Years ago, Israel’s plastics industry became synonymous with kibbutz industry. Several representatives of the Kibbutz Industries Association’s great plastics industry are now traded on the Tel Aviv Stock Exchange (TASE). The most prominent are Plasson Industries Ltd. (TASE: PLSN), controlled by Kibbutz Ma’agan Michael, and Palram Industries Ltd. (TASE:PLRM), controlled by Kibbutz Ramat Yohanan.
The long list also include Plastro Irrigation Systems Ltd. (TASE:PLSTR) at Kibbutz Gvat; Polyram Ltd. (TASE:POLRM) at Moshav Ram-On; Polysack Plastic Industries Ltd. (TASE:PLSK) of Kibbutz Nir Yitzhak and Kibbuts Sufa; and the two latest entries: Golan Plastics Products Ltd. (TASE:GLPL), controlled by Kibbutz Sha’ar Golan; and Plastopil Hazorea Company Ltd. (TASE:PPIL) of Kibbutz Hazorea.
Golan Plastics manufactures and distributes advanced liquids and gas pipes systems. It raised NIS 56.6 million in shares, bonds and options in its IPO early this year. It is now traded slightly above its flotation price reflecting a market cap of $31.5 million.
Kibbutz Sha’ar Golan owns 80% of Golan Plastics, the kibbutz’s main source of revenue. 60 of Golan Plastics’ 190 employees are members of the kibbutz, which has 300 members altogether. Golan Plastics posted a profit of NIS 16.2 million on NIS 159 million in revenue in 2004.
Plastics replace agriculture
Golan Plastics is an old-new company. Founded in 1969, it was only incorporated last years in preparation for its IPO. “The kibbutz decided in the 1960s that it was impossible to earn a living solely from agriculture, and turned to industry. The plastics industry was emerging Israel at the time, with most of the know-how purchased from Germany and Italy", says Golan Plastics CEO Moshe Dayan.
Golan Plastics’ core business is developing and distributing plastic pipes made of cross-linked polyethylene (PEX), marketed under the Pexgol brand. The polyethylene is cross linked in a chemical process in which long chain of carbon atoms with two hydrogen atoms attached to each carbon so that polyethylene molecules form carbon-carbon links with each other, creating a 3D network. This chemical process gives the PEX pipes two critical features: they can withstand temperatures up to 95 degrees Celsius and pressures up to ten atmospheres. Other important features include resistance to chemical corrosion, high flexibility, and a long life span.
Golan Plastics sells two types of PEX pipes. Pexgol pipes come in a range of diameters from ten to 500 mm. Pexgol pipes have been on the market for 30 years. They are used for heating systems and sanitary installation, and in industry for the transfer of corrosive liquids and slurries. Pexgol sales totaled NIS 121.3 million in 2004, 76% of the company’s sales. The company says 75% of PEX pipes’ sales are for underfloor and radiator heating systems.
Golan Plastics’ other main product is Multygol PEX pipes, which generated NIS 21.9 million in sales in 2004, 14% of revenue. Designed for heating and plumbing systems, Multygol comprises two PEX layers with an aluminum layer in the middle. The aluminum layer is bonded to the PEX layers with a special adhesive material, and the aluminum layer is butt-welded using an advanced laser technology. Dayan says Multygol pipes lightweight and strong, combining the advantages of plastic and metal pipe, but in terms of functionality, have no significant added value over Pexgol pipes. “Some customers prefer Multygol pipes. It’s a matter of preference, just like some people prefer buying a Mercedes Benz, while others prefer a different car.”
PEX pipe market growth
A secondary area of business for Golan Plastics is PVC, the company’s original business in the 1960s. The manufacture of rigid PVC shutters for the building industry account for 10% of the company’s business. The PVC profiles are used for shutters, wall covers, electric cable coverings, decorative fences and polystyrene boards. Until 2003, Golan Plastics was also a small-scale manufacturer of plastic furniture.
