Merrill Lynch has initiated coverage of Delek Group Ltd. (TASE: DLEKG) subsidiary Delek Automotive Systems Ltd. (TASE: DLEA) with a “Buy” recommendation and target price of NIS 60, a 30% upside on its current price of NIS 46.30. Analysts Haim Israel and Micha Goldberg note, “Delek Automotive is Israel’s largest autos importer, with a 23% market share. The group's principal activities are the import and distribution of Mazda, Ford and Lincoln brand vehicles, accessories and spare parts. It also provides vehicle towing and roadside repair services, and temporary car loans.” The company also distributes 85-100% of its profit as dividends.
Merrill Lynch says, “Delek Automotive is the only automotive pure play in Israel. There is no other way to invest directly in this fast-growing sector.” On a technical note, the analysts write, “Based on domestic macro trends and long-term contracts with its suppliers, Delek Automotive has a very low beta to GEM, MSCI Israel and 0.9 to the Tel Aviv 25 index. Combined with the high dividend yield/and transparent free cash flow generation, this makes Delek Automotive shares a strong defensive play, in our view.”
As for risks, Merrill Lynch says, “Delek Automotive’s principle risk at the moment is the investigation into CEO Gil Agmon (who owns 15% of the company - G.S.) based on an alleged attempt to bribe officials in return for a building permit for the company’s new logistic centre. This investigation, started in mid-2006, is ongoing. As we have no way of knowing the outcome, we have incorporated a worst-case scenario, in which Agmon will be forced to leave the company and Delek Automotive will be required to pay a NIS 100 million penalty. This sum is our own estimate. We note that a penalty that high has never previously been imposed on a company faced with similar accusations. We emphasize that we have no further details on the case and cannot predict the outcome: we model the above-mentioned penalty purely to be conservative. We do note, however, that investigations in Israel tend to go on indefinitely and that this should have no mid-term operational impact.”
Merrill Lynch also notes that the Mazda 3 and Ford Focus models currently account for 60% of the company’s sales and command the highest market share in Israel. The company is due to launch ten new models within a year, but “there is a risk that market share contracts if the public does not take to the new models.” Other risks are sector-wide: a recession and tax reform.
In a global perspective, Merrill Lynch says, “Israel is in a unique position in which by car density, the country is hovering between emerging/developed market status. Israel’s vehicle density, as measured by cars/1,000 residents, is far from that of its emerging market peers, but equally nowhere close to that of the developed world.” The US has more than 800 cars per 1,000 residents and China has less than 100. Only Israel and Greece lie outside the two clusters of developed and emerging markets in Merrill Lynch’s matrixes. Therefore, “from a global perspective, car density should increase. Using the leaner regression formula, Israel’s theoretical vehicles/1,000 residents should increase by 346 units, or 21% above the current number.” Merrill Lynch notes as a caveat that car penetration rate involve subjective factors that cannot be modeled.
Meanwhile, Union Bank of Israel has published a "Market Perform" recommendation for Delek Automotive, with a target price of NIS 52.20. "After twice distributing dividends during the year, amounting to NIS 1.5 and NIS 1.75 per share, the company announced in its second quarter report that it would distribute a further dividend of NIS 1.45 per share for each ordinary share of NIS 1 nominal value, amounting to NIS 131.37 million in total. The ex-date was September 10. Although the company has no set dividend policy, its historical dividend yields speak for themselves, and we believe that these will continue to characterise the company in the future as well," the bank's analysts comment.
Published by Globes [online], Israel business news - www.globes.co.il - on September 24, 2007
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