STOCK OF THE MONTH. April 2013 BUY OMAN INVESTMENT SECTOR SMALL CAP. Recommendation KEY HIGHLIGHTS A SHARQIYA INVESTMENT HOLDING CO.

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Alyson Spencer
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WEALTH MANAGEMENT STOCK OF THE MONTH April 2013 OMAN INVESTMENT SECTOR SMALL CAP Recommendation BUY CMP (RO) (27/3/2013) : 0.137 TARGET PRICE (RO): 0.

SAOG (MSM:SIHC) SIHC looks highly attractive at its current level which is at a discount of around 37% to our estimated fair value.

1 WEALTH MANAGEMENT STOCK OF THE MONTH April 2013 OMAN INVESTMENT SECTOR SMALL CAP Recommendation BUY CMP (RO) (27/3/2013) : TARGET PRICE (RO): EXPECTED RETURN (%): 37% STOCK DATA MCAP (RO million) WEEK HIGH (RO) WEEK LOW (RO) A SHARQIYA INVESTMENT HOLDING CO. SAOG (MSM:SIHC) SIHC looks highly attractive at its current level which is at a discount of around 37% to our estimated fair value. We believe that a sharp increase in the value of its portfolio investments over the past one year is still not reflected in the company s stock price. KEY HIGHLIGHTS A Sharqiya Investment is a holding company and hence, we have valued the stock using Sum of Parts Valuation Method. We recommend a Buy on the stock. We value the stock at RO 0.188, providing an appreciation of 37% from current levels. Our estimated fair Value is adjusted for cash dividend of RO per share approved on 24 March 2013 but does not include impact of 5% stock dividend proposed in 2013 on account of pending EGM approval. We have provided a holding company discount to current prices of available for sale investments and Investments at fair value through P/L to arrive at their fair value. SIHC had a net gain in the value of Available for sale investments of RO 2.1 million in FY 2012, around 60% of which came from increase in value of its stake in Al Jazeira Services. We believe that this sharp increase in the value of its AFS investments is still not reflected in SIHC s stock price. We also expect the stakes in Al Jazeira Services and ONES to further contribute to SIHC s valuation going forward. While earnings of ONES is expected to move up from execution of higher order book, increasing profitability and valuation of Al Anwar Ceramic Tiles is positive for Al Jazeira services. AJSS also holds quoted foreign investments of RO 5.1 million, mainly comprising high interest earning bonds. Besides earning investment income, SIHC s subsidiary Qalhat Real Estate Investment & Services LLC is earning lease income from a finance lease entered with Oman LNG (OLNG) from 2002 till 2025 for leasing a residential complex, thereafter which the property will be transferred to OLNG. The residential complex was constructed on land given by the Public Establishment for Industrial Estates (PEIE) for a lease period of fifty years. SIHC repaid RO 15 million of loans by 2008 which was also employed along with own funds for constructing the residential complex. Present value of minimum lease receivables amounting to RO 4,089,326 as on 31 Dec 2012 has been included in valuation. Upside to our target price could majorly come from increase in prices of its quoted investments such as ONES, AJSS and National Gas & foreign bonds. Downside risks include decline in prices of its quoted investments. ANALYST Nandakumar Chenicheri Asst. Vice President - AMD nandakumar@fincorp.org Tel: (+968) Ext. 353 VALUATION OF SIHC OMR Fair Value Lease receivables 4,089,326 Available for sale Investments 13,664,166 Investments at fair value through P/L 1,411,795 Prepayments and other receivables 194,476 Cash and cash equivalents 94,578 Total Assets 19,454,341 Term loans 2,100,000 Bank borrowings 1,480,272 Other liabilities 396,282 Cash dividend 400,000 Minority Interest 60,876 Total Liabilities & Minority Interest 4,437,430 Net Assets 15,016,911 Fair Value Per Share 0.188

