Table of Contents Executive Summary.Page 3 Company Analysis...

Page 3-7 Analysis of the Cellular Market and Fixed Telephony Industry Cellcom Israel Ltd. Description Principal Competitor: Partner Communications Company Ltd. SWOT Analysis of Cellcom Israel Ltd. Cellcoms Strategy and Future Analyzing the Financial Statements and comparison.Page 7-11 Common sized Income Statement Common Sized Balance Sheet Financial Ratio Analysis.Page 12-15 Liquidity Ratios Profitability Ratios Capital Structure Ratios Working Capital Activity Risk Analysis...Page 16-17 Credit Risk Analysis Bankruptcy Analysis Company Valuation.Page 18-19 WACC Calculation Based on P/E DCF Calculation Conclusion...Page 19 Bibliography....Page 20 Appendixes..Page 21-29

Executive Summary Cellcom LTD is an Israeli based telecommunication company that focuses on the cellular market and the landline market. We have analyzed and interpreted Cellcom financial reports in order to evaluate the firm and recommend whether the company's stock should be bought, sold, or held. We recommend buying Cellcom's stock. By analyzing the Israeli telecommunication market, we notice that Cellcom has a strong stature in it and is the biggest cellular firm in the country. Moreover, Cellcom has identified the changes the market is going through and is aimed toward adapting for them. Cellcom has understood that the future lies not only in hardware selling and airtime revenues, but in value-added services. We notice growth in Cellcom's revenues and net income. Nevertheless, our financial ratios analysis indicates high performance and stability that result in constant but safe growth. We have also analyzed Cellcom's main competitor, Partner, and found its stature to have a negative outlook. By calculating and evaluating the company's value by the P/E method and the DCF model we found that the stock is undervalued hence we recommend purchasing it.

Company Analysis Analysis of the Cellular Market and Fixed Telephony Industry1234 The cellular market and fixed telephony industry (hereinafter: "the telecom market", or "the market") of Israel is the most developed one in the Middle East, although not the biggest one. As a natural evolution of telecom, the market in Israel emerged from the national postal services/company (in Israel: "Israel Postal Company"). This service replaced the British service in 1948 as a sub-unit in the Postal ministry office, later renamed as the ministry of communication. Up to 1984, every fixed line subscriber was installed by the ministry itself. In 1984, Bezeq (the 1st PSTN5 company in Israel; the 2nd is HOT) was established as a government owned company in charge of the national fixed line telecommunication network. In 1986 the first cellular phone company was established (Pelephone- owned by Bezeq- now a publicly held company). Other Cellular phone companies were established: Cellcom (94') Partner/Orange (99') and MIRS (connected to the PSTN in 98'). In duration of almost nine years, Pelephone was the only cellular phone company in Israel. During that period, penetration rates were limited as a cellular phone was marketed for business men and not for the entire public due to high costs. After the entrance of Cellcom, these rates started growing exponentially as the latter promised to offer their services with relatively low prices. After the entrance and emergence of Partner to the cellular market, they have seized a great deal of the market and currently hold the secnond place. The distribution of subscribers among operators is estimated as follows: Cellcom 34.5%, Partner 32%, Pelephone 29% and Mirs 4.3%. 2012 is thought by many to be a revolutionary year in the cellular market: MIRS will reestablish their network as a modern one, Golan Telecom will establish a new network and several MVNO6 providers
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http://he.wikipedia.org/wiki/%D7%AA%D7%A7%D7%A9%D7%95%D7%A8%D7%AA_%D7%91%D7%99%D7%A9%D7%A8%D7%90%D7%9C 20-F Cellcom 2010 Edgar http://www.moc.gov.il/191-he/MOC.aspx http://www.ynet.co.il/articles/0,7340,L-4151913,00.html PSTN- Public Switched Telephone Network

A mobile virtual network operator (MVNO) is a company that provides mobile phone services but does not have its own licensed frequency allocation of radio spectrum, nor does it necessarily have all of the infrastructure required to provide mobile telephone service

(Rami Levi, Alon Cellular, Home Center and more7), will enter the market by leasing traffic capacity from the existing operators. This change will increase the fierceness of the market. The cellular phone market is growing marginally in the last 5 years, as the total percentage of subscribers is higher than the number of citizens (hence over 100%- in 2010 the cellular penetration rate was 128% as opposed to 127% in 2009). The cellular companies count on the population growth in Israel to keep the market growth rates rising. Trends in the cellular Industry There are several trends in the industry: financial, technological and social. The revenue generators (which will be elaborated further on) are shifting from air-time and SMS charges towards value-added services that are enabled from the technological innovations, especially smartphones. These services, such as content and internet services are highly consumed by subscribers whereas the traditional uses of cellular phones can be used ("Viber") freely by iPhone and by all cellular phones in the future. Finally, the Israeli social protests in 2011 along with strong legislative actions by the minister of communications shifted the focus towards the client, who was suffering from the services and rates given by the existing companies. It is considered that the entrance of the new providers and operators will create a "buyer market" as opposed to the "seller market" that existed until now. Cellcom Israel LTD. Description8 9 Cellcom is an Israeli based and publicly held10 Telecommunication Company that was founded in 1994. The vast majority of Cellcom's business is focused on wireless services and is their top revenue generator. Cellcom was the first to market mobile phones with Hebrew language menus. Cellcom holds most of the mobile phone subscribers amongst the other three providers, controlling over one third of the market (3.4 million subscribers- 700k of which are Arab-Israelis11). Cellcom's voice network is based on the modern GSM protocol, as data services are based on several other technologies. Cellcom is the pioneer in many technological fields in the mobile phone market: the first to launch the video calls and the first to launch a 3.5G network and services. Cellcom provides value-added and landline services based on an independent fiber-optic network. Although wireless/mobile services are the top revenues generator (64.1%), their portion in the company's revenues is diminishing (a 2.5% decrease from 2009) whereas landline and value-added services percentage of revenues is increasing. Principal Competitor: Partner1213 Partner Communications Company LTD. Is a mobile network operator, Internet Wi-Fi and fixed telephony service provider. Partner is publicly traded14. Although entering the market third and a few years after Cellcom did, Partner penetrated the market and swift a great deal of subscribers. Although ranked second among the subscribers, Partner holds the biggest amount of 3G subscribers. Partner uses the international brand name "Orange" although the French owners of the brand are not stake-holders in Partner.

All MVNO operators: Free Telecom LTD, Ituran cellular communications LTD, Rami Levi Shivk Hashikma LTD, Binat Semech (outsourcing) LTD, T2T telecommunications LTD., Home cellular LTD., Alon Cellular LTD and Gali Phone LTD.
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http://en.wikipedia.org/wiki/Cellcom_(Israel) http://www.Cellcom.co.il/Pages/default.aspx Dual listed traded both on TASE and NASDAQ The biggest cellular penetration among Arab-Israeli people Partner SEC 20-F report http://en.wikipedia.org/wiki/Partner_Communications_Company Dual listed traded both on TASE and NASDAQ

