Investment bank Merrill Lynch sees a weak fourth quarter for Israel's leading companies following a poor third quarter, as the economy increasingly feels the local effects of a global slowdown.
Merrill expects the shekel to weaken in the fourth quarter, which should help exporters such as Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Israel Chemicals Ltd. (TASE: ICL), NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE), and Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT).
So far in the fourth quarter, through Friday's representative rate setting, the shekel has weakened - reflected by a higher shekel-dollar exchange rate by 16.4%, while it is 3.5% weaker for the year to date.
However, Merrill expects declining consumer confidence and higher unemployment will reduce private consumption, weighing on sectors which depend on local demand, such as telecom, retail, and food.
In reviewing the third quarter, Merrill finds that while revenue for companies listed on the Tel Aviv 25 Index rose, net profit fell 40% compared with the corresponding quarter of 2007. Israel Chemicals and Israel Corp. (TASE: ILCO) accounted for 83% of aggregate net income, while Africa-Israel Investments Ltd. (TASE:AFIL; Pink Sheets:AFIVY.PK) and Delek Group Ltd. (TASE: DLEKG) lost a combined NIS 2.7 billion, or 62% of aggregate net profit.
Excluding holding companies, net profit at Tel Aviv 25 Index companies fell 33% in the third quarter compared with the corresponding period of the previous year. Net profit in the banking sector fell 73% and net profit at holding companies fell 28%.
Turning to specific sectors, Merrill expects a weak first half of 2009 for the agrochemicals sector, with a rebound in the second half of 2009. Merrill expects sharp falls in oil prices to have a negative impact on grain prices as demand for ethanol drops.
Merrill blamed what it termed an abysmal third quarter for the banking sector on exposure to US financial institutions Washington Mutual and Lehman Brothers, which it said cost the sector NIS 1.4 billion in revenue. However, even without Lehman losses, revenue would have fallen 2.5%, as fees declined in line with the Bachar committee reforms, and because of losses at banks' nostro portfolio. Loan loss provisions also rose, jumping 220% compared with the corresponding quarter, and do not appear set to fall anytime soon, as more loans are placed on bank "watch lists".
Merrill sees new car sales falling to 155,000 from 180,000, and sees a tough fourth quarter in the sector, as the economic slowdown and higher unemployment hit demand. Tax cuts in January 2009 will delay new car sales until then, and the introduction of a new Mazda 3 model late in the second quarter of 2009, which can push off sales of the popular car until then. Mazda 3 sales represent around 35% of Delek Automotive Systems Ltd. (TASE: DLEA) sales.
The investment bank is worried about the real estate sector "importing" the global real estate slowdown to Israel, and in the fourth quarter Merrill expects declining demand for commercial and residential real estate. Residential sale prices are down 5% in November, compared with November of 2007, and commercial rental prices are down 4%. The bank also notes tighter credit conditions for real estate companies, and lower demand in CIS and Russian markets where several Tel Aviv Stock Exchange-listed developers are exposed.
Merrill's prescription for the current market is investing in Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), as Merrill points to its low correlation with the market (beta) and high earnings visibility.
Published by Globes [online], Israel business news - www.globes-online.com - on December 8, 2008
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