Bank Hapoalim affirms Hold for Israel Corp, sets target 4% above market

Analyst worries about Tower Semiconductor
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Three weeks ago the Israel Corporation published its results for the third quarter and today Bank Hapoalim reiterated its Hold rating for the company, raising the price target from NIS 432 to NIS 498, 4% above the share price at opening today.

Analyst Rakefet Levison-Apter noted the NIS 30 million loss that the company posted for the third quarter, compared with a net profit of NIS 44 million in the parallel quarter last year. She attributes the loss to eroded profits of the subsidiaries Israel Chemicals, Oil Refineries, and shipping company Zim, and to steeper losses posted by Tower Semiconductor (Nasdaq:TSEM), in which the Israel Corporation owns 31.4%.

In addition, the Israel Corporation made provisions for the decreased value of its holdings in Koor Industries (NYSE:KOR).

The analyst attributes the recent rise in the share price of the Israel Corporation to gains in Israel Chemicals stock, and in the government agreeing to transfer to Tower the grant for FAB 2, its second fab in Migdal Ha'emek.

Levison-Apter believes that the holdings of the Israel Corporation are characterized by cyclical activity. She said that excluding the expected improvement in the activity of Israel Chemicals in 2002, the other companies - Tower, Zim and Oil Refineries are on a negative trend. Israel Chemicals accounts for the main asset value of the Israel Corporation.

The analyst explained that Tower is suffering from a negative trend because of the weak semiconductors market, while Zim is suffering from the slowing world trade. Oil Refiners has been hurt by sharply decreased gaps between the price it pays for crude oil and the selling price. In addition, the security situation is negatively affecting the company, the analyst said.

In the third quarter the Israel Corporation invested $17.5 million in a 40% interest in the enterprise sector-focused Finnish company RSL, Levison-Apter estimates that the Israeli Corporation will continue investing in companies similar to RSL, which have growth potential once the communications market recovers.

The analyst writes that shipping companies worldwide, several of which are potential candidates for acquiring the state's holdings in Zim, traded last year at earnings multiples of 14 on average, and an expected earnings multiple of 15.5 for the coming 12 months.

The analyst's valuation of Zim is based on an earnings multiple that is 5% lower than the earnings multiple of other shipping companies because of the state's holdings in Zim. Given the analyst's forecast that Zim's earnings in 2001 will come to $21 million, she evaluates Zim at $314 million.

The Israel Corporation owns 48.9% in Zim.

Levison-Apter estimates the value of Israel Chemicals at $1.39 billion, 14% above the market. The Israel Corporation owns 53.5% in Israel Chemicals.

Regarding Tower, the analyst writes that the semiconductor sector lacks transparency. She noted that its Fab 1 is losing money and the big investments in Fab 2 have not yet ended. The analyst writes that it is impossible to predict the semiconductor price levels after Tower completes raising funds for Fab 2. Given the high-risk level in investing in the company, the analyst values Tower according to its market price.

Oil Refineries, in which the Israel Corporation has a 26% interest, is valued at $471 million. The analyst noted that in the third quarter Oil Refineries lost NIS 71 million mainly because of the eroded gaps between the buying and selling prices of oil products, and increased financing costs. The rise in financing costs was caused by the devaluation of the rate of exchange of the shekel against the dollar, which the bank does not expect to continue in the fourth quarter.