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SWOT Analysis of Cellcom Israel Ltd. Strength Combination of leading market position and strong operational results. In 2010, Cellcom maintained our market-leading position, as reflected in our subscriber base, revenues from services, EBITDA, EBITDA margin and net income, leveraging a series of brand, customer service and content initiatives, as well as -cost efficiencies initiatives regarding essential operational processes within the company. Strong and distinctive own brand. Cellcom established brand enjoys strong recognition in Israel. They consider the enhancement of their image among consumers a top priority and continue to invest substantial resources to maintain Cellcom as a local cellular company with a warm personal touch. Focus on music and music-related content services, under one marketing umbrella -"Cellcom Media". Web Site. Cellcom's web site has the highest number of entrances to its web site compared to the other companies.15 Conservative policy in managing Liquidity and financial risks. Transmission infrastructure and landline services. Cellcom have an advanced fiber-optic transmission infrastructure that consists of approximately 1,570 kilometers of inland fiber-optic cable, which, together with complementary microwave-based infrastructure, connects the majority of cell sites and provides for substantially all of backhaul services. Strategic relationship with one of Israels leading business groups. Cellcom's ultimate parent company, IDB, is one of the largest business groups in Israel. They enjoy access, through the management services agreement, to the senior management of the IDB group, who are some of the most experienced managers in Israel. These managers, including veterans of the Israeli telecommunications market, provide Cellcom with financial, managerial and strategic guidance. Strong management team. Cellcom management team includes seasoned managers with significant experience and solid track records in previous managerial positions. Chairman, Mr. Ami Erel, is a veteran of the Israeli communications market and previously served as the chief executive officer of Bezeq. Chief executive officer, Mr. Amos Shapira, has been chief executive officer of KimberlyClarks Israeli subsidiary and of El Al Israel Airlines. Weakness Risks relating to Cellcom Ordinary Shares. A substantial number of the ordinary shares could be sold into the public market, which could depress the share price. Cellcom's largest shareholder, DIC, holds approximately 48.3% of the outstanding ordinary shares, as of December 31, 2010. The market price of our ordinary shares could decline as a result of future sales into the 3rd Generation. Cellcom holds the smallest number of clients of the 3rd generation phones compared all the other companies. Out of 3.2M only 941 using 3G.16 Dividends. Track recorded of aggressive dividends policy by which SH gets almost 100% of net profits.17 Increasing competitive pressures. Opportunity The new iPhone market will enable growth. Partner's management has caused their company to decline. This gives an opportunity to Cellcom to obtain more market share.

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Cellcom's acquisition of Netvision. This action will enhance the company's to successfully compete in the rapidly changing Israeli market. Where the company's biggest competitor are also un the frocess of forming major telecommunication groups. Threats New Government Regulations. Up until now there were 3 dominant companies in the Israeli cellular market. Israel now has a new minister in the office of communication, Mr. Moshe Kachlon, who promised the Israeli nation to be on the consumers side and to initiate a nuclear war against the Israeli cellular cartel. The new regulations include: 1. Fees for networks links are CANCELLED 2. Fees on contract termination are CANCELLED 3. Increase of competition by allowing 2 new companies MVNO to join the market - Golan Telecom & Mirs (aka HOT) & Rami Levi Comm. 4. Regulations on Smartphone sales: The Israeli cellular cartel is selling smartphones for outrageous prices (double and sometimes triple the price, compared to Amazon, Ebay or any private outlet. All of that is about to be revolutionized as a new regulation which is named in Hebrew Nitook Zika is gaining more public awareness through Facebook groups with the medias support. According to this new regulation, a consumer can now buy his brand new smartphone anywhere he/she wishes for half the price of the cartels retail price. Interconnected rates reduction (since 2011) Business results may be affected by continued recession. If this recession reoccurs, usage of our services decreases and we cannot otherwise compensate for lost revenues, it may have a material adverse effect on our results of operations, financial condition or prospects. If the number of customers that are unable to pay their bills increases or one or more of our larger business customers fails to pay the amount owed to us, it may materially increase our bad debts and have a material adverse effect on our results of operations and financial condition. Furthermore, the recession may adversely affect third parties we rely upon in the provision of our services, including interconnecting telecommunication providers, roaming Partners and services and equipment providers. Partner's acquisition of 012.The result of these kinds of mergers is the formation of telecommunications groups which are able to offer bundled mobile and fixed line services. Smile is the main competitor of NetVision and is active in the same market segments. Mobility devices, customers can move to another operator without changing their original number. The new iPhone market could disable growth due to that all companies hold it.

Cellcoms Strategy and Future Cellcom's goal is to strengthen their position as the leading cellular provider in Israel. The principal elements for the business strategy are: Focus on core business and synergetic complementary business. remain focused on the primary source of business, mobile communications and value added services over the advanced cellular network, while continuing to develop new complementary business, which we identify to be both cost synergetic to the core business and provide direct contribution to the business, such as the landline services to the business community, provided over our fiber-optic cables and microwave links and certain financial services recently launched, available to subscribers of all Israeli cellular operators. Cellcom believe that to steadfast focus on the core competencies is one of the main factors for the market leading position. Moreover, Cellcom wants to maximize customer satisfaction, retention and growth. The growth strategy is focused on retaining subscribers, expanding the selection of services and products offered to subscribers and tailoring offers to customers' needs, in order to enhance customer satisfaction and increase average revenues per user. Cellcom strive to be proactive at every service interaction with its customers, to offer a service which is as clear, simple and methodical as possible and to continually improve and enhance the flexibility of customer service. In addition Cellcom wants to Grow and develop its Internet, content and data services. The usage of cellular content and data services in Israel is
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currently relatively low compared to western European countries, attributed to Israel launching 3G services two years after its European peers. Cellcom launched the UMTS network in 2006, over a year after the competitors. Since then they experienced a significant growth in content and value added services. However Cellcom expect the recent and expected regulatory changes to burden the ability to fulfill the growth potential of the content and data services. As of December 31, 2010 approximately 1.14 million of subscribers are 3G subscribers, mostly post paid. In 2010 Cellcom launched their Carrier Ethernet network allowing the provision of data services at high speed and capacity. Cellcom also plan to utilize the momentum in the arena of Israeli content to expand content and data services, products and capabilities through in-house expertise and strategic relationships with leading cellular content providers, with special emphasis on original Israeli culture and usage enhancing content and applications in the cellular and complementary media. In 2009 they have launched Cellcom Media initiative, following our Cellcom Volume music-related initiative, featuring, among other things, the cellular music store, original content including drama series and on-net-reality programs, video games, social networks applications. The launch of "Cellcom Media" follows the success of Cellcom Volume music-related initiative that contributed positively to our revenues, brand identity and popularity amongst users in general and youth in particular. They also continued marketing our data-enhancing products, including a cellular modem and cellular router. In the future Cellcom is planning to further develop and strengthen the Cellcom brand. External market surveys that have commissioned indicate that brand recognition is an important factor in subscriber selection of, and loyalty to, a cellular operator. Due to extensive efforts in the past few years, they believe that they have established the Cellcom brand as one of the most recognized and respected consumer brands in Israel. They plan to continually enhance the brand through maintaining high network quality, the provision of innovative products and services, quality customer service and investments in advertising and promotional campaigns. They believe these enhancements are key to maintaining a competitive advantage, differentiating their services from their competitors and establishing and maintaining a successful relationship with the subscribers. All this will be done side by side with Optimizing cost structure. Cellcom intend to continue its efforts to control costs and improve efficiency while also improving the quality of our services. Analyzing the Financial Statements and comparison Cellcom - Common Size I/S
Year Ended December 31, Revenues % Revenues NIS Cost of revenues Gross profit Selling and marketing expenses General and administrative expenses Other (income) expenses, net Operating income Financing expenses, net Income before income tax (EBIT) Income tax Net income 2008 100.00% 6,417,000,000 52.90% 47.10% 10.90% 10.30% -0.40% 26.30% 4.80% 21.50% 6.10% 15.40% 2009 100.00% 6,483,000,000 51.40% 48.60% 11.00% 10.20% 0.10% 27.30% 3.40% 23.90% 5.70% 18.20% 2010 100.00% 6,662,000,000 49.90% 50.10% 11.30% 9.60% 0.10% 29.10% 3.50% 25.60% 6.20% 19.40%

Our first observation is that there is a constant increase in the Companys revenues from 2008 to 2010 (between 2008-2009 7.79% increase and between 2009-2010 2.76%) although this increase is diminishing. The increase in revenues in 2009 was mainly due to a 31% increase in revenues from content and value added services (including SMS), as well as a significant increase in revenues from landline services. The increase in revenues was partially offset by a substantial decrease in roaming
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revenues following the reduction in incoming and outgoing tourism resulting from the global economic slowdown. The increase in revenues was also offset in part by a decrease in revenues from domestic voice services mainly due to the ongoing airtime price erosion. The increase in revenues in 2010 was mainly due to a 26% increase in revenues from content and value added services (including SMS), an increase in revenues from landline services as well as an increase in roaming revenues. The increase in revenues has also resulted from a 6.8% increase in handset and accessories revenues. These increases were partially offset by a decrease in revenues from domestic voice services, mainly due to the ongoing airtime price erosion, and by a one-time provision for a refund to all our subscribers in a total amount of approximately NIS 66 million ($19 million) related to a major network malfunction we experienced in December 2010. The reason that we inserted the actual figure for the Net Income is there was an incredible increase between 2008 and 2009. Net Income
Y.E December 31, Net income (M) (In NIS millions) 2008 989 2009 1,182 2010 1,291 Change 2009 vs. 2008 19.50% 2010 vs. 2009 9.20%

