Initial half year indicators support arguments for corporate growth
Gulf Investment Services

For the first time during the year, MSM 30 Index has reported negative YTD returns of
-1.24 per cent for the period under review (mid-June to mid-July). This follows a strong regional undercurrent seen during the year which took regional indices to year lows. As regards to Oman, the vacation season seems to have drained out most of the liquidity in the market. The period was characterised by low volumes which took the index down by 2.55 per cent during the one month period. Severely hit by stock market revenues, most of the investment counters and companies with cash flows highly correlated to investment revenue have experienced selling pressure across the region. Apart from investment companies, other sectors have indicated healthy growth during the current year. This is reinforced by strong economic growth augmented by fiscal expansions and private participation.

Bankers upbeat
National Bank of Oman (NBO) has been aggressive in improving its net loan books which has seen a jump of 16.3 per cent during the year to RO629.651mn. This is augmented by a favourable macro environment with healthy economic activity and enhanced private sector investments. The credit growth has supplemented the net interest income growth of 15.3 per cent during the half year ended June 2006 to RO14.420mn. The net profits for the half year ended June 2006 have spurted up by 96.7 per cent to RO13.124mn, which translates to weighted average annual EPS of 331bz. The PE stands at 15.1 X on current market price of RO5.010

The niche player, Alliance Housing Bank, has reported interest income growth of 23.1 per cent to RO6.233mn. After 64.4 per cent increase in interest expenses, the Net Interest Income (NII) grew by 4.0 per cent to RO3.597mn. The other income has grown by 15.7 per cent to RO457K. After lower provisions towards loan losses, the profit before taxes improves by 11.9 per cent to RO2.598mn. Meanwhile, the profit after taxes improves by 12.2 per cent to RO2.297mn, this translates to annual FY06 EPS of 22bz. The PE stands at 10.9X on a market price of 239bz. Shareholders’ equity stands at RO29.918mn translating to a book value per share of 142bz. Price to BV stands relatively cheaper at 1.7X.

Oil marketers outshines
Despite constraints in supply chain, Shell Oman Marketing has witnessed 19 per cent growth in retail fuel growth during the half year ended June 2006. This constitutes almost 60 per cent of the company’s fuels portfolio. Meanwhile, it has seen 12 per cent YoY growth for the commercial business during the same period. The company has witnessed an overall revenue growth of 37.2 per cent for the six months ended June 2006 to RO112.856mn. YoY for the half year ended June 2006, the gross profit margins have come down to 10.1 per cent from 11.3 per cent for the corresponding previous period. At the same time, this has recovered during the second quarter of the current year (2006 Q2) to 10.5 per cent from 9.8 per cent in the first quarter of the current year (2006Q1). Healthy topline growth has augmented net profit growth of 27.3 per cent to RO4.773mn.

The company has got one of the best dividend payout history with current dividend yield of 6.8 per cent on FY2005 dividend of 75 per cent. Also, on annualised FY2006 earnings the stock is trading at 11.6X.

On a YoY basis, Al Maha Petroleum Company has added 17 filling stations to a total of 133 which took retail sales for the half year ended June 2006 up by 26 per cent to RO32.381mn. Meanwhile, during the second quarter of the current year, the company has added seven filling stations. This led to 22.8 per cent revenue growth for the same period in the segment. Overall, the topline for the half year ended June 2006 jumped up by 33 per cent. The gross profit margins (includes depreciation in cost of sales as the company has not provided the break up) has come down margi-nally by 140 basis points on YoY basis to 11.5 per cent for the half year ended June 2006. Cost of sales (includes depreciation), as a per cent of sales, has gone up from 87.1 per cent to 88.5 per cent. However, healthy sales growth has improved the gross profits by 19 per cent to RO6.506mn. On an effective tax rate of 11.9 per cent, the profits after taxes ended at RO1.993mn, 25 per cent higher than the same period last year. The annualised EPS stands at 664bz for the current year, which translates to a PE of 10.6 X.

Potential growth stories
Oman Cable has witnessed 32 per cent jump in revenues for the second quarter of current year compared to the previous quarter (2006Q1) of the current year. This resulted in a phenomenal revenue growth of 80.9 per cent during the half year ended June 2006 to RO49.235mn. This growth is supplemented by expansions and strong demand for cables in the region. The company has backward integrated to PVC compounding, which, along with proper hedging towards volatility of copper prices and
volumes growth, is apprehended to have improved the gross profit margins during the year. The GPM in 2006 Q1 stood at 11.1 per cent and has remarkably improved to 15.3 per cent in 2006Q2. Strong topline growth and improvement in margins took the net profits up by 241.1 per cent to RO3.073mn.

The outlook for high voltage and low vol-tage cables is strongly positive. The demand is strong from industrial capacity expansion and development of residential complexes. It should be noted that there is a synergy on association with Draka Holdings in the region. Already, the company has placed a firm foot in the regional market. On annualised EPS of RO2.056, the PE stands at 5.1 X. Also any possible split in the share would trigger liquidity in the counter.

For Majan Glass, the first quarter of the current year (2006Q1) was characterised by better sales and higher realisations. During the second quarter (Q2 2006) although the sales volumes were marginally down, the realisations per tonne of glass bottles have zoomed up by RO5.400 (4.2 per cent). For the half year ended June 2006, the company’s volume growth has been 0.7 per cent, while better realisations took the topline up by 7.7 per cent to RO2.992mn. The improvement in realisation has augmented margins. For the half year ended June 2006, the same has improved by 270 basis points to 44 per cent. EBITDA margins were at 37.7 per cent, up by 190 basis points after which lower depreciation and interest costs took the profits before extraordinary income up by 23.1 per cent to RO846K. During the first half of 2005, the company has written back RO961K towards government soft loans and term loans. This was in line with the restructuring efforts of the management. Due to this impact the net profits for the 2006H1 is down by 48.7 per cent (YoY).

Driven by realistic growth prospects
The oil prices are currently hovering about US$75/brl clearly indicating the more than expected budget surpluses for the region. The GDP growth too is likely to be in double digits, clearly indicating the prolonged boom period. However, the increase in interest rate, the inflationary fears, as well as the regional turbulences are playing spoilsport and may drive the investors away. Short-term market sentiments are expected to be driven by regional re-rating among market leaders.

Going forward, the fundamentals are likely to override the prevailing sentiments that are affecting the market. Sectors like banking (specifically Islamic Banking), cement, const-ruction, oil services sector and retailing are expected to prosper well.

Disclaimer: This report has been prepared on the basis of publicly available information, internally developed data and other reliable sources. While all care has been taken to ensure that the facts stated are accurate and the opinions given are reasonable, neither GIS nor any employee shall be responsible for the contents of this report.

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