something. One bit of feedback that I like to quote is from one of the portfolio managers, who told me that a certain Israeli stock accounts for 1% of his portfolio but 10% of his attention because there is so much noise."

"We feel that the judicial reform has been detrimental in that investors didn't want to look at Israel. When the war started, interestingly enough, people started revisiting the country because they assumed that the war wouldn't last forever, and meanwhile, valuations have even further derated. Since the beginning of the war, we're starting to see the entry of a lot of foreign investors. I think the common denominator is that while equity investors say that they're not going to invest in a war zone - as much as they like Israel, there is too much noise - they want to be on top of the news flow. They want to understand the impact on the companies and on the economy, and when the right time to invest again might be. Compared to last year we're starting to see interest pick up. We did a non-deal road show with Bezeq that saw a record level of demand; same thing with banks. I don't think this will turn into firm investments, I think people want to do their due diligence. But in general, the feedback is that they realized Israel has great quality companies - not impacted by the war, or marginally impacted - and lots of upside potential. But we won't see new investments at least until there is a clear sense of when the war will end. Right now there's still fear that there could be further conflict with Lebanon, and that's something that no one wants to be exposed to, at least on the foreign side."

However, regarding foreign bond investors, those who primarily purchase government and corporate bonds, Rosner explains that "we haven't encountered anyone who has sold their position." According to him, "Debt investors want to make sure that their coupons are paid and dividends are secured and that the company is not going out of business. They are asking more questions but it doesn't affect the investments.

Which sector interests investors the most?

When Tavy Rosner looks at the Tel Aviv Stock Exchange (TASE), he describes seeing "a lot of upside potential everywhere." We asked him where the opportunities are in his opinion: "We like the telecoms in general and Bezeq in particular. What we like about Bezeq is what we call a self-help story in the sense that they don't need to displace subscribers and clients from other companies. All they need to do is to upsell them. We don’t get a sense that telecoms companies are going after market share at all costs. There's less disruption, and prices are going up. Also, Bezeq is moving their Yes customers to IP-based services and therefore their costs are going down. They invested a great deal in fiber and reported last week that from 2025 onwards we're going to see a major decrease in CAPEX and an increase in EBITDA. When you look at valuation, it's trading at 5 times EBITDA where the European average is around 7. This isn’t something you see anywhere else for this kind of valuation. On top of that, they have been almost immune to the war, in the sense that no one is canceling their TV service or internet service."

What about the banks in Israel, are they also undervalued?

"They're trading at a cheaper multiple than European banks despite a higher return. Historically, there has always been this gap that they closed right before the judicial reform. The reform did a lot of damage in terms of the attractiveness. Again, I'm not talking about politics and I'm not talking about impact on the companies, but about the perception of Israel being a safe place to invest."

Another factor that may have weighed on the pricing of bank stocks was the proposal to raise the VAT rate from 17% to 26%, in an attempt to increase government revenue and fund the growing deficit. However, at the last minute, the proposal was replaced with a one-time payment totaling NIS 2.5 billion for the years 2024-2025. Rosner notes that "It would be around 6% of pre-tax profit, and 6% is not moving the needle."

According to him, banks in Israel are the sector that foreign investors find most interesting. The reason for this is that they are perceived as high-quality and safe, partly because the Bank of Israel has stringent regulatory standards. "There's lots of interest and they're extremely cheap. But again, investors are waiting for the right time," he adds. As market interest rates decrease, the banks' income from interest naturally declines, but he estimates that the Israeli banks' model is "very healthy": they are growing at a faster pace than the GDP and are focused on cost reduction such as relocating bank branches outside of Tel Aviv, thus maintaining a good level of profitability. Among the banks, he sees the highest upside today in Bank Leumi.

The mega deal was canceled, is the stock attractive?

Among the companies Rosner examines is NewMed Energy, which owns a stake in the Leviathan gas partnership led by Delek Group controlled by Yitzhak Tshuva. Last week, a major deal involving the partnership, UK company BP, and the Abu Dhabi oil company (ADNOC) was canceled.

The two companies were supposed to acquire half of the partnership's rights for NIS 7 billion. From Barclays' perspective, the cancellation of the deal does not affect the attractiveness of NewMed's stock, as they did not take the transaction into account in their model. "We always valued NewMed on a stand-alone basis. Israeli gas makes a lot of sense in the context of both Israeli needs and the needs of our neighbors, and with the Russia-Ukraine war, more and more countries - especially in Europe - have been wanting to diversify away from Russia. Israel has a significant amount of gas, and it's a great position to be in. That being said, the geopolitical impact is high: today, Egypt is Israel's friend and its largest gas client, but there's always a risk that one day they will go back on their contracts without any warning. I think a potential for war in the North is factored into the valuation as well. When the war started, the Tamar reservoir was shut down for a few weeks. Leviathan was not impacted, but there's always a risk that if things heat up with Hezbollah, the government might halt the drilling. That's something that's factored in right now, but it's still a sector that we like."

Published by Globes, Israel business news - - on March 21, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Tavy Rosner credit: Barclays
Tavy Rosner credit: Barclays
Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018