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Much More than Metal Prices; Why to Invest in Scope?

Globes - 17/09/2014
Translated from an article by Tzachi Koren, CEO and Alon Kushnir, Share Investment Manager at Excellence Nesuah.

Scope Metals Group supplies a wide variety of metals and engineering plastics products and provides its customers full logistical support – which makes it an interesting investment.

In Israel, the metals distribution business is comprised of a number of players that support the various local industries, including defense, construction, communications and others. For these customers, availability of stock, storage and quality are of vital importance. Throughout the years, these companies have dealt with many difficulties and challenges, some due to managerial problems while others where due to both internal and external market slowdowns as well as other factors.

Scope Metals was founded in 1980 and has been traded on the Tel Aviv Stock Exchange since 1992. The company is included in the mid-cap 50 listing, valued at approximately half a billion Shekels. The company, in Israel and via its global subsidiaries, engages in the import and marketing of semi-finished and finished metals products, mainly from aluminum, steel and stainless steel.

Scope has been owned by Shmuel Shiloh since its establishment. The FIMI Fund, which shared control of the company for a certain period, sold its holdings to the Shiloh family and to various institutional investors during 2013.

Scope is unique in that it is a One-Stop-Shop, a commercial platform serving over 4,500 customers in Israel and thousands more around the globe in all industries. The company markets over 80,000 off-the-shelf items. It seems that the company is attempting to position itself as the leader in supply of quality metals products, with emphasis on availability of supply to customers' sites and full logistical support (storage, cutting, sawing etc.). In fact, the company provides total outsourcing of inventory management to its customers.

Legitimate Industry Player

According to its annual financial statements, the business strategy of the company it to serve as a logistical center for the supply of metals and engineering plastics products, with international presence in the USA, Europe and the middle-east. The company supplies a wide variety of metals and engineering plastics products to industry. In addition, as mentioned, it provides its customers with logistical support including inventory forecasting, storage, cutting, sawing and fast delivery. The prices of some of the products sold by the company are influenced by fluctuations in metals prices.

In view of the high level of inventory held by the company we believe that the company is exposed to risk from metal price volatility that may impact its financial results.

In 2013 the turnover of the company was more than 1.25 billion shekels. About half of the income is generated in Israel and the rest is from the activities of the company in the USA, Romania, the Czech Republic and Poland. During the global economic crisis the company suffered a decline in activity – a decline that that significantly impacted the company's financial results.

In our opinion, a number of business/operational moves enabled Scope to endure the crisis and to emerge as a legitimate industry player. The company began adjusting inventory levels to sales potential while not impacting service or availability to customers. Moreover, the company maintains inventory mobility between its various branches (this way avoiding significant devaluation) and the operation in the USA underwent re-organization. In addition, the company reduced its debt.

Scope is dependent on prices as set on the commodities markets which are correlated to prices on the LME. Currency exchange rates also affect financial results. In our opinion, the company is attempting to mitigate these factors by rapid turning of inventory, making smaller more frequent orders from suppliers so that current metals prices and exchange rates are reflected in the final price to the customer (to the extent possible), by broadening its product line and applications, and by providing complete service and logistical-engineering solutions to its customers in order to position the company as a leading supplier to industry.

Significant Improvement in Financial Results

There was a significant improvement in the company's financial results in 2013, along with improvement in the operations in the USA. According to the company's annual financial statements, the company intends to expand its operations in the USA via its subsidiaries, Hadco Metal Trading and Materials Technology Solutions (MTS). Scope operates 5 service centers in the USA, after increasing its sales force (including in South Korea) and by opening new branches without any major capital investment.

It seems that the company is intent on changing the geographical make-up of its sales with an emphasis on international operations, with expectation for improved economic conditions in the USA and Europe and the desire to reduce dependence on the Israeli operation. Such a move entails no small amount of business risk. In our opinion, these risks are lessened by the fact that the company's growth is organic – preserving the company DNA and company culture over many years.

In conclusion, we are of the opinion that the company's shares are deserving of investment consideration.