MSM 30 Index recovers its losses to close marginally positive during the period under study Gulf Investment Services
Consolidation in regional markets has kept MSM volatile on stock specific activities during the period under review. MSM 30 Index could recover its losses to close marginally positive during the period. Overall, global equities have seen a meltdown on concerns of rising interest rates. However, GCC macro fundamentals remain intact on higher crude prices augmenting fiscal surpluses resulting in enhanced government spending in infrastructure and industrial capacities.
Real estate and tourism
With over RO13.154bn (US$34.16bn) planned investments till 2010, the Seventh Five Year Plan envisages a growth rate of not less than three per cent at current prices. Over 37 per cent of the investment plan, which is around RO4.868bn (US$12.64bn) comes from civil ministries. The second major portion goes to the oil and gas sector capex for gas based industry which is around 34 per cent of the total at RO4.474bn (US$11.61bn). Private sector investments in tourism projects and other investments (production and residential) constitute RO3.812bn. The aim is to diversify and enhance growth of non-oil sectors during the five year period at an annual average rate of around 7.5 per cent. Breakdown of this shows estimated 14.5 per cent growth of natural gas based industries, seven per cent growth in tourism and 11.6 per cent growth in non-oil merchandise exports. The tourism sector alone attracts around RO960mn investments in five years with public-private participation.
We have some examples, including The Wave project and The Blue City project (Al Madinat al Zarqa). Oman Tourism Development Company (OTDC) and Egypt's Orascom unveiled a master plan for the prestigious US$600mn joint venture, Muriya, to create a tourist destination in the country. Another MoU has been signed between OTDC and Saraya, to launch and deve-lop a tourism project. Also Al Safeer Group has commenced work on Safeer Mall Sohar, a 350,000 sq. ft. retail complex, which is due to open by end 2007.
The developments have already triggered real estate development costs to move higher. This is reflected by the Construction Cost Index, which has jumped from 0.16 in Q1 2005 to 1.19 in Q1 2006. However, the Building Material Cost Index has cooled off from 0.91 in Q1 2005 to 0.81 in Q1 2006. We believe that these planned investments will provide demand led growth in related industries.
Cementing the pie
One of the primary beneficiaries of infrastructure, real estate and housing developments are cement companies. Oman has two cement companies, Oman Cement and Raysut Cement with total capacity of 3.7 MTPA. This includes 2.2 MTPA of Raysut's facilities and over 1.5 MTPA of Oman Cement's facilities. Also, Oman Cement has planned to enhance its cement grinding capacity by 1 MTPA by September 2006, which will make the company the largest in terms of capacity in the country with 2.5 MTPA. This will take the total capacity to 4.7 MTPA during the year. Meanwhile, Oman Cement has made arrangements to take 100K tonnes of cement till September 2006 from Raysut. In addition, Raysut's plans to add on another 0.8 MTPA will take the total capacity to 5.5 MTPA.
On the demand front, these companies are already witnessing better realisations. Oman Cement has seen realisations per tonne improving by 8.6 per cent to RO25.848 (YoY) and 7.0 per cent (QoQ). The same for Raysut Cement improved by 9.5 per cent to RO25.259 per tonne, (YoY) and 5.9 per cent (QoQ). For Raysut Cement, exports contribute to 61 per cent of sales which has jumped up by 50.2 per cent to 255K tonnes while domestic sales have grown by 56.8 per cent to 162K tonnes. Earnings growth from the sector was vibrant with the sector outperforming others. The aggregate net profits for these companies have jumped up by 53.4 per cent to RO10.036mn. This was due to better rea-lisations and new capacity from Raysut during the period. Oman Cement has seen 1.8 per cent revenue growth to RO11.127mn. Improvement in realisations has contributed to improvement of margins, further augmenting net profit growth of 16 per cent to RO4.943mn. Raysut Cement reported 40 per cent revenue growth in the first quarter of current year, which boosted net profit growth by 213.1 per cent to RO5.093mn. Moving forward, we believe that the sector is bound to keep up its performance on better domestic and export demand.
Banking on growth
Growth in industrial and real estate devel-opments has provided banks with opportunity to grow their loan books. The aggregate credit growth for commercial banks in Oman has jumped up by 13.2 per cent (YoY) and 3.2 per cent (QoQ) by the end of Q1 2006 to RO4.011bn. Also the asset quality has shown consistent improvement on lower non-performing assets and better provision coverage. Analysis for five listed banks in Oman shows gross loan CAGR (2001-2005) of 4.4 per cent, with 25.0 per cent cumulative growth in gross loan books from end of 2001 to March 31, 2006. NPAs as a per cent of gross loans have dipped from 12.8 per cent as on December 31, 2001 to 8.8 per cent on March 31, 2006. An exact break-up of loan books is not available. However, recently CBO has revised norms for the personal segment, wherein it has reduced personal loan ceiling from 42.5 per cent to 40 per cent. At the same time, CBO has introduced a new ceiling of five per cent for housing loan. This has provided banks with room for growth in the segment.
Alliance Housing Bank is the niche player in the housing loan segment. The bank has seen 24 per cent growth in its gross loan books in the first quarter of the current year to RO138mn. The segment is witnessing competition with introduction of new schemes. Recently NBO has launched a new housing loan product Al Manzel, open to Omanis, GCC citizens and expatriates. The product offers 80 per cent of the property's value as loan, and maximum 25-year tenure. In another development, the International Finance Corporation, the private sector arm of the World Bank, has provided a long-term subordinated loan of US$100mn to BankMuscat. This aims to support the growth of the housing sector in Oman along with the growing SME sector.
Key picks in the value chain
Classification of real estate developments provides two value picks from MSM listed companies Al Anwar Ceramics and Oman Ceramics. Anwar Ceramics owns the well known tile brand Al Shams. Oman Holdings International has announced its recent acquisition of 57 per cent holding in the company. The company has witnessed five per cent revenue growth in the first quarter of the current year. The net profits for the first quarter has seen marginal drop of six per cent to RO480K. On a capital of RO5.738mn, the annualised 2006 earnings per share stands at 33bz, which is 10.5X its current market price of 350bz.
Oman Ceramics, which is into manufacturing of sanitary ware, is poised for growth from demand from the region. The capital restructuring process is underway and the company currently has accumulated losses of RO1.245mn. Meanwhile in the first quarter of 2006, the company has reported 12 per cent revenue growth to RO395K.
The road ahead
Overall we have been bullish on cement, banking, oil marketing and key industrial companies for the current year, which are benefiting from the healthy economic growth. However, macro factors like higher interest rates and negative regional sentiments may affect short term domestic momentum. But as of now, signs of positive sentiments and consolidation in regional markets, along with the strong domestic fundamentals have helped the market to maintain positive YTD returns. Moving forward, second quarter earnings expectations would be the key for a likely trend in the market. Value investors can look for corporate growth stories, which provide for buy opportunities in the market.
Index monitor
Percentage change in MSM indices during the one-month period to June 15, 2006
Gneral Index 30 .22
Banking and Investment -2.03
Industry 4.20
Services 1.97
Figures in percentage
businesstoday 2006
