Hedge funds sell El Al stock amid profit-taking

The ceasefire in the north, which took effect last week, saw a change in sentiment towards El Al shares. After rising 240% in the past 13 months, the Israeli airline’s share price changed direction last week, losing 21%, with its market capitalization falling by NIS 575 million to NIS 3 billion. The stock price opened slightly higher this week but is still well below its peak and is down more than 2% today.

Since the beginning of the war, El Al has benefited from a significant reduction in competition. Foreign airlines have suspended their flights to Israel – some for certain periods and most have not yet resumed their flights. El Al has become the dominant airline in Israel’s skies with a 44% market share of passenger traffic at Ben Gurion Airport.

As a result, airline ticket prices rose and El Al achieved record revenues and profits. In the third quarter of 2024, El Al’s revenues reached $1 billion, up 20% from the corresponding quarter of 2023, while in the second quarter of 2024, which was also a record, it rose 43% from the corresponding quarter of 2023. Profit in the third quarter was $187 million, 3.6 times higher than the corresponding quarter of last year. The company’s senior executives, led by CEO Dina Bental Janancia, received lucrative bonuses following these results.

The ceasefire reached last week led to the return of some foreign airlines to Israel. Last week, Wizz Air, Azal (Azerbaijan Airlines), Air Bulgaria, Air Seychelles and Aegean announced the resumption of flights to Israel and this means more competition for El Al.

Hedge funds are selling, and the rest of the investors are buying

Although the Israeli airline is in excellent condition, has no outstanding debts, and its stability leaves no room for doubt, the return of competition was enough for some investors to sell. Data from the Tel Aviv Stock Exchange data center indicates that those who led the recent decline in the stock price were hedge funds and Nostro companies, which have been selling shares aggressively since the second quarter of the year, and in October and November alone, they sold El Al shares worth NIS 260 million. On the other hand, foreign investors bought the company’s shares during these months at a value of 154 million shekels, and institutions (retirement funds and savings funds) purchased “Al Al” shares during this period at a value of 50 million shekels.

“Sophisticated investors bought the stock at the beginning of the fighting,” says Daniel Allon, managing partner at IBI Hedge Funds. “When the war started, El Al issued a profit warning and, shortly after, replaced the negative warning with a positive warning.” In fact, she suddenly realized that the war was good for her. There were smart people who bought stocks even before, but those who bought after also made a lot of money even on the eve of the ceasefire.

“Everyone who bought during this period made more than 100% of their money within a year. Those who bought at low prices remained invested until the ceasefire was announced, and then suddenly exited the trade. These are investors who have no connection to the trading world.” Aviation, and as soon as the story was over, they dropped all the cargo.”

‘The stock is too cheap’

Alon believes that by all measures (earnings multiples, comparing operating multiples to similar companies abroad, etc.) Alon shares are “very cheap” — certainly now after last week’s decline, but also at their peak. “It’s cheap because it’s a company with a bad history, and it takes a long time to fill the price gaps,” Allon explains. He also estimates that it will take time for institutional investors to buy the stock: “Management is not taking obvious actions, such as announcing an attempt to buy Isracard and then withdrawing from the deal. If instead they publish an announcement that they will do so.” We were focusing on the core business, allocating a certain amount to buy aircraft, a certain amount to dividends – I estimate the share price would have traded 50% higher than it is today, but there is no clear strategy on what to do with that money.”

He does not blame management for this, stressing that “about two years ago El Al published a presentation containing a strategy and stuck to it. The problem is that after the war, they stuck to it too quickly, and got there within a year instead.” Suddenly they have a lot of money, no debt, don’t know what to do with it, and instead of declaring that they will pay dividends when they can, they talk about acquiring companies to diversify income streams. But those who buy El Al shares want an airline, not a holding company, that’s the fear in the stock. In general, there is a great CEO who understands the world of aviation, but the company suffers from a “disease” typical of Israel – the controlling shareholder. Who decides what to do with the money?”

Published by Globes, Israel Business News – en.globes.co.il – on December 2, 2024.

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