Best Israeli Stock May Still Have 33% Upside for Barclays

  • Frutarom to extend surge as it pursues acquisitions: Barclays
  • Citi started flavor maker with `buy' even at highest valuation

Frutarom Industries Ltd., the best performer this year on the Tel Aviv Stock Exchange, is near the most expensive it’s ever been. Barclays Plc and Citigroup Inc. are undeterred.

There’s still a potential 33 percent upside to the maker of flavors for Coca-Cola Co. and Nestle SA, Barclays said on Wednesday. Citigroup started coverage of Haifa, Israel-based Frutarom with a buy last month, just as valuations climbed to the highest on record. The company this week announced its largest acquisition and raised its sales target to $2 billion for 2020 from $1.5 billion.

Each blue A marks an acquisition.
Each blue A marks an acquisition.

After a string of acquisitions that has made it the sixth-largest player in the $12 billion-plus global flavors market, Frutarom’s stock is up 56 percent this year, growing at least twice as fast as its two main competitors, Switzerland’s Givaudan SA and Germany’s Symrise AG. The company is still cheaper than its Swiss and German rivals, according to Bloomberg data. 

“Successful growth in Asia, Latin America, Africa and the U.S. primarily could drive the stock to 250 shekels," Tel Aviv-based Tavy Rosner from Barclays said in an e-mailed note. “Our upside case accounts for successful execution of 2020 targets."

The shares were unchanged at 188.5 shekels at the close of trading on Thursday, up 4.2 percent in the week. Barclays raised its target price to 200 shekels from 150 shekels.

Doubling Revenue

The aggressive expansion strategy of Frutarom’s Chief Executive Officer Ori Yehudai, who has nearly doubled revenue since 2010, has made the company the top performer on Israel’s benchmark index, which it joined at the end of 2014. The company has made 12 acquisitions this year including India’s Sonarome Pvt. Ltd. and Poland’s Amco Sp ZOO, extending its product base and geographical reach.

“Frutarom has a strong track-record of creating value through M&A, typically targeting smaller deals where prices are lower,” Citigroup’s Michael Klahr wrote in an e-mailed note on Nov. 26.

Frutarom revenues are climbing.
Frutarom revenues are climbing.

The company said this week it signed an agreement to buy Austrian flavor company Wiberg GmbH for about $130 million. The acquisition will help Frutarom to penetrate the savory industry in North America, Yehudai said.

“Frutarom made an impressive acquisition but the share is expensive," Bank Leumi Le-Israel Ltd. analyst Gil Dattner said in an e-mailed report on Dec. 15. “The valuation prices in expectations beyond what even the company’s ambitious target has laid out. We expect this share to underperform in the coming year."

While Leumi raised the company’s price target to 145 shekels from 112 shekels, that’s still about 30 percent below the current share price.

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