Deutsche Bank has raised its recommendation for Israel Corp. (TASE: ILCO) to "Buy", with a target price of NIS 6,000, a 40% premium on the share closing price of NIS 4,380 on the date of report. The share fell 2.8% yesterday to NIS 4,256 and continued to slide in morning trading today.
Deutsche Bank analyst Dan Harverd argues that Israel Corp. subsidiary Israel Chemicals Ltd. (TASE: ICL) is the primary growth driver for the parent company. He argues that Israel Corp's discount compared with its net asset value (NAV) has widened to historic levels of almost 30%, compared with an average of 8% in 2004. He notes, "The value of its 52% stake in Israel Chemicals accounts for over 80% of Israel Corp.’s assets, while we expect the fertilizer segment to account for over 75% of Israel Corp’s earnings before interest and taxes (EBIT) in 2008. We expect the discount to NAV to return to the long-term mean and believe that Israel Corp offers more meaningful upside than Israel Chemicals at current levels."
Harverd explains that, in recent years, the shares have moved in almost perfect alignment. He provides as his basis the statistic that there has been a correlation coefficient of 99% over the last 10 years. "More surprising has been the breakdown in the correlation in recent months. While Israel Chemicals’ stock is up 65% since November 2007, Israel Corp is up only 13%. Historically the value of Israel Corp’s Israel Chemicals stake has been exactly 100% of Israel Corp’s market cap on average since 2004. Currently this ratio has risen to 130%, which we view as a short-term anomaly indicating that Israel Corp is undervalued."
Harverd notes that Israel Corp’s stake in Israel Chemicals is by far its most significant asset in both value and profitability terms, accounting for 83% of Israel Corp’s asset value, not taking into account net debt. This ratio has remained relatively stable since mid-2005 as large investments by Israel Corp in Oil Refineries Ltd. (TASE:ORL) and Inkia Energy Ltd. have offset the impact of the strong share price performance at Israel Chemicals.
The analyst explains that profits at Israel Corp. are dominated by Israel Chemicals' contribution. "Israel Chemicals fertilizer segment alone accounted for 60% of Israel Corp’s EBIT last year. Given the recent sharp increase in potash and phosphate prices we expect the fertilizer segment to account for over 75% of Israel Corp’s EBIT in 2008. This provides the basis for our assertion that Israel Corp is basically a fertilizer play, despite other significant holdings in energy, shipping and the automotive sector," notes Harverd.
Harverd looks to another Israel Corp. subsidiary for a possible explanation. "The only explanation we can garner for the underperformance of Israel Corp. is that investors believe the value of Zim Integrated Shipping Services Ltd. has declined after weak 2007 results and poor stock performance from sector peers. The problem with this reasoning is that Zim only accounts for 6% of Israel Corp.’s asset value, so any changes in its value do not have a major impact on the parent company."
Harverd's new target price for Israel Corp. is based on a 10% discount compared with its underlying NAV, which he considers the most appropriate methodology for valuing a holding company. The main reason for the higher target price is the increase in value of Israel Chemicals in recent months as fertilizer prices climb. He adds, "Main risks include the concentration of the portfolio, investment in the automotive sector where company experience is limited, and the expansion of overseas operations where management influence is harder to exert."
Harverd predicts that Israel Corp. will post a net profit of NIS 3.23 billion on NIS 48.72 billion revenue in 2008 and a net profit of NIS 3.88 billion on NIS 54.44 billion revenue in 2009.
Israel Corp.'s other main subsidiaries include Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), IC Green Energy Ltd. and a joint venture with Chinese car maker Chery Automobiles Co. Ltd. It is also a major investor in Shai Agassi's electric car venture Project Better Place.
Published by Globes [online], Israel business news - www.globes-online.com - on April 29, 2008
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