The Market in 2012 / It Could Have Been Worse

Despite the global financial crisis, the Tel Aviv Stock Exchange made up some lost ground this year

In 2012 the Tel Aviv Stock Exchange managed to make up for part of its 20% drop the previous year as the TA-100 index regained 7%, while falling 5% short of the S&P 500. Leading the pack was the banks index, with a 23% gain after falling a dismal 34% in 2011 due to new regulations.

Telecom was the only major index to lose ground in 2012, unsurprisingly shedding 33% following an influx of cheaper competition.

Maintaining their 2011 momentum in the first half of 2012, tech shares rose 18% for the year, led by Babylon, Retalix and Mellanox Technologies - the top three performers of the TA-100 this year despite slumps by Babylon and Mellanox in the latter half while the rest of the market surged. The year's three biggest flops on the TA-100 also had something in common: All were IDB group companies.

The stars of 2012 ...

Babylon: Future looks bright

After reaching a peak NIS 2 billion last summer Babylon's trading value fell to NIS 1 billion due to a slap on the wrist from Google, the source of 84% of its revenues, and worries over its planned debut on Nasdaq getting canceled. Babylon's stock nevertheless rose 153% in 2012, topping the TA-100 in performance.

Babylon's share price has been driven by impressive growth rates the past two years. In the first nine months of 2012 its revenues soared 230% to NIS 470 million, while net profits skyrocketed 520% to NIS 68 million and are expected to climb even higher: NIS 35 million to NIS 40 million in the fourth quarter.

Outlook: Babylon is trading at a price/earnings ratio of 12, much lower than expected when considering its rapid growth. A stock offering is anticipated early in 2013 on Nasdaq, known for better appreciating Internet companies, which should buck up Babylon's price considerably.

Retalix: Windfall exit

Last month's announcement of Retalix's purchase by electronics giant NCR for $650 million to $800 million in cash drove its share price up nearly 50% for a 78% overall gain since the beginning of the year. The company, with NIS 1.05 in equity, is trading at a NIS 2.7 billion value.

The big winners of the exit are the Alpha Group with a 19.5% stake in the company and Ishay Davidi's FIMI Opportunity Funds holding 18.2% - which started out as 12% bought in March 2008 for $40 million. FIMI is expected to record about $80 million on its investment when the deal is completed within several months and Retalix is delisted from trading in Tel Aviv.

Mellanox: Peaked in August

Mellanox shares have plunged over 50% since August, but still ended the year up 77%. The stock, now trading at a NIS 8.7 billion company value, jumped about 50% after each of the company's first two 2012 quarterly reports were released.

The company’s September report showed revenue growing by 130% to $157 million and profits soaring 460% to $60 million, but its stock reacted by plummeting 10% on a disappointing revenue forecast of $145 million to $150 million in the fourth quarter.

Outlook: Sergey Vastchenok, senior analyst at Oppenheimer & Co., expects Mellanox to rally after the first quarter of 2013, saying the company’s reliance on U.S. government investment puts it at risk of becoming a “fiscal cliff” casualty. Vastchenok adds that Mellanox usually suffers from seasonal weakness in the first quarter, something not apparent the past two years because of one-off deals struck by the company. “I expect Mellanox’s profits in the first quarter will be lower than the consensus outlook,” he concludes.

Delta:
Stumbling no more

Third quarter profits for Delta-Galil Industries soared 160% on its acquisition of Schiesser, Germany’s largest underwear manufacturer, sending its shares up another 30% for an overall gain of 73% since the beginning of 2012. The company is now trading at a value closely reflecting its NIS 1 billion in equity.
After years of being seen as struggling to cope with the textile industry’s exodus to the Far East, Delta has turned into a growing enterprise with a knack for plucking up other floundering companies and turning them around. Under Delta’s new business model, product development remains in Israel while production is outsourced to countries like Bulgaria, Egypt and China.
Outlook: Delta’s P/E ratio is 4.7 ? much lower than other fashion companies trading on the TASE, including those showing less promising results. Most analysts therefore anticipate that Delta will do well again in 2013.

Kamada:
Ripe for the picking

Having cut down its losses and planning a float on Nasdaq, Kamada’s star as a niche biomed venture is rising, as did its share price ? 63% in the past year. Booming sales of its Glassia drug for congenital emphysema have boosted revenues and, with its proven technology and U.S. Food & Drug Administration approvals, Kamada seems ripe for the picking by one of the major pharma concerns.

... and the biggest letdowns

Discount Investments: Drowning in debt
Along with Clal Insurance, Discount Investments remains one of the key assets in Nochi Dankner’s IDB group, holding controlling stakes in Koor Industries ? which itself owns 40% of Makhteshim Agan and 2.3% of Credit Suisse ? and Cellcom, Supersol, Property & Building, Elron Electronic Industries and Given Imaging.

With profits from its main cash cows suffering and P&B writing off its part in the vaporized Las Vegas Plaza casino and hotel project, it isn’t hard to grasp why Discount Investments stock took the largest beating of the year among TA-100 companies by diving 54% in 2012, despite a rally by Credit Suisse shares.
Outlook: Pressure from its debt-ridden parent IDB Holding will likely force Discount Investments into selling one of its assets, a move that could provide an upside. Given Imaging might be a candidate: Japan’s Fujifilm has made a play on the company for an estimated $750 million.

Clal Biotechnology:
Missing Teva

Clal Biotechnology Industries, a holding company controlled by Clal Industries that invests in ventures dealing in health sciences like D-Pharm, BioCancell, Andromeda Biotech and MediWound, saw its share price slashed in half since the beginning of 2012.

Aclinical trial flop by D-Pharm’s flagship product and the abandonment by Teva of several of its joint ventures with MediWound contributed to the fall, as did a NIS 33.5 million loss posted in the third quarter.
Outlook: If a diabetes drug developed by Andromeda succeeds in clinical trials, Clal Biotech shares should enjoy a very strong upside according to Shlomo Meir, CEO of DBM Investment House.

Cellcom:
Plunging profits

Cellcom shares dropped 46% in value during 2012 amid a surge of competition and new regulations in the cellular market. Profits fell 37% to NIS 133 million in the third quarter. Cellcom has the largest customer base of Israel’s cellular operators.

Outlook: Oren Mulkandov, senior investment manager at Migdal Capital Markets, thinks Cellcom has made it through most of the storm and has a potential 15% upside.

Ceragon Networks:

Flagging sales

The crises in Europe and the U.S. hampered Ceragon revenues this year and, along with a shrinking kitty, brought its share price down 44% for the year. Investors are worried that the company might issue more stock to shore up its meager $28 million in cash reserves, thereby diluting their holdings. Ceragon has also lowered its sales forecast for the last quarter.

Alon Blue Square:

No longer a two-horse race

David Wiessman’s Alon Holdings Blue Square, owner of the Dor Alon gas station chain and Mega supermarkets, dropped 42% in trading value in 2012. Mega, one of Israel’s two largest supermarket chains that have long dominated the market together, has been thrashed recently by the smaller mushrooming discount chains. From a 4.1% operating margin in 2007, Blue Square reported just 1.4% in the first half of 2012, less than any other publicly held retail operation. The company now has a trading value of NIS 590 million as opposed to NIS 1.6 billion in equity.

Outlook: Jacob Georgy, CEO of Leumi Partners Research, says he thinks the cash-starved company will eventually let go of its retail business, which should boost its value significantly

Moti Milrod