October 12, 2020

The Rise of the Electra Consumer Products Share This Year Does Not Yet Reflect Its Full Potential

The agreements signed by Electra Consumer Products this year lay down a solid foundation for the company's continued growth - which will establish profitability and will strengthen the bottom-line contribution

By Eyal Dabi

Since the Corona crisis began, I have often insisted, in the columns I wrote for Globes on one of the unique characteristics - the dichotomous impact on the performance of sectors and companies, and even more so on stock behavior. Because I attach great importance to the purchase price at which the investment is made, I have recently presented many stocks that have received a disproportionate blow - one that is disproportionate to the business harm inflicted.

This time I wish to present an interesting example of investing on the other side of the equation - Electra Consumer Products.  The Electra Consumer Product share has increased by no less than 70% from the beginning of the year, so it is quite natural that the gut feeling is that the stock is already expensive. The point is that if we look at the market value that the company has reached, against the background of the quality of performance it presents, it is difficult to say that it is at an unusual pricing level.

If we shall calculate Electra Consumer Products’ operating profit multiplier based on the results of the last 12 months and the current market price, we shall discover that it stands at a reasonable level of 12. What is so attractive about a company with a "reasonable level of pricing"? The fact that the expected growth is not reflected on all aspects of the stock price.

Following the sale of its holding in Golan Telecom, Electra Consumer Products' activities currently focus on two main sectors: The first one is the sector of electrical consumer products, where the company imports and distributes "white" and "brown" electrical products, including air conditioners. The second area of activity is the retail sector, which includes two well-known and leading distribution chains - "Shekem Electric" and "Mahsanei Hashmal".

About three weeks ago, after parting ways with Golan Telecom, Electra Consumer Products issued an unusual notice to the stock market - "voluntary financial information". In fact, the company again presented consolidated financial statements, excluding Golan Telecom, as of August 31, 2020.

If we examine the growth in Electra Consumer Products’ revenues in the first eight months of the year, we find that it grew by 10% compared to the same period in 2019. This is certainly a fine growth, but in relation to the increase in operating profit, it is not comparable at all, since, in the first eight months of the year, operating profit was 2.5 times higher than that recorded in the entire year of 2019.

It is clear that the reason lies in the operational profitability that made a considerable jump - from a rate of 2.5%, in the corresponding period last year, to 6% this year. Part of the improvement is probably due to the optimization of expenditures - logistics, inventory management, etc. - but revenue growth has made a huge contribution in this regard.

This is particularly noticeable in the electrical consumer goods segment and in the graph shown in this article, you will find that the relationship between revenue and profitability is significantly strong and cannot be questioned.

The high sensitivity of profitability to revenue is often a weakness, especially at a time when the profit margin is at the top of the curve, for the simple technical reason: the potential for improvement that remains, in the optimistic scenario of continued growth, is considerable lower than the possible damage in the opposite scenario – where revenue would go the other direction.

Beyond what has been contributed by the Corona, Electric Consumer Products has established its growth for another long period - outside of Israel, by means of business agreements it has signed during the year.  I shall briefly mention three of these agreements: a memorandum of understanding with a large European customer engaged in the area of development and production of heating systems, in an estimated amount of NIS 300 million over five years; An agreement with a company from the Bosch Group, for the establishment of a joint venture for the development and production of advanced air conditioning systems and heat pumps; And an additional agreement, with one of the leading customers in Europe, in the framework whereof unique production and assembly lines will be developed for the customer.

The contribution of these agreements will be gradual and will be spread over a considerable period of time, but they will add many tens of percentages to the company's revenue. If so, the financial picture is clear: the chance of a further improvement in the profitability of Electra Consumer Products is significantly higher than the risk of shrinking.

I would like to focus on the comparison between Electra Consumer Products and Tadiran Holdings on two parameters: the operating profit multiplier and the profitability rate of the electrical products field.

The multiplier of Tadiran Holdings now stands at 16 - a level that is about 33% higher than that of Electra Consumer Products. Regarding profitability, here too Electra Consumer Products can get quite a bit of encouragement, since its operating profit margin in the area stands at 8% , while that of Tadiran is close to 12% - so that there is still room for improvement.

Bottom line: The agreements that Electra Consumer Products signed this year provide a solid foundation for the company's continued growth - something that will establish profitability and strengthen its contribution to the bottom line. Despite the rise in the share price, it still does not fully reflect the potential for improvement - so that in my opinion, it is a good investment, even at the present.