Does the sharp fall in the share price of Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ), because of the Israel Securities Authority investigation into insider transactions involving controlling shareholder Shaul Elovitch, present a buying opportunity? To judge from updates by Barclays and Citi, and local investment house Leumi Capital Markets, the answer seems to be that it does.
Barclays and Citi both published updates yesterday, following news of ramification of the ISA investigation. Tavy Rosner of Barclays writes, "We remain positive on Bezeq and recommend investors to look beyond the short-term volatility."
Rosner reminds investors that "Bezeq is not under investigation, only the Chairman and a few managers are – and not have been indicted." On the State Comptroller's report into the Ministry of Communications' handling of matters relating to Bezeq, he writes, "The report primarily points to some lack of transparency at the Ministry regarding the appointment of the director-general, and with regard to the discussions with Bezeq. The Comptroller recommends that the process regarding the removal of structural separation at Bezeq should be inclusive of the Ministry of Finance and also involve the point of view of competitors. We note that the report covers former Telecom Ministers, and a new one has been in charge since May 2017," - the reference is to Ayoub Kara.
Rosner sees the report as good news for Bezeq. "In December 2016 the Ministry of Communications had notified Bezeq that is was advancing the cancellation of the corporate separation at Bezeq; however, shortly afterward the State Comptroller asked the ministry to put the process on hold until it published its audit. With this now behind us we believe that progress will resume on the regulatory side. We do not see any reason preventing the lifting of corporate separation to occur in the coming months, especially in the context of Bezeq having fulfilled the requirement to open its infrastructure to wholesale. However, given the timing and scope uncertainty we continue to argue that investors should not account for this in their investment case."
Rosner adds: "Since all the interested-party transactions have been duly approved by the minority shareholders we do not believe that any of these transactions can be amended retroactively. However if any wrongdoing occurred, we believe Bezeq would be entitled to compensation."
Rosner rates Bezeq "Overweight" with a positive outlook, and a price target of NIS 7.50, representing about 31% upside on today's market price.
Citi rates Bezeq "Buy" with a price target of NIS 6.8, representing approximately 19% upside. Analyst Michael Klahr wrote yesterday that although the ISA investigation was liable to be prolonged and might even lead to changes in Bezeq's management, it should not affect Bezeq's revenue. As he has stated in the past, his view is that the investigation could have a positive outcome for minority shareholders in Bezeq if it leads to improvement in corporate governance at the company.
Leumi Capital Markets analyst Gil Datner believes that there is no quick killing to be made on Bezeq. He says that the investment horizon for Bezeq has lengthened because of the current crisis, and that the situation represents an opportunity to improve the price for the long term. "Our recommendation to long-term investors is to exploit the declines to buy the stock," Datner writes, and continues, "Even though the company is having to cope with erosion of profits because of the competitive environment, and with the cloud of the investigation, this is still a company with very strong standing in the telecommunications market, and a mighty generator of cash flow from which investors benefit though its dividend distributions – all this is not going to disappear," he writes confidently.
"As far as structural separation is concerned," he adds, "even if we assume that the process will continue to be delayed for a long period of time, we still believe that in the end it will happen. Structural separation is an anachronistic and ineffective tool, and the case for abolishing it remains valid" Datner refers to the structural separation imposed by the regulator between Bezeq and subsidiary Yes such that it cannot exploit Yes's tax losses.
Published by Globes [online], Israel business news - www.globes-online.com - on July 13, 2017
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