Elite Client Idea #62

Palram Industries (1990) Ltd. ‘Palram’ (TASE Ticker: PLRM; Price: ₪28.65/share)

(Latest financials are for the quarter ending March 31st 2023; FY22 year-end: December 31st 2022)

Palram is a leading manufacturer and distributor of thermoplastic panels/boards using PVC/polycarbonates. These are integrated into follow-on products such as greenhouses, pergolas, gazebos, etc. installed in homes (‘Canopia’ segment). Its products are also used in industry, agriculture, and public buildings.

It generated FY22 sales from PVC (26%), Polycarbonate (48%), Canopia (19%), and point-of-sale display (7%) segments.

It has several plants in Israel and US, and distribution centers in main consumer markets (including tie-ups with major retailers). Tangible assets split: Israel (59%), Europe (19%), US (19%).

It periodically makes bolt-on acquisitions and disposes sub-par operations.

Geographic revenue split: Europe (34%), US (40%), Israel (7%), Others (19%).

Latest quarterly results were suppressed by slowing demand due to high inflation - leading to inventory build-up at retailers.

Moreover, rising raw material (PVC and polycarbonate) and transportation costs squeezed margins.

Cost inflation was offset by long-term agreements with its largest shareholder (Ramat Yohanan Kibbutz) covering personnel, electricity, and rental expenses.

Palram reported TTM revenues of ₪1.7bn (FY21: ₪1.8bn), ebit of ₪127mn (FY21: ₪305mn), and net profits of ₪127mn (FY21: ₪209mn)

During the pandemic, Palram enjoyed bumper profits as it had access to raw materials when its competitors didn’t. This lasted till Q1 of FY22.

Average ebit since FY16 was ~₪140-150mn (which isn’t far removed from less favorable TTM conditions) implying after-tax earnings of ~₪110-120mn.

(10% fluctuations in US$ or Euro vs. Shekel impacts profits by ~₪6-7mn.)

Palram paid down borrowings in the last few years - leaving it in sound financial condition with ~₪94mn in net cash (net of borrowings and leases). Current and liquid asset ratios are strong; and tangible equity stood at ₪900mn.

Receivables are slightly higher than historic averages; however, all accounts >$50,000 are credit insured.

Gross margins >30% indicate reasonable pricing power. There’s heavy spend on distribution but this contributes to competitive strength. Returns on tangible equity are healthy at ~13%.

The equity trades for ₪737mn, which is ~6.4x earnings, ~4.4x ebit (net of cash), and 82% of tangible equity.

Though recent dividends were cut from ₪70mn to ₪40mn, management aims for minimum 25% payouts; and three-year average dividends yielded ~7.6% at market.

Lower home sales due to higher interest rates generally increases expenditure on existing homes - and for Palram’s products.

Longer-term demand prospects appear favorable and Palram is well-situated. The investor seems to be getting good value for money obtaining this well-managed enterprise on these terms.