The increase in net income in 2010 compared with 2009, was primarily due to an increase of 2.8% in revenues, while total operating expenses increased by only 0.2%, leading to an increase of 9.6 % in operating income. This increase was partially offset by an increase in financing expenses and income tax. The increase in net income in 2009 compared with 2008, was primarily due to an increase of 1% in revenues, while total operating expenses decreased by 1%, leading to an increase of 4.6% in operating income. The increase also resulted from a decrease in financing expenses and income tax. EBITDA Margin Although the EBITDA margin is (in our opinion) overrated by analysts, we still believe that it has significance when analyzing the cellular market as they suffer from high values of amortization and depreciation due to the nature of their business. In 2010 there was improved profitability. Illustrated by two key margins: EBITDA margin was 40.03% (an indicator for the core profitability of the firm). This is as although both EBITDA and revenues have been increasing the growth EBITDA has been greater than the growth in revenues leading to an increasing EBITDA margin.
EBITDA Margin = EBITDA/Revenues EBITDA (in millions of NIS) Revenues (in millions of NIS) EBITDA/Revenues 2008 2,482 6,417 38.67% 2009 2,529 6,483 39.00% 2010 2,667 6,662 40.03%

Operating margin was 29.09% (a measurement of what proportion of revenue is left over after paying variable costs of production - a healthy margin indicates the ability to pay for fixed costs). We can see that both operating income and revenues have been increasing for the past years; however, the growth in operating income has been greater leading to an increasing operating margin.
Operating Margin (Operating income/Revenues) Operating income (in millions of NIS) Revenues (in millions of NIS) Operating income/Revenues 2008 1,690 6,417 26.33% 2009 1,768 6,483 27.27% 2010 1,938 6,662 29.09%

Partner - Common Size I/S

Year Ended December 31, Revenues Cost of Revenues Gross Profit Selling and Marketing Expense General and Administrative expenses Other income net Operating Profit Finance income Finance expenses Finance costs, net Profit before income tax (EBIT) Income tax expenses Profit for the year 2008 100.00% 6,302,000,000 61.38% 38.62% 6.16% 4.51% 1.02% 28.97% 0.48% 3.40% 2.92% 26.06% 7.05% 19.01% 2009 100.00% 6,079,000,000 62.02% 37.98% 6.37% 4.77% 1.14% 27.98% 0.46% 3.36% 2.90% 25.09% 6.32% 18.77% 2010 100.00% 6,674,000,000 61.33% 38.67% 7.18% 4.58% 0.96% 27.87% 0.42% 3.13% 2.71% 25.16% 6.53% 18.62%

We can observe here a fluctuating amount of Revenues. There is a significant increase in revenues of 8.9% between 2010 2009 after a drop in revenues of 3.66%. Perhaps this can be explained by the new smartphones that were introduced in 2010.

Net Income
Y.E December 31, Net income (M) (In NIS millions) 2008 1,198 2009 1,141 2010 1,243 Change 2009 vs. 2008 -4.99% 2010 vs. 2009 8.2%

The fluctuation in net income is mainly explained by the fluctuation in revenues when other expenses stayed similar over the years. EBITDA Margin
EBITDA Margin = EBITDA/Revenues EBITDA (in millions of NIS) Revenues (in millions of NIS) EBITDA/Revenues Operating Margin (Operating income/Revenues) Operating income (in millions of NIS) Revenues (in millions of NIS) Operating income/Revenues 2008 2,298 6,302 36.46% 2008 1,826 6,302 28.97% 2009 2,304 6,079 37.90% 2009 1,701 6,079 27.98% 2010 2,570 6,674 38.50% 2010 1,860 6,674 27.86%

We can see that EBITDA has been decreasing as Operating Margin is increasing over the past few years. This may be an accounting trick in order as the EBITDA is a measure of profitability; when taken alone it shows that the profitability of Partner has been increasing. However, when taking into account an additional profitability measure (Operating Margin) we can see that this conclusion is strange. EBITDA is probably easier to manipulate with accounting tools as its parts are more susceptible to assumptions (what amount goes into interest, what is taxed, what and how our items are depreciated etc.).

Cellcom - Common Size Balance Sheet

Year Ended December 31, Assets Cash and cash equivalents Current investments, including derivatives Trade receivables Other receivables Inventory Total current assets Trade and other receivables Property, plant and equipment, net Intangible assets, net Total non- current assets Total assets Liabilities Short term borrowings Trade payables and accrued expenses Current tax liabilities Provisions Other current liabilities, including derivatives Total current liabilities Debentures Provisions Other long-term liabilities Deferred taxes Total non- current liabilities Total liabilities Shareholders' equity Share capital Cash flow hedge reserve Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 2008 5.01% 1.24% 26.93% 0.80% 2.17% 36.15% 10.97% 39.34% 13.54% 63.85% 100.00% 5,488,000,000 5.99% 12.34% 1.55% 0.86% 7.02% 27.75% 61.97% 0.31% 0.02% 2.84% 65.14% 92.89% 0.02% -0.20% 7.29% 7.11% 100.00% 2009 14.16% 4.26% 24.75% 0.99% 2.34% 46.50% 9.50% 32.86% 11.15% 53.50% 100.00% 6,379,000,000 5.49% 12.64% 1.05% 1.32% 6.35% 26.84% 65.61% 0.25% 0.02% 1.43% 67.30% 94.14% 0.02% -0.36% 6.21% 5.86% 100.00% 2010 8.89% 6.74% 24.65% 1.07% 1.73% 43.08% 9.96% 34.41% 12.56% 56.92% 100.00% 5,996,000,000 5.80% 11.94% 2.20% 1.40% 6.32% 27.67% 65.26% 0.28% 0.02% 1.08% 66.64% 94.31% 0.02% -0.35% 6.02% 5.69% 100.00%

Red flags: Looking at the common size balance sheet we can immediately see that Cellcom held significantly more cash in 2009 than in 2008 and 2010. There are two main reasons for this: 1) Higher net income that resulted in higher ending cash balance and 2) lower Trade receivables and selling off PP&E (also lower) that both contributed to cash and cash equivalents 3) these fluctuations can also indicate a lack of consistency in company policy. We can see a downward rate change of almost 1% in inventory holdings of total assets. This tells us the way that the company values its inventory or, on the other hand, that the company's policy of revenue generators is shifting slowly to other directions such as the aforementioned value-added services on the account of hardware. We notice a downward rate change in receivables which is a good sign that the company is collecting more owed money. Partner - Common Size Balance Sheet
2008 Assets Cash and cash equivalents Current investments, including derivatives Trade receivables Other receivables Inventory Derivative financial instruments Total current assets 01 3.56% 0.00% 21.36% 0.64% 2.42% 0.52% 28.50% 2009 5.85% 0.25% 22.67% 0.55% 2.81% 0.00% 32.14% 2010 5.70% 0.11% 23.65% 1.26% 1.79% 0.00% 32.52%

Trade and other receivables Advance payment in respect of the acquisition of 012 smile Property, plant and equipment, net Intangible assets, net Deferred income tax asset Derivative financial instruments Total non- current assets Total assets

8.07% 0.00% 37.46% 24.39% 1.57% 0.00% 71.50% 100.00% 5,165,000, 000 11.00% 15.86% 0.08% 4.76% 0.93% 0.00% 0.14% 0.81% 33.57% 31.23% 0.00% 1.03% 0.45% 0.19% 0.00% 32.89% 66.47%

8.43% 0.00% 36.71% 22.41% 0.25% 0.07% 67.86% 100.00% 5,623,000, 000 13.37% 13.82% 0.60% 4.23% 1.00% 0.60% 0.07% 0.36% 34.06% 24.52% 5.34% 0.68% 0.41% 0.11% 0.00% 31.05% 65.11%

