ELBIT IMAGING LTD EMITF
February 15, 2018 - 12:00am EST by
creditguy
2018 2019
Price: 2.70 EPS NM NM
Shares Out. (in M): 9 P/E NM NM
Market Cap (in $M): 25 P/FCF NM NM
Net Debt (in $M): 167 EBIT 0 0
TEV ($): 191 TEV/EBIT NM NM

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Description

Thesis

Elbit Imaging’s stock is traded  on the  NASDAQ  (EMITF) and  the Tel  Aviv  Stock  Exchange. The Company’s Notes are traded on the Tel Aviv Stock Exchange.  The stock is a micro-cap with a current market capitalization of $25 mm USD and an enterprise value  (market cap plus debt minus cash) of $191 mm USD.

At $2.70, Elbit Imaging stock is trading at ~30% our conservative estimate of the Company’s net asset value of $8.65 per share which is relatively easy to calculate due to recent capital raises at two private companies that establish post money valuations. 

Elbit Imaging’s most significant source of value is a 19% fully diluted private company stake in a medical device company by the name of Insightec.  In the last month Insightec raised mezzanine capital at a post money valuation of $610 mm or more than two times the valuation from the last funding round.  Despite the markedly higher valuation ascribed to Insightec Elbit Imaging’s share price increased only modestly while its subsidiary Elbit Medical (which Imaging owns 90% of; the remaining 10% of Elbit Medical is publicly held trading under the ticker EMTC on the Tel Aviv stock exchange) increased much more significantly. 

Because of Elbit Imaging’s levered capital structure, increases (and decreases) in the values of the Elbit Medical’s healthcare assets (Insightec and another biotech company named Gamida Cell) have an outsized effect on the valuation of Imaging.  In other words, the recent massive valuation increase ascribed to Insightec due to its last funding round should have caused Elbit Imaging’s stock price to increase in percentage terms much more than the price of Elbit Medical.

However, due to Imaging’s smaller market gap than Medical, and diverse mix of assets (real estate and medical assets) that makes the Company hard to analyze, and a levered capital structure, and the fact that shares of Imaging are held almost exclusively by retail investors, the share price of Imaging is trading at a massive discount to the sum of its parts (NAV of $8.65). 

Finally, for the better part of the past year the stock price of Imaging has been under pressure because an Israeli bank who received reorg equity in the prior restructuring (and is such not a long term holder) has been selling its stock for more than six months more or less indiscriminately (meaning they are not price sensitive) into the market.

What’s interesting is over the same period of time that the stock price has been weak the share price of the Company’s bonds (also traded on the Tel Aviv stock exchange) have been rising steadily.

We believe that there are several near term imminent catalysts that should cause the stock price to re-rate.  First, Elbit recently closed the sale of the Radisson Blue hotel in Bucharest to Cerberus which will enable it to repay most of its first lien debt due in May of 2018.  Second, Elbit Medical plans to raise secured debt at Elbit Medical collaterized by its equity stakes in Insightec and Gamida Cell which will allow Medical to repay the loan Elbit Imaging provided it and in turn allow Imaging to repay the remainder of it’s first lien debt still outstanding after proceeds from the hotel asset sale are applied.   As the Company continues to de-lever, liquidate its remaining real estate assets, and simplify its corporate structure and as investors focus on the medical assets owned by Elbit Imaging through it’s subsidiary Elbit Medical that comprise the vast majority of the current enterprise value we believe the stock will re-rate at a materially higher price – that is to say at a price closer to the sum of its parts (i.e. NAV of $8.65).

Business Segments

Elbit Imaging’s value is comprised of 5 assets: 

a)      Radisson hotel complex, Bucharest

b)     Elbit Medical Technologies; Elbit Imaging owns an 88% fully diluted stake in Elbit Medical.  Elbit Medical owns a 19% fully diluted stake in Insightec and a 13.6% fully diluted stake in Gamida Cell.

c)      Plaza Centers NV; Elbit Imaging owns a 45% stake in Plaza Centers.  Plaza Centers is heavily indebted and has had to restructure its debt on multiple occasions.  To be conservative, I assign zero value to Elbit Imaging’s stake in Plaza.

d)     Land plots in India; Elbit Imaging in partnership with Plaza centers (50/50, respectively) owns land in three different locations.

Asset Descriptions, Valuation, and Recent Events

Radisson hotel complex.  On 11/29/17 Elbit Imaging announced the signing of a final sales agreement to sell its 98.2% share stake in the hotel complex.  The net value expected to be received is estimated at 81 mm euro of which 8 mm euro will fund sellers loan.  The Company is expecting to close the sale this month (February 2018).

