Road to recovery

As Oman is at a much better position to award new projects in the pipeline, current level valuations for MSM look attractive

The past nine months have seen dramatic events in stock markets across the world. We have witnessed markets falling and touching bottom, commodities crash, policy makers from different economies coming out with financial rescue plans and finally, the recovery of markets and stabilisation of economic fundamentals in earnest.

The Muscat Securities Market (MSM) was no exception. Until the first quarter, the market was weak, coupled with low volume and turnover battering investors' confidence and forcing them to run to the proverbial hills.

However, the satisfactory second quarter results along with the launching of the Investment Stabilisation Fund and a strong upturn in global markets set the scene for the MSM to continue its upward trend for the next six months in a row from April, evidently supported by the increasing oil prices and the encouraging signs of recovery in emerging market.

Total market capitalisation for October has declined by 2.98 per cent to RO6.25bn compared to RO6.44bn registered at the end of September 2009. The market heavy weight banking and investment sector, which represents almost 50 per cent of the total market capitalisation, declined by 1.38 per cent of its market cap to reach a total value of RO2.96bn down from RO3.01bn recorded earlier in the month.

The service and insurance sector, which represents around 35 per cent of the aggregate market cap, recorded losses of 2.98 per cent during the month to end at RO2.18bn compared to RO2.25bn recorded in September 2009.

The industrial sector, which accounts for approximately 15 per cent of the total market capitalisation, has shed 7.05 per cent to RO1.10bn, thereby becoming the worst performer during the month.

Resilient banking sector

Healthy balance sheet figures of aggregate Omani banks show that the sector has so far remained resilient and largely insulated from the impact of adverse external developments, thanks to the accommodative monetary policy by the Central Bank of Oman and the fiscal support extended by the government that has helped sustain demand.

Though credit witnessed moderate growth, total assets increased by 7.8 per cent to RO13,943.6mn in September 2009 from RO12,937.1mn a year ago.

The increase in assets was driven by an 11.1 per cent growth in credit which reached RO9,618.1mn as at the end of September 2009 compared to RO8,659.6mn at the end of September 2008.

Aggregate deposits of commercial banks as at the end of September 2009 grew by 12.6 per cent to RO8,850.3mn over its corresponding level of RO7,857.3mn a year ago.

Private sector deposits increased by 6.4 per cent to RO6,461.4mn, representing 73 per cent of total deposits, whereas government deposits rose by 28.6 per cent to RO1,795.4mn, representing 20.3 per cent of total deposits, and deposits by public enterprises increased by RO205mn to RO593.5mn.

Tier-I capital amounted to RO1,628.4mn, representing 12 per cent of commercial banks' total assets. Provisional figures on profits of commercial banks (after provisions and taxes) for the first nine months of 2009 amounted to RO194.9mn compared to RO209.3mn during the same period in 2008.

Broad money supply (M2) increased by 7.7 per cent to RO7,665.8mn by September 2009 over the previous year. Money supply as represented by narrow money (M1) comprising the currency held by the public and local currency demand deposits registered an increase of 3.2 per cent over the 12 month period ending in September 2009 to reach RO2,239mn.

Net buying and selling (monthly)

  Omanis GCC and Arabs Foreigners MSM change
January 5,517.8 (4198.6) (1319.2) -12%
February 271.5 (1396.7) 1,125.3 1 %
March (4432.5) (3,407.5) 7,840.1 -5%
April 2,086.0 84.0 (2,170.0) 11%
May (2689.7) 786.8 1,902.9 6%
June (18,731.9) (7,776.1) 26,508.0 2%
July 15,148.1 (1,129.4) (14,018.7) 4%
August 5,967.0 (3,636.0) (2,330.9) 7%
September 11,903.1 (8,286.7) (3,616.4) 4%
October 13,735.3 (9,144.6) (4,592.0) -3%
November MTD 5,289.6 (2,381.8) (2,907.9) -1%

Figures in RO'000, Source:NBO Research, MSM data

Top gainers YTD change Volume
Turnover change%
Al Jaziera Services 161.7% 92,633 151.6%
Gulf Int. chemicals 149.7% 5,733 28.9%
Oman Inv. & Fin. 72.7% 63,103 70.1%
Oman United Ins 71.3% 68,441 19.7%
ONIC. Holding 60.2% 68,441 43.5%
Top Losers YTD hange Volume
Turnover Change (%)
Al Batinah Hotels -25.0% 15 1.5%
NAT. Detergent -23.7% 1,072 6.3%
Tageer Finance -20.3% 1,406 1.7%
Oman Oil Marketing -10.8% 1,357 2.2%
Oman Chromite -9.3% 91 3.0%