11.23% 0.53% 36.57% 19.14% 0.00% 0.00% 67.48% 100.00% 5,627,000, 000 11.16% 13.70% 1.28% 4.69% 0.91% 0.46% 0.05% 0.20% 32.45% 32.63% 22.25% 0.96% 0.41% 0.14% 0.04% 56.42% 88.88%

Current Liabilities Current maturities of notes payable and other liabilities and current borrowings Trade payables Parent group trade Other payables Deferred revenue Provisions Derivative financial instruments Income tax liability NON CURRENT LIABILITIES Notes payable Bank borrowings Liability for employee rights upon retirement, net Dismantling and restoring sites obligation Other non-current liabilities Deferred income tax liability TOTAL LIABILITIES EQUITY Share capital - ordinary shares of NIS 0.01 par value: authorized - December 31, 2009, and 2010 - 235,000,000 shares; issued and outstanding December 31, 2009 *154,440,136 shares December 31, 2010 *155,249,176 shares Capital surplus Accumulated deficit Treasury shares, at cost - December 31, 2009 and 2010 - 4,467,990 shares TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

0.04% 47.36% -7.07% -6.80% 33.53% 100.00%

0.04% 44.16% -3.06% -6.24% 34.89% 100.00%

0.04% 19.53% -2.20% -6.24% 11.12% 100.00%

Red Flags: We can see a jump in cash from 2008 to 2009. We can see no significant changes in the assets to explain this jump. However, looking at the liabilities we immediately notice a jump in bank borrowing from 2008 (0%) to 2009 (5.34%/NIS 305,328,900). More alarmingly is the leap in bank borrowing from 2009 (5.34%/NIS 305,328,900) to 2010 (22.25%/NIS 1,252,007,500). Over the same period (2009 2010) we also note a significant decrease in capital surplus an alarming sign of underperforming. This can be explained by the changing of both the CEO and CFO in 2011 when the 2010 20-f is filed. As learnt in class the CEO wants to show increased profitability (also known as "taking a bath"), working in cohesion with the CFO dumping all of the bank loans in the year they arrive and then paying them back in order to increase capital surplus (spare cash) will be seen as a success in their job.

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Financial ratio Analysis Liquidity ratios

Current ratio Cellcom Partner 2008 1.3027 .08489 2009 1.7325 0.9436 2010 1.5570 1.0022

Comparing Cellcom and Partners current ratios, we can note that Cellcoms ratios are much higher. The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities with its short-term assets. The higher the current ratio, the more capable the company is for paying its obligations. A current ratio around 1 means that, on average, for one dollar in asset there is one dollar for liability. Therefore, we can say that Cellcom is overly healthy and, barring 2008, Partner is healthy. This is as Cellcom is holding too much current assets with respect to their liabilities.
Quick ratio Cellcom Partner 2008 1.2246 0.7768 2009 1.6454 0.8610 2010 1.4942 0.9468

Quick ratio is an indicator of the Company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. As a rule of thumb: the higher the quick ratio, the better the position of the company. The quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength18. Cellcom, for every dollar of liabilities, has more than one dollar of liquid assets. This was amplified in 2009 by the unusual amount of cash held by the Company. Partner has a ratio of below one for 2008, 2009 and 2010; in order to meet the debt obligations Partner will probably have to collect on some accounts receivable or sell some assets (such as inventory).
OCF to Sales Cellcom Partner 2008 32.58% 29.41% 2009 33.34% 31.58% 2010 33.77% 31.97%

This ratio, which is expressed as a percentage, compares a company's operating cash flow to its net sales or revenues, which gives investors an idea of the company's ability to turn sales into cash 19. We can see instantly from this ratio that Cellcom earns more operating cash flow for every dollar of sales that Partner for the past years. Cellcom earns on average approximately 33 agurot for every sales shekel and Partner earns on average approximately 31 agurot for every sales shekel. Analysis Both companies appear to be healthy, from a liquidity point of view. Cellcom is in a better condition since it has a better ability to create cash and liquidity. However, this may be to an excess in Cellcoms case. Partner has been struggling in the past couple of years but seems to have fixed their cash and liquidity troubles.

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http://www.investopedia.com/terms/q/quickratio.asp#axzz1eK4bDAWv

19 http://www.investopedia.com/university/ratios/cash-flow-indicator/ratio1.asp#axzz1eK4bDAWv

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Profitability Ratios
Profit margin Cellcom Partner 2008 15.41% 19.00% 2009 18.23% 18.76% 2010 19.37% 18.62%

A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings 20. We can see that, on average, Partner has a higher (18.80%) profit margin that Cellcom (17.67%). However, looking at the data critically we can see that Cellcoms profit margin has been increasing whereas Partners has been decreasing. This may be explained by the change of both CEO and CFO and we will need to compare the results to the consolidated financial statements of 2011 in order to see whether the decrease is a real one or a fabricated one to show effectiveness.
ROE 21 Cellcom Partner 2008 2.535 0.6916 2009 3.160 0.5815 2010 3.785 1.985

Return on equity measures a company's profitability by revealing how much profit a company generates with the money shareholders have invested. This ratio is important as every investor wants to achieve the highest return possible. The reason that Cellcom has such a high ROE is due to a high net income with respect to low equity; again we return to the high cash reserves held by Cellcom that have assisted the Company in preventing a issuance of equity in order to raise funds. Partner, on the other hand, has similar (even higher) net income over the past years but Partner maintains high equity due to the recent (2009, 2010) authorization of shares.
ROA Cellcom Partner 2008 0.1802 0.2319 2009 0.1852 0.2029 2010 0.2153 0.2208

ROA is the most significant ratio for assessing profitability; it shows how a company uses its assets to generate profit. Partner has had a higher ROA than Cellcom consecutively during the past years. Although this appears to place Partner as the better user of assets we observe a fluctuating trend over the years; whereas, Cellcom has maintained an upward trend throughout the same time period. We can expect Cellcoms ROA to increase next year but are unable to make the same estimation about Partner. Both companies have been similar at converting their respective investments into profits; however, Partner has been better over the past years. This may just be due to the fact that Partner has many more employees than Cellcom and therefore are able to use their assets more efficiently.
Earnings per share Cellcom Partner 2008 0.65 0.31 2009 0.73 0.43 2010 0.99 0.55

The earnings per share ratio show us how much a company allocates their profits for each outstanding share of common stock. It is generally considered to be the most important determinant in a shares price. However, as its formula is it is susceptible to accounting manipulations. Looking at the earnings per share ratio we can see that Cellcom far surpassed Partner in all previous years. Both companies have been increasing their respective earnings per share. However, Partner had better growth from 2008 to 2009 (28% compared to 11%) and a similar growth from 2010 to 2009 (22% compared with 26%).

20 http://www.investopedia.com/terms/p/profitmargin.asp#axzz1eK4bDAWv

21 Appendix4

03

P/E ratio Cellcom Partner

2008 34 53.22

2009 43.917 47.372

2010 33.02 36.945

The P/E ratio compares the Companys share prices with its earnings per share. As a rule when comparing two companies, or comparing a company to its industry a higher P/E ratio is good. However, as the denominator of the ratio is based on accounting measure of earnings it is susceptible to manipulation. Therefore the ratio is only as good (accurate) as the underlying earnings number. We can see that Cellcom has a steady P/E ratio with a spike in 2009. Partner, on the other hand, has an ongoing negative trend in their P/E ratio over the three years. This may be due to the high share price due to speculation on Cellcoms stock in 2009 due to their increased cash holdings. Such holdings may be an indicator of impending strategic changes that are about to occur. We know that Cellcom did in fact purchase Netvision in 2011. Capital Structure Ratios
Debt to Equity Ratio Cellcom Partner 2008 13.07 1.98 2009 16.05 1.86 2010 16.58 7.98

