Oman Strategy Report 2017

Transcription

1 Oman Strategy Report 2017 Date: 29 th March, 2017 We are optimistic about economic situation of Oman in light of a focused development plan, the prioritization of public investment, the draft foreign investment law, push to the growth of SME s and concerted effort on the diversification plan. Various stakeholder reservations about Oman were largely because of the cyclical pressures the economy was facing due to continued period of lower oil prices. In this context, the recent successful International bond sale (the issue was subscribed over 4x) provides some grounds for optimism. This was an important event from an economic perspective but was also important, and potentially very positive, for Omani equities as its brings in the much needed liquidity and provides tools to the government for their future policy actions. The recent bond issue also demonstrates, Sultanate s ability to tap international bond market at attractive terms compared to the peers. Secondly, aided by higher oil prices, hydrocarbon revenues will start to gradually rise from Non-oil revenues will also gradually increase over the coming years, backed by a re-pricing of government services, the corporate income tax rate increase, and the expected introduction of value-added tax from 2018 onwards. Oman government budgeted spending of OMR11.7bn in 2017 which is 1.7% lower than the budgeted spending of last year and 7.5% lower than the actual expenditure of OMR12.65bn in The overall agenda of 2017 budget comes in line with the approach adopted in the last couple of years. Such approach aims at rationalizing spending and enhancing its efficiency, as well as keeping public spending within justifiable levels, which we believe is justified keeping in view the expected outlook of oil. Our views on Oman has been seconded by Moody s as well. Moody s expects Oman's fiscal buffers will support the country through its process of fiscal and external adjustment. Oman's 2017 fiscal deficit to narrow substantially to OMR3.1bn (USD8.1bn, 11.4% of GDP) from an estimated OMR5.0bn (USD13.0bn, 20.1% of GDP) in 2016, and fiscal deficits will continue to decline gradually over the following years. Moody s believe Oman's Baa1 rating with a stable outlook reflects its high wealth levels and a still comparatively strong government balance sheet, balanced against credit challenges, including its heavy reliance on the oil and gas sector. The stable outlook reflects the anticipated resilience of Oman's rating over the next 12 to 18 months and signals that upward and downward pressures are balanced. Within GCC on a forward P/E and P/Bv basis, Oman is currently trading at the lowest price to earnings and price to book multiple of 9.2x and 1.12x respectively for U Capital Oman universe is trading at an even lower multiple than the MSM at 8.54x and 1.07x for P/E and P/BV respectively for 2017, while there are companies which are trading at even lower multiples in our Oman Research universe. Some of the stocks within our universe have witnessed price appreciation either in 2016 or are up YTD which either wiped out or squeezed potential upsides. However, there are companies within our universe which offer capital gain in double digits. Some companies who do not offer higher upside offer an attractive dividend yield. The dividend yield of Oman and U Capital Oman Universe is higher than the regional peers. We believe that stocks with good upside potential or even those with limited upside that offer good dividend yields, should be kept under the radar. In terms of public offerings, after years of dry period we expect to see increased activity in the market from public offerings, as the government seeks to privatize some of its holdings as well as private companies see that revival in oil prices might benefit them as well. Several companies be it because of regulatory reason or any other have announced about plans of going public. As of latest, at least 8 companies have announced plans of going public in

2 U Capital Oman Universe Company Name Price (OMR) YTD Chg. Market Cap (OMR mn) P/E 2017e (x) P/Bv 2017e (x) Div. Yld 2017e (%) Fair Value (OMR) Upside / Downside (%) Recommendation Banking Bank Muscat % 1, % % National Bank of Oman % % % Bank Dhofar % % % Bank Sohar % % % Ahli Bank % % % HSBC Oman % % % BUY Accumulate Accumulate Accumulate Hold Hold Leasing Al Omaniya Fin Services % % % National Finance % % % Oman Orix Leasing % % % Muscat Finance % % % Taageer Finance % % % United Finance % % % Hold Hold BUY Accumulate Hold Hold Cement Oman Cement Ltd % % % Raysut Cement Ltd % % % Hold Hold Telecom Omantel % 1, % % Ooredoo Oman % % % Hold Accumulate Others Oman Cables % % % Al Jazeera Steel % % % Al Maha Petroleum % % % Source: Bloomberg & U-Capital, Price as of Hold BUY Accumulate 2

3 Table of Contents Oman Equity Strategy 4 Economic Outlook 7 Real & Nominal GDP 8 Oil & Gas Sector of Oman 9 Oman Budget Oman Government International Bond 11 Ongoing Construction & Infrastructure Projects 12 Inflation 13 Diversification Plans 14 Privatization & IPOs 15 Sectoral & Company Outlook 16 Banking 17 Cement 26 Leasing 30 Telecom 38 Others 42 3

