The key for selection of investment opportunities lies in performance during the year ahead

Oman’s equity markets have been attracting investors with healthy fundamentals and secular earnings growth among its corporate sector. During the period under review, mid-October to mid-November, the benchmark MSM 30 Index touched its lifetime high of 5799.77 on October 30, 2006. On the same day, the industry index and the services and insurance index touched 4949.01 and 2431.55 respectively. During the period, the industry index has seen a remarkable gain of 12.65 per cent. Stocks like Raysut Cement, Oman Cables, Al Anwar Ceramics, Al Hassan Engineering, Al Jazeera Tube Mills and Majan Glass have reported healthy growth in 2006, which has attracted investor interest.

However, sharp correction in regional equities influenced correction in the MSM 30 Index, thereby taking its YTD returns down to 11.64 per cent as in mid-November. Moving forward, the key for selection of investment opportunities lies in performance during the year ahead along with dividend yields for the current year. At this juncture, we tried to spot some opportunities based on dividend yield, earnings multiple and price to book multiple.

The year 2006 has been witnessing strong growth in core earnings bestowed by economic buoyancy. GIS estimates a growth of 11.4 per cent in nominal terms, considering an average oil price of US$60/brl. In this situation, the corporate sector in Oman is awaiting its full year performance numbers. We believe that healthy growth at earnings level will contribute to returns through liberal dividend payouts for share holders during the year. On the basis of 2005 payouts, the current aggregate market dividend yield hovers around 4.1 per cent, the same as that of the aggregate yield of the cons-tituents in the benchmark MSM 30 Index. Going by individual cases, we present ten stocks which have given better yields than the market aggregate. However, we limit individual descriptions to three key picks.

The aggregate MSM market is trading at 11.8X its latest annualised earnings. However, we have growth stories with healthy fundamentals, which are trading lower than market multiples. We have selected the top ten stocks in terms of PE multiples which are lower than that of the market and that are expected to register healthy earnings momentum in the near future. Also, on the basis of price to book value, we have got five stocks which are trading at attractive levels.

Oman Flour Mills is one among the top picks in terms of dividend yield with low earnings multiple. The company, during the year ending June 2006, declared 15 per cent dividend. The performance for the first quarter ended September 2006 has improved considerably with improvement in margins due to proper planning of raw materials and focus on overall efficiency. The net profits for the same period have grown by 2.5 times to RO1.226mn due to this impact, along with investment income of RO339K. The company has a flour milling capa-city of 800 tonnes per day along with an animal feed with an installed capacity of 1,100 tonnes per day. The company also holds about 79 per cent shareholding in a poultry company, Modern Poultry Farms, which produces in excess of 100mn eggs a year. The company markets its flour products under the brand name Dahabi. The company also produces more than 20 different animal feeds under the brand name Barakat, while eggs are marketed under the brand name Dana. The market segment which the company targets is characterised by fierce competition as demand exceeds supply in the region. However, we believe that the company will be able to benefit from its brands along with efficient mana-gement strategies to deliver earnings growth.

In terms of consistent disbursals of retained earnings, Al Omaniya Financial Services has been in the forefront. During the year 2005, the company has distributed 21 per cent in terms of dividend, while registering healthy growth in lease receivables. We believe that Al Omaniya Financial Services, one of the prominent pla-yers in the sector, will benefit from sectoral advantages. The hire purchase assets of the company have gone up by 29.46 per cent (YoY) to RO52.94mn as on September 30, 2006. Total provisions cover 136.3 per cent of the NPAs, improving its asset quality. For the nine months ended September 2006, installment finance income has jumped up by 25.89 per cent to RO4.085mn, which we believe is bound to witness healthy growth during the coming year. Interest rate rise has been a concern for the sector, taking the cost of funds higher. The company witnessed an 89.83 per cent rise in interest expenses resulting in the net installment finance income going up by 11.68 per cent at RO2.965mn. Net profits ended at RO1.431mn, up by 6.55 per cent. We expect the company to maintain healthy payouts during the current year, which along with low earnings multiple as against the market and sector provides a potential investment opportunity. Meanwhile, the company plans to issue eight million conver-tible bonds at a price of RO1.020 per bond, of which 50 per cent will be compulsorily conver-ted during the first year and the balance 50 per cent during the second year. We believe that this will augment long term resources of the comp-any to meet its growing business needs.

The third stock that has been selected is Oman Cables Industry, the major corporate growth story the year has seen. The stock is trading on earnings multiple of 8.3X (FY06). The company’s expansions during the year were well in line with growth in cable demand which has led to superior earnings growth. The company witnessed incremental volumes from its plant II expansions, doubling its revenue for the nine months ended September 2006 to RO85.203mn. With improved product mix from expansion efforts and backward integration through PVC compounding, the company was able to exhibit consistent improvement in margins. The net profits have grown more than four times to RO7.013mn. Oman Cables is currently managing Draka’s cable manufacturing subsidiary in India (Associated Cables). This brings in a monthly fee, stake in the company’s equity and other annual monetary benefits. Currently, it enjoys an annual commercial understanding fee of RO113,000 till 2010 from ACPL. Meanwhile, Indian cable manufacturers are witnessing strong order flows due to capacity expansions in the power segment. Given this scenario, Oman Cables is bound to benefit in getting international exposure along with incremental shareholder value. We believe the company is bound to witness healthy earnings growth, thus providing an excellent investment opportunity. Meanwhile, the company has proposed liberal bonus shares in the ratio of 2:1 along with a split in face value from RO1 to 100bz per share.

In the above section we have suggested three stocks under various collective parameters. However, if we have to decide a stock just by one yardstick of say P/E, then it may not provide a right direction. The growth factors and sustainability will always play a role in the future earning potential.

If one is convinced on these factors, then it leads to an appropriate selection. Also, investors may consider an additional tool for identifying a stock as that of reverse earning multiple, i.e, earning yield.

If the sustainable earning yield of a stock is above the cost of funds – currently at six-seven per cent in Oman – then it is worth investing in. This may add more stocks to our list than we have charted in the table. Similarly, the case of P/B as well as dividend yield also works in a similar fashion. Also, the sustainable dividend payout and earning potential should be collectively looked at while one is selecting a stock on dividend yield basis.