The debt to equity ratio tells us how much the company is using debt in order to finance operations. A higher ratio indicates that a company has been aggressive in financing its growth with debt. Cellcoms ratio is abnormally high for the industry that they are in. Partner maintains a steady ratio around 2 just after the crisis in 2008 but in 2010 in order to expand Partner issues a lot more debt. This may be an attempt to generate more earnings and expand operations in order to brace the company for the incoming competitors due to the changing regulations in the industry.
LTD to T-Assets Cellcom Partner 2008 0.6514 0.3289 2009 0.6729 0.3105 2010 0.6664 0.5642

The long term debt to total assets ratio is a measurement representing the percentage of a corporation's assets that are financed with loans and financial obligations lasting more than one year. The ratio provides a general measure of the financial position of a company, including its ability to meet financial requirements for outstanding loans. A year-over-year decrease in this metric would suggest the company is progressively becoming less dependent on debt to grow their business22. We can see that although it fluctuates slightly Cellcom has maintained a steady ratio for the past few years. In contrast Partner seems to decline initially jumped by 45% between 2009 and 2010. This complements the debt to equity ratio and teaches us that Partner has taken a lot of long term debt in order to leverage expansion. Cellcom is more leveraged than Partner. This increases Cellcoms risk as it is more exposed to external market forces (such as interest rate). Working Capital Activity
Receivable Turnover Cellcom Partner 2008 4.21 5.54 2009 3.94 4.65 2010 4.32 4.76

Cellcom has an average of 4.1 whereas as Partner has an average of 5. The ratio shows how effective the company is in collecting debt from sales. The higher the ratio the less interest free credit is extended from the Company to the customer. Cellcom should consider lowering the amount of accounts receivable in order to increase their ratio as the money that they are not collecting is not earning for Cellcom. Although Partners ratio also appears low they are doing better than their competitor.

22 http://www.investopedia.com/terms/l/long-term-debt-to-total-assets-ratio.asp#axzz1eSilmRLX

04

Accounts Receivable Days Outstanding Ratio Cellcom Partner

2008 86.57 65.79

2009 92.44 78.42

2010 84.48 76.68

This ratio shows the amount of time it take the Company to collect the money owed to it from sales done on credit. On average Partner (73.62) collects its debt quicker than Cellcom (87.83). Money is the lifeblood of any company and in this case Partner is in a much better position than Cellcom. Partner is more efficient in many ways and this is an example of one of those ways. Partner is simply better at collecting the money it is owed.

Accounts Payable Turnover Ratio Cellcom Partner

2008 2.22 2.23

2009 1.94 1.96

2010 2.00 2.24

The Accounts Payable Turnover Ratio tells how the Company pays off its suppliers. Cellcom and Partner both have a ratio of around 2. The low ratio shows off the credit policy that both companies receive from their respective suppliers. Their suppliers are allowing them to extend their payment of payables thus allowing each company to fully utilize their cash.
Inventory Turnover Cellcom Partner 2008 28.53 30.94 2009 22.36 23.86 2010 31.94 40.52

The inventory turnover shows us an interesting trend with regards to the industry. The turnover ratio measures the number of times inventory is used during a period. We can immediately see that 2009 was a slow year in the industry for both companies. It may have been the changes in regulation regarding contract cancellation and length of commitment or perhaps a significant part of the consumers were waiting on a new Apple release before purchasing a new handset.
Asset Turnover Ratio Cellcom Partner 2008 3.23 1.22 2009 2.18 1.08 2010 2.57 1.18

Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. It also indicates pricing strategy: companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover 23. From the ratios we can see that Partner has a low asset margin corresponding perfectly with the higher profit margins we saw earlier. On the contrary, Cellcom has a higher asset turnover corresponding with the lower profit margins seen earlier. Analysis Analyzing only the working capital activity of Cellcom and Partner, it would appear that Partner is preferable. Partner has a lower receivable turnover and is able to collect its owed money faster than Cellcom. Also, we can learn from the asset turnover that Partner has a high profit margin which in turn increases profit and retained earnings working to maximize the return for the shareholder.

23 http://www.investopedia.com/terms/a/assetturnover.asp#axzz1eT5uq8fk

05

Risk Analysis Credit risk What is the probability that Cellcom will not be able to meet its obligations to its creditors or investor? Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from customers. Cellcom Management has a credit policy in place and the exposure to credit risk is monitored on an ongoing basis. The Company conducts credit evaluations on receivables over a certain amount, and requires financial guaranties against them. Management monitors outstanding receivable balances and the financial statements include appropriate allowances for estimated irrecoverable amounts. The Company is exposed to credit risk arising mainly from its operation in Israel. The Company invests in high ranked (AAA) Israeli government and institutional debt securities. The Companys cash and cash equivalents are maintained with major banking institutions in Israel. At the reporting date, there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivatives, in the consolidated statement of financial position. Financial instruments that could potentially subject the Company to credit risks consist primarily of trade receivables. Credit risk with respect to these receivables is limited due to the composition of the subscriber base, which includes a large number of individuals and businesses. The maximum exposure to credit risk of financial assets at the reporting date by type of counterparty is:

Another way to show Cellcom's Credit Risk is its ICR:

ICR EBIT/Interest 2008 16.62650602 2009 10.25828 2010 16.11321

This Ratio is used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. When a company's interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable. An interest coverage ratio below 1 indicates the company is not generating sufficient revenues to satisfy interest expenses. We can see the Cellcom's ICR is quit high and so the probability not to meet its obligations to creditors is very low.

06

Bankruptcy Risk The common method to estimate a company's bankruptcy risk is using Altman's Z-score24. The Z-score is analyzed by a multiplication and summation of coefficients and financial ratios, given by the following equation:
Cellcom 2008 0.050109329 0.072886297 0.084730321 1.615683601 1.169278426 Z-score 3.340310307 2009 0.141558238 0.062078696 0.079416836 1.966020816 1.016303496 3.436455255 2010 0.088892595 0.060206805 0.096257505 2.014825818 1.111074049 3.658545257 Z-score Partner 2008 -0.05072604 -0.00677832 0.311713456 2.74841043 1.220135528 3.8479206 2009 -0.01920683 -0.00807576 0.081173751 3.235001366 1.081095501 3.88272694 2010 0.000710858 -0.13889106 0.088569398 2.233978404 1.186067176 3.31752299

Zones of Discrimination: Z > 3.0 -Safe Zones 1.81 < Z < 3.0 -Grey Zones Z < 1.81 -Distress Zones Throughout 2008-2010 Cellcom was within the safe zone. Moreover, the Z-score results have improved from 2008 to 2009 (2.8% improvement) and from 2009 to 2010 (6.46%). By analyzing the ratios, we can identify two major reasons for the constant growth: the EBIT/TA ratio has grown significantly (21.2%) between 2009-2010, and is highly counted for in the weighted calculation due to the high coefficient given by Altman to this ratio (3.3). The reason is that EBIT is carefully observed by creditors since it represents the amount of cash that a company will be able to pay off creditors, hence a spotlight indicator for possible bankruptcy. Cellcom is deep within the "safe zone". Moreover, the constant increase can assign healthy attributes to the company's security and life-expectancy and an indicator that the company is performing well on the overall level. Partner's z-scores have sustained a substantial decrease (14.5%) between 2009 to 2010. The main reason is a significant decrease (30.9%) in the MVE/BVL ratio; if the trend of z-score decreases continues into 2011, and will drag Partner into the grey zone, the company's safety and stability may be in risk.

24 http://en.wikipedia.org/wiki/Altman_Z-score

07

Company Valuation WACC Calculation We assume that the CAPM model holds so we may calculate the appropriate weighted average cost of capital (hereinafter: WACC). The WACC will be used to discount the cash flows in the DCF model in order to calculate the company's value.

Based on P/E To determine Cellcoms company value based on P/E ratio, we should multiply the overall industry's P/E ratio by Net Income. The average P/E ratio of the industry is 22.625. Cellcoms Net Income in 2010 is 1,291,000,000.

Real Price at 31.12.10 = 116 NIS > Estimated Stock Price= 293.33NIS We can see that the real price of the stock today is lower than its Estimated Stock Price. Therefore, the stock price is under-valuated.

