12/03/07

From: Globes, 12 March 2007

Uri Shuster

Revenue totaled NIS 1.042 billion and net profit totaled NIS 96 million. The company’s share touched the NIS 100 threshold. FIMI has made a paper profit of NIS 133 million on its investment in Scope Metal.

2006 was a record year for quite a few Israeli companies, but the case of Scope Metal Trading and Technical Services Ltd. (TASE: SCOP) exceeds all statistical boundaries. The results of the products and raw materials importer and marketer for the metals industry are unquestionably the epitome of everything related to business improvement by an Israeli public company. In effect, the company has changed beyond all recognition, and there is almost no relationship between the numbers for year-end 2005 and those presented today, for year-end 2006.

The fourth quarter of the year continued the steady improvement in the company’s results. Quarterly revenue totaled NIS 298.9 million, 90% more than for the corresponding quarter of 2005. Operating profit almost tripled to NIS 53.4 million, and net profit soared 310% to NIS 33.2 million.

Although the fourth quarter was the best in terms of performance, it was by no means unusual. The results for the year demonstrate that Scope Metal succeeded in passing the NIS 1 billion threshold, with NIS 1.042 billion in total sales – an increase of 75.5% over 2005. Operating profit rose to NIS 170.7 million, 93.5% more than in the previous year, and net profit rose 127% to NIS 95.6 million. It should be noted that annualized weighted profitability for the second half of the year indicate an annualized growth of more than NIS 120 million. However, the deficit in current cash flow grew to NIS 104.6 million, mainly because of an increase in inventory and customers. In addition to the NIS 1 billion threshold, the company recently passed another financial and psychological threshold a few days ago, when the share fought for NIS 100 threshold during trading – a height never before reached.

Scope Metal’s growth rate has made the company’s ambition of dual listing on Nasdaq at a company value of at least $300 million more realistic. On the basis of the company’s 2006 financial report, this offering value gives a p/e ratio of 13, although the ratio falls to 10 on the basis of figures for the second half of the year, which means that the possibility is quite practical.

76% of Scope Metal’s revenue came from the domestic market, and this proportion is expected to decline in the coming years, since the company has subsidiaries in the United States and Czech Republic, and revenue from operations in Romania and China will begin to flow this year.

Scope Metal’s shareholders’ equity and liquid assets at the end of the year offer many opportunities for further expansion. The company hopes that its business growth will primarily come from its ongoing global deployment and its one-stop shop strategy for becoming a supermarket designed to meet all its customers’ needs, so they will not seek bargains anywhere else. The company’s operating profit from domestic activity contributed most of the consolidated profit, as it was five times the profit from international operations. This indicates that there is still a great deal of room for streamlining.

Preparing for a drop in prices

Despite a clear and promising horizon, it is necessary to take into account that Scope Metal is riding a positive cycle in the global metals market, which if reverses course is liable to cause quite drastic harm to the company’s business. In addition to concern about falling prices for goods, which would narrow profit margins, there is also concern about a drop in value of inventory, which was valued at NIS 583 million at the end of last year. It should be remembered that opening a position on foreign currency in order to protect prices is not the usual practice in this industry, nor is it effective. However, the fact that the company has approximately 60,000 items in a wide range of sectors, and a rapidly expanding international presence, reduces the risk level.

It is also important to remember that, in recent years, especially since the September 11 terrorist attacks, the industry has been consolidating through mergers, which makes supply more rigid and price falls less likely. Growing demand by China and the aviation and shipping industries also somewhat reduces worries about falling prices.

First Israel Mezzanine Investors Ltd. (FIMI), which invested NIS 153 million in Scope Metal last April at NIS 53.50 per share, has made a number of very successful deals in recent years. If Scope Metal’s graph continues to climb, then FIMI controlling shareholder and General Manager Ishay Davidi will have made an extraordinary investment. FIMI has already made a paper profit of NIS 133 million on its investment in Scope Metal, and assuming that the company continues to progress at its present rate, then FIMI will see an annualized return on investment of 100%.