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msm: february 16-march 15

While the market bows to selling pressure, corporate earnings are going up
Gulf Investment Services

The benchmark MSM 30 index that touched its lifetime high of 5956.46 on January 18, 2007, slid to touch its lowest point for the year of 5564.37 on March 14, 2007. Although the undercurrent has been positive, the concentration of activity towards the new entrant, Bank Sohar, has driven away liquidity from the rest of the market. The market, in the period under review (mid February to mid March), declined 1.74 per cent, and as a result the year to date returns stand at a meagre 0.56 per cent. This is well against the historical trend seen during the dividend season. During the period under review, the industry index was the only sectoral index that closed positive with a gain of 3.64 per cent.

Earnings soar
Aggregate annual net profits for the leading 100 listed companies on the Muscat Securities Market have registered a commendable growth of 20.2 per cent for the year 2006 to RO409.265mn. Upbeat through a healthy fiscal scenario, robust private sector investments in building capacity, along with higher consumer spending, contributed to the positive performance of the corporate sector during the year. Both personal and industrial consumption have shown secular growth, which has driven the overall topline growth. Aggregate revenues for these 100 companies witnessed a jump of 22.3 per cent during the year 2006.

Buoyant on new capacities
In terms of revenue growth, companies like Oman Cables Industry, Al Hassan Engineering, Majan Glass, Al Anwar Ceramics and National Aluminum Products, falling under the category of 'other industry companies', have registered topline growth of 51 per cent to RO268.695mn. Healthy margins contributed by robust topline growth have led to a 73.6 per cent jump in the aggregate net profits of these companies to RO17.432mn.

The cement sector, being a major contributor to the overall industry segment, has been classified separately. The sector has reaped benefits from the combination of new capacities, healthy demand and higher realisations. Aggregate revenue for the two cement manufacturers has jumped up by 35.7 per cent to RO97.685mn. Raysut Cement Company has increased its capacities by one MTPA to 2.2 MTPA. This, along with healthy realisations, has propped up its revenues for the year 2006 by 71.4 per cent to RO47.975mn. Oman Cement Company recently increased its cement grinding capacity. The company saw revenue growth of 13.1 per cent to RO49.710mn. Growth in topline and better realisations have augmented operating margins of cement manufacturers. Subsequent to this, the aggregate net profit for the cement sector has improved by 46.3 per cent to RO41.214mn. The prevailing retail price of cement is at RO2 per bag, while the realisation by the cement companies as at the end of 2006 was only RO26.5/tonne. This gives good room for them to dictate the price at the factory levels. We expect a 5-10 per cent rise in prices this year.

Fuelled by demand
The oil marketing sector has witnessed demand led growth during 2006. The three oil marketers in Oman – Shell Oman Marketing, Oman Oil Marketing and Al Maha Petroleum Products Marketing, have seen an aggregate topline growth of 27.9 per cent to RO471.383mn in 2006. The growth was commendable, particularly after the supply chain constraints seen during the early part of the year.

All the business segments in the sector, including retail, aviation and lubricants were blessed with an upbeat mood in economic activities. Oman Oil Marketing Company has registered 34.5 per cent revenue growth to RO121.397mn, while additions of new retail filling stations have propped up revenues for Al Maha Petroleum Products Marketing Company by 30.5 per cent to RO123.497mn. Shell Oman Marketing, which dominates the market with overall revenue market share of 48 per cent, saw its topline growing by 23.4 per cent to RO226.489mn. Going forward, we expect the additional supply from Sohar refinery could augment further growth in the sector. However, the temporary halt due to maintenance in the first quarter could dampen the topline.

Fully booked
The hospitality industry in Oman has shown commendable growth during the year 2006. Corporate business activities and increase in the inflow of tourists lifted the occupancy rates of the hotel industry significantly. The thrust on the development of infrastructure and concentration on the development of the non-oil sector has helped the sector revive. Overall, all companies in the sector have registered double digit growth. The aggregate topline for six companies in the sector has jumped up by 22.5 per cent to RO22.585mn.

The year has seen steady increase in average room rates, thus improving the margins and augmenting earnings growth. We expect an increase in demand during the current year for the operating hotels, due to the closure of Al Bustan and Sheraton hotels for renovation.

Mobile drive
Omantel, the only listed player in the telecom sector, has reported 19.6 per cent growth in revenue for the year 2006 to RO323.632mn. The growth in the total service revenues in the period from 2004 to 2006 has been mainly driven by the increase in mobile revenue resulting from an increase in the number of mobile subscribers, in particular the pre-paid users . The year 2006 witnessed steady growth in the mobile subscriber base. The pre-paid subscriber base has crossed the one million mark. Oman Mobile’s revenue has overtaken that of Omantel’s. The company's net profits, attributable to equity shareholders of the company, ended at RO80.696mn, an increase of 19.1 per cent compared to the previous period.

Riding on performance
The banking sector has seen commendable growth in the overall credit of commercial banks by 20.5 per cent to RO7.2bn. The aggregate Net Interest Income (NII) for the five listed banks has gone up by 17.2 per cent to RO202.143mn during the year 2006. BankMu-scat and NBO have outperformed in the sector with NII growth of 27.5 per cent and 16.1 per cent respectively. In terms of net profits, the aggregate figure has jumped up by 30.2 per cent to RO142.087mn. The growth in net profits was augmented by healthy growth in fee-based income and recoveries during the year 2006. BankMuscat has registered net profit growth of 33 per cent to RO60.432mn, while the same for NBO was as high as 49.7 per cent to RO30.426mn. At the same time, Bank Dhofar, which registered 7.6 per cent NII growth, has seen 41.8 per cent growth in net profit to RO20.130mn. This was supported by growth in other income, lower provisions and increase in recoveries during the year.

Focus on value buying
The current year’s performance is likely to be healthy as the economic prospects are enabling the continuation of the trend. In addition, the recent government initiatives towards investment in certain industrial proj-ects in the northern and southern parts of the country are likely to materialise in the second half of the year. Also, the prevailing high liquidity situation pronounces healthy asset creation and good consumer spending makes it more productive. Investors could bottom fish at the current levels into the companies in sectors like banking, cement, leasing, logistics and contracting.

(This report has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. However, neither Gulf Investment Services nor any employee shall in anyway be responsible for the contents of this report.)