DCF Calculation26 We estimated the growth rate by calculating the average growth in gross profit from 2008-2010 to be 6.1%.We believe that the gross profit can give us a better estimation of the growth rate than the net income, because it does not take the temporary loss of impairment on inventory into account. Our WACC and growth rate are estimated and therefore we calculated the Discounted Cash Flows, for a time period of 3 years, for a pessimistic, expected and optimistic scenarios. In order to use the DCF model, we need to know the future cash flows we estimated three pro-forma income statements for each of the above scenarios. We estimated the three cash flows for each scenario as EBIT*(1-T) discounted by the WACC in order to get the DCF value. We added these discounted cash flows to the terminal value which was found by using the Gordon model. This table shows the three scenarios.
25 http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=PriceRatios&symbol=CEL

26

Appendix 6 Full DCF calculations

08

Scenario Optimistic Estimated Pessimistic

WACC 6.1% 6223% 7.27%

Growth rate 5.7% 5.15% 4.42%

DCF(NIS) 4,745 4,684 4,530

Terminal Value 443,475 060,823 59,317

Company Value 448,220 166,507 63,839

We found in each of the three scenarios that the current market valuation is undervalued.

Company Valuation summary The best valuation method is probably some combination on these two methods: Estimated Value = DCF Valuation*80% + P/E Valuation *20% = 139,040.32 As we can see according to the estimated value of Cellcom the current market valuation is undervalued. We would advise to buy Cellcom's stock. Conclusion and Summary Cellcom is active in a changing environment market after years of stagnation. The future entry of new players to the scene along with global technological innovation illustrated by the smartphone phenomenon, have urged Cellcom to take action. In the past, the most important revenue generators were hardware (cellular phone) selling and air time charging. Now days, we notice a trend towards value-added services that are enabled by the aforementioned technological innovation. We notice that Cellcom outperforms its main competitor, Partner, in almost every aspect. We have witnessed an increase in revenues and gross profit that are indicators for the company's success. Cellcom has increasing ROA figures, and their LTD to TA ratio has stayed constant throughout the years, which indicates stability and corporate control. Moreover, Cellcom is in the "safe zone" from bankruptcy point of view. We have found Cellcom to be significantly undervalued and that their stock price does not represent its true value. By finding the company's value by the DCF model and by the terminal value, we can say that Cellcom's stock should be bought since we expect future increase in its price.

09

Bibliography
Cellcom Israel Ltd. Company Profile, Datamonitor, 29 Sep 2011 Company Financial Report - CELLCOM ISRAEL LTD. FORM 20-F 2009 - 2010 Company web site Competitor Financial Report - PARTNER ISRAEL LTD. FORM 20-F 2009 - 2010 http://en.wikipedia.org/wiki/Altman_Z-score http://en.wikipedia.org/wiki/Cellcom_(Israel) http://en.wikipedia.org/wiki/Partner_Communications_Company http://he.wikipedia.org/wiki/%D7%AA%D7%A7%D7%A9%D7%95%D7%A8%D7%AA_%D7%91%D7 %99%D7%A9%D7%A8%D7%90%D7%9C http://investors.irCellcom.co.il/ http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=PriceRatios&symbol=CEL http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=cel http://seekingalpha.com/symbol/cel?source=search_general&s=cel http://www.bdicode.co.il/CompanyTextProfile_ENG/568_500_0/Cellcom%20Israel%20Ltd http://www.Cellcom.co.il/Pages/default.aspx http://www.iese.edu/research/pdfs/DI-0912-E.pdf http://www.investopedia.com/terms/a/assetturnover.asp#axzz1eT5uq8fk http://www.investopedia.com/terms/p/profitmargin.asp#axzz1eK4bDAWv http://www.investopedia.com/terms/q/quickratio.asp#axzz1eK4bDAWv http://www.investopedia.com/university/ratios/cash-flow-indicator/ratio1.asp#axzz1eK4bDAWv http://www.marketwatch.com/investing/stock/cel/profile http://www.moc.gov.il/191-he/MOC.aspx http://www.wikiswot.com/SWOT/4_/Orange.html http://www.wikiwealth.com/research:cel http://www.ynet.co.il/articles/0,7340,L-4151913,00.html http://ycharts.com/companies/CEL/historical_data/price?p=5&start_month=11&end_date_string=2011-1124&start_day=24&start_date_string=2006-11-24&end_year=2011&end_date_object=2011-1124&start_year=2006&start_date_object=2006-11-24&end_month=11&end_day=24 http://ycharts.com/companies/CEL/historical_data/price?p=5&start_month=11&end_date_string=2011-1124&start_day=24&start_date_string=2006-11-24&end_year=2011&end_date_object=2011-1124&start_year=2006&start_date_object=2006-11-24&end_month=11&end_day=24

21

Appendix1

Appendix 2

Appendix 3

20

Appendix 4 Cellcom ROE27:

Partner ROE28:

27 http://ycharts.com/companies/CEL/return_on_equity#startDate=12/31/2008&endDate=12/31/2010&zoom=

28 http://ycharts.com/companies/PTNR/return_on_equity#startDate=12/31/2008&endDate=12/31/2010&zoom=

22

Appendix 5
Date 31/12/2010 30/12/2010 29/12/2010 28/12/2010 27/12/2010 23/12/2010 22/12/2010 21/12/2010 20/12/2010 17/12/2010 16/12/2010 15/12/2010 14/12/2010 13/12/2010 10/12/2010 09/12/2010 08/12/2010 07/12/2010 06/12/2010 03/12/2010 02/12/2010 01/12/2010 30/11/2010 29/11/2010 26/11/2010 24/11/2010 23/11/2010 22/11/2010 19/11/2010 18/11/2010 17/11/2010 16/11/2010 15/11/2010 12/11/2010 11/11/2010 10/11/2010 09/11/2010 08/11/2010 05/11/2010 04/11/2010 03/11/2010 02/11/2010 01/11/2010 Close CEL 32.69 32.61 32.23 31.96 32.08 31.92 31.71 31.86 31.71 32.48 32.36 32.52 33.24 33.33 35.04 34.91 34.89 34.77 34.85 34.54 34.14 33.65 33.35 33.56 34.06 34.25 33.8 34.8 34.36 34.23 33.64 32.91 33.58 33.39 33.67 33.97 33.27 33.3 32.95 33.15 33.14 32.84 33.51 Close ^NYA 7964.02 7951.91 7961.48 7931.67 7920.94 7925.36 7931.76 7906.1 7846.96 7835.31 7840.24 7798.78 7855.22 7850.02 7823.3 7782.14 7750.32 7739.64 7740.69 7751.58 7712.25 7603.73 7430.94 7483.34 7500.54 7579.26 7470.77 7610.3 7641.08 7619.94 7488.76 7472.63 7617.51 7623.24 7723.24 7747.46 7702.31 7782.2 7800.66 7782.43 7608.41 7582.14 7509.21 % CEL 0.25% 1.18% 0.84% -0.37% 0.50% 0.66% -0.47% 0.47% -2.37% 0.37% -0.49% -2.17% -0.27% -4.88% 0.37% 0.06% 0.35% -0.23% 0.90% 1.17% 1.46% 0.90% -0.63% -1.47% -0.55% 1.33% -2.87% 1.28% 0.38% 1.75% 2.22% -2.00% 0.57% -0.83% -0.88% 2.10% -0.09% 1.06% -0.60% 0.03% 0.91% -2.00% -0.83% % ^NYA 0.15% -0.12% 0.38% 0.14% -0.06% -0.08% 0.32% 0.75% 0.15% -0.06% 0.53% -0.72% 0.07% 0.34% 0.53% 0.41% 0.14% -0.01% -0.14% 0.51% 1.43% 2.33% -0.70% -0.23% -1.04% 1.45% -1.83% -0.40% 0.28% 1.75% 0.22% -1.90% -0.08% -1.29% -0.31% 0.59% -1.03% -0.24% 0.23% 2.29% 0.35% 0.97% -0.06% Beta 0.7379

