We renew the coverage for Mivtach Shamir with a buy recommendation, at a target price of NIS 150, when in our estimation, the potential for value flooding in the company may be more significant, and the target price is derived from the current NAV model.
Mivtach Shamir is one of the leading maintenance companies in Israel. The company began trading on the Tel Aviv Stock Exchange in 1983, and over the years has made a number of impressive transactions, including the deal to sell Tnuva.
Mivtach Shamir is owned and managed by businessman Meir Shamir, who owns about 40% of the company’s shares. The company has proven in the past that it knows how to generate significant value in its investments, while maintaining conservatism and a low level of leverage.
In the last two years, the company’s management, headed by Meir Shamir, has taken very successful actions, identifying opportunities and improving portfolio companies. These actions have led to a significant flood of value in the value of the companies, while creating a solid basis for the continued growth of an insurer. In our opinion, the increase in the share price does not sufficiently reflect the book value of the holdings, and certainly not the immediate potential for improvement that exists in some of the assets. This, however, led to a deepening of the discount in the stock, so we believe that this is an opportunity. In our opinion, the immediate overflow of value comes from 4 main areas:
1. Issuance of a fan – Last month, a Manif company was issued, which deals with providing financing to developers in the construction industry, with the principle of financing being capital completion, which in most cases ranges from 50% -60% of the equity required for the project. Prior to the issue, Mivtach Shamir held approximately 74% of the leverage, which was recorded in the Company’s books at a value significantly lower than its value in the issue, which currently stands at approximately NIS 430 million (Mivtach Shamir’s share). The successful IPO, along with the stock’s performance since it began trading (an increase of about 35%) and loans of tens of millions of shekels that Pharaoh leveraged in favor of Mivtach Shamir, embody a significant flood of value for the insurer.
2. Investment in the Alon Tavor power plant – In November 2018, the IEC issued an invitation to participate in a tender for the sale of the Alon Tavor power plant. In July 2019, the IEC announced that the winner of the tender is MRC Alon Tavor, in which Mivtach Shamir holds 33.3%. The price won by Mivtach Shamir together with its partners (Rafek Energy and China Harbor) in the tender was approximately NIS 1.872 billion. The Alon Tavor power plant has 15-year electricity production licenses. In our opinion, the book value of the power plant is significantly lower than the value of MRC, as will be expanded below.
Real Estate – In our opinion, the value in the books of Hod Hasharon Towers and the company’s property in Herzliya are priced conservatively, and do not reflect the significant flood of value that is expected in these properties in the short term.
4. Rise in technology company multipliers – In the past year there has been a significant increase in technology company multipliers, as reflected by the NASDQ multiplier, which rose from a PE multiplier of about x45.0 at the beginning of 2020, to a PE multiplier of about x68.0 today.
Below is the latest NAV model for Mivtach Shamir, which reflects a significant upside of about 50% in relation to the company’s market value, before we fully price another significant upside, which we believe exists in the value of the MRC power plant, in real estate rights and in technology companies. Investor insurer.
Explanation of the NAV model
public companies
Mivtach Shamir holds 2 public companies. The value of the companies in the model is presented in accordance with their market value and Mivtach Shamir’s holding rate in the companies:
• Manif – In our estimation, the value of Manif in Mivtach Shamir’s books on 30/09/20 was only NIS 50-55 million (Mivtach Shamir’s share in Manif’s equity as of 30/09/20, plus goodwill). In December 2020, Manif was issued, and in the past month it completed a 35% increase in value relative to the issue, with the value of Mivtach Shamir’s holding in the company being approximately NIS 430 million, 7-8 times compared to its value in the company’s books in the previous quarter. It should be noted that with the issuance of a lever, it had to immediately repay loans it received from a price insurer, which appear in net financial debt in the model. The issuance of a lever and the rapid rise in the share price should, in our opinion, have led to a significant increase in the value of Mivtach Shamir, such that Lady has not yet fully expressed itself.
• Gilat – Gilat is an Israeli technology company that specializes in the development, production and marketing of products and services in the field of satellite communications around the world, with an emphasis on the field of connectivity in aviation and cellular and Internet communication services. At the end of January 2020, the controlling shareholders entered into an agreement with Comtech Telecommunications to sell their holdings in the company in exchange for a share value of $ 10.25, which reflects a value of approximately $ 566 million per company (approximately 50% above the current price). At the same time, the effects of the corona eruption led to the cancellation of the agreement, while paying compensation in the amount of about $ 70 million to Gilat, for the cancellation of the agreement and related expenses. It should be noted that the eruption of the corona had a significant negative effect on Gilat, including the postponement and cancellation of transactions that led to a decrease in the volume of activity. These, reflected in the impact on results in the first three quarters of 2020. However, the proliferation of new transactions and collaborations, along with expected recovery in the areas of activity as part of a global return to routine, are expected to support improved results, including beyond profitability.
