Liquidity levels on the bourse are likely to rise once the Galfar stock is listed on the bourse. Analysis by BankMuscat Equity Research

The world markets were jolted in August because of the sub prime crisis in the US. Markets fretted on huge losses from sub prime mortgages, which were issued to borrowers with weak credit histories and then bundled together and sold to investors as high yield mortgage bonds. On the back of mixed economic data, weak housing market, problems with sub prime loan defaults, high oil prices and continued geopolitical tensions – drawing from the consensus – these developments should remain a drag on US economic growth in 2008. The London Stock Exchange has traded flat during the year, showing a small gain of one per cent while the German stock exchange posted the biggest gain of 13 per cent among prominent markets in the region during the period. The Chinese indices – Shenzen and Shanghai Composite – gained 98 per cent and 169 per cent respectively, while the Kospi (Korean) and Hang Seng (Hong Kong) indices advanced by 30 per cent and 24 per cent respectively. The Indian markets also gained by around 13 per cent while the Japanese markets declined by six per cent during the period. These markets saw heightened volatility due to the sub prime shock but were resilient enough to recover from their lows as clarity emerged regarding the fragmented and sparse exposure to sub prime paper.

GCC market performance

The Gulf markets have been largely immune to developments in the US credit markets. A clear divide has been witnessed in the regional market performance this year. While Oman, Kuwait and Bahrain have displayed a secular uptrend this year, KSA, Dubai and Qatar have been volatile. Oman is the second-best performing market in the GCC so far, returning 19 per cent year-to-date next only to Kuwait that returned 27 per cent during the period.

The GCC markets showed mixed performance during August, with Saudi emerging as the best performing market with gains of 9.2 per cent during the month. Oman was the second best performing market and moved up by 3.5 per cent. Profit-booking put pressure on the UAE markets, thus closing the month in negative territory.

Omani market

The market momentum continued with the MSM30 Index registering 3.4 per cent gains in August. The banking sector was the biggest gainer during the month, moving up by 6.8 per cent, followed by the services sector with returns of 2.2 per cent. The industrial sector delivered 2.5 per cent during the month. The overall volumes in the market witnessed some decline, which was expected, as the Galfar initial public offering (IPO) was open for subscription.

Despite the strong performance, the market is valued reasonably at 11.5-12x FY2007E, indicating that the index has merely caught up with improving fundamentals without any expansion in multiples. The first set of results after Gonu did not throw up major surprises and indications are that the buoyant financial performance will continue only in the third quarter.

In terms of H1FY07 financial performance, the financial sector grew the fastest both in terms of revenues (42 per cent) and profits (42 per cent). Though the credit offtake through the banking sector grew by 27 per cent to RO5.3bn as of June 2007, the performance of the financial sector was aided to an extent by holding and the brokerage set due to healthy mark to market gains as a result of buoyant MSM performance. Insurance companies have shown a profit decline of 59 per cent on account of underwriting losses due to Gonu. In the services segment that includes oil marketing, hotels, telecom and ports, among others, revenues grew by 16 per cent while profits grew by 20 per cent implying a margin expansion. We attribute the margin expansion to the operating leverage in this segment. For instance hotels revenues went up by 30 per cent while profits moved up by 75 per cent.

The industrial sector posted a growth of 20 per cent driven by consumer goods and other miscellaneous industrial companies. At nine per cent, profit growth in the cement sector was muted due to lower sales at Oman Cement because of post-Gonu shutdown and lower margins of Raysut Cement due to higher sales in the northern markets.

Omantel continues to maintain stable financial performance and offers decent dividend yield at current prices, but its inability to diversify out of Oman is suppressing valuations. A keenly awaited development on the second mobile licence in Qatar fell through with the company not making it to the second round of bidding. Our call: status quo rather than a negative.

Galfar IPO

The market has recently witnessed a RO60.2mn IPO of Galfar Engineering and Contracting Company. It is one of the largest contracting and construction companies in Oman and also one of the largest contractors for the government and quasi-government institutions like Petroleum Development of Oman, Ministry of Defence, etc. The issue evoked strong interest both locally and at the regional level, which led to an oversubscription of 14.5 times driven by strong demand from institutions. The company has businesses in diverse sectors like oil and gas, roads, bridges and environmental construction, and is on a growth path with a strong order book and increasing focus on high margin EPC (engineering, procurement and construction) business.

Sector outlook

We believe that the long-term fundamentals of the corporate sector are intact. After the refunds from Galfar IPO, liquidity is expected to return to the markets though trading concentration could be witnessed initially after Galfar listing. On a specific note, the asset growth in the banking sector continues to be healthy and would continue to lead the index performance next year as well. However, as competition increases, non-fund based income growth will be the key. The buoyancy in the construction sector as witnessed in the form of steady order inflows for Galfar is expected to continue, driven by government’s fiscal initiatives. The strong economic activity is reflected in the ports sector. Ports Services Corporation has floated a tender for its expansion while we expect strong volumes growth for Salalah port in 2008 and 2009 on the back of new capacity. A clear market share shift is evident in the oil-marketing sector, as Al Maha Petroleum’s volume growth outstrips the industry growth by a wide margin.