How many cell phones can a country have per capita? And when is it clear that the market has reached saturation? When there is one cell phone for every person is the market fully penetrated? Not if you are an Israeli wireless provider. The current subscriber base in Israel is over 100% of the population due primarily to non-residents such as Palestinians and foreign workers. With such a mature market, analysts are not extremely optimistic about future growth, but there are attractive fundamentals behind some of the major players.
Currently there are four licensed wireless providers in Israel: Cellcom (CEL), Partner, Pelephone, and MIRS. Of the four, Cellcom and Partner are the primary competitors and both have been growing their market share in recent quarters at the expense of the other two. The mature industry makes for stable cash flows and predictable margins. Because of the stability of the business, Cellcom has decided to pay out 95% of cashflow to investors in the form of regular dividends. Consequently, the stock has a 7% plus dividend yield.
The management team is relatively new to Cellcom but is a strong group that has been hand selected by IDB group. IDB is the largest and most diversified Israeli holding company and has been instrumental in CEL’s growth over the last 2 years. IDB held virtually all of the CEL stock prior to the recent IPO and still controls 54.6 million shares making IDB the largest shareholder of CEL and also keeping CEL as the largest position for IDB. It is safe to assume that the holding company will keep a tight controlling interest in CEL and the experience in operating in the regional market will likely be a strong asset for CEL.
The current corporate strategy rests on four primary pillars
- Maximize customer satisfaction, retention, and ARPU growth
- Grow content and data usage
- Strengthen the brand and promote customer loyalty
- Increase profitability through cost control
Management appears to be succeeding as the last report showed value added service revenues up 51% and a strong quarter on most all metrics. As number portability is launched in December, CEL will have to draw on its customer loyalty to keep from losing valuable clients to competitors. At this point it looks as if the major players will not enter a price war upon commencement of portability, but investors should keep a close eye on margin trends for the fourth quarter as well as the first quarter of 2008.
With national tax rates expected to fall, and an attractive debt structure with a low rate, it appears that CEL is set up to deliver significant value to investors. While growth may not be as eye popping as counterparts in developing nations such as China, the company continues to see moderate increases in revenue while at the same time enjoying the stability of a mature national infrastructure. I am excited to see how the earnings report is taken on Thursday and expect to see higher prices as investors digest the information.
Disclosure: Author has a long position in CEL