Even after a 300% surge in the El Al Israel Airlines Ltd. (TASE: ELAL) share price this year, Psagot Investment House Ltd. believes that the share is cheap, both absolutely and in comparison with the airlines sector. Psagot began covering the El Al share with a "Buy" recommendation and a target price of NIS 4.50, a 70% premium on the market price.
Psagot analyst Noam Pinko writes, "El Al is in a good period financially, thanks to impressive results, due mainly to lower oil prices, but also as a result of the growing number of passengers at Ben Gurion Airport and streamlined operations, despite the growing competition."
The fall in the price of oil is having a positive effect on the airline. According to Pinko, a $0.01 drop in the price of a gallon of jet fuel cuts the company's fuel expenses by $2.4 million (not including hedging expenses). Over the past year, the price of a gallon of fuel plummeted from $2.30 to $1.20, which means that the company's ratio of fuel expenses to revenue fell from 34% to 24%, amounting to an annual saving of more than $200 million.
Pinko believes that despite the growing competition from foreign airlines and low-cost companies, El Al benefits from a strong label among Israelis, so that its loss in market share is relatively small. "The competition is affecting the prices, and lower fuel prices enable the airlines to offer more competitive prices," Pinko states. He mentions that the company signed a purchase and leasing agreement for 15 new Boeing Dreamliner planes, "which are expected to upgrade the flying experience. That will make it easier to both handle the competition and save significantly on operating expenses." The cost of the purchase is $1.25 billion.
"Significantly cheaper than the competition"
According to Pinko, passenger traffic leaving Ben Gurion Airport is growing by leaps and bounds - 10% a year, and 18% in 2015. Passenger traffic is affected mainly by the security situation, and this traffic therefore declined in the second half of 2014. "El Al's share is significantly cheaper than that of its competitors in EV/EBITDAR multiples (EBITDA, not counting leasing expenses)," he asserts. "We believe that due to the security risk and the volume of activity, El Al should be traded at lower multiples than the industry as a whole, but not as much so as in the current market."
Based on his valuation, Pinko arrives at a NIS 4.50 target share price. He says that his model is relatively conservative, and takes a fall in EBITDA in 2016 into account. El Al, controlled by Knafaim Holdings Ltd. (TASE: KNFM), currently has a NIS 1.3 billion market cap.
The big slide in the price of oil, combined with a rise in the number of passengers at Ben Gurion airport, brought El Al record results in the third quarter, with a $93 million net profit - over nine times its net profit in the corresponding quarter last year. El Al's net profit in the first three quarters of 2015 was $94 million, compared with a $13 million loss in the first three quarters of 2014.
Published by Globes [online], Israel business news - www.globes-online.com - on December 20, 2015
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