Rating Update: Stock Rating C-High Neutral (6/11/19)-Optibase Ltd (OBAS).

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BUSINESS

Optibase Ltd., together with its subsidiaries, operates in the fixed-income real estate sector in Switzerland, Germany, and the United States. The company purchases and operates real estate properties intended for leasing and resale primarily for the purpose of commercial, industrial, office space, parking garage, and warehouse use, as well as for residential purposes. The company was formerly known as Optibase Advanced Systems (1990) Ltd. and changed its name to Optibase Ltd. in November 1993. The company was founded in 1990 and is headquartered in Herzliya, Israel. Optibase Ltd. is a subsidiary of The Capri Family Foundation.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, OBAS is expected to continue to be a major Value Eraser.

Optibase has a current Value Trend Rating of C (High Neutral).
This rating combines very contradictory signals from two proprietary PTR measures of a stock’s attractiveness. Optibase has a poor Appreciation Score of 21 but a very high Power Rating of 89, triggering the High Neutral Value Trend Rating.

Optibase’s stock is selling well above targeted value. The current stock price of $11.20 compares to targeted value 12 months forward of $8.
Optibase’s low appreciation potential results in an appreciation score of 21 (79% of the universe has greater appreciation potential.)
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Optibase has a Power Rating of 89. (This very high Power Rating indicates that OBAS has a higher likelihood of achieving attractive investment performance over the near to intermediate term than all but 11% of companies in the universe.)
Factors contributing to this very high Power Rating include: recent price action has been extremely favorable; and is in a strong phase current.

INVESTMENT PROFILE

Optibase’s financial strength is low. Financial strength rating is 20.
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Relative to the S&P 500 Composite, Optibase Ltd has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that OBAS is higher risk. Low stock price volatility is a positive for Optibase. Relative weaknesses include: low historical profitability, low financial strength, high financial leverage, low expected growth, low historical growth, and high earnings variability. Optibase’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. OBAS has unusually low market capitalization.

CURRENT SIGNALS

Optibase’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Optibase’s current technical position is very strong. The stock price is in a 20.8 month up move. The stock has appreciated 80.0% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

The stock is currently rated C.
Optibase Ltd (NASDAQ: OBAS) stock suffered a major decline of -17.5% on 6/11/19. The shares closed at $0.33. Moreover, trading volume in this decline was unusually high at 155% of normal. The stock has been exceptionally strong relative to the market over the last nine months but has declined -7.4% during the last week.

CASH FLOW

In 2018, Optibase experienced a very significant reduction in cash of -$6.69 million (-33%). Sources of cash were much lower than uses. Cash generated from 2018 EBITDA totalled +$9.72 million. Non-operating uses consumed -$4.29 million (-44% of EBITDA). Cash taxes consumed -$1.75 million (-18% of EBITDA). Withdrawal of investment from the business totalled +$4.03 million (+41% of EBITDA). On a net basis, debt investors removed -$13.70 million (-141% of EBITDA) while equity investors withdrew -$0.70 million (-7% of EBITDA).
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Optibase’s Non-operating Income, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Optibase Ltd Peer Group. (Since 2016 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, Optibase was in the third quartile and lower quartile. Currently, Optibase is substantially below median at -44% of EBITDA (-$4.29 million).

Optibase’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Optibase Ltd Peer Group. In most years, Optibase was in the third quartile and lower quartile. Currently, Optibase is lower quartile at -18% of EBITDA (-$1.75 million).

Optibase’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Optibase Ltd Peer Group. In most years, Optibase was in the second quartile and top quartile. Currently, Optibase is upper quartile at +41% of EBITDA (+$4.03 million).

Optibase’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Optibase Ltd Peer Group. In most years, Optibase was in the top quartile and lower quartile. Currently, Optibase is lower quartile at -141% of EBITDA (-$13.70 million).

Optibase’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Optibase Ltd Peer Group. In most years, Optibase was in the second quartile and top quartile. Currently, Optibase is slightly above median at -7% of EBITDA (-$0.70 million).