Elbit Medical.  88% fully diluted stake is owned by Elbit Imaging.  Elbit Medical trades on the Tel Aviv Stock Exchange.  Elbit Imaging provided shareholder loans to Elbit Medical of 42 mm USD (147 mm shekels).  The loan matures on January 1, 2019.

INSIGHTEC.  The Company is developing the Exablate, the first MRI-guided ultrasound-guided device to be approved by the FDA.  Insightec is the first company to develop a technology that successfully targets and inserts ultrasound waves through the skull.  The technology is being targeted in five markets – neurology, oncology, targeted brain drug delivery, women's health and urology.  Insightec has deep relationships with key industry players and medical academic institutions and global strategic partnerships with GE and Siemens.  INSIGHTEC has installations at leading medical sites in U.S., Europe and Asia.  Insightec has achieved several regulatory and reimbursement approvals of note in recent years.

·                  FDA approval for treatment of essential tremor

·                  InSightec has been granted with a recommendation from the Centers for Medicare & Medicaid Services (“CMS”) for reimbursement of treatment of essential tremor.

·                  FDA approval for phase III of research into the treatment of Parkinson symptoms using the brain system.

·                  FDA approval for phase I of clinical trial for the treatment of neuropathic pain using the brain system.

·                  Obtaining CE approval for the treatment of prostate cancer.

·                  Approval of a clinical trial for treatment of Alzheimer and treatment of first patient. (*)

·                  Approval of a clinical trail for treatment of Epilepsy.

·                  Completion the treatment in Parkinson tremor patients in the Phase I / II clinical trial.

·                  Conducting a first trial using MRI-guided focused ultrasound to open the Blood-Brain-Barrier (BBB).

In December of 2018, Koch Disruptive Technologies, the new venture capital arm of Koch Industries, announced a $150 mm investment in Insightec at a pre-money valuation of $460 mm (post-money of $610 mm).

In 2014, Insightec signed an investment agreement with York Capital and other investors for an investment of $62.5m based on a $200 mm pre money valuation.

Insightec moved much of its operations from Israel to the U.S. in recent years.  Insightec’s CEO is Maurice Ferré.  Earlier in his career, Ferre founded MAKO Surgical Corp., a developer of medical robots, which was acquired by medical technologies company Stryker Corporation for $1.65 billion in 2013.  Ferre has an impressive track record, owns a significant amount of stock that he purchased (was not granted) and has stock options at a significantly higher valuation than the most recent raise (meaning he is highly incentivized to produce).

“Focused ultrasound is a new, non-invasive therapeutic technology that can serve as a supplement or complement to traditional surgery, drug delivery, or radiation therapy. It is analogous to using a magnifying glass to focus beams of light on a point and burn a hole on a leaf. With focused ultrasound, instead of an optical lens being used to focus beams of light, an acoustic lens is used to focus multiple beams of ultrasound energy on a point deep in the body with a high degree of precision and accuracy, sparing the adjacent normal tissue.  Where each of the individual beams goes through the tissue, it doesn't have enough power to affect the tissue, but at that focal point where all the beams converge, there's a number of biological effects on the tissue that occur. When we got started 10 years ago, the scientific community understood three mechanisms of action of how focused ultrasound affected tissue. Today, we understand 18 mechanisms. 10 years ago, there were three clinical disorders that were in various stages of research and development commercialization. As of today, there are 75. This field is exploding.”

Insightec hopes to be able to get FDA approval later this year to use focused ultrasound to treat Parkinson’s tremor.  A pivotal trial for Parkinson’s dyskinesia is being organized by Insightec. 

Currently Insightec is also organizing focused ultrasound trials for:  Alzheimer’s disease, brain tumors, OCD, depression, epilepsy, and neuropathic pain, etc..  There are 10 mm patients with essential tremor and 100,000 with Parkinson’s tremor.  Nonetheless, Parkinson’s disease has much more name recognition amongst public so winning FDA approval to use FUS to treat Parkinson’s tremor would mark an important milestone.

There is an increasing evidence that treating movement disorders with focused ultrasound (vs. the gamma knife or deep brain stimulation; the current standards of care) is more effective, less invasive, and results in fewer complications.  The challenge currently to more widespread adoption of FUS is reimbursement although patients with movement disorders are well organized and will over time drive increased adoption.

There are also trials underway that pair focused ultrasound with various biotech drug therapies.  A ground-breaking clinical trial for women diagnosed with stage IV metastatic breast cancer is now enrolling patients at the University of Virginia Health System.  The pilot study combines two therapies: focused ultrasound and a cancer immunotherapy drug. Patients in the clinical trial will receive non-invasive focused ultrasound therapy to ablate (or destroy) part of the primary breast tumor or metastatic tumors along with administration of the Merck medication pembrolizumab (Keytruda®).  Preclinical studies have suggested that focused ultrasound can “unmask” breast cancer cells, making them visible to the immune system. The theory is that applying focused ultrasound to the tumor creates a local immune response that draws anti-cancer immune cells to the area. The pembrolizumab could then prevent the tumor cells from deactivating the invading immune cells, allowing the immune cells to continue killing cancerous cells.