The field of energy
The company has 2 holdings in the field of conventional energy, with the main holding being in MRC, which owns the Alon Tavor power plant, alongside a land holding in Givat Hashlosha, which may be built on a power plant in the future.
MRC Alon Tavor
The power plant owned by the company (33.3%), is presented in a model with a balance sheet value which, as of September 30, 20, was approximately NIS 137.8 million (the purchase cost plus the profits generated by Mivtach Shamir). In our opinion, this value is significantly lower than the true value of MRC, as it does not embody the additional value that we believe should be taken into account, which comes from a number of key parameters:
• Operational efficiency: As part of the transfer of ownership of the station to MRC, operational efficiency has been achieved in several areas, but the most significant savings are due to the gas contract signed with Shark Reservoir, which from next year is expected to lead to a significant reduction in gas station purchases. In the past, Rafek Energy (Mivtach Shamir’s partner in MRC) estimated that the effect of the gas agreements on its profits is expected to be significant, including as a result of its holding of 33.3% of MRC.
• Option to build an additional picker power plant: MRC was given the option to build a new “picker” power plant on the site based on natural gas, with a capacity of up to 230 MW. For this station, reserve a place in the electricity grid and it will enjoy a guaranteed availability rate for 20 years from the date of its operation. According to publications of Mivtach Shamir’s partnerships with MRC, the financial closure and the construction of the power plant are expected to take place in the second half of the year.
Possibility to build another power plant: for MRC, an option to purchase additional space, adjacent to the existing power plant, which can in the future be used to develop a power plant with an expected volume of hundreds of MW. This station requires the series and additional approvals, however as the development plan progresses, it means significant value flooding for MRC and Mivtach Insurance.
It should be noted that recently, Generation Capital, which owns Rafek Energy, a partner (33.3%) of an insurer in MRC, wrote in its reports:
Source: Generation Capital, Q3.20 Reports
This means that if the work plan built to achieve a return of 14% -12% is met, while the risk of the property is significantly lower than this risk, given the nature of the regulation of the station’s availability rates, it can be clearly said that there is immediate value flooding to MRC. In our estimation, MRC has the potential for an upside of tens of percent, with the eyes set on the valuation of MRC that is expected to be included in the publication of Generation Capital’s annual financial statements, which we estimate will be significantly higher than the asset value.
Energy magic
Mivtach Shamir holds about 53% of the shares of Kesem Energy, which is promoting a project to build a power plant powered by natural gas in the center of the country (areas of Kibbutz Givat Hashlosha), with a capacity of hundreds of MW.
Recently, the project received a significant regulatory encouragement shot, with the National Infrastructure Commission approving the power plants for deposit.
In its decision, the committee adhered to the decision of the planning committee in the south, which refused to build two other power stations, claiming that the construction of a power plant in the center of the country, and in particular the Kesem power plant, would save hundreds of kilometers, south to the center of the country. Of the Reading power plant (whose operation was recently extended until October 2022 with an option for further extension until 2026), the need will increase for a newer and more efficient power plant, which can serve the demand for electricity in Gush Dan.
It is too early to determine whether the power plant will be built, and when, but it is clear that as the Kesem power plant is developed, its value may be hundreds of millions of NIS, which will flood Mivtach Shamir with great value, while the value of the property in the company’s books (as of December 31, 19) Only NIS 3 million (in investments in affiliated companies).
Real Estate
The insurer has two main real estate assets, which in our opinion are worth more than their value in the books, and are expected in the not-too-distant future, to enjoy a flood of value, and in particular by obtaining additional building rights.
Hod Hasharon Towers
The insurer has a maintenance of 42.5% in Hod Hasharon Towers. The towers enjoy an occupancy of over 90%, with a high-quality and decentralized mix of tenants, including technology companies and companies in the life sciences and medical fields.
The partnership in the property is promoting a master plan for two additional towers in an area of tens of thousands of square meters (as shown in the Ashtrom Properties presentation), while the acquisition of the rights is expected to contribute to an additional value of hundreds of millions of NIS per property. According to the latest valuation, the property was capitalized at a rate of about 7.2% -7.0%.
In our estimation, the appropriate discount rate should not be higher than 6.5%, a discount rate that gives the property a value of approximately NIS 970 million, and after deducting the debt, a net value of approximately NIS 720 million. This value gives the insurer a maintenance value of approximately NIS 306 million. We emphasize that in the model we have not added value in respect of the additional rights that are expected to be received, an increase in value that may be significant.