Optibase’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Optibase Ltd Peer Group. In most years, Optibase was in the second quartile and lower quartile. Currently, Optibase is lower quartile at -69% of EBITDA (-$6.69 million).
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Optibase’s Cash, %Revenue has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Optibase Ltd Peer Group. (Since 2011 Cash, %Revenue has decelerated very sharply.) In most years, Optibase was in the second quartile and top quartile. Currently, Optibase is above median at +83%.

PROFITABILITY

Optibase’s return on equity has eroded very significantly since 2009 accelerating very sharply after the 2016 level.
Optibase’s very strong negative trend in pretax operating return significantly augmented by a very strong negative trend in non-operating factors is a significant analytical factor.
The productivity of Optibase’s assets declined over the full period 2009-2019: asset turnover has experienced a downtrend although it experienced a very sharp recovery after the 2010 low.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend even as it experienced a very sharp decline after the 2012 high.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Optibase’s return on equity is lower quartile (-4.3%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is at the lower quartile (0.5%) reflecting asset turnover that is lower quartile (0.07X) and slightly below median pretax margin (7.1%).
Tax “keep” rate (income tax management) is lower quartile (-196.%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is upper quartile (4.51X).

GROWTH RATES

There are no significant differences between Optibase’s longer term growth and growth in recent years.
Optibase’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 5.3% per year.

Total asset growth has been 6.5% per year.

Annual E.P.S. growth has been -43.9% per year.

Equity growth has been -1.5% per year.
No consensus growth rate forecast is available for Optibase.
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Relative to the Optibase Ltd Peer Group, Optibase’s historical growth measures are erratic. Total asset growth (6.5%) has been at median. Revenue growth (5.3%) has been slightly below median. E.P.S. growth (-43.9%) has been lower quartile. Equity growth (-1.5%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Optibase’s stock price performance has been variable and below market. Between August, 2008 and June, 2019, Optibase’s stock price rose +36%; relative to the market, this was a -40% loss.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 36.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through May, 2019 of 36.7% is upper quartile relative to Optibase Ltd Peer Group.

Current 5-year total return performance of 15.4% is substantially above median relative to the S&P 500 Composite.
Through May, 2019, with substantially above median current 5-year total return of 15.4% relative to S&P 500 Composite, Optibase’s total return performance is upper quartile relative to Optibase Ltd Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, OBAS’ overall valuation is high. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is upper quartile. Ratio of enterprise value/revenue is upper quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable.
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Optibase has a major value gap compared to the median valuation. For OBAS to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 11.70X to 4.81X. If OBAS’ ratio of enterprise value/revenue were to fall to 4.81X, its stock price would be lower by $-22 to $-10.
For OBAS to fall to lower quartile valuation relative to the Optibase Ltd Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 11.70X to 2.68X. If OBAS’ ratio of enterprise value/revenue were to fall to 2.68X, its stock price would decline by $-28 from the current level of $11.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, OBAS is expected to continue to be a major Value Eraser.
Optibase’s current Price Target of $8 represents a -24% change from the current price of $11.20.
Optibase’s low appreciation potential results in an appreciation score of 21 (79% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 21, the high Power Rating of 89 results in an Value Trend Rating of C.
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Optibase’s current Price Target is $8 (+1% from the 2018 Target of $8 but -24% from the 06/11/19 price of $11.20). This plateau in the Target is the result of a +1% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted increase in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is -5.5% — below our recent forecasts. Forecasted return on equity erratic but little changed between 2010 and 2018. The current forecast is significantly below the 2014 peak of 6%.

PTR’s growth forecast is 9.0% — above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2013 peak of 18%.

PTR’s cost of equity forecast is 5.1% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is below the 2013 peak of 7.2%.
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At Optibase’s current price of $11.20, investors are placing a positive value of $2 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 4.0% versus a cost of equity of 5.0%.
PTR’s 2020 Price Target of $8 is based on these forecasts and reflects an estimated value of existing assets of $2 and a value of future investments of $6.

About John Lafferty 37832 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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