In 2008, all the sectors are expected to do well and the general level of activity on the bourse may increase. Analysis by BankMuscat Equity Research

The clear-cut case of re-rating emerged when the MSM index returned 62 per cent in 2007, 1.8x FY07E earnings growth. This performance was second to a 141 per cent gain in 1997. The stock market discounts forward earnings, and when its return versus the corporate profit growth deviates to such an extent, the message is quite clear – the underlying belief in the sustainability and longevity of earnings is very strong. High average volumes supported the run-up in the index. This was either an acknowledgement of Oman as a frontier market reflected in wider investor participation or liquidity chasing returns. We feel it was a combination of the two.

MSM in 2008

The MSM index that accounts for RO7.4bn in market capitalisation is trading at a PE of 15.1x 9MFY07 annualised earnings after adjusting for the results that have already been declared. The absolute valuation itself is modest, given the base case assumption of 20 per cent profit growth for our coverage universe in the index. We expect the banking sector to continue to grow the fastest in terms of profits. The oil marketing, cement and industrial sectors should grow profits by 15-17 per cent while telecom will tag along with single digit profit growth. In sum we expect aggregate profits to grow 20 per cent (excluding Omantel) in 2008 for 72 per cent of the index market cap. The holding companies that derive bulk of their value from the performance of the front line stocks should also benefit accordingly. The general level of activity should increase as more paper (IPOs of Takamul, Oman Merchant Bank and Nawras Telecom) hits the market.

A look at various sectors

The banking sector in Oman is one of the key beneficiaries of the rapid economic growth of the sultanate during the last decade. The low credit-to-GDP ratio, high capitalisation levels and good corporate governance standards are the hallmarks of the banking industry in Oman. The sector is likely to expand in FY08 mirroring the overall macroeconomic growth in Oman on the back of high oil prices. The six major listed banks are expected to grow by 22 per cent (ex-Sohar Bank) in 2008. Spreads are likely to remain under pressure due to pressure on the yields on loan as well as the increase in cost of funds. The year 2008 is likely to witness the IPO of at least one more Omani bank and entry of a few GCC banks and hence the competitive landscape is likely to undergo a change. The banking sector is currently trading at P/E of 17.3 and price-to-book of four on 2008 numbers. We feel the oil marketing sector deserves an inevitable investment exposure in one’s portfolio given the fact that fuel has a significant spill over effect of any macro buoyancy.

While it benefits from increasing population through increase in the number of vehicles on the retail side of the business, it serves as a good proxy to the project activity in the country through bulk fuels segment. A clear shift in market share from Shell Oman Marketing is visible over the last few quarters. Accordingly, the sector profit growth is muted due to lower growth at Shell. This sector is currently trading at P/E of 12.9 on 2008 earnings.

We expect Raysut to continue to benefit from increased capacity utilisation and buoyant realisations. High clinker prices and full capacity utilisation would restrict volume growth at Oman Cement. Interesting developments continue at Oman Cables and Renaissance Services, the biggest contributors of profits to this segment. Oman Cables continues to expand capacity in the existing line of business. Product diversification should also drive growth from H2FY09. The initial benefits of capex should be visible at Renaissance Services in 2008 in addition to its plans of an acquisition and the divestment of two of its non-core businesses. In general, industrials are trading at P/E of 14.8 on 2008 earnings.

Underlying trends

Oman’s realised oil prices were around five per cent higher in 2007. As a result, nominal GDP growth of 11.6 per cent was achieved. Omani crude oil prices averaged US$85.6 per barrel in Q4FY07. That is 32 per cent higher than the average realised prices in 2007. Therefore surpluses and higher nominal GDP growth are likely in 2008. In simple terms, a higher than 2007 growth in nominal GDP should augur well for corporate profits. On account of high oil prices, there is a strong possibility of positive surprises in corporate performance in 2008 and profits exceeding our current targets. Another important trend is the growth in expatriate population in the country. In our view this is a very strong indicator as it denotes an immediate step up in demand as well as an increase in employment rate to support the increase in economic activity. In 2007 till November the expatriate population has increased by 117,000 to 627,000 or 22.8 per cent over the 2006 end figures.

Risk factors

We see inflation and a US slowdown-led correction in oil prices as concerns for local equities. The former can impact directly in terms of how it is countered. In the recent budget, as a means to control inflation, the tender board has reduced its meeting frequency. While this is more of a policy gesture, concrete measures such as further increase in bank reserve requirements, change in lending norms, curtailing of government spending and socially motivated steps won’t be taken lightly by the market. A US slowdown-led oil price correction is more of a perception risk at this juncture that can impinge on the fiscal spending plans initially through caution and eventually through action if deterioration in outlook accentuates.