Citi and Lehman Brothers are sanguine about Makhteshim Agan Industries Ltd. (TASE: MAIN) despite the company's revenue and profit warning for the fourth quarter of 2007. Lehman Brothers reiterated its "Overweight" recommendation for the company, but cut its target price from NIS 40 to NIS 38. The investment bank gives a "Neutral" recommendation for the chemicals sector. Citi reiterated its "Buy/high risk" recommendation for Makhteshim Agan, and NIS 40 target price.
Lehman Brothers says, " In our view Makhteshim's fourth quarter profit warning represents a blow to investor's confidence for two reasons: the company has not delivered on its cost saving program and management communication with investors has been weak. Beyond this, we believe the probability of margin recovery next year is high thanks to stronger volumes and possible price increases. On our new assumptions, excluding price recovery, we find Makhteshim's valuation attractive.
Lehman Brothers adds that it had predicted a net profit of $29 million on $480 million revenue for Makhteshim before the company's profit warning. "We were at the low end of expectations for both, we believe. We are not concerned with the top line. Our $480 million forecast called for 14.6% growth and that seems to be intact to a large degree."
Citi says, "The warning looks like a series of unfortunate events more than a failure of strategy or a change in market conditions. Makhteshim has to become more reactive and accelerate cost containment. The market may not give it the benefit of the doubt, but strong market conditions should ensure the shares recover in 2008." Citi nevertheless cut its 2008 earnings per share forecast for the company by 13% to reflect the company's warning.
Citi attributes the warning to "US dollar weakness, higher raw material costs that could not be passed on, and higher operating costs incurred to rebuild inventories appear to have been the main factors behind the profit squeeze in the fourth quarter." It adds, "Makhteshim will start 2008 with a need to boost prices."
Citi said, "Makhteshim is changing, moving away from its holding company structure to become an integrated organization. However, it would appear it needs to accelerate the upgrading of its reporting systems to be able to react more quickly to developments. Demand is still robust, with growth close to 20% in 2007 and a likely 10% in 2008. This strong demand picture and rising farm incomes should aid cost recovery."
Makhteshim rose 4.5% by mid-afternoon, as it tries to recover from Thursday's 16% plunge.
Published by Globes [online], Israel business news - www.globes-online.com - on January 13, 2008
© Copyright of Globes Publisher Itonut (1983) Ltd. 2008