CRYS I CIBC Oppenhimer's Take: on FORTY, CRYS
NVESTMENT CONCLUSION:
We recently met with management in Israel and are
reiterating our STRONG BUY rating. Three of
Formula's subsidiaries; Forsoft, Crystal, Wiztec are
growing at a faster clip than we originally anticipated.
As such, we would not be surprised if Formula easily
surpassed our revenue estimates in 3Q98.
A delay of the Transtech IPO will affect our gains on
shareholdings projected and consequently our EPS
estimates for the quarter, but we expect operating
numbers to be very strong. In our former projections,
we had estimated that Transtech would generate $3.3
million of shareholding gains. Consequently, we have
reduced our EPS estimate (include gains on
shareholdings) from $0.68 to $0.27. We expect this
deal to be successfully completed when the market
conditions improve.
Armed with $140 million in cash, the FORTY
management team will be able to gobble up a greater
array of software/IT entities with compelling
valuations. We expect M&A activity to heat up under
the Formula umbrella.
FORTY indicated that it will fully consolidate the
results of Mashov, a holding company, in which it
owns a 40% equity stake in 3Q98 results.
Consequently, we are raisng our revenue projections
for the remaining quarters of 1998 and 1999.
However, this will be some slight earnings diluted in
3Q98 and 4Q98 from this transaction.
We recently visited with the management of Formula
Systems in Israel. Bussiness is currently very strong.
Sales from Crystal, Forsoft, and Wiztec have been
VERY strong throughout this quarter. As such, we
would not be surprised if Formula SIGNIFICANTLY
beat our revenue est. for 3Q98. Last quarter these
three
subsidiaries combined, represented 40% of total
revenues, so any boost in sales should be very
accretive to Formula's top line.
Given the complexity of the financial transactions, we
would counsel investors to focus on FORT's operating
income results because EPS has been so difficult to
predict. FORTY's EPS results fluctuate so drastically
because of gains on conditions. We are expecting
FORTY's operating income to increase by roughly
$500,000 to $6.6 million in 3Q98, $700,000 to $26
million in 1999, and $3.3 million to $44.1 million in
1999.
At this time, we are also taking into account the recent
Shekel devaluation. In early October, the dollar hit its
annual high against the Shekel at 4.50 but is currently
around 4.20. One month prior the shekel was selling
for 3.851. This represents 9% devaluation in a very
short time period. If we continue to see a ramp in the
Israeli
CPI and the dollar continues to be strong, then we
would expect to see Formula's top line to show slowing
growth because of the currency translation. Formula's
domestic sales (which represent 60% of the company's
total sales) would be impacted by any further
devaluation so we are trying to be conservative in our
prognostications. If it were not for the currency effect
and our belief that Formula will spin off unprofitable
Mashov subsidiaries, then our revenue projections
would have been much higher. |
