June 16-July 15

Industry sector leads the gains in July, while the market looks forward to Galfar's huge IPO
Gulf Investment Services

The period under review (June 16-July 15) saw bullishness being sustained. The market gained 1.7 per cent, thereby lifting the year-to-date returns to nearly 15 per cent. The primary driver continued to be the industry sector, which saw returns of 3.9 per cent. Raysut Cement, Oman Flour Mills and Oman Cables were instrumental in fuelling the sector and the benchmark index. The banking sector that followed next with returns of 3.5 per cent was lifted by OIB and ONIC Holding, which sold its stake in Alliance Housing Bank (AHB). Bank Sohar, the new entrant saw hectic activity owing to information of a growing loan book and switch of accounts from other leading banks. The market expectation has been built around an operational profit in the first year of operation.

In July the market witnessed a major move towards the acquisition of AHB by Ahli United Bank (AUB). ONIC Holding, which held 20 per cent of AHB and was indirectly controlling the board, sold its stake to a syndicate of local shareholders and AUB's associates – Strategic Investments and Al Wafra Intl Investments. This has come about despite AHB's board promising shareholders of a plan to get a better deal compared to BankMuscat's share swap offer of 1:3.13. It may be recalled that the AUB had earlier received approval for taking a 35 per cent stake in the bank through the private placement route. In the meanwhile, Tamdeen Investments had sold its stake in AUB to International Bank, which in turn is held by National Bank of Kuwait (NBK). Eventually, NBK will make its entry into Oman through AHB. These events show the openness of the economies in the region, particularly in Oman where an Arab bank and two Qatari banks already have their presence. The excesses in terms of liquidity and profitability are driving the corporate sector to expand their horizons geographically.

First half earnings calendar begins on a promising note. The first eight companies that have come out with results for the first half of 2007 have shown excellent growth compared to the same period last year. The aggregate bottomline has grown 53 per cent and the topline has grown 49 per cent showing improvement in margins. The prospering economy and growing order book has enabled the companies to expand their capacity and capitalise on the situation. GIS Research estimates that the bottomline of the aggregate index's constituents would grow by 36 per cent year-on-year during the first half. The market benchmark represented by these 30 stocks has returned 15 per cent during the year. This shows that more upside would be in the offing in the near future considering the MSM-30 earnings multiple of 11.8X (07E).

The impending summer season would see a relative decline in market activity compared to the earlier months. The improved sentiments in the regional markets too have rubbed on the sentiments here. August will be dominated by Galfar Engineering's IPO of RO60mn. With some blue chip companies' share prices being stretched we feel aggressive profit booking in these stocks seems imminent.

The current holding of foreign investors in MSM stocks stands at 23 per cent of the aggregate market. This improved marginally in July. Increasing interest from large international players and regional institutions has led to lower floating stock. In the long run this may prove risky to the market as a few corners would control the pricing of a stock. It is high time that the regulators and market participants bring about more companies on board so that investors are able to spread their risk and gain a wider investment opportunity.

The government could also take multiple steps to divest its stake in various companies to increase the free float in existing listed companies and list the stocks that it privately holds. This would not only solve the need for development of the capital market but also enable the distribution of wealth in the country. The divestment would also assist the government to garner resources for the development of non-oil related industries and create jobs.

Disclaimer: This report has been prepared on the basis of publicly available information, internally developed data and other reliable sources. Care has been taken to ensure that the facts stated are accurate and the opinions given are reasonable, but GIS or any employee shall be responsible for the contents of this report.