4 Oman Equity Strategy Growing optimism because of successful bond sale After a challenging 2016, Oman faces an improved economic environment in 2017 with relatively higher oil prices and continued progress on Vision We are fairly positive on the outlook of Oman compared to the previous years as various stakeholder concerns about Oman were largely because of the cyclical pressures the economy was facing due to continued period of lower oil prices. In this context, the recent successful International bond sale by (the issue was 4x subscribed) provides some grounds for optimism. This was an important event from an economic perspective but was also important, and potentially very positive, for Omani equities as its brings in the much needed liquidity and provides tools to the government for their future policy actions. The recent bond issue also demonstrates, Sultanate s ability to tap international bond market at attractive terms compared to the peers. Glimpsing back to 2016 and certain outlook for 2017 Despite various uncertainties and issues, Oman equity market posted a gain of 6.96% in Oil prices touched fourteen-year low in 2016, contraction in budgeted spending, vagueness related to tax issue, ambiguity related to Fed rate actions and OPEC unfruitful meetings in first couple of quarters in 2016 to name a few hindered the growth in the markets. However, things have been pretty clear this time around, as Fed has set a clear path regarding rate rise, OPEC has become a much cohesive unit, oil prices on the average have been trading much higher than previous year, tax related ambiguity has been cleared and liquidity has improved even further. So all in all we think 2017 would be a much better year for the equities compared to last year. Year to date performance of MSM and blue-chip stocks signals an entry Oman market is down year to YTD Change (%) date by 4.14% and the prominent 0.0% blue-chip stocks in banking, telecom and cement sector are down as well. Most of the stocks -4.0% -8.0% -12.0% -8.8% -7.5% -6.8% -6.3% -4.6% -4.5% -4.1% -2.1% have recently gone ex dividend -16.0% -15.4% -15.0% as well. Even though some of the -20.0% -19.4% stocks do not offer a double digit upside but combining it with the -24.0% Ooredoo Oman Al Jazeera Steel Bank Muscat Al Maha Petroleum Bank Sohar Raysut Cement Ltd Omantel Ahli Bank United Finance MSM30 Al Omaniya Fin Services handsome dividend yield would Source: U Capital & Bloomberg result in a decent return. 4

5 Price to earnings multiple cheapest across GCC Within GCC on a 2017e P/E basis, Oman is currently trading at an attractive price to earnings multiple of 9.20x, lowest amongst all the other countries. U Capital Oman universe is trading at an even lower multiple than the MSM at 8.54x, while there are companies which are trading at even lower multiples in our Oman research universe. PE 2017e (x) Al Jazeera Steel Bank Muscat Oman Orix Leasing Taageer Finance National Finance National Bank of Muscat Finance Ahli Bank Bank Dhofar Bank Sohar KSA Qatar Dubai Abu Dhabi Oman Kuwait U Cap Oman Universe Al Jazeera Steel Bank Muscat National Bank of HSBC Oman Oman Orix Leasing Taageer Finance Bank Dhofar Muscat Finance National Finance Bank Sohar KSA Qatar Dubai Abu Dhabi Oman Kuwait U Cap Oman Universe Source: U Capital & Bloomberg Price to book multiple cheapest across GCC as well Across GCC on a 2017e P/bv basis, Oman is trading at lower multiple than other GCC countries at 1.12x. U Capital Oman universe is trading at an even lower multiple than the MSM at 1.07x, while the companies proposed by U Capital are trading at even lower multiples which warrants an entry point. PBv 2017e (x) Source: U Capital & Bloomberg 5

6 Al Jazeera Steel National Finance Muscat Finance Tageer Finance Ooredoo Oman Oman Orix Leasing Al Maha Petroleum Al Omaniya Fin Services National Bank of Omantel KSA Kuwait Qatar Dubai Abu Dhabi Oman U Cap Oman Universe Proposed strategy: Cherry picking and dividend plays Some of the stocks within our universe have witnessed price appreciation either in 2016 or are up YTD which either wiped out or squeezed potential upsides. However, there are companies within our universe which offer capital gain in double digits. Upside (%) 30.0% 25.7% 25.0% 24.0% 18.0% 12.0% 20.0% 18.2% 14.7% 14.4% 14.4% 11.6% 10.6% 6.0% 6.3% 0.0% Bank Muscat Al Jazeera Steel Oman Orix Leasing Bank Sohar Ooredoo Oman National Bank of Oman Al Maha Petroleum Bank Dhofar Muscat Finance HSBC Oman Source: U Capital Some companies who do not offer higher upside offer an attractive dividend yield. The dividend yield of Oman and U Capital Oman Universe is higher than the regional peers. Dividend Yield e (%) 12.0% 10.0% 10.5% 9.0% 8.0% 6.0% 4.0% 7.6% 7.6% 7.1% 6.9% 6.9% 6.8% 6.8% 6.7% 3.3% 3.3% 3.8% 4.5% 5.2% 5.2% 6.1% 2.0% 0.0% Source: U Capital & Bloomberg We believe that stocks with good upside potential or even those with limited upside that offer good dividend yields, should be kept under the radar. 6

7 ECONOMIC OUTLOOK 7

8 e 2017e 2018e e 2017e 2018e Oman Economy Real & Nominal GDP Growth expected to pick up in 2017 Omani economy continued its vigorous growth and maintained its high growth profile up until 2014, when oil price continued to average over USD100 per barrel. However, with fall in hydrocarbon prices mainly because of the oversupply, the petrodollars earned by Oman have witnessed a steep fall which have ultimately resulted in a decline in the overall financial position of the country. Consequently, nominal GDP during 2016 is expected to have declined by 6.9% compared to 2015 while real GDP is expected to have grown by 1.8% YoY in 2016 on the back of increase in productivity. On the diversification front, Oman's economy still continues to be subjugated by petroleum activities, which accounted for 28.2% of nominal GDP during 9M16 as compared to 36.4% of nominal GDP during 9M15 and 34.1% during While average daily crude oil production was higher in 2016 as compared to previous years, the collapse in global oil prices that began in 2014 resulted in a decrease during 9M16 of 29.4% in the nominal GDP contributed by the oil and gas sector as compared to 9M15. Nominal GDP Real GDP 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% % 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Nominal GDP (OMR bn) Growth (%) Real GDP (OMR bn) Growth (%) Source: IMF Going forward, IMF expects nominal and real GDP of Oman to Grow by 10.3% and 2.6% respectively, largely because of expectation of higher average oil prices and also because of increase in production levels from different economic sources. Apart from these Omani authorities have taken bold measures to limit the impact of the fall in oil prices on the fiscal deficit, including cutting spending on wages and benefits, subsidies, defense, and capital investment by civil ministries. These measures are projected to reduce expenditures in 2017/18. The sustained impact of these measures, combined with the planned increase in corporate income tax from 2017 and the introduction of VAT in 2018, will narrow the fiscal deficit over the medium-term. The current account deficit, estimated at 21.3% of GDP in 2016, is also expected to persist, though declining, through the medium-term. In 2017 and 2018, current account deficit as % of GDP is expected to decline to 17.6% and 14.8% of the GDP respectively. 8

