Overall growth of the economy is already visible through exhaustive corporate actions for the year ended 2005
Gulf Investment Services

GDP growth of 23.1 per cent during nine months ended September 2005 (RO8.55bn) does not surprise on better crude and natural gas extraction. But the overwhelming impro-vement in the manufacturing sector in Oman gives a reason for enthusiasm. While crude extraction and incidental services during the period has jumped up by 42.1 per cent to RO4bn for the said period, natural gas extraction too had witnessed a sharp rise of 58.3 per cent to RO291mn. It should be pointed out that the nine month growth in both the activities had exceeded the provisional figures for the entire year 2004. Now that the activity in these sectors has been buoyant on allocation of more blocks to various multinationals, the figure is bound to grow. The government is trying to develop difficult fields through joint production sharing programmes with foreign firms. Meanwhile, seven oil blocks have already been awarded to foreign firms through this venture. Under all these developments the country is expected to produce around 760,000-770,000 barrels per day during the current year.

Meanwhile, the manufacturing sector on a whole contributed RO647mn to the GDP with healthy growth of 19.1 per cent over 2004. The Sohar region is now witnessing capacity additions (major projects are likely to attract investments worth US$12bn) in refining (Sohar Refinery Company), downstream industries (Oman Polypropylene, Sohar Polyethylene) and aluminum smelter (Sohar Aluminum Smelter Project). These only constitute a portion of the projects under implementation that are expected to fuel the manufacturing sector’s contribution in the coming years. These projects had already triggered growth for related industries like turnkey service providers, engineering firms and other equipment and ancillary suppliers in the region. One alarming fact is the fall in construction activities, which witnessed a slowdown of 1.9 per cent during the nine months ended September 2005. But we believe that this is bound to grow with all planned capacity additions in the economy. Coming to the services front, all sectors like trade, hotels and restaurants, transportation, financial intermediation and real estate had posted healthy growth.

Now, a look at the fiscal situation. The government announced the 2006 budget with an estimated expenditure of RO4.237bn and revenue of RO3.587bn leaving a deficit of RO650mn. This is in comparison with an estimated surplus of RO1.4bn recorded in 2005. The budget is estimated to have been based on an oil price of US$32 per barrel. This is far too low compared to the average price of US$48.4 per barrel in 2005 and current levels of US$75 per barrel.

Value from capacity additions
In the Seventh Plan, the average economic growth is projected at three per cent compared to an average growth of 8.7 per cent in the Sixth Plan. But the emphasis has been given to non-oil activities which are projected to grow at 7.5 per cent. The thrust to the non-oil sector augurs well for reduction of the volatility in its performance as oil prices are directly under the control of external influences.

Overall growth of the economy is already visible through exhaustive corporate actions for the year ended 2005. All industry leaders had ended up with lavish dividends and bonus issues. The swelling of shareholder value had resulted in a healthy market in Oman. We believe buoyant economic activity and primar-ily, on growth of manufacturing sector would provide us with value picks, bolstering growth stories, turnarounds.

Renaissance Services is expected to do better in the current year with good order books. Acquisitions of Topaz Energy & Marine and BUE Marine have helped the company to strengthen its credentials in engineering and marine business. Also, the investments for owning new tonnage in the shipping business would augment the growth in FY2007. Also the company expects more than 100 per cent growth in its medical and education business. Industrial expansions in the country are expected to increase the off take of power and water from utilities which will directly have a positive impact on the largest private utility AES Barka. Among the peer group, the company is in a better position to enhance shareholder value on better asset availability and capitalisation. The company owns 427MW power plants with 20 MIGD water desalination plant in Barka.

Majan Glass is expected to post better results for the current year on higher order books. Also, to meet the rising demand, it has planned to commence its 100 TPD idle furnace along with its third production line in the current year, increasing production levels by 40 per cent. The proposed expansion is expected to be operational by the second half of the current year. Meanwhile, Al Jazeera Tube Mills is optimistic on its performance and expects to improve its realisations in the future. The new mill is operational and the company is going for merchant bar production by early 2007.
Apart from the local industrial demand, regional construction boom contributes to additional inputs. This is particularly true in the cement sector, which is witnessing strong demand. Most of the companies had planned for capacity additions to bet on the planned infrastructure growth. Raysut Cement is the first one to gain from this demand, as its expanded capacity would be one among the first to achieve completion.

Awaiting first quarter indicators
Markets through mid March to mid April were active with splits and the said corporate actions. The dividend effect has reflected in the MSM index with healthy corrections. It should be highlighted that during the same period, the regional markets had played havoc on investors. The YTD of Oman market still remains positive whereas most of the regional indices had slumped to negative levels. Although this had created confusions in the trading community, the markets were consolidating for the much awaited indications from the first quarter of 2006.

Initial numbers from NBO show a successful restructuring effort from the management’s side. The bank has posted net profits of RO5.534mn, up by 82.9 per cent. The annualised EPS is at 277bz, which translates to a PE of 17.38 and P/BV of 2.38 on a market price of RO4.810. On better economic performance and mana-gement efforts, the bank is to witness good growth. Meanwhile, BankMuscat has reported 28.1 per cent increase in net profit for the quarter ended March 2006 to RO13.250mn, which translates to an annualised EPS of 64bz on a face value of 100bz. The PE on annualised earnings now stands at 14.42X at market price of 918bz. The growth in revenue was 25 per cent to RO21.680mn. Growth in net interest income of the bank is lower than that posted by NBO.

In the industry segment, Oman Cables has reported strong growth of 70.8 per cent topline growth at RO21.224mn. This was possible with expansions and strong demand for electrical cables in the region.

The net profits zoomed 74.3 per cent to RO0.910mn, which translates to an annualised EPS of RO1.217. The stock at market price of RO9 is very cheap on PE of 7.4X FY06 earnings. Markets would take a direction on first quarter numbers and staying invested for long-term are recommended for investors. Meanwhile, short-term trading opportunities are ample in the market.

Comparisons on first quarter market returns place Oman at a healthier position. While the regional market had seen havoc with steep falls during the period, MSM maintained positive YTD returns. The vigilant market watchdog, the transparency in the system, the enforcement of the disclosure norms, absence of margin trading, the presence of institutio-nal investors and HNI who take decisions after stringent screening process were some of the reasons that enabled the MSM to weather the regional storm.

gulf investment services. Tel: 24790614 Fax: 24790612. Email: clientservice@gisoman.net