Israeli investment house

Ilanot Batucha

released an optimistic report on

Tower Semiconductors

(TSEM) - Get Report

Tuesday, rating it as a buy. The analyst set a price target of $30.7 -- 83% above the current market price.

The firm believes that the semiconductors sector is in the early phase of a

rising demand cycle, which should continue till the end of 2002. Analyst Eran Yaccobi predicts that rising demand will expand the semiconductors industry by 40% in 2000 and by another 30% in 2001.

Yaccobi says that the trend today among design-and-

fab semiconductors companies, such as

Intel

(INTC) - Get Report

,

Motorola

TST Recommends

( MOT) and

Toshiba

(TOSBF)

, is to increasingly outsource production to fabs, or fabrication plants, such as Tower. Hence, the number of independent manufacturers is on the rise.

By 2010, some 50% of the production of printed circuits will be done by independent manufacturers, against 10% today, market sources predict.

Despite his sunny forecast, Yaccobi notes that his buy recommendation is based on Tower's winning a $200 million subsidy from the Israeli government for its second fab, to be located in Migdal Haemek. This dependence makes Tower a very high-risk investment but without the grant, its value shrinks to 76% of its current level. Its assets so far include its first fab and its 10.8% stake in

Saifun Technologies

.

With regard to the Middle East crisis, Yaccobi says the government's funding of the grant would signal to foreign investors that it's business as usual, despite the Palestinian unrest.

Although Tower posted a profit (excluding one-time expenses) for the third quarter, Ilanot Batucha believes that the company will lose $400,000 in the second half as a whole.

Yaccobi predicts that in 2001 the company will net $6 million, but in 2002 its operating losses are expected to reach $10 million, due to the launch of the new plant. The investment firm forecasts that in 2004 the new unit will reach maximum capacity, and the company will post an operating profit of $35 million.

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