9 Oil & Gas Sector of Oman Oman's Oil and gas sector continues to play a major role in the country's economy. Despite government efforts to diversify oil and gas away from the economy. The country is the largest non-opec crude oil producer in the Middle East, with crude oil and condensates output increasing to 1,004.3 thousand bbl/d in 2016 from thousand bbl/d year in 2015 and thousand bbl/d in Over the years the increase in crude oil production from 2011 to 2016 largely resulted from the use of enhanced oil recovery techniques, such as polymer, miscible and steam (gas or solar-generated) injection, for which Oman is a leading proponent in the MENA region. However, in January 2017, Oman began to reduce oil production by 5%. (or approximately 45,000 barrels) in line with commitments agreed upon at the December 2016 OPEC meeting in Austria. The majority of Oman's oil and gas reserves are distributed relatively evenly among the South Oman, Oman Foreland, Central Oman and West Oman sub-basins. Oman's total proved oil and condensate reserves as at 2015 increased slightly to 5.37bn barrels as compared to 5.30bn barrels in While the proven gas reserves decreased to 23.0 tcf in 2015 from 24.4 in The decrease was as a result of gas production as well as the categorization of gas volumes and variations in the number of wells and exploratory studies. Almost 85% of Oman's remaining gas reserves are contained within 10 fields operated by Petroleum Development of Oman. Oil, Gas and Condensate Reserves (bn boe) Oil, Gas and Condensate Production (mn boe/d) M-2016 Source: Ministry of Oil and Gas. In terms of refining, there are two refineries currently operating in Oman, namely the Mina Al Fahal refinery and the Sohar refinery. The Ministry of Oil and Gas has restructured its refinery sector by merging the Sohar Refinery Company with the Mina al Falal refinery in order to reduce costs. The new company has been launched as the Oman Oil Refineries and Petroleum Industries Company. Duqm Refinery is a major new greenfield refinery strategically located in the south eastern coast of the Sultanate of Oman. Once the refinery is completed, it will have the capacity to process around 230,000 barrels of crude oil per day. Duqm Refinery will be one of the growth engines for the special economic zone. It will provide development opportunities for new projects that will directly and indirectly interface with the refinery. These projects will look to benefit from the refinery s products as well as provide different logistic services to the refinery. 9

10 Oman Budget 2017 Oman continued its transformation and development further higher by announcing a budget which was more detailed and transparent than previous years budget came with more austerity and firmness to drive the country out of the fold of oil and move it towards more non-oil sources and inculcate more taxes/fees to shore the country on a sustainable path. To name a few, budget announced several measures including: low recruitment in public sector recruitment, review of subsidies, privatization of government assets, spending on essential projects and amendment of various fees/services/ income tax laws etc. Oman government expects to earn revenue of OMR8.7bn in 2017 which is 1.16% higher than the budgeted revenue last year and 18.4% higher than the actual estimated revenue of In terms of breakup, oil constitutes majority of the earnings at 51% followed by revenue from non-oil sources at 29.8% and the last by gas at 19.1%. Methods of increasing non-oil revenue: Introducing tax on certain commodities such as alcohol and tobacco Increasing fees on companies which employ foreign workers Increasing fees of civil services provided by Royal Oman Police Limiting tax exemptions granted for companies and establishments Amending rules and regulations pertaining to exemptions of customs duties Implementing revised tariffs for large consumers of electricity for commercial, industrial and Government use Implementing the standardized fees of municipal services Oman government budgeted spending of OMR11.7bn in 2017 which is 1.7% lower than the budgeted spending of last year and 7.5% lower than the actual expenditure of OMR12.65bn in The overall agenda of 2017 Budget comes in line with the approach adopted in the last couple of years. Such approach aims at rationalizing spending and enhancing its efficiency, as well as keeping public spending within justifiable levels. The expenditure is divided into current expenditure (72.7%), investment expenditure (22.8%), participation, and other expenses (4.57%). Key points to be addressed are; 1) Current expenditure is approximately close to the budgeted revenues at 98%, lower by 2.30%, 2) Subsidy has been lowered fractionally from OMR400mn in 2016 to OMR395mn in 2017, 3) Oil and gas production expenses have seen a marginal rise of 1.7% YoY to OMR1.82bn compared to OMR1.79bn in 2016, 4) Development expenditure (including government companies) forms 11.45% of the total spending as against 11.34% in 2016 budgeted figures. The government expects its budget deficit to drop to OMR3bn in 2017, decline of 9% and 43.4% from the 2016 budgeted and 2016 actual respectively. The budget deficit is projected at 12% of nominal gross domestic production and 11% of real gross domestic production for The deficit would be funded through net foreign borrowings of OMR2.1bn, net local borrowings of OMR400mn and the rest amounting to OMR500mn from reserves. 10