Property in Herzliya
Land owned by the company on Hamanofim Street (Tolmans House), with 2 adjacent plots, with a total area of about 5 dunams. Following the unification of the plots, in April 2020, the Tel Aviv District Planning and Construction Committee approved the deposit of the land plan, the principles of which combine office building with commercial and residential, when during September the plan was deposited. Only NIS 42 million (investment real estate item). However, we anticipate that it is expected to yield the company additional significant value. At this stage, as the additional rights have not yet been approved, we have not added a value model for this land.
Djerbina (India)
The company owns land in the city of Chennai, India, which was purchased about 12 years ago, when the value of the land in the books is only a few million NIS (as of December 31, 19). These days, the company is working to find a buyer for this land. In our opinion, the company is not expected to develop the land itself, and if an offer is received to purchase the land, a transaction will be made that may flood additional value for the insurer.
Investments in affiliated companies and long-term loans
In the NAV model, this item amounts to approximately NIS 340 million. This amount is derived from the extended solo report published by the company in its financial statements, under the item “Investments in companies treated according to the equity method and long-term debtors”, which as of September 30, 20, amounts to approximately NIS 741.1 million. From this amount, we reduce the book value of: (1) Hod Hasharon Towers, (2) MRC Power Station – Alon Tavor and (3) Manif (according to our calculation according to Manif’s equity as of 30.9.20, which Published in the company prospectus), which are presented separately in the NAV model.
To our understanding, out of this amount of about NIS 340 million, about NIS 90 million is attributed to the long-term debt item (about half is attributed to amounts received from a fan with the issue), amounts most of which were received at the company’s fund with a fan issue and about NIS 150 million attributed to an insurer’s investment. In Tower Vision, Davidson and BEAN & CO, the amount of the investment can be seen in the list of the affiliated companies that the company presents in its annual reports (Note 11, on page 112). From conversations we have had with the Company, we assume that the book value of these companies in Mivtach books has not changed substantially.
• Tower Vision – Tower Vision, establishes passive infrastructure for cellular and wireless networks in India, and operates on the BOO method “Build, Hold and Operate”. As of December 31, 19, the value of the company’s balance sheet was approximately NIS 57 million.
Davidson – This is a European investment fund that works to provide loans to high-tech high-tech companies. The foundation’s activities focus mainly on the city of Berlin. According to Mivtach’s financial statements as of December 31, 1919, the balance sheet value of the investment in Davidson was approximately NIS 47 million.
• Bean & Co – a company that operates in the field of cultivation, cultivation and processing of cocoa plantations, as well as production and sale of cocoa worldwide. As of December 31, 1919, the company’s balance sheet value was approximately NIS 43 million.
The balance of the value in this item, approximately NIS 100 million, is attributed to Mivtach Shamir’s investments in technology companies. However, Mivtach Shamir has additional investments in technology companies, which are reflected in NAV in the section Other financial investments.
Other financial investments
In the NAV model, this item amounts to approximately NIS 135 million. This amount is derived from the extended Solo report published by the Company in its financial statements, under the item “Financial assets at fair value through profit or loss”, which as of September 30, 20, amounts to approximately NIS 238.5 million. From this amount, we reduce Gilat’s market value in the model as of the date of publication of the reports, since Gilat appears in the model as a marketable asset, in its market value.
From Mivtach’s annual reports, it can be learned that out of an amount of approximately NIS 285 million, financial assets at fair value through profit or loss (ZK + ZA), only approximately NIS 70 million is attributed to other investments, most of which are related to technology. It should be noted that we do not claim to examine the value of the technology companies in Mivtach’s investment portfolio, but it is certainly worth noting the significant multiplier expansion that occurred in the technology industry in the past year, and hence the potential inherent in these investments, which are recorded in Mivtach books.
Tax: The company has capital losses that may assist it in future savings in tax payments. In the past, we have learned that the company holds assets for a long time, and in a conversation with management it was made clear to us that it does not intend to make significant realizations. However, we think it is quite possible that holdings will be realized in the future, and we take a tax that is about 5% of the NAV value.
Bottom line, Mivtach Shamir is one of the leading holding companies in the Israeli capital market, which has proven more than once that it knows how to create value for its investors, and we believe that it will continue to do so in the future.
In our opinion, there are a number of valuable assets in the insurer, which already in the short term, we expect that will lead to a significant flood of value for the company, and in particular in the field of energy activity and its real estate holdings.
In light of the above, we renew the coverage of Mivtach Shamir with a buy recommendation, at a target price of NIS 150 per share, which is more than 50% higher than the share price in the market.
Mutual funds holding Mivtach Shamir