Markets at 7000, Then and Now

Transcription

1 23 rd January, 211

2 The bench mark MSM 3 index has reached 7 levels once again after the maverick movement of the markets, scaling the 12 and falling to 42 levels in the last two and a half years. Market capitalization of the MSM is presently at RO billion and the average daily market turnover is around RO 7.8 million. However the investor participation in the markets remains lackluster as compared to the historic levels probably as a result of the risk aversion of players. MSM index has touched 7 levels on three occasions in its entire history. Out of those three occasions, markets were on a positive trend on two instances, the first in September 27 and the second at present. The markets presently trade at a PE of 13 based on the annualized earnings of 21 and 1.9 times the latest book value. Majority of the heavy weights, irrespective of the sectors presently trade at a discount to their historic valuation levels when the index was at the same levels on a positive mode. In this regard we thought it fit that we review the valuation levels of some of the key stocks in the MSM during these three periods when the index touched 7. Our observations are tabulated below. MSM 3 Index Market Trend 26-Sep-7 7,8.38 Positive 23-Oct-8 7,93.93 Negative 17-Jan-11 7,21.69 Positive Price PE** PBV Price PE** PBV Price PE** PBV Bank Muscat National Bank of Oman* Oman Cables Oman Cement* Omantel Renaissance Services * Stock prices adjusted to the changed face value of 1 Bz. **PE is based on the annualized earnings; Reported earnings are considered for Bank Muscat and Oman Cement for which FY 1 results are already published. Basis for selection: We have considered two companies each from the three sectors as the sample size based on market capitalization and liquidity The present valuations of the broad markets continue to be reasonable with the MSM general index and the Sector indices trade at a discount to the average valuations of the last four years barring the excruciating contraction during the market fall of 28.This signals a genuine scope for the markets to demonstrate further upside. We expect the improvement in macro economic conditions and the business confidence to perk up the corporate profitability and expect the markets to go up supported by the increase in investor participation going forward. Page 2 of 14

3 Markets Then and Markets Now Muscat Securities Markets made a smart recovery of 67% from its low of in less than two years. In the meanwhile the crude oil prices also gained by about 2% from its low of $ The General Index recorded a yearly return of 6.6% in 21 and presently shows a year to date return of 3.5%. The gradually increasing market depth and breadth of late, point to the continuation of the investor confidence backed by the positive trend of the markets. A period of fluctuating trade intensity The last three years witnessed a significant fluctuation in the trading activities as result of the topsy turvy ride of the markets. After falling 23% in 28, the market capitalization of the MSM showed an increase of 15% and 2% in the subsequent years and reached RO 11 billion as on date. The earlier dwindling trade intensity in the markets was primarily as a result of the wait and watch approach of the participants. The average daily turnover recorded a decline of 37% and 42% in the last couple of years in a row to reach RO 5.3 million in FY21.However subsequently the daily turnover showed an increase of 46% to reach RO 7.8 Million. After showing a drop of about 5% in the last two years, the average trades per day witnessed an increase of 39% during the last couple of weeks of this new financial year Market Statistics (YTD) MSM3 Index(points) 2, 15, 1, 5, Mkt. Capitalization as on Closing day (Mn. RO) Daily Averages (YTD) MSM3 Index(points) Average trades per day (RHS) 16, 14, 12, 1, 8, 6, 4, 2, - Average daily Turnover RO ' (RHS) Average daily Turn over RO ' (RHS) *M-Cap as on the last trading day Page 3 of 14

4 Foreign participation stayed healthy Despite the shaken confidence in the global equity markets, the participation of foreign investors in Muscat Securities Market continues to be steady Foreign Participation MSM3 Index(points) Foreign Participation % (RHS) The foreign participation in the listed stocks of MSM has recorded an increase in the last five years to reach 22% as on 31 December 21, from 16.2% of December 25. The Market carnage of seven months, eroding 4% of the shareholder value Markets witnessed a sharp fluctuation in trading activity during the seven months period between June 8 and January 9 when the index scaled its all time peak of and then crashed to 42 levels. Market depth and breadth stayed tepid in January 29 when markets dipped to its lows resulting in an erosion of 4% of the value for the listed companies and undergoing a sizeable shrinkage in the turnover of more than 9% compared to June 8. A compilation of the key statistics which is shown below would be of interest to the readers. Date MSM Index Volume Turnover (Mn.) (Mn. RO) Trades M Cap (Mn.RO) June 12, 28 12, ,71 12,52 January 21,29 4, ,74 7,544 January 17, 211 7, ,411 11,166 The recent trade statistics at the index level of 7 speaks loudly that the investor confidence which was missing is back in the markets. The market breadth has shown an increase of 125% and market depth, an increase of above 3% from that at 42 levels. Page 4 of 14