I believe that there is strategic buyer interest in INSIGTECH from the likes of Medtronic, Boston Scientific, St. Jude, etc and that the Company will ultimately be acquired by one of those companies before or after an initial public offering

Gamida Cell.  Gamida Cell is developing stem cell based products from umbilical cord blood to treat patients with hematological diseases.  Lead product NiCord started Phase III trial recently.  NiCord received a breakthrough designation from the FDA.  NiCord is based on enriched stem cells from umbilical cord blood using the NAM expansion technology.  Clinical trials results from Phase I/II were submitted to the FDA, Phase III started in the US and EU.  Phase III study of NiCord® will enroll 120 patients in an open randomizes controlled study.  Control group – patients treated with unmanipulated cord blood of one or two units.  Phase III primary end point – time to neutrophil engraftment.  Primary end point readout and submission – 2020.

In July 2017, Gamida Cell raised $40 mm at a $120 mm pre-money valuation.  The raise was led by Shavit Capital Fund.  Novartis (who had been an investor in prior rounds), VMS Investment Group, Israel Biotech Fund, IHCV and Clal Biotechnology Industries also participated.  Elbit Medical currently holds a 13.6% fully diluted stake in Gamida Cell.

Gamida Cell plans to go public in the second half of 2018.

Land Plots in India.  There are two land plots of significance held by Elbit Imaging and Plaza Centers (50/50 JV).  One land blot is located in Bangalore.  Bangalore is one of the cities with the highest growth in India – about 47% in a decade.  The land is in East Bangalore, is 54 acres, and is held on the books (at it’s estimated fair market value) at 38 mm euros.  (Imaging’s share of the value then is 19 mm euros.)  The second land plot is located in Chennai the fourth largest city in India with a population of more than 10 mm residents.  The land in Chennai is located in proximity to one of the largest technologicl parks in India and consists of a plot of 74 acres.  That land is on the books at a valuation of $21 mm.  On a combined basis (after translating euros to US dollars) the two land plots are valued by the Company as worth $35 mm.  To be conservative, I am writing down the value of the land further to $20 mm USD.  One important thing to understand is Elbit Imaging’s various attempts to sell the respective land plots to developers have unraveled due to developers inability to raise equity to consummate their purchase agreement and for various other reasons.  My view is that both land plots are ultimately monetized but the timing is uncertain.

 

Sum of the Parts Valuation

See below.

Elbit Medical              
EMITF              
               
               
Market Cap       Equity Stakes   M of $'s  
Price    $             2.70          
Shares Out                    9.19   Radison Blue                    96.4  
Market Cap    $           24.82   Plaza Centers                        -    
        Land Plots in India                    20.0 35.11 mm BV of land
Enterprise Value            
Debt                 176.5   Loan to Elbit Medical                    42.0  
Equity                    24.8          
Cash                    10.0          
                  191.3   Insightec @ 88.0%               102.0  Koch investment
               
Value       Gamida Cell 88.0%                  19.1  
Equity Stakes                 244.4   Debt at Elbit Medical                  (42.0)  
Less: Net Debt                 166.5          
                     78.0          
Shares                    9.19   Cash                      6.9  
Implied Value P/S  $             8.48          
                          244.4  
               
               
Shareholdings    Shares  %      
York Capital Management          1,802,428 19.61%      
Davidson Kempner Capital Management       1,313,180 14.29%      
Other           6,075,200 66.10%      
Total           9,190,808 100.00%      
             
        EMITF Stake in Elbit Medical Fully Diluted   88.0%
             
             
Debt   M of $'s   Insightec Value    
             
Series H Bond                    84.7   Pre-Money 460 460
Series I Bond                    76.7   Koch Inv. 75 150
Bank Hapoalim                    15.1   Post Money 535 610
        % Fully Diluted Ownership 22.0% 19.0%
        Value to Elbit Med 117.7 115.9
          117.7  
             
             
             
        Gamida Cell Value    
             
        Pre-Money 120  
        Investment 40  
        Post Money 160  
        Elbit Medical % 13.6%  
                  176.5   Value to Elbit 21.8  
             
             
             
             
             
             
             

 

Catalyst

Refinancing of 1st lien debt (by May 2018; it's maturity date).  IPO of Gamida Cell (2H 2018).  Additional FDA approvals of Focused Ultrasound for various therapeutic indications (Parkinson's etc.).

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