11 Oman Government International Bond Oman's government completed its entire foreign borrowing plan for 2017 in a single issue earlier this year by selling USD5bn of international bonds. Bond sale, in tranches of 5, 10 and 30 years, was about double the size that most investors had expected and a huge amount for a country which returned to the international bond market in 2016 after an absence of two decades. Order books for the issue totaled USD20bn, as per media sources, showing that it can for now count on strong international demand for its high-yielding debt. The early issuance of bond was a very prudent decision by the government as globally interest rates are expected to increase signaled by US Fed. GCC Government International Bonds Announce Date 5-Year (mm/dd/yyyy) Maturity (years) Coupon Rate % Yield % Moody's Rating Abu Dhabi Government International Bond 4/25/ Aa2 Bahrain Government International Bond 11/17/ Ba2u Saudi Government International Bond 10/19/ A1 Qatar Government International Bond 5/25/ Aa2 Oman Government International Bond 3/1/ Baa1 Kuwait Government International Bond 3/20/ Aa2 10-Year Abu Dhabi Government International Bond 4/25/ Aa2 Bahrain Government International Bond 11/17/ Ba2u Saudi Government International Bond 10/19/ A1 Qatar Government International Bond 5/25/ Aa2 Oman Government International Bond 3/1/ Baa1 Kuwait Government International Bond 3/20/ Aa2 30-Year Abu Dhabi Government International Bond Aa2 Bahrain Government International Bond 9/10/ Ba2u Emirate of Dubai Government International Bonds 1/22/ Saudi Government International Bond 10/19/ A1 Qatar Government International Bond 5/25/ Aa2 Oman Government International Bond 3/1/ Baa1 Kuwait Government International Bond Source: Bloomberg Data as of 29 March

12 Ongoing Construction & Infrastructure Projects Muscat International Airport is due for completion in 2017, Oman Airports Management Company announced in November The new OMR365m (USD944.9m) Salalah International Airport was officially opened in November 2015, having started operations in June, and was constructed by Larsen and Toubro India and Galfar. New airports have also recently opened at Duqm and Sohar, while a fifth is under construction at Ras Al Hadd. In April 2015, Hong Kong-based Hutchinson Port Holdings announced that investments totaling USD303mn were being made to quadruple the capacity of the international container terminal at the Port of Sohar to 6m twenty-foot equivalent units by One of the biggest mega-projects taking shape in the sultanate is at Duqm, with a port and associated special economic zone (SEZ). The SEZ, with total area of 1745 sq km and 80 km of coastline on the Arabian Sea, is the largest in the MENA region, and one of the biggest in the world. A central part of the country s diversification strategy, it includes zones for industry, residential areas, tourism, logistics, and an education and training cluster. The Port of Duqm opened in 2011 and is at the heart of the growing development. Authority developing Duqm predicted the 1,172-hectare industrial park would attract $10 billion of investment by 2022, including USD370mn which the Chinese side would spend on infrastructure. Chinese-owned company that will manage investments at the industrial park, said it would include light and heavy industry as well as a $150 million, five-star hotel, a USD100mn hospital and a school. In second half of 2016 it was announced that Oman s Special Economic Zone Authority at Duqm (Sezad) has signed a OMR77.1mn agreement with Kuwait-based Gulf United Construction to build roads, infrastructure facilities and buildings at Port of Duqm. Two of the biggest projects in health care are the USD1.48bn Sultan Qaboos Medical City Complex at Barka and the USD1bn Salalah International Medical City. One of the most important sectors in the sultanate s economic diversification plan is tourism, particularly given its potential for catalyzing regional development. One of the planks of this strategy is the ITC (Integrated Tourism Complex) concept. As a net importer of many construction materials, Oman is well-placed to benefit from lower commodity prices expected to persevere through 2016, pushing forward with developments while costs are lower, particularly at a time when pressures on the government budget and competition between contractors is mounting. The strength of the US dollar, to which the Omani riyal is pegged, is another advantage for importing contractors. The Sultanate has been investing heavily in developing new industrial estates and expanding existing ones. As many as 216 industrial projects are under different stages of construction, while plots are allotted for another 421 new units in different industrial estates and a free zone located across the Sultanate of Oman. 12

13 Inflation in Oman to pick up in 2017 Oman s CPI basket is majorly composed of three groups. Food and Non-Alcoholic Beverages (23.9%), Housing, Water, Electricity, Gas & Other Fuels (26.5%) and Transport (19.2%). Any change in the above items effects the overall inflation number. Oman increased the oil prices after 17 years, before oil prices were deregulated the prices of the sub groups used to witness pretty marginal increase as seen in last three years ( ). However, the deregulation of oil price has not only affected the transport subgroup but has also been cataclysmic in raising the price of the other components in the basket. IMF in its April 2016 report estimated inflation in Oman to be at 0.25%, however they changed the inflation estimate in its October 2016 report to 1.1%, which we believe that IMF in its previous report did not incorporate the fuel price deregulation. Oman CPI Basket Weights Education, 1.4% Recreation, 1.1% Communica tion, 5.6% Transport, 19.2% Health, 1.2% Furnish & Household Eqp., 3.8% Source: NCSI Inflation in Oman came out to be 1.12% in 2016, tad higher than the IMF estimate. Restaurants & Hotels, 6.1% Misc, 5.2% Food & Beverages, 23.9% Tobacco, 0.1% Clothing & Footwear, 6.0% House, water & electrcity, 26.5% Inflation (%) 3.50% 2.78% 2.70% 2.74% 2.71% 2.58% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% e 2021e U Capital Estimates IMF Estimates Avg Estimates Source: IMF & U Capital We at U Capital estimate inflation in Oman to rise by 2.5% in 2017; mainly because of hike in transport, expectation of reduction in water and electricity subsidy and also because of rise in the prices of food and beverages sector. Our views are in line with the views of the executive president of the Central Bank of Oman who expects the inflation to be between 2-3% this year. 13

