Flourishing from the fear factor
NICKY BLACKBURN
11/18/2001
The Jerusalem Post
Daily
Page 11
Jacob Even-Ezra makes a living from fear. That sounds harsh, but even Even-Ezra will admit people would not buy products from his company, Magal Security Systems, if they weren't afraid for their lives. In today's environment of fear and anxiety, it comes as no surprise that Yehud-based Magal, which sells computerized perimeter security systems, is attracting a great deal of interest.
In the month after the September attack on the Twin Towers in New York, when virtually every other stock initially crashed to the floor, Magal's share price rose on Nasdaq from $4.99 on September 10, to a high of $13.15 on October 8. Even today, the stock price remains at approximately $7.80. Though Magal has not yet received any new orders as a result of the suicide attacks, the company has been flooded by inquiries.
"Already we have received more inquiries than ever before, and we're getting them for new places. Governments today are looking to protect places like water reservoirs, because they realize that someone could poison the water," says Even-Ezra.
"We can't yet translate these inquiries into orders, but we have no doubt that they will follow. We believe that in the second half of 2002, we will start to see the flow of orders, as governments begin to move into action."
Though the world's current situation has undoubtedly had a big impact on Magal's prospects, Even-Ezra says that the company was on the rise even before the latest troubles. Even-Ezra, an energetic man in his 70s, leaps to his feet to demonstrate. On a whiteboard in his office he draws a graph showing the company's share price over the last year, depicting a distinctive rise in the company's share price several months before the September 11 attack.
"I believe that people started to look for under- valued shares like ours," says Even-Ezra, returning to his chair. "All of a sudden, the market found itself looking for old economy companies with real profits.
"We fit the bill. We have an excellent balance sheet and are growing every year. We have a future. People like the stock now, they were too busy before and were blind to what was going on."
Magal is growing - sometimes in fits and starts - but nevertheless the trend is upwards. After a brief dip in sales in 1999, when the company saw revenues of $31.9 million, down a marginal 0.4% from sales of $32.1m. in 1998, sales have been been climbing. In 2000, revenues grew to $38.5m., of which $2.8m. was net income. This year, the sales figure is likely to reach $40m.
The company has also recently set up a new company in New York: Smart Interactive Systems, which specializes in real-time video monitoring security services. Even-Ezra, who plans to invest up to $20m. in the company, estimates that it will see $600,000 in profits per quarter by the last quarter of 2002, and break even in two years.
MAGAL'S MAIN products are perimeter security systems that automatically detect, locate and identify intruders. It currently sells 28 different types of systems, ranging from video motion detection sensors that detect pre-defined intruders, to mounted sensors that detect vibrations due to climbing or cutting of fences, and volumetric sensors that detect intruders moving through an invisible detection field.
The company also has a security management system called MagNet, which integrates outdoor and indoor sensors, access control and CCTV systems into one multi-operator graphic system.
Customers include army, air force and naval installations, prisons, oil refineries, pipelines, air carriers, borders, parliaments, civil airports, warehouses, industrial and communication facilities and power stations. Even the Queen's residences in Britain are protected by Magal, which currently has a 40% share of the worldwide market and operates in 70 countries.
In Israel, Magal has been declared a monopoly because it controls about 90% of the market. Most of the fencing around Israel's most sensitive facilities is monitored and controlled by Magal's sensors. This year alone, the company won two contracts from the Ministry of Defense, worth some $3.4m., to restore the electronic perimeter system along the Gaza border. It also received another $1.5m. order to protect the ministry's headquarters.
One of the most surprising facts Even-Ezra reveals is that only a few airports in the world use smart security systems to protect perimeter fencing, notably O'Hare in Chicago and Ben-Gurion.
"People are fighting yesterday's war, because they are looking for bombs concealed in passengers' luggage, like at Lockerbie," says Even- Ezra, referring to the Pan Am jetliner explosion over Scotland more than a decade ago. "That was many years ago. Government's need to change their tactics.
"Today, in an airport, there is a sterile area where only authorized people can go. It is designed to stop terrorists getting on to a plane before it takes off and concealing a weapon or a bomb under a predesignated seat. It is protected by all sorts of security, including automatic doors and access control. On the perimeter of the airport, however, they put a stupid fence that you can climb over or cut, and walk through to the planes. Anyone can walk onto an airfield whenever they want.
"Take Heathrow. Thousands of millions of dollars have been invested in security, from sophisticated access control systems to complicated X-ray machines, but on the perimeter - zero. Does it make sense?" asks Even-Ezra in amazement.
Even-Ezra believes that September 11 will change all that. "In a year or two, airports will start to introduce perimeter security systems, and we will get a good part of that business, because we're the only ones with the experience," he predicts.
Even-Ezra is passionate about this subject, and it is not surprising. Magal was set up over 30 years ago with the sole task of preventing terrorism. The company was founded as a subsidiary of industrial giant Israel Aircraft Industries (IAI) at the request of the IDF, after terrorists burst into kibbutz Misgav Am and took a number of children hostage.
In 1984, IAI decided to privatize the company, because it lacked synergy with its other products. Even-Ezra and partner Nathan Kirsh bought 74% of the company, and Even- Ezra took control.
