Mellanox Premium Grows as Hours Expand: Israel Overnight

Mellanox Technologies Ltd. (MLNX) shares traded in New York outperformed their local counterparts last week, creating the highest premium among the most-traded Israeli companies in the U.S. before the Tel Aviv Stock Exchange begins its first week of operations with extended hours.

Mellanox, the Yokneam Elit, Israel-based maker of equipment that speeds electronic data transfers, slipped 1.1 percent to $50.32 on June 14 in New York, leaving the stock 4.3 percent higher than shares traded in Tel Aviv. The Bloomberg Israel-US Equity Index of the biggest Israeli companies traded in the U.S. lost 0.7 percent, for a 0.5 percent drop in the week. Allot Communications Ltd. (ALLT) advanced 5.7 percent as Gazit-Globe Ltd. (GZT) posted the biggest decline, losing 7.7 percent.

Trading hours will be extended by an hour Mondays through Thursdays beginning this week in a bid by the Tel Aviv Stock Exchange to more closely align its day with foreign markets and increase volume on the bourse, which dropped 44 percent from the beginning of 2010 to the end 2012. The exchange may struggle to bolster trading after MSCI Inc., whose equity indexes are tracked by investors with about $7 trillion in assets, chose not to recommend Israeli stocks for inclusion in its Europe Index last week, according to William Scholes at Aberdeen Asset Management Plc.

“The European Index would have been a huge bonus for the market in terms of the volumes,” Scholes, assistant investment manager at Aberdeen in London, which manages a $72 million fund, said in a telephone interview June 14. “Israel is no longer an emerging market, nor does it belong to the indices of the classic EMEA developed markets. It’s a tough position and that has consequences for not just liquidity, but market efficiency.”

MSCI Reclassification

MSCI Inc. (MSCI) decided against including Israel in its Europe Index last week, a change that Tel Aviv Stock Exchange head Ester Levanon said June 6 would have lured as much as $2 billion in foreign capital. Institutional investors consulted “are not supportive of an inclusion of the MSCI Israel Index” in the European gauge, the New York-based index provider said in a statement June 11.

Trading will be stretched to 5:30 p.m. on the TASE, as the exchange is known. The move is the latest step the bourse has taken as it seeks to lure international investors after MSCI Inc.’s 2010 reclassification of the market as developed reduced flows. Volumes on the index fell 7.8 percent in the first five months of this year, according to data provided by the Tel Aviv Stock Exchange.

“It seems like a fairly small measure,” Scholes said of the trading hour extension. “If you talk to the local brokerage houses, the liquidity going through the market daily is not exactly putting a strain on the exchange, so a few hours on the side is by no means a surefire way of offsetting not being included in Europe. It’s hard to say what other measures are at the exchange’s disposal.”

Underlying Value

Shares of Mellanox slumped 0.8 percent in the week, outperforming a 5.6 percent tumble in Israel. The New York share’s premium over the Tel Aviv stock was the biggest on the Bloomberg Israel-US gauge. Shares of the Yokneam Elit, Israel-based company have slipped 10 percent since it said on May 30 that it will be delisted from the Tel-Aviv Stock Exchange on Sept. 1. The shares will be replaced on bourse benchmarks beginning today.

“The delisting doesn’t change the underlying value of Mellanox, it remains a very differentiated leader in the area,” Alex Gauna, a San Francisco-based analyst at JMP Securities LLC. “We recommended that investors use this delisting pressure that’s emerged in the stock as an opportunity to buy it.”

Gauna rates Mellanox “market outperform” or buy, with a price target of $70.

Organic Growth

Listing just on the Nasdaq is “easier and cheaper,” Mellanox’s Chief Executive Officer Eyal Waldman said in an interview with Bloomberg Television in London June 13. Some 20 percent to 25 percent of Mellanox shares are held in Israel, UBS AG said in a May 31 note.

Waldman said the company plans to grow organically and no acquisitions are planned. The company said on May 15 that it agreed to acquire Monterey Park, California-based Kotura Inc., a developer of advanced silicon photonics optical interconnect technology, for $82 million. Earlier this month, Mellanox said it was buying Roskilde, Denmark-based Iptronics, a distributor of electrical equipment.

Allot, which makes technology used by telecommunications providers to track wireless traffic, posted the best weekly gain in a month, while Gazit-Globe, a real estate company based in Tel Aviv, had the steepest decline since 2011.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net

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