2 A. VALUATION OF AVAILABLE FOR SALE INVESTMENTS We have valued Available for sale investments at their current prices to which a holding company discount has been provided. We have estimated the fair value for available for sale investments at RO 13,644,166. Company s Available for sale investments majorly include stakes in local companies such as - Oman National Engg. & Inv. Co. (ONES) (12.5% Holding) into billing & collection of electricity and water charges for utility service providers, Operation and maintenance of power generation stations, desalination plants, hospital equipment, air conditioning plants and sewage treatment plants. Al Jazeira Services (AJSS) (6% Holding) - engaged in contracting services including catering, housekeeping, laundry, equipment supply & allied services and also into investment activities. National Gas (15% Holding) into distribution of LPG both to industrial and domestic consumers. National Gas has been negatively impacted by the rising supply costs of LPG cylinders, increasing manpower costs and governmental quota restrictions in Oman. National Gas is looking forward to updated regulations regarding pricing, quantity and cylinder replacement which would likely improve the performance of cylinder business. National Gas also ventured into the south east asian market last year by acquiring Shell s LPG business in Malaysia. Acquisition was funded through loans which led to increased finance costs hitting the profitability. However, the acquisition coupled with growing business in UAE, Saudi and Qatar markets are expected to contribute positively to the company s performance and stock price going forward. Other AFS investments include other local industrial stocks, unquoted local investments, Quoted US dollar denominated investments and Unquoted investments denominated in EURO & other foreign currencies. OMR Local - Quoted : Valuation of Available for sale investments No. of shares Price (27 Mar) Market Value Cash Dividend Total Value Discount Fair Value Oman National Engg. & Inv. Co. 10,000, ,560, ,004 3,700,004 15% 3,145,003 Al Jazeira Services 6,700, ,901, ,035 3,236,435 15% 2,750,970 National Gas 4,501, ,011,988-2,011,988 15% 1,710,189 Other industrial 3,914, ,703 4,109,771 10% 3,698,794 Local - Quoted 12,387, ,742 13,058,198 11,304,957 Local - Unquoted : Vision Insurance 244, ,656 15% 207,958 A' Sharqiya University 630, ,000 15% 535,500 Industrial 25,000 25,000 15% 21,250 Local - Unquoted 899, , ,708 Foreign quoted - Investment sector (US Dollar Denominated) 1,514,690 1,514,690 10% 1,363,221 Foreign unquoted - Investment sector (Euro & Others) 256, ,978 10% 231,280 Available for Sale Investments 15,058, ,742 15,729,522 13,664,166 F I N C O R P W E A L T H M A N A G E M E N T Page 2

3 B. VALUATION OF INVESTMENTS AT FAIR VALUE THROUGH P/L Investments at Fair value through P/L majorly include interest bearing foreign bonds. We have provided a holding company discount of 10% on the investments to arrive at their fair value. We have estimated the fair value for investments through P/L at RO 1,411,795. Valuation of Investments at fair value through P/L OMR Market Value Discount Fair Value Local quoted - Services 13,180 10% 11,862 Foreign quoted: Banking and investment 784,977 10% 706,479 Services 600,988 10% 540,889 Industrial 169,516 10% 152,564 Foreign quoted 1,555,481 1,399,933 Fair Value through P/L Investments 1,568,661 1,411,795 COMPANY PROFILE A Sharqiya Investment Holding Co. SAOG was established in 1998 and its activities include promotion of new projects in Oman and Overseas, acquire existing businesses, invest in local and overseas financial markets and contribute to the development of Oman in line with the policies and priorities announced by the State. Company has a wholly owned Subsidiary Qalhat Real Estate Investment & Services LLC which is into real estate investment and development and the leasing and maintenance of real estate properties. The subsidiary constructed and handed over a housing complex for Oman LNG (OLNG) during March 2002 under a finance lease arrangement. The lease agreement is for a period of 23 years from the date of handover. The Internal rate of return on lease receivables is 16%. The company is expected to earn a lease income of RO 654,002 in FY 2013 compared to RO 661,932 in FY 2012 and RO 666,845 in FY The company also earned a maintenance service income of RO 176,936 in FY 2012 compared to RO 146,596 in FY During 2012, Company established a subsidiary Rehab for Medical Rehabilitation LLC which has incubated Oman s first medical rehabilitation center for post surgical/trauma care patients. The subsidiary is yet to commence its commercial operations and will be engaged in the distribution of medical equipment. Company has incurred preoperative expenses of RO 47,811 for this project in During 2012, company decided not to pursue the integrated tourism project at Ras Al Ruwais considering the long gestation period of the project and wrote off the preliminary expenses incurred on the project of RO 354,790. F I N C O R P W E A L T H M A N A G E M E N T Page 3