Golan Plastics is proud of its standing as the only manufacturer in the world of 160mm to 500mm diameter plastic pipes. The narrower diameter pipes are mainly used for housing construction industry, while the larger diameter pipes are designed for municipal infrastructure and industrial use. The company says the housing construction market is more stable, whereas the municipal market is affected by municipal and government financing for projects.
Golan Plastics says there is a global trend to switch from pipes made of copper and other metals to PEX pipes, because of rising prices for metal pipes, compared with the raw material for plastics, and also because PEX pipes are more resistant to corrosion and affect the water quality less.
Dayan says competitors’ pipes are made from concrete, steel, copper and non cross-linked polyethylene. Golan Plastics mentions three types of pipes as alternatives to the company’s products: pipes made by silane cross-linked polyethylene; non cross-linked polyethylene pipes, which can handle water up to 60 degrees Celsius; and pipes made from non cross-linked material that is stronger than Pexgol, but cannot withstand high temperatures.
65% of Golan Plastics’ sales in 2004 were overseas. The company estimates that it controls 8% of the European market, and its financial report states that one customer accounts for 15% of revenue.
Dayan says that Golan Plastics’ Israeli competitors include Plastro, Middle East Tube Ltd. (METCO) (TASE:TUBE), Plassim Ltd., Banit Holding Ltd., Palgal Plastic Industries Ltd., and Meltzerplast. There are also many foreign competitors. “Our strength lies in our ability to offer a wide range of pipes for customers. We provide high-quality pipes, and meet delivery deadlines,” says Dayan. “We invest great efforts in meeting different standards, and we’re in contact with 30 standards institutes worldwide.”
Most of Golan Plastics’ sales were in Europe, mostly Denmark. It has a fairly small presence in North America, with sale of less than NIS 10 million. “Until recently, most pipes in the US market were made from copper,” says Dayan. “We’ve been sensing a change in the US market in recent concerning the use of plastics, and we intend to invest greater efforts in this market.”
“The effect of rising oil prices in marginal”
Golan Plastics’ IPO gave it NIS 13.5 million in cash. The company has a financial debt of NIS 90 million, and NIS 60.5 million in shareholders’ equity out of a balance sheet total of NIS 196.3 million at the end of the second quarter of 2005. The company’s sales growth has averaged 10% a year over the past five years, accompanied by steady growth in its operating and net profits, and in its profit margins.
Golan Plastics posted a profit of NIS 4.7 million on NIS 44.1 million in revenue for the second quarter of 2005, and a profit of NIS 9.5 million on NIS 87.2 million in revenue for the first half of the year. Its gross profit was NIS 29.8 million for the second quarter, reflecting a gross profit margin of 34.1% of revenue. Its operating profit was NIS 17.1 million, reflecting an operating margin of 17.4%, compared with 15.4% in 2004.
“Globes”: Why did you go public?
Dayan: “Our main goals were to replace our plant, change our marketing methods, and invest in equipment. It took us a long time to persuade the kibbutz to bring in a partner. The kibbutz was used to full ownership of the company, and preferred going to the stock market because it couldn’t find a strategic partner that could contribute to the company’s activity.
“On the basis of growth in overseas sales, we decided to buy more production lines this year. We’ll invest about NIS 4.5 million in several new production lines located in the new production hall to be built at a cost of NIS 3 million.”
How much is the rise in oil prices likely to affect your profit margins?
“The effect of rising oil prices on us is marginal. Our pipes are made from raw materials that are not significantly affected by the rise in oil prices. Companies that make only plastics are suffering from a price rise of over 40%. But, as I said, the effect on us isn’t dramatic, and we’re raising our prices accordingly.”
What’s your strategy for the coming years?
“Our strategy is growth, with an emphasis on overseas activities, especially in sales and marketing by expanding activities of our foreign subsidiaries. Our growth engine is the US and European markets, and a recovery by Israel’s construction industry. The Moscow municipality recently decided to replace the city’s pipes, and we co-own a factory in Russia together with a local company.”
Published by Globes [online], Israel business news - www.globes.co.il - on September 21, 2005