Investment bank HSBC (NYSE:HBC) analysts Dan Harverd and Will Manyol published a comprehensive report on IDB Holdings Sunday, predicting that once the market picks up IDB shares will bounce back aggressively.
The analysts strongly recommend investing in IDB group companies, particularly IDB Development and the Discount Investment Corporation.
The analysts added that the beta on the IDB shares, the parameter that measures the share's performance compared with the market yield, is one of the highest of all TA-25 shares (shares listed on the Tel Aviv Stock Exchange's Maof-25 index).
The bank says that is why the reaction of the IDB shares to market changes could be more aggressive.
Another reason to invest in IDB now, say the analysts, is the cliche that there's no better time to invest than during a recession.
IDB will publish a strategic merger plan sometime during the first half of 2002, after a deal selling 51% of the company to new shareholders - the Kardan investment group, the Carasso family and businessman Leon Recanati - is complete.
The plan includes structural changes in the conglomerate, increasing leverage, dividend distribution, sale of assets and expansion abroad.
The analysts predict a merger between Clal Industries & Investments and IDB Development in 2002, and one between the Discount Investment Corporation and IDB Development in 2003. The bank predicts IDB Holdings will head a consortium made up of five divisions ¿ finance, technology, real estate, communications and retailing.
In their review of the consortium, the analysts estimate IDB Holdings is traded in a grave 27% discount: the value of its holdings stands at NIS 5.2 billion compared with their market value, which is a mere NIS 3.8 million.
HSBC expects IDB, like other holding companies in the market, will sell its smaller holdings, as they contribute little to the company¿s value, but rob it of valuable management time. The bank believes IDB will sell Azorim Properties as well as its investment house Ilanot Batucha, but that it won¿t ever sell certain companies, such as Clal Insurance, Mashav and Supersol (TASE:SAE), the sale of the latter having long been speculated about.
Following the sale of these assets, analysts expect a large dividend distribution in the IDB group in order to repay loans taken to finance the IDB Kardan deal.
The investment bank gave IDB Holdings an Add rating and set its price target at NIS 118, 105 higher than its market price. HSBC still, however, prefers IDB Development to IDB Holdings, due to its historically superior performance, better liquidity, and IDB Holdings expulsion from various leading indices. Their preference also stems from the higher discount IDB Holdings trades at, in spite of the similar exposure the two companies had to market turbulences.
HSBC gave IDB Development a Buy rating and set its price target at NIS 146, 25% higher than the share¿s market price. The upgrade is mainly the result of the expected 2003 merger with Clal Industries and Discount Investment. The bank added that the sale of several small holdings and that of Azorim and Ilanot Batucha may lead to a large dividend distribution.
The analysts also mention the fact that IDB Holdings loan of $50 million taken to acquire another chunk of IDB Development was used only partially, with only $10 million spent so far. The bank foresees an additional purchase of IDB Development shares by IDB Holdings, in its efforts to maintain teh same components of holdings in the companies to be merged with IDB Development.
Discount Investment Corporation was also rate a Buy with an NIS 160 price target, 20% higher than its market price. The bank estimates Discount Investment is done with write offs, and that asset sales by this company will also lead to large dividends.
The bank mentions the negative impact of the low, next to zero pricing of the Tevel cable company on Discount Investment. It is estimated United Pan-European Communications (Nasdaq:UPCOY, ASE:UPC), a 46.5% shareholder in Tevel, might sell its holdings in the company according to a price higher than its market price. The investment bank estimated Tevel at $175 million (including the $25 million reflecting the holding in NetVision), or $1,200 per subscriber. If the sale of UPC to Discount Investment Corporation will be done according to $1,500 per subscriber, Tevel could grow in value to $334 million, and thus influence the valuation of DIC itself.
Clal Industries receives an Add recommendation and a price target of NIS 27, 17% higher than the market price, from HSBC. The bank points out Clal Industries is the country¿s most major investor and one of the top ten European investors in biotechnology firms, which could yield it an increase in value in the long term.
Elron Electronic Industries (Nasdaq:ELRN) also gets an Add recommendation from the bank, and a $15 price target, 13% higher than its market price. Elron, now merged with Elbit (Nasdaq:ELBT), may very possibly get sold. The bank estimates a sale of 49% of NetVision, held by Elron, to Discount Investment, may also happen. The bank recommends investing in Elron also due to the 35% discount at which it is now trading.