For a long time TowerJazz, the maker of semiconductors, wasn’t considered one of the jewels in the crown of its controlling shareholder, The Israel Corporation. But this year has seen Tower shining brighter, with its share price soaring 170% – by far the biggest gain of any stock in the Tel Aviv Stock Exchange’s TA-100 index.
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At first glance, Tower’s numbers don’t add up to a company with a $730 million market capitalization. While its revenues have almost doubled, thanks to a new chip-manufacturing tie-up with Japan’s Panasonic, Tower has turned in losses for the last two quarters.
But part of those losses were due to big depreciation expenses, which don’t represent cash losses and are tied to capital spending made in the past. Looking at the company’s earnings before interest, taxes, depreciation and amortization, or Ebitda, Tower looks much stronger. In the third quarter, operating profit reached $37 million, up from $33 million in the second and $21 million a year earlier. For investors, that’s a key indicator.
It’s an impressive achievement for a tiny company competing against giants like Intel and Infineon and other semiconductor foundries – companies who contract Tower to make their semiconductors – like Taiwan’s TSMC and China’s SMIC. Chip-making is a volume business and demands heavy and continuous capital spending. Tower’s market niche is Tier 2 and Tier 3 companies.
Teaming up with Panasonic
The reason for Tower’s sharply improved results is its 51% stake in the joint venture with Panasonic joint venture formed a year ago. The Japanese company moved its three manufacturing facilities based in Hokuriku, Japan which have been producing large scale integrated circuits for over 30 years, into the JV and committed to buying chips from it for the next five years. Tower invested $7.5 million of its own capital in the undertaking.
The joint venture has generated $400 million in new revenues for Tower, which adds up to an annual rate of $900 million – almost doubling the company’s total sales. And Tower is planning to increase revenue from the Japanese venture by another $150 million in 2016. This week Tower announced that Fairchild Semiconductor had started mass production at the joint venture plant.
Meanwhile it is shutting one of the three plants, which should trim some $130 million of its fixed costs.
Tower's further plans include consulting and supporting the establishment of a chip facility in India at an investment of $4 billion by the local government. Construction of the plant, in partnership with IBM, pends approval by the Indian government.
Even without the Panasonic JV, Tower has seen a big improvement in its business. Organic growth from its 10 biggest customers has grown 34%.
Russell Ellwanger, Tower’s American CEO, is the one behind the turnaround. He inherited a company deep in debt and close to insolvency, but promised a few years ago the company would reach $1 billion in sales by 2015. Right now, Ellwanger’s forecast is pretty close to the mark.
Analysts are forecasting that Tower will end 2014 with revenues of $828 million, up from $505 million in 2013. Net profit with reach $15.8 million, turning around from losses of $107.7 million last year and $70.3 million in 2012.
On Wednesday, Tower shares closed 2.9% higher at 54.31 shekels ($13.81) in Tel Aviv.
Still the company remains burdened by debt. Tower owes $285 million to bondholders and another $210 million to banks. To help improves it leveraging, the company recently signed a new financing agreement with Bank Leumi and Bank Hapoalim. The $111 million it owes them was due to be repaid in the next two years; under the new accord, repayment will be spread out through October 2018.
The new agreement will help reduce the losses the banks have suffered with Tower from a $500 million loan they made a decade ago. In 2008, after several years of losses, Tower won consent from the two banks for each to write off $100 million of the debt, leaving it with debt of just $200 million outstanding.
In exchange, Israel Corporation, which owns about a third of Tower, agreed to inject additional capital into the company and the banks were given notes convertible to equity. Leumi and Hapoalim did just that two years ago, giving them each of them a 14% stake in Tower. More recently, the two banks took advantage of the rally in Tower shares to sell and are no longer major shareholders.