14 Diversification Plans to continue in full swing Oman s ninth five-year development plan ( ), which was the last of the series of 5-Year Plans for the Vision 2020, reflects prudent and realistic goals. Many items have been revised when compared with actual averages observed over The aim is to cut non-core expenditure in favor of additional attention towards investment spending on selected key programs and projects. Private sector role was the backbone of the plan and the government have already been engaged in supporting this view through either the public private partnerships (PPPs) or providing additional facilities. As per the Ninth plan statement, total targeted investments is at OMR41bn to be funded by 52% from private investments with the balance coming from public investments. The private investments shall be in commodities production activities (32.6%), services activities (37%) and 29% in infrastructures. Targeted projects for private sector (on either individual or partnership basis) cover Oman railway, tourism structures within Port Sultan Qaboos, Port Khasab, South Batinah Logistics Area, some fisheries projects, Ad Dhahirah Economic Area and Shinas Port. Historically, the government succeeds in engaging private sector in vital sectors such as power and water. Thus, we expect similar achievements in the current and upcoming plans. The 9 th Five-Year Plan ( ) maintains focus on economic diversification, welfare and social benefits enhancement, and at the same time drive to boost the private sector. To support this view, five prime sectors are targeted. These are: 1) manufacturing, 2) transportation and logistics, 3) tourism, 4) fisheries and 5) mining. Over 500 programs and policies to be activated in relation to those sector. The reason for choosing these five sector in our view is mainly its untapped potential and country s determination to transform from an oil producing country to a diversified mix. Apart from that these sectors have the ability of creating significant number of jobs, bearing also in mind the low Omanization rates. Oman is a commodity rich country and further exploration into the mining sector would be utmost important in the wake of further subsidy cuts to reduce operating costs. Last but not the least, geographical location of Oman, has placed it as business and logistic hub for traffic across continents of Europe, Asia and Africa. In continuation of 9 th Five Year Plan, government in Oman in late 2016 launched a program called Tanfeedh - the National Program for Enhancing Economic Diversification. Tanfeedh invited the nation to view the outcome of six weeks of meetings and workshops that welcomed scores of chief executive officers and representatives from the private sector. The plan is considered the final in a series of developmental plans comprising Oman Vision 2020, which seek to achieve financial and economic stability, diversifying the economic base and sources of national income, altering the role played by government in the Sultanate's economy, expanding the participation of the private sector and enhancing the quality of life for Omani citizens. The program will look at targeted sectors identified by the Royal Decree (1/2016), namely manufacturing, tourism, transport and logistics, mining, and fisheries. The role of Tanfeedh is to link the different strategies of the targeted sectors together, and provide a platform for sustainable partnership between the public and private sectors. The Labs will start by addressing the manufacturing, tourism and logistics sectors in addition to creative financing and labor market. A second stage will cover the mining and fisheries sectors, aligning the five main diversification sectors of the Development Plan. 14

15 Privatization & IPO s in 2017 In 2016, government embarked on implementing a privatization scheme in accordance to a framework set for the period of ( ). The first phase of the scheme is completed after setting up a holding company for each sector, and transferring government shares to the relevant holding company. Furthermore, ownerships of some government companies have been transferred to sovereign funds, in preparation of privatization. Further, the Government aims to sell a number of its assets, notably those which entail higher operating expenses or maintenance costs. We believe such scheme will be given more importance in coming days as it is the basic tool leading to expanding the ownership base of private sector, and deepening the securities market. On the same note government is pretty focuses on completing the Public-Private Partnership (PPP) law. Such a law is expected to facilitate the partnership between public and private sectors. Over the years the government has been stressing on the need for state-linked firms and ministries to sell assets and bring on private partners to invest in projects, instead of merely relying on government funds and contractors. As reported by media, Oman has more than 60 companies owned by the government, which also holds stakes in many listed firms as well. During 2016, government started transferring its stakes in some local companies to specialized sovereign funds. Some of the well know companies were transferred to Oman Investment Fund and Oman Global Logistics. In third quarter of 2016, Ministry of Finance transferred its stakes in Oman and Emirates Investment Holding Co and Port Services Corporation to the Oman Investment Fund while the ministry s stake in Salalah Port Services was transferred to Oman Global Logistics Group. While in the fourth quarter, Ministry of Finance transferred its majority stake in Oman Cement and Omantel to Oman Investment Fund. We believe the government strategy of transferring assets to the new management will help in bringing in efficiency and will leave government assets in the expert hands. On the IPO front, companies in Oman both at government and private level have announced ambitious plans for Several companies be it because of regulatory reason or any other have announced about going public. Hence at least 8 companies are expected to go public in Mining Development Oman Kunooz Oman Holding Muscat Electricity Distribution Company Al Ahlia Insurance National Life Ins. & General Oman & Qatar Insurance Falcon Insurance Vision Insurance Analyst: Hettish Karmani Head of Research 15