Source:NBO Research, MSM data
Outperforming industrial sector
On a year to date basis, the industrial sector has outperformed the rest of the two sectors, increasing by nearly 73 per cent. The industrial sector aggregate net profit decreased by nearly 38.2 per cent to RO37mn from RO60mn at the same period last year.
The decrease was significantly impacted by high levels of inflation during the beginning of the year and further decrease in realisation. Raysut Cement, one of the sector heavyweights, reported 9M'09 earnings declining by 7.4 per cent to reach RO24.18mn from RO26.13mn for the same period last year.
The decrease in earnings is attributable to the lower margin from sale of imported cement and the halt in production because of planned maintenance and rehabilitation of grinding systems. Furthermore, competition from the neighbouring markets has created pressure on both margin and volume front. While at the same time, Oman Cement reported well above expected earnings despite being affected by the dumping from their UAE competitors.
Buoyant copper prices, thanks largely to China and South Korea, have helped Oman Cable recover and perform well above expectations. On a quarter to quarter basis, net income increased remarkably by 25 per cent, reaching RO2.4mn as against RO1.9mn for the second quarter of 2009.
Al Anwar Ceramics reported a sales growth of 41 per cent to RO12.3mn compared to RO8,73mn in the same period last year. The strong financial performance of the firm is due to the maximum utilisation of its new capacity and increased penetration in the local markets.

Figures in RO mn Sep-08 Sep-09 Growth
Total assets 12,937.10 13,943.60 7.8%
Credit 8,659.60 9,618.0 11.1%
Investment 1,351.10 1,675.80




Net Profit 209.3 194.9 -6.9%
Broad Money(M2) 7,164.30 7,665.80 7.70%
Narrow Money(M1) 2,170 2,239 3.20%

Source: Company reports, MSM, NBO Research

Sector Watch

  YTD Mkt Cap(%) 9ME 08 9ME09 Growth
Banking and Inv 48.33% 50% 3.01 2.96 -1.7%
Industrial 73% 35% 1.18 1.10




Serv. & Ins 7.90% 15% 2.25 2.18 -3.1%
MSM 30 16.82% 100% 6.44 6.24 -3.1%

Source: Company Reports , MSM, NBO Research

Services & Insurance sector
The service and insurance sectors have also witnessed their earnings fall by 11 per cent to RO114mn from RO129mn a year earlier. Omantel, Oman's largest company by market value, has achieved net earnings of RO105.8mn, compared to RO107.4mn for the nine months ended September 30, 2009, representing a decline of 1.5 per cent.

The company may take a one-time charge of RO9.2mn in the fourth quarter after offering voluntary redundancies looking to cut costs. Omantel is also waiting for shareholders' approval for a $50mn injection into the struggling Pakistani unit Worldcall.

Renaissance Services
9M'09 total revenue rose by 3.34 per cent to RO176.1mn compared to RO170.4mn. Overall, the diversified business group achieved good results apart from the engineering division where margins decreased by nearly 2 per cent, dragged down by project delays, an unfriendly global environment, and postponement of major oil and gas projects.

In the oil marketing sector, Shell Oman, Al Maha Petroleum and Oman Oil have all reported a YOY drop in revenue of 12 per cent, 16 per cent and 4.1 per cent respectively. This drop was mainly due to the amendment of the quota system fixed for diesel sold to filling stations located in the border areas and the decrease in the international selling prices of aviation fuel.

Also affecting income in the sector is the new licensing fee issued by the Ministry of Commerce which is 4bz per rial of the total annual revenue. Additionally, the increase in the purchase prices of petroleum products from Sohar refinery with effect from August 1, 2009, will pressure margins.

As Oman is at a much better stage to award new projects in the pipeline, current level valuations for MSM look attractive considering the future earnings growth of the constituents. The current P/E of 12.8X is well below average of GCC average of 16.7X. The dividend yield of 3.9 per cent for MSM is also quite well-placed compared to the GCC counterparts.

By and large, the first nine months has been a time of relief for investors.Going forward, we believe the market will continue its upward trend as the crude price is stabilising and basic metal prices have also recovered to a large extent.

Inflation has eased significantly and government expenditure is continuing at a faster pace with an increasing number of projects being announced. The future is bright but not without risks. Investors have learnt this the hard way over the past twenty-four months. Let us hope their memories do not fail them during the next twenty-four.

Road to recovery
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