5 Valuations of Bellwethers when markets scaled the top and bottom Majority of the actively traded stocks such as Bank Muscat, Omantel etc. irrespective of the sectors had undergone shrinkage in valuations by more than 6% in January 29, during the market carnage. MSM -3 at ( Jun 12, 28) MSM -3 at 4188 ( January 21, 29) Stock Price PE PBV Stock Price PE PBV Bank Muscat National Bank of Oman Oman Cables Oman Cement Omantel Rennaissance Services *PE based on the annualized earnings Market valuations undergone expansion and excruciating contraction MSM-3 index was trading at a PE of 13.7 and PBV of 2.74 in 27 when the markets were on a bullish mode The valuations shrunk during the steep fall in 28; the PE dropped to 9.61 and PBV dropped to 1.62 There was an expansion of valuations when the markets showed a recovery in 29 where PE expanded to and PBV to 1.71 Price to Earnings Average* Present MSM Index Banking & Investment Holding Industry Services and Insurance Price to Book value Average* Present MSM Index Banking & Investment Holding Industry Services and Insurance * Exluding the effect of 28 fall Though the above table indicates that the current valuation levels are almost close to the historic averages, we are confident that markets would improve further and our reasoning is summarized in the following paragraphs. Page 5 of 14

6 Jan Feb March April May June July Aug Sept Oct Nov Dec Al Maha Research Market dynamics better at the current levels Out of the three occasions that we mentioned earlier, where the General index touched the 7 levels, the market capitalization and depth stay highest at present. The increasing liquidity in the markets supported by the positive sentiments indicates market s strength to continue the northbound movement. This one of our reasons for us to be positive going forward. Date MSM Index Volume Turnover (Mn.) (Mn. RO) Trades Mcap (Mn.RO) January 17, 211 7, ,411 11,166 October, , ,659 7,678 September 26, 27 7, ,624 7,54 Average ,565 8,783 M -Cap as on month end Recent market statistics reflect increasing confidence Market Statistics- 21 4,, 35,, 3,, 25,, 2,, 15,, 1,, 5,, Turnover Volume Trades per day (RHS) The up move of the markets in the last four months backed by the increasing liquidity and the increasing trade intensity point to the increasing investor confidence. Page 6 of 14

7 Markets on recovery path The revival seen in the global markets clearly indicates that the capital markets have left behind the worst part of the after effects of the financial meltdown and the uncertainty about the economic recovery. Markets in the Middle East have shown a convincing recovery of above 4% in the last couple of years signaling their trajectory out of the woods. 12.% Recovery of GCC indices from their lows 1.% 8.% 6.% 4.% 2.%.% MSM3 Abu Dhabi Dubai Qatar Saudi Arabia Kuwait Bahrain Index Average The visionary leadership and development oriented budgetary programmes adopted by the government has helped the Omani economy to counter the repercussions of the global financial crisis, which had its impact across the economies of the world. The sound economic, financial and monetary policies aiming at further economic diversification and the encouragement of investments have helped the Sultanate to maintain the stability of the financial sector and the markets. With the increase of oil prices and continuance of the prudent financial, economic and monetary policies, the Sultanate's economy is expected to record a growth rate of above four per cent this year. The equity markets, the leading indicator of the economy has already started showing signs of a clear up trend. Page 7 of 14

8 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Al Maha Research Catalysts to drive the Markets The Equity markets are expected to reflect the upshot of the macroeconomic fundamentals which are back on track and projected to advance gradually in the coming years. Crude oil at $ 9 The two fold increase of crude prices in the last two years has supported the Omani economy to sail through the rough weather. As crude oil production provides more than 7 percent of the total income for Oman and crude exports account for more than 65 percent of Sultanate's overall exports, the increasing crude prices will continue to be the major trigger for the markets going forward. Oman's oil output has shown a growth of 13.3% from 28 to reach 862,7 barrels per day in the first eleven months of 21 and the production is expected to reach 1 million barrels a day by 215. Avg. Oil Production Per day (' Bl) Forecasted Oil Price (US $ bl) *21 data as on November 1 Source: GDP Growth and swelling Current Account surplus As per forecasts, the GDP per capita (at the current prices) of Oman is expected to grow 2% in the next five years from the present levels. The Current account balance of the Sultanate is expected to show a momentous growth and the Current Account balance as a percentage of the GDP is forecasted to reach above 3% of the GDP by 212.The consumer prices in Oman rose 4.2 percent year-on-year (y-o-y) in September, up from 3.4 percent in August. However, as per the forecasts by the IMF, inflation is expected to ease out to 2% levels in the next two to three years. Page 8 of 14