16 SECTORAL & COMPANY OUTLOOK 16

17 Banking Sector The total net loans & advances of the six listed banks reached OMR 18.5bn (+1.2%QoQ; +8.9%YoY) as at the end of FY16. The total customer deposits of these banks touched OMR 17.4bn (-0.5%QoQ; +3.8%YoY), stretching the Loan-to-Deposit Ratio (LTD) to a multi-year high of 106%. On the back of the recent Government International bond issuance (USD 5bn), we believe that the pressure on liquidity will ease a little in 2017, thereby letting the LTD to decline by a notch. Amongst the banks, HSBC Bank Oman grew its net loans & advances at the fastest pace of 18.1%YoY as at the end of FY16, followed by Bank Sohar at 16.1%YoY, Bank Dhofar 9.5%YoY, Bank Muscat 8.6%YoY and NBO at 5.4%YoY. Ahli Bank posted a flat net loans & advances growth at a mere 0.3%YoY. Net Loans & Advances Market Share, FY16 Customer Deposits Market Share, FY16 Bank Sohar 10% Ahli Bank 8% HSBC Oman 8% Bank Muscat 43% HSBC Oman 11% Bank Sohar 9% Ahli Bank 7% Bank Muscat 43% Bank Dhofar 16% National Bank of Oman 15% Source: Bank Financials, U Capital Research Bank Dhofar 16% National Bank of Oman 14% Bank Dhofar grew its customer deposits at the fastest rate amongst the six listed banks, at 11.3%YoY, during FY16, followed by National Bank of Oman (NBO) at 6.6%YoY, Bank Sohar at 4.6%YoY and HSBC Oman at 3.6%YoY, and Bank Muscat at 1.3%YoY. Ahli Bank, however, posted a YoY decline in its customer deposits for FY16 at -2.3%YoY. Loan & Deposit Growth vs. Loan-to-Deposit Ratio (LTD) 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Q1'16 Q2'16 Q3'16 Q4'16 Q1'17F Loan-to-Depost Ratio (LTD) -RHS Loan Growth (YoY) -LHS Deposit Growth (YoY) -LHS 107% 106% 105% 104% 103% 102% 101% 100% 99% Operating Income & Net Profit Growth vs. Costto-Income 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Q1'16 Q2'16 Q3'16 Q4'16 Q1'17F Cost-to-Income (RHS) Operating Income Growth (YoY) -LHS Net Profit Growth (YoY) -LHS 49.0% 48.0% 47.0% 46.0% 45.0% 44.0% 43.0% 42.0% 41.0% Source: Bank Financials, U Capital Research 17

18 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jul'13 Sept'13 Nov'13 Jan'14 Mar'14 May'14 Jul'14 Sept'14 Nov'14 Jan'15 Mar'15 May'15 Jul'15 Sept'15 Nov'15 Jan'16 Mar'16 May'16 Jul-16 Sep-16 Nov-16 OMR bn Total operating income of the six banks has been posting decline over the last two quarters as cost of interest-bearing liabilities has been on the rise sequentially, resulting in squeezed margins. However, we foresee a slight reversal of the trend in Q1 17. Given that we foresee banks to curtail any upward pressure on costs, cost-to-income is expected to normalize to an average of ~44%. Within Oman, liquidity conditions have deteriorated but levels have been stable over the last few months. In fact, the total bank lending ratio has come down from a peak of 82.7% in Oct 16 to 79.6% in Dec 16. Rial Omani Overnight Domestic Inter-Bank Lending Bank Lending Ratio 100,000 80,000 60,000 40,000 20, % 80.9% 79.6% 83.0% 82.0% 81.0% 80.0% 79.0% 78.0% % OMR Overnight Interbank Lending, OMR'000 OMR Overnight InterBank Lending Interest % p.a Deposits Net Lending Inclusive of eligible Govt. Soft Loans Lending Ratio For Bank Lending ratio: 1. Deposits include customers deposits as well as net balances due to banks abroad and capital funds 2. The lending ratio effective from 1st January 2009 is 87.5% of deposit base. 3. Amount in excess is the sum of excesses of individual banks and not the difference between aggregate net lending and permitted lending of all banks Source: CBO, U Capital Research Additionally, Rial Omani domestic interbank lending rate hovered near 0.470% in the last three months of FY16, down from a peak of 0.578% in Mar 16. Broad Money Supply (M2) growth is outpacing the growth in Narrow Money Supply (M1), on monthly as well as yearly basis. Money supply trends seem to have picked up in January 2017as far as broad money supply is concerned, in spite of a 6.8%YoY decline in M1 (currency outside commercial banks & demand deposits), spurred on by a 7.7%YoY increase in quasimoney resulting in a 2.6%YoY increase in M2. M2 has grown at an average rate of 6.2% over Jan 16-Jan 17, down from an average of 11.1% in the previous year. Month-on-Month Growth, % Year-on-Year Growth, % 5.5% 4.5% 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% -3.5% -4.5% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Money Supply (M1) Money Supply (M2) Money Supply (M1) Money Supply (M2) 18

