Leader & Co maintain Neutral rating for Supersol

Tel Aviv investment house Leader & Co today reiterated a Neutral rating for Supersol (NYSE, TASE:SAE) ( SAE), after the company's soggy report for the second quarter of 2002.

Blaming its woes mostly on the recession, the Israeli retail chain reported a 48% dive in net profit to NIS 28 million, versus NIS 53 million in the corresponding quarter of last year. Second-quarter sales shrank 3% against the parallel quarter to NIS 1.67 billion.

The writing was on the wall, says Leader analyst Ori Hershkovitz. Although Supersol is Israel's biggest food retailer, its figures show substantial difficulties, attributable mainly to the recession and to Israel's security situation. The company had remained resilient to the surrounding environment, Hershkovitz says, but succumbed in the second quarter.

The troubles became evident months ago, he says, especially after Supersol chair Dalia Lev told the daily Ha'aretz that several factors were combining to make 2000 a terrible year: "The difficult controlling interest situation, the escalation of tensions and mainly the changes in the ownership of the Club Market chain, and the expected changes at (rival) Blue Square," she listed.

Supersol's results were also impacted by a drop in marginal productivity of its streamlining processes, widened financial margins the banks charge retailers, an 0.5% rise in commissions the marketing chains charged, and increased security expenses, Leader notes.

Rising consumer prices and the timing of the Passover holiday also weighed on the company's results, Hershkovitz says. The situation could improve later in the year, he adds.But the second was a poor quarter even when these effects are neutralized, indicating an absence of growth and eroding operating profits.

Hershkovitz reiterated a Neutral rating for Supersol and set a share price target of NIS 15.8, about 10% above its current level on the Tel Aviv Stock Exchange. He estimates that arch-rival Blue Square will also post poor results for the second quarter, and recommends that investors avoid domestic retailers for now. Better choices are exporters such as Teva Pharmaceuticals (Nasdaq:TEVA) and Israel Chemicals (TASE:ICL), he concludes.

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