Until then, Magal's only customer had been the IDF, so Even-Ezra decided it was time to approach the international market. Over the following years, Magal began making inroads abroad, and at the same time introduced a range of new security products.
One of these products was an automatic bomb detection system purchased from Sorek Nuclear Research Center. The system, called Aisys, uses X-rays to identify explosive devices in a variety of hiding places, including airline passenger baggage, postal bags, letters and parcels. Despite what appeared to be a relatively large potential market, Magal stopped selling the system a few years ago due to lack of demand.
Even-Ezra clearly feels sore about this, and puts the blame on a decision by the government to purchase competing X-ray machines from a US company, InVision . The decision came after the US government gave Israel $50m. to help combat terrorism. The only proviso was that Israel buy US products with the money.
"Explain that to the Japanese," says Even-Ezra. "They didn't understand why our government didn't want our equipment."
OVER THE years, Magal, which went public on Wall Street in 1993, has also been active in acquisitions. Since 1993, it has purchased four Daimler-Benz subsidiaries - Stellar Security Products of California, Senstar (Great Britain), Senstar Corp. (Canada), and Senstar GmbH (Germany). In 1997, it also acquired Perimeter Products in the US for $4m., and in 1999 bought another US company, Racon.
Even-Ezra believes these subsidiaries give Magal clout. Aside from increasing Magal's critical mass, they have also enlarged the company's product line and expanded the company's distribution capability in poorly represented markets.
In the last few years, the company has also shifted into the sector of turnkey projects and integration. Traditionally, Magal supplied only equipment and security systems to customers, but the company realized it was too limited a market. Worldwide, this market is estimated to be worth $80 to $100m., while the market for integrated systems is about $1b.
"When you work on a project you might sell $1m. of equipment, but the people working on the integration side make between $5-$10m. per project," explains Even-Ezra.
In 1999, the company won its first turnkey project in India, worth $3.5m. Last year, the company won another, worth $5.5m., from a CIS country.
In July, Magal launched its newest venture, Smart Interactive Systems. The company will integrate sensors and video cameras located in a protected area and then transmit the images picked up by the cameras to a central monitoring station for analysis and response in real-time.
The system, which in installed free of charge, costs subscribers a minimum of $500 a month. It is aimed primarily at industrial sites, commercial businesses and VIP residences. Operations have begun in New York with some eight to nine clients, and will gradually expand to the rest of the country, and eventually abroad.
"There are many applications for such a system," says Even-Ezra. One of his clients placed the video cameras in strategic locations on his route from the office in his shop to his car. Using the system, he can call up beforehand to see if there is anything, or anyone, that looks suspicious en route. If so, he waits until the coast is clear to take his day's earnings to the bank.
Smart, as Even-Ezra likes to call it, employs 10 people. So far Magal has invested $750,000 in the company, but this figure will rise dramatically in the years to come.
"There are hundreds of thousands of businesses that can use this system," says Even-Ezra, who believes that in a few years most security systems at industrial and commercial sites will adopt video monitoring systems. "The sky is the limit."
Since the sector of security video monitoring services only began recently, after wideband telephony services became more widely available and the picture quality of video transmissions improved, Even-Ezra believes that it will take some time for competition to build up. At present, he says, there are only small players in the field. "Our plan is to be the first and to become the leader of this market," he says.
After September 11, one thing is clear: the security market is likely to be flooded by competitors, especially when times are so hard in virtually every other sector. Dozens of companies have already jumped on the bandwagon and are going from one airport to another, describing themselves as security consultants and touting a whole range of security options.
While this could be considered bad news for Magal, which has hitherto had an extremely strong grip on the market, Even-Ezra believes that when it comes to security systems for perimeters, Magal will continue to be a leading company.
"Security isn't like producing plastic bottles. You don't buy a machine and put raw materials in one side and get a product on the other. We have lots of knowhow in security, and a lot of experience in the field. It takes years to build smart equipment. Security isn't something that you buy off the shelf," he says.
There are many small companies in the perimeter security sector today, but Even-Ezra describes most as one- product companies with revenues of below $4m.
In the sector of turnkey projects, however, Magal is a very small fish. Competitors include Lockheed Martin, Siemens, Honeywell International and Compudine. In this sector, Magal will never take a leading role. Instead, it is more likely to receive the crumbs left over by the big players. These crumbs can still be lucrative, however.
To maintain its edge, Magal is looking ahead. It already has four new products in the pipeline, one of which could be very attractive to the US right now. Even-Ezra does not want to reveal more at this juncture, however. "It would only help the terrorists," he says.
The company is also planning new acquisitions. Negotiations for three new acquisitions are taking place, and Even-Ezra believes that one or two of these will be finalized before the end of the year.
The year to watch Magal, Even-Ezra predicts, is 2002.
"It's going to be our most significant year," he says. "First of all, we will grow in our core business because of the security situation, we will get more turnkey projects, introduce new products, and we will also grow because of the acquisitions. That year, we also believe that Smart will begin to participate in our income, not just our expenses. We expect another leap in income." |
