Booster shots reduce Israel's Covid-19 illness rates

The Fund rose 2.3% (in AUD) and 2.4% (in USD) in the month of October. By comparison, the Tel Aviv Stock Exchange 125 Index and the Tel Aviv Stock Exchange Small and Medium Cap 60 Index rose 3.7% and 4.3% respectively (in ILS).

Top Holdings (alphabetically)

Airport City Ltd

Israel

Diversified Real Estate Activities

Ilex Medical

Israel

Health Care Distributors

Kenon Holdings Ltd

Singapore

Independent Power Producers & Energy Traders

Priortech Ltd

Israel

Electronic Components

Telsys

Israel

Technology Distributors

Israeli technology stocks have thus far underperformed their global peers in the latter half of 2021. This represents a marked reversal from their strong relative performance in 2020 and the first half of 2021. The Israeli technology sector is dominated by small and mid-cap companies, which have experienced a correction in recent months, and also has a circa 13% weight to clean energy stocks, which have also struggled of late.

As discussed in prior reports, the Fund is heavily orientated to the Technology sector (circa 40%) and the compelling opportunities it represents. However, stocks such as Priortech (-8%) fell during October following a strong month in September. We remain optimistic about this position as demand for the Company’s products (semiconductors) continues to grow and it expands its production capabilities. Other stocks, such as Human Xtensions (-22%), continued to suffer from the impact of Covid-19.

The Fund’s positions in the Banking/Insurance and Real Estate sectors fared better. The wealth effect in Israel is favouring both sectors as low interest rates, rising wages and commercial growth fuel the residential real estate market and in turn generate further wealth. In addition the characteristics of tenants in the office real estate segment have changed, with high-tech companies and their derivatives pushing up rental prices to record levels.

Airport City, an office and logistics real estate company (+5%) continues to benefit from the high occupancy rates in Israel as it pursues a growth strategy of purchasing real estate rights in Tel Aviv. Buligo, another real estate company focused on the residential sector (+37%), maintained its share price momentum after its IPO in September. Bank Leumi (+8%) and Migdal Insurance (+11%) rose in the expectation of strong 3rd quarter results announcements in November.

Stock in focus

Tower Semi-conductor (dually listed in New York and Tel Aviv, symbol TSEM) is a leading foundry of high value analog semiconductor solutions. The company manufactures advanced analog integrated circuits and leads the analog ecosystem with high-quality, innovative technological and manufacturing solutions, providing strong competitive advantages in various growing markets. To complement its advanced technology platforms, the Company also offers world-class design enablement services, providing mature and valuable tools that enable a quick and accurate design cycle.
Tower’s chips are used in various growing industries including automotive, telecommunications infrastructure and consumer goods. The chip industry currently has strong momentum with a global shortage relative to rising demand. In order to meet demand, Tower recently announced its intention to expand four of its seven factories, increasing production capacity and benefitting from significant operational leverage.

The Company recently released its results for the 3rd quarter of 2021. Revenue was $387 million, the highest quarterly revenue in the Company’s history, compared to $310 million in the third quarter of 2020, reflecting 25% year on year growth. Operating profit for the third quarter was $44 million, more than double the $19 million recorded in the third quarter of 2020 and 30% higher than the $34 million recorded in the second quarter of 2021. Net profit for the third quarter was $39 million, again more than double the net profit of $15 million recorded in the third quarter last year. The company’s current market capitalization is $3.8 billion and it trades at 10 times EBITDA.

Tower has a very experienced management team that has reduced debt while doubling revenue and improving profitability. The Company has had a challenging few years, with the expiration of some customer agreements, however Tower has high operational leverage in strong markets and we believe the good times are ahead as it once again enters a period of growth and expansion. The Company has developed a richer capability mix combined with pricing initiatives, enabling it to target more than 15% net profit margins in 2022. Their long-term forecast is very positive, indicating continuous growth for the foreseeable years.

Macro developments

With the help of the widely distributed booster shots, Israeli Covid-19 illness rates have dropped significantly, and the country opened its boarders for incoming tourists on November 1st. The composite state-of-the-economy index for the third quarter of this year indicates a continued expansion in activity, and the Bank of Israel is predicting that Israel’s GDP will grow by 5.5% in 2021 and 6% in 2022.

High-tech services exports have been the main growth driver of the Israeli economy over recent years, amounting to US$36.0bn in 2020, while business services exports for all other sectors combined totalled US$10.7bn. The American economy is the main importer, accounting for approximately 40% of total high-tech services exports, with additional primary destinations including the European Union (15%) and Britain (6%). Looking ahead, high tech exports are expected to continue to grow at a rapid pace in coming years. This dynamic is expected to support the strength of the Shekel, by offsetting the trade deficit in the current account of the balance of payments, and also through the inflow of foreign direct investment.