19 % of Conventional Bank OMR Lending, Dec'16 % of Conventional Bank OMR Deposits, Dec'16 Over 7% Over 5% to 7% Over 4% to 5% Over 2% to 4% Over 0% to 2% Nil Over 7% Over 5% to 7% Over 4% to 5% Over 2% to 4% Over 0% to 2% Nil Source: CBO, U Capital Research Going into 2017, we believe that net interest income of banks will begin to improve on the back of rising interest rates as assets become due for re-pricing as well as new assets get booked, resulting in higher yield, especially as more than 50% of conventional banking deposits are within 0-2% interest rate bracket, as of Dec 16. We believe that improvement in yield on interest earning assets will outpace the growth in cost of interest bearing liabilities, resulting in improvement in net interest margins for the banks in the near-to-medium term. Outlook We are cautiously optimistic on the Omani Banking sector, owing to its stable fundamentals and the Government s prudent policies to support fiscal reforms and the non-oil sector. Oman s State Budget for the year 2017 projects a 2% growth in GDP for the year. The government is expected to bring about privatization reforms and implement Tanfeedh-led non-oil economic diversification strategy. The private sector is expected to participate in infrastructure projects through Public-Private Partnerships (PPPs) which will continue to support the economy along with generating employment opportunities. We believe that credit growth will be under pressure, however, improving margins (net interest margins (NIMS)) on the back of rising interest rates will help some of the banks to grow their revenues. However, as credit growth is likely to remain weak, lower loan origination fee income will dampen any growth in other operating income. On the cost front, we believe the banking sector in general will aim to curtail any alarming growth in its operating expenses, as focus remains on maintaining profitability in a relatively weak operating environment. However, for 2018 and beyond, we are optimistic that the banking sector, on the basis of its fundamental soundness, will continue to see improvement in profitability through expanding NIMs as well as pick-up in loan growth, and improvement in capital adequacy as upward pressure on credit costs eases. We believe that as the Government s revenue diversification efforts bear fruition, the country s economic outlook is likely to improve. 19

20 Mar-16 May-16 Jun-16 Aug-16 Sep-16 Nov-16 Dec-16 Jan-17 Mar-17 Bank Muscat (BKMB) Recommendation: Buy TP (OMR): Bloomberg Ticker BKMB OM Current Market Price (OMR) wk High / Low (OMR) 0.465/ m Average Vol. (000) 1,212.5 Mkt. Cap. (USD/OMR mn) 2,730 / 1,051 Shares Outstanding (mn) 2,752.1 Free Float (%) 66% 3m Avg Daily Turnover (000) m Avg Daily Turnover (000) PE 2017e (x) 5.9 PBv 2017e (x) 0.6 Dividend Yield '17e (%) 6.5% Price Perf. (1m/3m) (%) / ,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Series /share Upside / (Downside): 26% Analyst: Ayisha Zia BKMB OM, OMR Net profit to grow at a CAGR of 2.5% over Bank Muscat's total operating income is expected to grow at a CAGR of 3.5% over 2017F-2019F. Even though we believe the bank will continue to grow its net interest income as spreads improve on the back of rising interest rates, we believe that this growth will outpace the growth in other operating income mainly on account of a mid-single digit growth expectation for loanbook as well as increased competition from other banks. We believe that the bank will beable to maintain its operating cost to income ratio, where salaries & wages will increase only at the rate of inflation (which is expected to remain low). Provision expense will continue to increase albiet at a slower pace than we expected last year, resulting in a tepid profit growth outlook over the forecast horizon. Net Loans & Advances growing at a healthy rate; Deposit growth might be a constraining factor in the medium term Net loans grew by 8.6% YoY in FY16 to reach OMR 7.96bn whereas deposits grew 1.3%YoY to reach OMR 7.46bn, resulting in a loan-to-deposit ratio of 106% for FY16, up from 99.5% in FY15. We believe that the bank's net loans & advances will continue to grow at mid-single digit pace going forward, buoyed by oil price recovery resulting in an uplift in the Omani economy. Deposit growth, however, will continue to remain under pressure, partially eased by the Government's external borrowing. Asset quality expected to remain under pressure Impairment for credit losses in FY16 was OMR 70.3 mn as against OMR 72.0 mn in FY15, declining by 2.4%YoY. Recoveries from impairment for credit losses were OMR 35.5 mn for FY16 as against OMR 35.9 mn, also declining by 1.1%YoY. Going forward, we believe that cost of credit risk will slightly increase given the Central Bank of Oman's (CBO) recent reqgulation on provision on re-structured loans. However, we expect non-performing loans as a % of gross loans to remain stable at historical levels. Income Statement Operating Income Operating Profit Net Provisions & Taxes (61.2) (65.5) (72.0) (74.9) (77.2) Net Profit Balance Sheet Assets 12,545 10,820 11,584 12,084 12,641 Shareholders' Equity 1,397 1,547 1,687 1,803 1,921 Net Loans & Islamic Financing 7,330 7,957 8,318 8,634 8,965 Customers' Deposits & Islamic Invest 7,363 7,458 7,834 8,076 8,401 Key Ratios Cost to Income 42.0% 41.8% 41.9% 42.0% 42.1% Loans to Customer Deposits 99.5% 106.7% 106.2% 106.9% 106.7% ROAE 13.0% 12.0% 11.3% 10.6% 10.2% Dividend yield 4.7% 5.3% 6.5% 6.5% 6.5% EPS (OMR) BVPS (OMR) P/E (x)* P/BV (x)* Source: Company Reports, U Capital Research *P/E and P/B from 2017 onwards calculated on price of 03/28/