4 Income Statement OMR Lease income 661, , ,194 Maintenance services and other income 216, , ,764 Gain on sale of Available for sale investment 5,635 17, ,393 Gain on investment at fair value through P/L 62,483 (297,745) 40,573 Interest income 117,217 9,724 22,258 Dividend income 583, , ,901 Operating income 1,647,810 1,225,168 1,297,083 Staff cost (350,103) (333,194) (324,290) General and administrative expenses (216,149) (165,551) (180,424) Interest expense (217,285) (140,911) (38,821) Exchange loss - (62,714) - Brokerage cost (8,553) (57,236) (4,903) Depreciation (2,284) (4,691) (5,494) Director's remuneration (28,850) (23,900) (22,700) Impairment of available for sale investment (132,006) (19,736) (61,249) Impairment of project cost (354,790) - - Operating expenses (1,310,020) (807,933) (637,881) Profit before taxation 337, , ,202 Taxation (51,972) (47,327) (44,709) Net profit 285, , ,493 Profit attributable to equity holders 304, , ,493 EPS Other comprehensive income 2,220,951 (199,882) 664,795 Total comprehensive income attributable to equity shareholders 2,525, ,026 1,279,288 Total comprehensive income per share Balance Sheet OMR Lease receivables 4,089,326 4,138,911 4,169,631 Available for sale investments 14,407,794 11,056,587 8,374,327 Investments at fair value through P/L 1,568, ,497 2,179,692 Prepayments and other receivables 194, , ,329 Cash and cash equivalents 94, , ,817 Property and equipment 529 2,530 6,576 Total Assets 20,355,364 17,249,198 16,098,372 Term loans 2,100,000 3,000,000 - Bank borrowings 1,480,272 37,352 1,057,747 Other liabilities 396, , ,610 Minority Interest 60, Total Liabilities & Minority Interest 4,037,430 3,457,157 1,776,357 Shareholder's Equity 16,317,934 13,792,041 14,322,015 Source: Company disclosure, FINCORP Investment Research F I N C O R P W E A L T H M A N A G E M E N T Page 4

5 RESEARCH CONTACT DETAILS Nandakumar Chenicheri (+968) Ext: 353 Gaurav Ramaiya (+968) Ext: 348 Mable C Pereira (+968) Ext: 342 mable@fincorp.org BROKERAGE CONTACT DETAILS Mohammad Al Ghalayini (+968) Ext: 333 mohammad@fincorp.org Deena Omeir (+968) Ext: 334 deena@fincorp.org The Financial Corporation Co SAOG (FINCORP) PO Box 782, PC 131, Sultanate of Oman Tel : Fax : Disclaimer The research team of The Financial Corporation, SAOG (hereto referred as FINCORP) has prepared the information, analysis and expressed its opinion on the subject matter of this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, FINCORP makes no guarantee, representation or warranty, whether express or implied, and accepts no responsibility or liability as to its accuracy or completeness of the data, being provided. All investment information and opinions are subject to change without notice. The investor will indemnify FINCORP and its directors, officers, and employees against any loss or damage or other liabilities (including costs), which they may suffer as a result of reliance on this report. This report is not to be relied upon in substitution for the exercise of independent judgment. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. FINCORP will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. FINCORP and its affiliates or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. FINCORP and its affiliates may act as market makers or underwrite securities of companies discussed herein (or investments related thereto), and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. Authors or contributors of this report could have direct interest in the capital market or in the securities mentioned herein. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of FINCORP. F I N C O R P W E A L T H M A N A G E M E N T Page 5

MSM LISTED STOCKS - CURRENT DIVIDEND YIELD

MSM LISTED STOCKS - CURRENT DIVIDEND YIELD MSM LISTED STOCKS - CURRENT 19/02/13 ANALYST Nandakumar Chenicheri Asst. Vice President AMD Email: nandakumar@fincorp.org Tel: (+968) 24822300 Ext. 353 NO. COMPANY OUTLOOK (NEXT SIX MONTHS) RECORD DATE