23

29/10/2010 28/10/2010 27/10/2010 26/10/2010 25/10/2010 22/10/2010 21/10/2010 20/10/2010 19/10/2010 18/10/2010 15/10/2010 14/10/2010 13/10/2010 12/10/2010 11/10/2010 08/10/2010 07/10/2010 06/10/2010 05/10/2010 04/10/2010 01/10/2010 30/09/2010 29/09/2010 28/09/2010 27/09/2010 24/09/2010 23/09/2010 22/09/2010 21/09/2010 20/09/2010 17/09/2010 16/09/2010 15/09/2010 14/09/2010 13/09/2010 10/09/2010 09/09/2010 08/09/2010 07/09/2010 03/09/2010 02/09/2010 01/09/2010 31/08/2010 30/08/2010 27/08/2010 26/08/2010 25/08/2010 24/08/2010

33.79 34.03 33.29 33.5 33.88 33.41 33.2 32.43 32.16 32.38 32.33 32.21 31.98 31.63 31.74 31.47 31.32 31.54 31.52 30.78 30.62 30.37 30.16 30.06 29.99 29.53 29.22 29.2 29.34 28.81 28.6 28.62 29.45 29.01 28.95 28.43 28.31 28.2 27.97 27.49 27.25 27.5 27.44 28.06 28.39 27.73 28.23 28.49

7513.35 7504.85 7480.87 7530.8 7546.38 7522.91 7515.67 7523.81 7423.65 7571.1 7520.6 7546.59 7561.5 7489.62 7479.01 7478.42 7425.01 7448.33 7434.18 7272.53 7335.91 7281.07 7299.31 7310.32 7263.37 7301.04 7141.51 7210.85 7245.95 7266.02 7154.65 7169.48 7179.79 7162.08 7156.18 7067.51 7034.37 6999.94 6959.94 7055.03 6966.25 6910.98 6704.15 6695.28 6794.91 6665.26 6696.12 6681.03

-0.71% 2.22% -0.63% -1.12% 1.41% 0.63% 2.37% 0.84% -0.68% 0.15% 0.37% 0.72% 1.11% -0.35% 0.86% 0.48% -0.70% 0.06% 2.40% 0.52% 0.82% 0.70% 0.33% 0.23% 1.56% 1.06% 0.07% -0.48% 1.84% 0.73% -0.07% -2.82% 1.52% 0.21% 1.83% 0.42% 0.39% 0.82% 1.75% 0.88% -0.91% 0.22% -2.21% -1.16% 2.38% -1.77% -0.91% -1.55%

0.11% 0.32% -0.66% -0.21% 0.31% 0.10% -0.11% 1.35% -1.95% 0.67% -0.34% -0.20% 0.96% 0.14% 0.01% 0.72% -0.31% 0.19% 2.22% -0.86% 0.75% -0.25% -0.15% 0.65% -0.52% 2.23% -0.96% -0.48% -0.28% 1.56% -0.21% -0.14% 0.25% 0.08% 1.25% 0.47% 0.49% 0.57% -1.35% 1.27% 0.80% 3.09% 0.13% -1.47% 1.95% -0.46% 0.23% -1.53%

24

23/08/2010 20/08/2010 19/08/2010 18/08/2010 17/08/2010 16/08/2010 13/08/2010 12/08/2010 11/08/2010 10/08/2010 09/08/2010 06/08/2010 05/08/2010 04/08/2010 03/08/2010 02/08/2010 30/07/2010 29/07/2010 28/07/2010 27/07/2010 26/07/2010 23/07/2010 22/07/2010 21/07/2010 20/07/2010 19/07/2010 16/07/2010 15/07/2010 14/07/2010 13/07/2010 12/07/2010 09/07/2010 08/07/2010 07/07/2010 06/07/2010 02/07/2010 01/07/2010 30/06/2010 29/06/2010 28/06/2010 25/06/2010 24/06/2010 23/06/2010 22/06/2010 21/06/2010 18/06/2010 17/06/2010 16/06/2010

28.94 28.87 29.07 29.27 29.22 29.05 28.52 28.7 28.35 29.04 29.36 28.86 28.75 28.34 28.02 28.25 27.6 27.51 27.31 27.2 27.4 26.85 26.58 26.07 25.8 25.59 25.58 25.85 26.2 26.35 25.75 25.87 25.73 25.29 25.12 25.05 24.93 25 25.33 26.38 27.2 26.91 27.58 27.63 27.52 27.18 27.02 27.16

6784.97 6813.15 6850.45 6968.08 6959.79 6871.58 6861.04 6881.94 6902.71 7139.75 7188.3 7153.72 7174.27 7182.14 7146.99 7174.9 6998.99 6994.57 6999.18 7044.99 7046 6965.11 6901.91 6731.16 6820.04 6739.64 6709.51 6916.81 6903.36 6907.78 6794.48 6808.71 6755.81 6685.78 6486.09 6434.81 6462.03 6469.65 6520.09 6736.6 6763.93 6730.24 6850.05 6858.95 6978.86 6988.25 6982.04 6976.08

0.24% -0.69% -0.68% 0.17% 0.59% 1.86% -0.63% 1.23% -2.38% -1.09% 1.73% 0.38% 1.45% 1.14% -0.81% 2.36% 0.33% 0.73% 0.40% -0.73% 2.05% 1.02% 1.96% 1.05% 0.82% 0.04% -1.04% -1.34% -0.57% 2.33% -0.46% 0.54% 1.74% 0.68% 0.28% 0.48% -0.28% -1.30% -3.98% -3.01% 1.08% -2.43% -0.18% 0.40% 1.25% 0.59% -0.52% -1.27%

-0.41% -0.54% -1.69% 0.12% 1.28% 0.15% -0.30% -0.30% -3.32% -0.68% 0.48% -0.29% -0.11% 0.49% -0.39% 2.51% 0.06% -0.07% -0.65% -0.01% 1.16% 0.92% 2.54% -1.30% 1.19% 0.45% -3.00% 0.19% -0.06% 1.67% -0.21% 0.78% 1.05% 3.08% 0.80% -0.42% -0.12% -0.77% -3.21% -0.40% 0.50% -1.75% -0.13% -1.72% -0.13% 0.09% 0.09% -0.20%

25

15/06/2010 14/06/2010 11/06/2010 10/06/2010 09/06/2010 08/06/2010 07/06/2010 04/06/2010 03/06/2010 02/06/2010 01/06/2010 28/05/2010 27/05/2010 26/05/2010 25/05/2010 24/05/2010 21/05/2010 20/05/2010 19/05/2010 18/05/2010 17/05/2010 14/05/2010 13/05/2010 12/05/2010 11/05/2010 10/05/2010 07/05/2010 06/05/2010 05/05/2010 04/05/2010 03/05/2010 30/04/2010 29/04/2010 28/04/2010 27/04/2010 26/04/2010 23/04/2010 22/04/2010 21/04/2010 20/04/2010 19/04/2010 16/04/2010 15/04/2010 14/04/2010 13/04/2010 12/04/2010 09/04/2010 08/04/2010

27.51 27.19 26.4 26.27 25.92 26.03 25.7 25.59 26.2 26.18 25.2 26.92 27.32 26.1 26.17 27.41 27.41 27.29 28.2 28.08 28.64 28.12 28.48 28.71 28.68 28.95 27.19 27.77 28.67 28.85 30.78 30.3 30.51 31.02 31.35 32.13 33.06 32.76 33.25 33.29 33.24 33.83 34.18 34.32 34.6 34.34 34.15 33.94

6989.88 6817.97 6814.76 6783.51 6559.71 6596.12 6512.42 6600.27 6860.39 6839.61 6661.1 6791.57 6893.29 6631.36 6665.83 6666.74 6775.45 6653 6927.21 6959.21 7063.83 7077.64 7234.37 7316.36 7221.66 7257.62 6916.18 7011.92 7258.02 7337.25 7543.12 7474.4 7589.29 7499.72 7463.09 7677.65 7701.61 7642.83 7644.67 7669.11 7596.56 7584.62 7719.66 7728.96 7638.35 7641.75 7629.05 7565.33

1.18% 2.99% 0.49% 1.35% -0.42% 1.28% 0.43% -2.33% 0.08% 3.89% -6.39% -1.46% 4.67% -0.27% -4.52% 0.00% 0.44% -3.23% 0.43% -1.96% 1.85% -1.26% -0.80% 0.10% -0.93% 6.47% -2.09% -3.14% -0.62% -6.27% 1.58% -0.69% -1.64% -1.05% -2.43% -2.81% 0.92% -1.47% -0.12% 0.15% -1.74% -1.02% -0.41% -0.81% 0.76% 0.56% 0.62% -0.88%

