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midastouch017

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midastouch017

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Wednesday, 03/08/2006 2:08:56 PM

Wednesday, March 08, 2006 2:08:56 PM

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“Some of the best technological solutions in security are produced in Israel”
James McIlree, senior analyst at investment house C.E. Unterberg, Towbin, estimates that the US defense and security market will grow by 6%-7% in coming years and recommends Supercom stock.

Shiri Habib 8 Mar 06 18:41

“Israel has a unique defense and security industry,” says James McIlree, managing director and senior analyst at C.E. Unterberg, Towbin. “In these industries, every government tends to work with local companies, and companies from smaller countries usually have a problem here. Israeli companies, however, have managed to find ways to focus on and penetrate the US market, and Israel also has an extensive defense base.”
McIlree, a specialist in defense and security industries was in Israel for a brief visit last week , during which he toured several companies which focus on security and defense technologies. “Usually, when an analyst goes out to the field, he sees a few excellent companies and a few that are not so good. I was surprised to find nothing but amazing companies in Israel,” he says. “I examine public companies so that I can report back to investors that everything is OK in the company concerned, and I also examine private companies, since they could be competitors to companies that investors are interested in, or their suppliers or customers. Sometimes they are also potential customers for Unterberg , if the company decides, for example, to float.”

Globes: Which of the companies impressed you most?

McIlree: MTI Computers and Software Services Ltd. (TASE:MTCO) is a very interesting company. It takes wireless technologies originally developed for the military and tries to bring them to commercial companies as well. Another interesting company is BioGuard Components and Technologies Ltd., which focuses on biometrics technologies (identification of unique characteristics such as iris and fingerprint for authorized access). We also visited Ituran Location and Control Ltd. (Nasdaq:ITRN); TASE:ITRN), which is a most impressive company. It appears to have a very strong management, good lines of business, impressive revenue growth, and a good strategy. You don’t come across a company like that every day.”

Your area of expertise includes defense and security companies. What exactly is the difference between the two?

”I think the main difference between defense and security is the customer. In defense, the military is the main customer, while in security, the military can be a customer, but so can civilian and government bodies, such as the police, fire department, and others. You can also have commercial customers.

”There is a considerable overlap between customers or applications of companies in both fields. For example, a company can sell a product which protects a military base, and the customer is either the Israeli or US military. The product can also easily be sold to a private body. So you have the same product but sold to a different customer. Magal Security Systems (Nasdaq: MAGS; TASE: MAGS) for example, is a company that sells to both military and commercial customers, and it is the type of company we’re looking for: companies that can sell to a wide range of customers, thereby reducing the risk, as opposed to a company which focuses on one type of customer only.”

One of the factors affecting defense and security companies is the fear of terrorist attacks. This has influenced share prices, although it has not always translated into increased demands for a company’s products. Magal, for example, soared 9% in one day at the end of February, following an attempted attack on an oil rig in Saudi Arabia.

McIlree is not troubled by possible fluctuations in prices of defense and security stocks. “There will be fluctuations in the short term. If everyone thinks there will be a terrorist attack and it does happen, this does not mean that stocks of security companies will rise; all it means is that everyone guessed right. Stocks go up and down not on the basis of what happens, but on what people think might happen.”

He advises that people should look at the long-term picture from one to three years hence. “We are looking for companies that have a good forecast for the next twelve to 36 months, and we recommend their shares to investors even when prices fall. I came to Israel to find companies which would be suited to the Homeland Security market, since we believe that there will some very good opportunities in this market in coming months. We expect that some of the top technological solutions will be produced by Israeli companies.

Do small companies have a chance of survival in this type of industry

”They will all survive; the question is do they want to just survive or also grow. If you want to grow you must have a good product that is suited to a growing market, or a company that can either be merged with or acquired by other companies. Of the Israeli companies I have seen, there are some that would be suitable acquisitions. Some of them may opt for a share issue, but it would not be appropriate for me to give specific details.”

Which public companies would represent an opportunity for investors?

”I have been following SuperCom (Euronext: SUP; OTCBB: SPCBF). They are currently rated by us at ‘Market Perform’, but they have done some good work in restructuring their expenses and have done some excellent work in developing products for the biometrics sector. I have not covered Ituran so I cannot make any recommendations about their stock but I was impressed with their lines of business. I also like Magal’s business; they have done some good work and have created a good niche for themselves in the market. They have a product line that will ensure their continuing growth.”

McIlree expects the US market to grow annually by 6%-7% in the coming years. “I very much hope that nothing bad will happen in the world,” he laughs, “But the defense and security market will continue to grow, regardless of events in Iraq, Afghanistan and the Middle East.”

Published by Globes [online], Israel business news - www.globes.co.il - on March 8, 2006

http://www.globes.co.il/serveEN/globes/docView.asp?did=1000069507&fid=1724

Dubi

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