A Clear Connection to Israel

06/02/2008 12:00 am EST

Focus: GLOBAL

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says Israel’s largest cell phone provider offers lots of upside in a technologically advanced country.

Israel rarely comes up in discussions of global “safe havens”. But so far this year, Israel has been a pretty good place to hide from Wall Street’s woes. The Morgan Stanley Capital International (MSCI) Israel index is up nearly 5% year to-date—good enough to earn the country a spot among the world’s best performing markets.

Israel is also a unique case in the sense that it straddles the increasingly hazy line between “developed” and “emerging” markets. Whatever the index purveyors may say, it’s clear that a nation with nearly $30,000 per-capita GDP and dozens of world-class technology firms doesn’t quite belong in the same bucket as Sri Lanka or Colombia.

Cellcom Israel (NYSE: CEL) is Israel’s largest mobile phone service provider, with sales of $1.6 billion in 2007. Since February 2007, the company has had a dual listing on both the New York and Tel Aviv stock exchanges.

Discount Investment Corp. Ltd., one of Israel’s largest business groups, owns just over 50% of the company. With 3.1 million subscribers, Cellcom has a 34% share of Israel’s mobile telecom services market. Roughly three-quarters of Cellcom’s subscribers are individuals, and the remaining 25% are corporate customers.

Israel’s mobile telecom market is fairly well developed, with a penetration rate almost 125%. In other words, there are more than nine million mobile phone accounts for a population of 7.2 million people. Furthermore, spending on telecom services in Israel accounts for 4.4% of gross domestic product. That’s a higher proportion than even the US and Europe.

But despite the relative maturity of the industry, Israeli mobile phone users spend the bulk of their money on voice services, or plain old phone calls. Value-added content like messaging, e-mail, and ring tones accounts for less than 10% of Cellcom’s revenue. In Europe, the norm is closer to 20%.

As a result, Cellcom’s Average Revenue Per User (ARPU) runs about $40 per month, versus more than $50 in European markets with similar levels of mobile phone usage. Part of this is due to Cellcom’s history as a low-cost alternative to other carriers, and Cellcom was also somewhat late in rolling out these services.

But Cellcom’s content-related revenue surged nearly 50% last year, albeit from a low base. This was in part due to a marketing strategy that draws heavily on Cellcom’s position as the leading provider of music-related content.

With EBITDA (earnings before interest, taxes, depreciation, and amortization) of $550 million in 2007—a 35% margin—Cellcom throws off tons of cash. It has also done a good job keeping expenses under control. And at less than 12 times earnings, and less than eight times EBITDA, the valuation looks very reasonable. (The ADRs closed above $35 Friday—Editor.)

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