Healthcare stocks

In July the Israeli market rebounded from the underperformance witnessed in June. Concerns regarding losing control of the second wave of Covid-19 moderated and the number of new and severe cases stabalised.

Top Holdings (alphabetically)

Doral Group Renewable Energy R Israel Renewable Electricity

Ilex Medical Israel Health Care Distributors

Priortech Ltd Israel Electronic Components

Solaredge Technologies United States Semiconductor Equipment

Telsys Israel Technology Distributors

A significant proportion of the performance was generated through the Fund’s exposure to the Healthcare sector. This was mainly a result of two positions (both written about in previous newsletters): Ilex Medical, in which we hold a position of 4.2%, and Itamar Medical, in which we hold a position of 3.4%.  Both companies rose by circa 30% during the month of July.

Ilex Medical (TASE: ILEX) is a leader in the medical diagnostics field and specialises in marketing, selling and supporting equipment, disposables and reagents to laboratories and healthcare establishments in Israel. Ilex is closely affiliated with leading multinational medical conglomerates like Abbott, Hologic, Grifols, and BioMerieux, which provide solutions in a diverse range of medical fields such as microbiology, blood banking, hematology coagulation, IVF and more.

One of Ilex’s holdings is benefitting from the fight against COVID-19.  Medtechnica (MEDI.TASE) is Israel’s largest medical equipment distributor.  In July Ilex increased its existing 58% stake in Medtechnica through a tender offer, acquiring 100% of the company. Ilex also recently entered the broader index in the Israeli Stock market, becoming part of the TA-125.  This brought significant attention to the company from institutional investors.

Itamar Medical (TASE: ITMR) engages in the research, development, marketing, sale, and leasing of non-invasive medical devices for the international cardiology market, including the United States and Europe. We expect that the company will show a significant increase in revenue from its main offering, a perishable product for diagnosing sleep apnoea.

Macro Developments

According to Bank of Israel data, the composite state-of-the-economy index remained unchanged in June compared to May. This comes following an especially sharp decline registered in April and a moderate decline in May, during which time economic activity gradually returned.

Most of the index components appear in the index with a lag of one or more months, and in June reflected the beginning of the local economy’s return to activity. However, it is important to note that current economic activity has still not returned to ‘normal’, and the breakout of a morbidity wave in the beginning of July is delaying the orderly return to activity, a development that is likely to be reflected in the composite index data in the coming months.

Looking ahead, and assuming the restrictions on economic activity will continue and may even become stricter during the remainder of the year, 2020 is expected to conclude with a real term decline of 7.9% in GDP.

Stocks in Focus

SolarEdge – listed on the Nasdaq (ticker SEDG)

In January 2018 we wrote about a company called SolarEdge. We described SolarEdge as having a significant technological advantage that, we believed, would help it dominate its market.  We held SolarEdge in our existing funds and subsequently purchased the stock for the Alpha Israel Fund.  It proved to be one of our most successful positons until we sold it recently, for reasons explained below.

SolarEdge is now a global leader in Smart Energy Technology, leveraging world-class engineering capabilities. With a relentless focus on innovation, SolarEdge developed the DC optimized inverter solution that changed the way power is harvested and managed in photovoltaic (PV) systems. The SolarEdge intelligent inverter solution maximizes power generation while lowering the cost of energy produced by the PV system, for improved RoI (Return on Investment). The trade war between the US and China has been a positive factor as it has helped SolarEdge become an even more dominant player in the solar inverter space after Chinese giant Huawei trimmed its US operations in June of last year.

When describing our approach to individual investments we often talk about process, discipline and milestones. SolarEdge is an excellent example of this. When we built our position in SolarEdge in the beginning of 2018, SolarEdge’s sales for FY17 were US$687m with an operating profit of US$92m. SolarEdge showed significant improvement when they reported results for FY18: sales had increased to US$937m and operating profit was US$140m.  These results, along with the understanding that the company was expanding its scope of products into the storage (batteries) segment of the industry, led us to increase our position in the company. In 2019 the company reported sales of US$1.4billion with operating profit of US$190m.

