Ormat Technologies Inc (ORA)

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Time for Ormat

As fuel prices keep rising, more and more investors will discover the technological and managerial virtues of this geothermal energy company.
Shlomo Greenberg

Merrill Lynch launched its coverage of Ormat Industries (TASE: ORMT) with a very warm and justified “Buy” recommendation. After all, it's a unique company in a growing industry. At a current price of NIS 44, Merrill Lynch recommends the share in the short and long term, and I can only agree. A large part of Ormat’s share price is due to the surge in oil prices, which are liable to rise further, but a story is developing here that should be looked into. It's a story in which both economic and psychological forces come into play.
"Global warming and high conventional energy prices have prompted favorable fiscal and regulatory treatment for alternative energy suppliers, driving investment in the sector. This trend is expected to accelerate and Ormat is well placed as the only pure geothermal energy play on Nasdaq via its 77%-owned subsidiary, Ormat Technologies," Merrill Lynch's report says, though it should be pointed out that Ormat Technologies is in fact listed on the New York Stock Exchange under the symbol ORA.

In the three weeks since New Year’s, Ormat Technologies' share has risen 39%. I think that a long-term investment in Ormat is the way to do business in it: buy the share and hold onto it. This is because this is a share that will be discovered, as time goes on and oil prices stay high, and as investors seeking investment in successful alternative energy source come to recognize that geothermal power is successful and economical. In addition, when investment institutions get to know the company’s unique management better, they will feel safer buying the share at ever higher premiums. Yehuda and Yehudit Bronicki are a couple of managers of the kind of international calibre that Israel needs so much.

Until Merrill Lynch entered the picture, four analysts covered Ormat, one of which, Deutsche Securities, gave a “Sell” recommendation for the share in December 2004, and vanished. The share has subsequently risen 143%, but this broker is silent. Why? Maybe Deutsche Securities still has a short position as per its recommendation, and has no money to update its earlier report.

Merrill Lynch analyst Haim Israel uses two economic models to evaluate Ormat: the discount cash flow (DCF) model, and the economic value added (EVA) model. He picks the model that gives the lower target price, in order to be as conservative as possible. The DCF model gives a target value of NIS 50 for the share, which is the target price he uses. He believes that the company will acquire more companies, and I have no doubt that the subject is on the management’s agenda. The problem is the lack of synergetic companies. Ormat Technologies is traded at a p/e ratio of 36 for 2006.

http://www.globes.co.il/serveen/globes/docview.asp?did=1000054520&fid=1052

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