The shares of local wireless titans Cellcom and Partner Communications lost 50% of their value in the last 12 months, yet equity analysts at UBS and Psagot Investment House suspect that neither has bottomed out. Ilanit Sheref of Psagot and Ziv Tal of UBS both lowered price targets for the two companies by about 20% this week.
Banking giant Citi had preceded them by three weeks, slashing targets for the two companies by 50% to 60%.
This week's barrage was started by UBS. The Swiss bank lowered its 12-month price target for Partner by 20%, to NIS 40 per share. UBS cut its target for Cellcom by 23% to $15 (NIS 55.65 ). (Cellcom is dual-listed on the Tel Aviv Stock Exchange and on Nasdaq.)
Even so, UBS analyst Tal reiterated a Buy rating for Partner, which operates in Israel as Orange, because its price on the market when he wrote the report was NIS 32. Cellcom, on the other hand, received a Market Perform rating. That is a neutral position, meaning Tal expects Cellcom to behave roughly like the benchmark TA-25 index over the next 12 months. While his target is NIS 55.65, the share is trading at NIS 57.
Psagot is less sanguine about the companies' prospects than UBS. Analyst Ilanit Sheref cut her target for Partner by 20%, from NIS 36 to NIS 29. Her target for Cellcom is NIS 52, down 21% from her previous target of NIS 66.
"Despite the steep drop in Cellcom and Partner shares, their prices still do not incorporate all the anticipated difficulty to come," writes Sheref. Not only is competition raising its head but so is the regulator, she explains. Both companies delivered poor reports for the third quarter of 2011 and aren't expected to have done any better in the fourth quarter.
Israel's mobile market is notoriously saturated, exceeding 100% (meaning that many people have more than one cellphone. ) But the playing field had been the home turf of just three companies: Cellcom, Partner and Pelephone, a subsidiary of the Bezeq phone company. They were not exactly fierce competitors, and generally toed a common line on pricing.
And then their business environment changed, thanks to the regulator. They're still making money, only a little more slowly.
Declining profits
Take Partner. For the third quarter of 2009 it posted revenues of $419 million and profit of $70 million. For the third quarter of 2010 these figures were $450 million and $84 million, respectively. But in the same quarter of 2011, while revenues were reported at $472 million profit had shrunk 44% against the previous year, to $47 million.
Cellcom did not have greater joy. For the third quarter of 2009 the company reported revenues of NIS 1.7 billion and net profit of NIS 289 million. In 2010 revenue for the quarter was again NIS 1.7 billion and profit climbed to NIS 332 million. In the third quarter of 2011, revenues held steady at NIS 1.7 billion, but net profit had dropped to NIS 199 million.
Part of the companies' problem is that the regulator allowed the entry of mobile virtual network operators, such as Rami Levi Communications, with others poised to start operating. As their name suggests, MVNOs are mobile phone operators that do not have their own network infrastructure and instead lease these assets from companies that do. Rami Levi, for example, uses those of Pelephone.
Then there are the upcoming rivals Golan Telecom and MIRS, both of them regular mobile operators with their own infrastructure. Both will pose serious problems for Partner and Cellcom investors, particularly Golan: It is expected to offer cheaper service, as much as 40% below the prices of the established wireless carriers.
Golan Telecom is the "baby" of French immigrant Michael Golan, the man behind the French mobile revolution in France, together with French businessman Xavier Niel. Golan, formerly known as Michael Boukobza, had been the CEO of Free Telecom. He vows to bring transparency and simplicity to Israel's mobile market. "The bundles we will offer will be fair and simple to understand, without 'footnotes', 'fine print' and 'asterisks'," the company writes on its website.
UBS predicts that Golan will offer calling plans that include high-speed Internet and 800 to 1,000 minutes of talk-time a month for as little as NIS 100 to NIS 140.
The bottom line is that UBS thinks Golan and the other new rivals will reduce the average revenue per user for the "big three" wireless carriers by 12% this year and an additional 4% in 2013. Doesn't sound so bad? UBS foresees that as translating into a 34% drop in net profit this year for Partner and 28% for Cellcom.
Psagot writes that increasing competition in the field will have customers rethinking their current calling plans.
Consumers seem to want alternatives. Israel's first MVNO, Rami Levi, signed up 15,000 customers in under two months, writes Sheref.
Partner and Cellcom will be further constrained in their growth by the super-saturation of the local market.
If the future of the cellular stocks looks so grim, with most other analysts urging investors to sell, why did UBS give Partner a Buy rating?
UBS cites several factors in the stock's favor. Ziv Tal likes Partner more than Cellcom because Partner has greater potential for streamlining, to start. Second, Partner owner Ilan Ben-Dov is trying to sell a piece of the company in order to gain liquidity. UBS thinks he may bring in private equity funds or strategic investors, which could support the value of Partner's shares on the market.
Beyond the features specific to Partner, the UBS analyst likes the dividend flow from the mobile herd. Ben-Dov bought Partner through his holding company Scailex, which borrowed heavily to effect the takeover. Now Scailex need dividends from Partner to repay bondholders.
Then there's Cellcom, which is owned by Nochi Dankner's IDB group. The dividends from Cellcom will climb the IDB pyramid to meet the top companies' own bond repayment needs.
UBS predicts a dividend yield of 8.9% for Cellcom and 9.1% for Partner in 2012.
Back to Citi, which three weeks ago advised Israeli investors to get out of local cellular stocks. Citi cuts its target for Partner to NIS 21.50. (Remember, Psagot's target is NIS 29 and UBS' is NIS 40). It cut its target for Cellcom to NIS 32.50. (Psagot's target is NIS 52 and UBS' is NIS 55.65). You choose whose analysis to buy.
