Performance of the bourse continues

Despite a modest gain of 9.1 per cent last month, the MSM index continues to lead its GCC peers for the year. Analysis by BankMuscat Equity Research.

The global markets retreated on the back of a depreciating US dollar, high oil prices and continuing worries about the American credit market. The Dow Jones Industrial Average (DJIA) lost 6.26 per cent during the month while the tech-heavy Nasdaq declined 5.81 per cent as market talk of an immediate recession in the US economy continued to grow louder by the day. The US Fed cut the federal funds rate by 25 basis points and reaffirmed that “the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction”. US firms Wachovia Corp and Fannie Mae reported additional losses related to the crisis in the US sub-prime mortgage market while Bank of America and JP Morgan Chase warned of losses in the immediate term. A weak dollar and a stronger yen hit export-oriented firms in Japan and the Nikkei lost around 11 per cent during the period. The Indian equity markets continued to witness robust capital inflows and closed 3.8 per cent higher, overcoming concerns of a below par industrial production data.

The Muscat Securities Market (MSM) moved lower in the list of best performing regional markets. It gained 9.1 per cent after leading the best performing charts in the GCC last month (up 12.5 per cent). Year to date the local index continues to outperform its peers gaining 49.8 per cent. A sharp run up in the index, together with concentrated trading interest in Galfar Engineering resulted in a relatively modest index performance for the month. In addition, with the third quarter results already out, no fresh triggers were available to take the market to a new level.

Strong numbers for third quarter

The results for the first nine months of the MSM Index components have been very strong. Revenues for the period grew 24.3 per cent while profits expanded 34 per cent. The banking and investment segment has grown the fastest in terms of profits (41.5 per cent) while the industrial sector has grown the fastest in terms of revenues (33.7 per cent).

The banking and investment sector accounted for 24 per cent of index revenues and 48 per cent of index profits for the first nine months of 2007. The top line grew by 33 per cent and bottom line by 41.5 per cent. In this space, banks accounted for 80 per cent of revenues and 75 per cent of profits, wherein both the figures have grown by 30 per cent for the first nine months. The overall revenue and profit growth for the set is higher due to strong growth registered by holding companies due to mark to market or realised gains on equity investments on the back of strong stock market performance.

Holding and brokerage companies grew top line by 46 per cent and profits by 96 per cent for the period. The revenue and profit growth has been the highest for Gulf Investment Services at 170 per cent and 226 per cent, respectively. In fact, Al Jazeira Services (classified under services segment, though investments have been the main value driver), Gulf Investment Services and Al Anwar Holding were the top three in terms of profit growth among the 30 companies.

The services segment accounted for 33 per cent of market capitalisation, 53 per cent of revenues and 36 per cent of index profits. This segment grew revenues by 17.4 per cent and profits by 31.5 per cent. Oil marketing companies accounted for 48 per cent of the segment’s revenues and 13 per cent of the profits. Revenues here grew by 18 per cent while profit growth outpaced sales with a growth of 28 per cent due to high volume growth and low fixed costs. Renaissance Services and Omantel are the other two heavyweights in this segment. The royalty write back in the third quarter for Omantel buoyed the profit growth for this segment as it accounts for 31 per cent of the segment’s revenues and 64 per cent of its profits. Excluding Omantel, the profit growth of 31.5 per cent for the sector declines to 24 per cent, which is still a healthy figure.

The industrial sector accounted for 23 per cent of revenues and 16 per cent of index profits. This is the smallest component of the MSM Index at just around 15 per cent of the market capitalisation. The profit growth for this sub segment of the index was muted as Oman Cement that accounts for a quarter of the segment’s profits saw a year on year decline due to high cost clinker imports. However, Raysut Cement and Oman Cables, controlling 51 per cent of segment profits, buoyed the aggregate numbers to some extent with a 26 per cent and 43 per cent growth, respectively. Barring Al Jazeera Tube Mills and Al Hassan Engineering, all the other companies in this set saw a healthy profit growth.

Stay invested

We feel that valuations continue to be favourable irrespective of the sharp index performance for the year. The MSM Index trades at 12.6x on annualised earnings for the first nine months of 2007. The financial set trades at 13.7x while services and industrials trade in the 11-12x range.

The last two weeks’ flattish index performance, as against a three-month gain of 21.7 per cent shows a slowdown in the index movement. The recent range-bound trading in the MSM index is an indication that investors are weighing fresh allocation decisions in the light of a sharp run up in the MSM index over the past few months. This has also been partly prompted by technical calls with regards to market being overbought, which is governed by short-term trading considerations. However, our analysis shows that the market has merely played catch up with earnings with absolutely no PE expansion. With modest historical valuations (we are at 2007 end), relatively better corporate governance standards and no signs of a substantial growth deceleration in bulk of the market capitalisation, we feel investors should stay invested in the local equities. We are bullish.