may 16 - june 15

Though the market declined sharply on the opening day after Cyclone Gonu, the recovery was equally sharp
Gulf Investment Services

Cyclone Gonu's devastating hit during the first week of June 2007 distracted the progressive path of the economic activity and destroyed a significant portion of the sultanate's capital stock. However, it will also generate unprecedented construction activity in the sultanate as millions of dollars worth of housing, commercial property and infrastructure are replaced and repaired.

Once the rebuilding is fully underway, the construction boom will spark higher growth rate of output and employment. There will be more persons employed in the country over the coming years as part of rebuilding efforts and rejuvenating the economy that experienced a hitch. The sultanate has been blessed with good reserves and higher oil revenues will finance the rebuilding and recovery efforts. Insured losses are expected to be heavy, but with the prudent policy adopted by the local insurance companies, the risks have been mitigated to an extent. Extensive infrastructure repair and replacement are required on the coasts by the northern regional governorates.

State fiscal pressures, which had been easing due to high oil revenues, might return as a result of expenditures made necessary by the cyclone. Business confidence, however, is showing little change as most of the corporate houses are enjoying good order book and mitigated their risks through necessary insurance coverage.

There could be an impact of loss of customers in the immediate future but that could be gained back depending upon the recovery period. In particular, infrastructure-based companies dealing with cement, contracting and building materials as well as commodity based companies are likely to see furthering of their order book in the coming years.

Cross border deals
The Muscat Securities Market (MSM) reflected the sentiments that prevail among the business community, wherein the aftermath of the cyclone is expected to propel the economy. Though the market declined sharply on the opening day after Gonu, the recovery was equally sharp. And on the net, the period from mid May to mid June posted a whopping gain of 5.6 per cent – about half of the current year's gain. The advance-declines were, however, marginally positive with 41 gainers and 36 losers. The industry and services sector witnessed nominal gain while the banking and investment sector performed well owing to interests from foreign and regional investors. RO135mn worth of stocks exchanged hands with predominant interest seen in the banking and investment sector. Omantel too witnessed increased activity as international funds picked up significant interests. Relatively sizable trades were recorded in ONIC Holding, Alliance Housing Bank and Bank Dhofar.

The market was overwhelmed with actions surrounding takeovers and mergers. Promi-nent among them was the entry of Dubai Financial Group and Japanese Orix Group into ONIC Holding, which indirectly controls Alliance Housing Bank. ONIC Holding that has a market capital of about RO80mn, directly controls two insurance companies: Al Ahlia Insurance and National Life Insurance. Its associate includes Alliance Housing Bank and Oman Orix Leasing and its significant investments include BankMuscat, Nabil and Oman Chlorine. Considering its investment horizon, Dubai Financial paid a hefty premium of 50 per cent to the then prevailing market price. This has been set as a benchmark for the future acquisitions.

Meanwhile, BankMuscat made a public call for acquiring Alliance Housing Bank through a share swap, but the same fell through due to the reluctance of the major shareholder and the subsequent entry of Bahrain based Al Ahli United Bank through a proposed strategic stake (35 per cent). The other major development in terms of foreign entry into Omani business includes a Germany based bank, Baader Bank, into Gulf Investment Services, and a US based firm into Financial Services.

A few more deals that are in the offing or are being talked about in the 'Markazi street' includes that of the impending change of ownership at United Power, possible entry of a strategic shareholder into Bank Dhofar, Bank Sohar and Renaissance Services. These developments clearly show the openness of the economy and the potential that it provides for the international investors. These strategies also work as a gateway for the region which is relatively restricted for the foreign investors.

The prospering economy and corporate growth have revolutionised the way the corporate strategy in Oman is being articulated. From looking within, the corporate world has started looking wider into other markets for its growth. Omantel has announced its intention to take a significant stake in a Pakistan based telecom company during the period. It may be noted that Pakistan has a penetration rate of less than 45 per cent and is growing at a rate of more than 20 per cent per annum. However, the ARPU is significantly lower at US$6 as per the statistics of Telecom Regulatory Authority of Pakistan. While it may be premature to come to a conclusion on the strategy, the market is already crowded with the presence of MTC, Etisalat and Vodofone in various segments.

Among the other companies, BankMuscat is eyeing to establish its presence in a larger way in the UAE after its establishment in Riyadh and local brokerage companies are expanding their presence into the neighbouring market. Manufacturing companies are aiming to set up their branches or establish their units to serve the already existing market due to the need of proximity.

Forecast
The month of July is likely to witness the creation of liquidity through profit booking for the forthcoming IPO of Galfar Engineering and Contracting, Oman Oil Marketing and Oman Qatar Invest-ment Company. Relatively lower quarterly performance due to disruption of services/production by a few corporates might also dent the sentiment temporarily. But the continued interest from international and regional investors can hold the market from falling steeply. Long-term investors may bottom fish when the market corrects.

On the economic front, as PDO had safeguarded its treasure, Oman is likely to come out of the problem soon as the prevailing oil prices are likely to keep the government's treasury ringing. The rebuilding exercise with both the government and private sector participation could evolve a new set of collaborative strategy for the future, which will not only successfully bring back the country into the growth path but also fuel broader and sustainable growth.

Disclaimer: This report has been prepared and issued by Gulf Investment Services Co on the basis of publicly available information, internally developed data and other sources believed to be reliable. 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 held responsible for the contents of this report.