2.52% 0.05% 0.46% 3.41% -0.55% 1.29% -1.33% -3.79% 0.30% 2.68% -1.92% -1.48% 3.95% -0.52% -0.01% -1.60% 1.84% -3.96% -0.46% -1.48% -0.20% -2.17% -1.12% 1.31% -0.50% 4.94% -1.37% -3.39% -1.08% -2.73% 0.92% -1.51% 1.19% 0.49% -2.79% -0.31% 0.77% -0.02% -0.32% 0.96% 0.16% -1.75% -0.12% 1.19% -0.04% 0.17% 0.84% 0.25%

26

07/04/2010 06/04/2010 05/04/2010 01/04/2010 31/03/2010 30/03/2010 29/03/2010 26/03/2010 25/03/2010 24/03/2010 23/03/2010 22/03/2010 19/03/2010 18/03/2010 17/03/2010 16/03/2010 15/03/2010 12/03/2010 11/03/2010 10/03/2010 09/03/2010 08/03/2010 05/03/2010 04/03/2010 03/03/2010 02/03/2010 01/03/2010 26/02/2010 25/02/2010 24/02/2010 23/02/2010 22/02/2010 19/02/2010 18/02/2010 17/02/2010 16/02/2010 12/02/2010 11/02/2010 10/02/2010 09/02/2010 08/02/2010 05/02/2010 04/02/2010 03/02/2010 02/02/2010 01/02/2010 29/01/2010 28/01/2010

34.24 34.68 34.7 34.3 34.17 34.38 34.05 33.6 33.61 33.98 34.2 34.44 34.41 34.77 34.7 34.53 34.68 34.53 34.31 35.45 35.5 35.68 34.95 34.75 34.79 33.83 34.41 34.08 34.06 33.88 33.63 33.44 33.84 33.97 34.25 33.66 33.38 33.27 32.6 32.55 32.13 31.99 32.16 32.61 32.66 32.11 32.07 32.2

7546.18 7604.44 7600.93 7539.02 7447.8 7460.72 7464.9 7403.58 7385.6 7408.16 7478.86 7419.02 7386.85 7443.57 7474.13 7426.7 7350.96 7362.85 7353.24 7327.67 7294.02 7292.53 7291.31 7173.07 7164.66 7135.97 7100.75 7035.04 7013.45 7030.67 6974.6 7078.53 7083.25 7080.38 7035.2 7013.35 6874.56 6898.72 6819.12 6835.16 6713.87 6782.75 6787.86 7042.62 7101.44 7008.23 6883.78 6956.99

-1.27% -0.06% 1.17% 0.38% -0.61% 0.97% 1.34% -0.03% -1.09% -0.64% -0.70% 0.09% -1.04% 0.20% 0.49% -0.43% 0.43% 0.64% -3.22% -0.14% -0.50% 2.09% 0.58% -0.11% 2.84% -1.69% 0.97% 0.06% 0.53% 0.74% 0.57% -1.18% -0.38% -0.82% 1.75% 0.84% 0.33% 2.06% 0.15% 1.31% 0.44% -0.53% -1.38% -0.15% 1.71% 0.12% -0.40% 0.88%

-0.77% 0.05% 0.82% 1.22% -0.17% -0.06% 0.83% 0.24% -0.30% -0.95% 0.81% 0.44% -0.76% -0.41% 0.64% 1.03% -0.16% 0.13% 0.35% 0.46% 0.02% 0.02% 1.65% 0.12% 0.40% 0.50% 0.93% 0.31% -0.24% 0.80% -1.47% -0.07% 0.04% 0.64% 0.31% 2.02% -0.35% 1.17% -0.23% 1.81% -1.02% -0.08% -3.62% -0.83% 1.33% 1.81% -1.05% -1.12%

27

27/01/2010 26/01/2010 25/01/2010 22/01/2010 21/01/2010 20/01/2010 19/01/2010 15/01/2010 14/01/2010 13/01/2010 12/01/2010 11/01/2010 08/01/2010 07/01/2010 06/01/2010 05/01/2010 04/01/2010

31.92 32.12 32.35 32.45 32.97 33.06 33.37 32.45 32.55 32.7 32.3 32.72 33.01 32.7 32.96 32.92 32.83

7035.61 7028.32 7073.13 7030.61 7174.46 7329.83 7443.68 7356.79 7448.52 7430.14 7370.45 7449.05 7425.35 7393.93 7377.7 7354.87 7326.74

-0.62% -0.71% -0.31% -1.58% -0.27% -0.93% 2.84% -0.31% -0.46% 1.24% -1.28% -0.88% 0.95% -0.79% 0.12% 0.27%

0.10% -0.63% 0.60% -2.01% -2.12% -1.53% 1.18% -1.23% 0.25% 0.81% -1.06% 0.32% 0.42% 0.22% 0.31% 0.38%

28

Appendix 6
NIS millions 2,010 Revenues Cost of revenues Gross profit Selling and marketing expenses General and administrative expenses Other (income) expenses, net Operating income Financing income Financing expenses Financing expenses, net Income before income tax (EBT) Income tax Net income EBIT (EBT+Income Tax) Tax 25% - [10.25=0.75] Free Cash Flow (EBIT*(1-tax rate)) DCF = Free CF/(1+WACC)^ Terminal Value CF3/(WACC-g)^1 Terminal Value PV DCF Valuation 6,6620 3,3220 3,3400 756.00 2,011 7,005.155 3,493.114 3,512.041 794.941

Pro forma Est.

2,012 7,365.985 3,673.042 3,692.944 835.888 2,013 7,745.402 3,862.237 3,883.165 878.944

Pro forma Optimistic

2,011 7,041.734 3,511.354 3,530.380 799.092 2,012 7,443.113 3,711.501 3,731.612 844.640 2,013 7,867.370 3,923.057 3,944.314 892.785

Pro forma Pessimistic

2,011 6,956.133 3,468.669 3,487.464 789.378 2,012 7,263.252 3,621.814 3,641.438 824.230 2,013 7,583.90 3,781.70 3,802.20 860.620

641.00

674.017

708.736

745.242

677.537

716.157

756.978

669.301

698.851

729.706

5.000 1,9380 106.00 -336.0 -230.0 1,7080 417.00 1,2910 2,1250

5.258 2,037.825 111.460 -353.307 -241.847 1,795.978 438.479 1,357.498 2,234.457

5.528 2,142.792 117.201 -371.506 -254.305 1,888.487 461.065 1,427.422 2,349.552

5.813 2,253.166 123.238 -390.642 -267.404 1,985.762 484.814 1,500.948 2,470.576

5.285 2,048.466 112.042 -355.152 -243.110 1,805.356 440.769 1,364.587 2,246.125

5.586 2,165.229 118.428 -375.396 -256.967 1,908.261 465.893 1,442.368 2,374.154

5.905 2,288.647 125.179 -396.793 -271.614 2,017.032 492.449 1,524.583 2,509.481

5.221 2,023.564 110.680 -350.835 -240.155 1,783.410 435.411 1,347.999 2,218.820

5.451 2,112.906 115.567 -366.324 -250.758 1,862.149 454.635 1,407.514 2,316.783

5.692 2,206.193 120.669 -382.498 -261.829 1,944.364 474.707 1,469.657 2,419.071

0.750 1,5930

0.750 1,675.843

0.750 1,762.164

0.750 1,852.932

0.750 1,684.594

0.750 1,780.616

0.750 1,882.111

0.750 1,664.115

0.750 1,737.587

0.750 1,814.303

1,577.578

1,561.571

1,545.726 171,902.76

1,587.742

1,581.756

1,575.792 470,527.67

1,551.377

1,510.131

1,469.982 63,617.8

161,823.09 4 4,684.875 166,507.96

443,475.65 6 4,745.290 448,220.94

59,307.92 7 4,531.490 63,839.41

Company Valuation (DCF+Terminal Value PV)

29