As we write this report, we can see the fruits of the company’s market dominance. Its first-half results for 2020 show sales of US$763m and operating profit of US$125m. Wall Street expected earnings of 53 cents on revenue of $319.6 million, however, the company reported earnings of 97 cents per share on revenue of $331.9 million, causing the stock to soar 15% and reach an all-time high share price of US$200.

We very much believe in the continued success of SolarEdge.  However, its current share price assumes continued future success in the residential sector, in which it already has a huge market share.  The company’s recent move into the commercial sector and plan to enter the utility sector are positives but also represent big challenges. Lastly, we have not yet seen much progress in the field of electric motors and are still waiting to see how their investment in the field of batteries plays out.

One day we might return to holding the company, it is just a matter of the right pricing and if the batteries gain momentum.  Without doubt, it has been a great investment. We take a lot of pride that it has revolutionized the solar industry by inventing a better way to collect and manage energy in PV systems.  Today it is a global leader in smart energy technology with a relentless focus on innovation.

Radcom – listed on the Nasdaq (ticker RDCM)

RADCOM is a leading expert in cloud-native Network Intelligence for telecom operators transitioning to SDN/NFV (Software Design Networks/Network Functions Virtualization). It provides end-to-end quality monitoring and service assurance solutions. The company is headquartered in Israel and has offices in the US, Brazil, Japan and India.

Put simply, RADCOM is the operators’ eyes into their networks. Operators want to manage their networks according to the customer experience and RADCOM enables this by monitoring all the data packets that traverse the network.  It is a leading expert in this space because it:

• Understands the customer experience;
• Automatically detects network problems;
• Deploys cutting-edge cloud technology that utilises machine learning and AI;
• Is the best and most advanced virtualised solution for large scale operators; and
• Was the first to invest and transition to virtualized assurance solutions.

The industry is currently at a turning point. For some time expectations for the transition to 5G have been high but it has been delayed due to technological barriers and the significant investment in infrastructure that the transition requires. However, the point is very close at which the cloud-native NFV and 5G industries gain enough maturity for communication service providers (CSPs) to ramp up their investments. Evidence is mounting that CSPs are getting ready to move, particularly because 5G standards have now been set and the vendor ecosystem can now innovate around these standards.  CSPs understandably want certainty in the technology standards before investing significant capital.

RADCOM has a global customer base including some of the world’s top tier telecommunications companies. This includes names like AT&T, Rakuten, BT, China Telecom, GVT, KPN , Orange, Telecom Argentina, Telefonica, and Vivo.   In May 2019 RADCOM signed a multi-year contract to provide its cloud-native assurance solutions across Rakuten Mobile’s entire virtual network. Key take aways from this are:

• Rakuten is a global leader in e-commerce, fintech, digital content and communications spanning 70+ businesses with 1.2 billion members worldwide;
• Rakuten Mobile, launched in October 2019, is the fourth mobile network in Japan (fully virtualized) that aims to disrupt the market with an automated, 5G-ready network.

The company announced this month the launch of its automated 5G assurance solution, RADCOM ACE, built on RADCOM’s cloud-native expertise and designed so operators can manage their networks in a more dynamic and agile way. RADCOM ACE is built to ensure that 5G services run continuously at optimal quality, while at the same time improving the operators’ operational efficiency through automation and rapidly enhancing time to market for new services and innovations. RADCOM ACE is the culmination of RADCOM’s significant product investment over the last few years and has been reinforced by customer feedback to enable a new way of monitoring 5G services that ensures a great customer experience as operators’ transition to 5G.

To summarise, RADCOM is well-positioned to benefit from the growing demand for 5G solutions in an industry that is at a turning point.  It operates in a niche that will be vital in the continued rollout of next-generation, high capacity networks, including 5G, IMS, SDN/NFV, and others.