9 Al Maha Research GDP and Inflation Current account balance Current account balance in $ Billion Source: IMF GDP per capita in RO (RHS) Widening budget surplus Inflation(%) Source: IMF Source:IMF Current account balance in percent of GDP (RHS) Source: IMF Oman's state revenues climbed 19.4 percent in the first nine months of 21 widening its budget surplus, boosted by higher oil prices. The Sultanate posted a budget surplus of RO 563Million in the first nine months of 21, up 14.7 percent compared to the same period last year. Oman had income of RO 5.8 billion from January to September, up from RO 4.8 billion in the same period in 29. The government is expected to base its 211 budget on an average oil price of $58 per barrel. The widening budget surplus as a result of the increasing crude oil prices can stimulate government spending and thus will be one of the major catalysts for the markets to move forward. Increasing government spending in the Eighth five year plan, 211 budget outlays up 12.5%... With the expectations of the higher oil revenues Oman plans to raise spending by 12.5 percent in its 211 budget to push ahead with infrastructure and development projects. Oman overshot its original spending plans in the past two years to help its economy ride out the global financial downturn. The budget spending was set at RO 7.2 billion for 21 and the 211 spending is expected at RO 8.13 billion to ensure consistence in growth for development projects. With the Government entering into the penultimate plan (Eighth Five year Development plan) of its Vision 22 strategy, the overall allocation towards various development projects in Roads, Ports, Housing, Airports, Health, and Services sectors has reached about RO 12,15 million. This comprises ongoing appropriations carried forward from the seventh plan amounting to RO 6,444 million. The new allocations made during the Eight Five year plan stands at RO 5,572 million. The plan aims to spend about RO 3,2 million as oil production investment expenditure and RO 3,47 million as investment expenditure for gas production. Page 9 of 14

10 Credit growth and liquidity to perk up Private sector credit in Oman grew by 7.5% in the last couple of years. The overall outstanding credit stood at RO1, million in October 21 and accounted for 67 per cent of total assets of lenders. On a year-on-year basis, credit growth was 9.3 per cent as at the end of October 21. As per the projections by Business Monitor International total credit of Omani banking is expected to grow at a CAGR of above 1% over the next four years to reach RO billion by Credit Growth of Omani Banks ( RO Billion) E 211E 212E 213E 214E Source: Business Monitor International Broad money (M2) registered a growth of 7.5 per cent to RO 8,358 million in October 21 compared to RO 7,775.9 million in October 29. Money supply as represented by narrow money (M1), comprising currency held by the public and local currency demand deposits, expanded by 14.7 per cent to RO. 2,651.1 million on a year-on-year basis in October 21. The indications of improvement in liquidity and credit off take will act as a major catalyst for the markets to keep up the northbound move. Page 1 of 14

11 What next? Based on the historical averages and our prognosis for the future, we are of the opinion that markets would look more positive. This would result in some of the key stocks rising higher from current levels. In order to substantiate our reasoning, we have carried out the following 1. First the PE, PBV multiples at index levels of 7 with positive trend were taken and averaged. 2. Secondly PE, PBV multiples of last four years were taken and averaged excluding the effect of market fall in Finally a new average of (1) and (2) was estimated and used as Base multiple 4. The annualized earnings per share and the latest available book value per share were considered for the exercise. Continuing on the earlier sample study, we have arrived at the average price levels at which some of the stocks probably trade, assigning equal weightage to both the valuation methods. Result of our survey is as follows. Stock Price as on Expected Base PE Base PBV 17 Jan '11 Price Bank Muscat Oman Cement Omantel Renaissance Services Please note that the valuations arrived at for Oman Cables and National Bank of Oman are not appearing to be realistic considering the present market scenario and hence are excluded in order not to mislead the readers. We expect individual stocks to move up from the steam expected from the additional earnings. We see a stock specific re ratings apart from the overall expansion in valuations on the back of better corporate profitability and a healthier market outlook. With the business confidence gradually returning back supported by the macroeconomic fundamentals, we expect the pending and fresh capacity expansion plans of companies to Page 11 of 14

12 take place. The improvement in markets and increasing trade intensity is likely to attract money waiting on the side lines. This can bring a change in the investor perception and risk appetite. The increased Market breadth and depth will improve foreign participation in the market. As the scope for value unlocking improves we expect more closely held companies to enter the equity markets rolling out new IPOs Page 12 of 14

13 PO Box 165 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: , Fax: Contacts Telephone Research: Suresh Kumar Radhika Gadhia Khushboo Badlani Institutional Sales: A. S. Kedarnath Steven Noronha Brokerage: Abdullah Al Hinai Mahmoud Al Hamsaidi Page 13 of 14

14 DISCLAIMER: The research report has been prepared by for private circulation amongst selected clientele for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe any investment. This Report is not directed to, or intended to be used by, any person or entity who (or which) is a citizen of (or domiciled) in any jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the company to any registration or licensing requirements within such jurisdiction. 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. and its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to companies mentioned herein or inconsistent with any recommendation and related information and opinions. and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. The information contained in this report has been obtained from the sources believed to be reliable ad in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, Al Maha Financial Services LLC makes no guarantee, representation or warranty, whether expressed or implied, and accepts no responsibility or liability to its accuracy and completeness of the data, being provided. Opinion expressed is our current opinion as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors must take their own decision 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 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. Page 14 of 14