21 #N/A May-16 Jun-16 Aug-16 Sep-16 Nov-16 Dec-16 Jan-17 Mar-17 National Bank of Oman (NBOB) Recommendation: Accumulate TP (OMR): Bloomberg Ticker NBOB OM Current Market Price (OMR) wk High / Low (OMR) 0.259/ m Average Vol. (000) Mkt. Cap. (USD/OMR mn) 893 / 344 Shares Outstanding (mn) 1,548.5 Free Float (%) 32% 3m Avg Daily Turnover (000) m Avg Daily Turnover (000) PE 2017e (x) 7.2 PBv 2017e (x) 0.6 Dividend Yield '17e (%) 6.8% Price Perf. (1m/3m) (%) / ,000 4,000 3,000 2,000 1,000 0 Volume /share Upside / (Downside): 14% Analyst: Ayisha Zia NBOB OM, OMR Superior spreads but slower credit offtake to weigh down total operating income The bank's net interest income & Islamic income increased by 7.2% YoY in FY16, driven by a modest growth in loans and a favourable funding mix. However, its net interest margin has shown a marginal decrease primarily due to upward pressure on cost of funding, despite higher asset yields. NBO has performed credibly in this environment maintaining the highest spreads amongst its peers. Its non-interest income, however, declined by 15.7%YoY FY16 primarily due to lower insurance referral income, which was impacted by regulatory changes implemented at the beginning of the year. Since the bank adopted a conservative growth strategy with focus on maintaining asset quality, hence its loan origination fees also inevitably declined. In FY16, its net operating expenses also rose by 4.4%YoY and a in lieu of a lower operating income, its cost-to-income ratio shot up from 44.2% in FY15 to 46% in FY16. We expect the bank's profit to increase at a muted CAGR of 3% over F. Spreads seem to have bottomed out As at the end of FY16, 56% of net loans & advances and roughly the same amount of customer deposits are duefor interest rate re-pricing within one year. Within these, OMR 915mn or 62% are expected to be re-rpices within 3 months. Therefore, we are expecting the bank to benefit from spread improvement in rising interest rate environment. Recommended dividend below last year's payout The board recommended dividends at a conservative level to ensure the bank remains well capitalised and to prepare for significant imminent regulatory changes including IFRS 9. The bank s capital adequacy ratio after the dividend payout stands at 17.4%, against the regulatory requirement of 13.25%. The bank s core equity ratio stands at 12.3%, against the regulatory requirement of 8.25% reflecting the bank s robust capital position. Income Statement Operating Income Operating Profit Net Provisions & Taxes (15.6) (17.7) (21.9) (24.1) (26.6) Net Profit Balance Sheet Assets 3,263 3,533 3,647 3,711 3,779 Shareholders' Equity Net Loans & Islamic Financing 2,534 2,670 2,777 2,916 3,003 Customers' Deposits & Islamic Invest 2,250 2,399 2,506 2,542 2,579 Key Ratios Cost to Income 44.2% 46.0% 44.1% 45.6% 45.6% Loans to Customer Deposits 112.6% 111.3% 110.8% 114.7% 116.5% ROAE 13.2% 9.1% 10.6% 10.6% 10.7% Dividend yield 6.4% 6.8% 6.8% 6.8% 6.8% EPS (OMR) BVPS (OMR) P/E (x)* P/BV (x)* Source: Company Reports, U Capital Research Note: EPS from 2015 onwards adjusted for interest payable on Tier 1 perpetual bond *P/E and P/B from 2017 onwards calculated on price of 03/28/

22 Mar-16 May-16 Jun-16 Aug-16 Sep-16 Nov-16 Dec-16 Jan-17 Mar-17 Bank Dhofar (BKDB) Recommendation: Accumulate TP (OMR): Bloomberg Ticker BKDB OM Current Market Price (OMR) wk High / Low (OMR) 0.251/ m Average Vol. (000) Mkt. Cap. (USD/OMR mn) 1,193 / 459 Shares Outstanding (mn) 2,041.6 Free Float (%) 47% 3m Avg Daily Turnover (000) m Avg Daily Turnover (000) 54.8 PE 2017e (x) 9.8 PBv 2017e (x) 0.8 Dividend Yield '17e (%) 6.0% Price Perf. (1m/3m) (%) / ,500 2,000 1,500 1, Series /share Upside / (Downside): 12% Analyst: Ayisha Zia BKDB OM, OMR Net profit to grow at a CAGR of 8.7% over F The bank is expected to continue to increase its operating income over the forecast period on the back of improving NIMs and growing other operating income as loanbook is expected to expand at a CAGR of ~7% over F. Also, the bank is expected to continue to harness operating cost growth (as displayed in ) and therefore maintain cost-to-income ratio at the current levels of ~44.6% over the forecast period. Net provisions expense growth is also expected to be curtailed at the current levels, growing only as the loanbook expands. This results in net profit growth expectation of a CAGR of 8.7% over F. Improving spreads dampened by rising cost of funding 52% of inetrest-rate sensisitive customer deposits of the bank are due for re-pricing within one year (constitute 34% of total customer deposits). However, 58% of net loans & advances are due for interest rate re-pricing within one year from Dec-end FY16, and therefore, we believe that the bank's spreads will improves, dampened by rising cost of funding. Proposed dividend payout as % of par reduced slightly; expected to be maintained at this level The bank's board of directors have proposed a cash dividend of 13.5% for FY16 (15%: FY15), and stock dividend of 7.5% for FY16 (10%:FY15). We believe that the Board proposed this in order to preserve capital adequacy where total capital ratio declined from 14.7% in FY15 to 14.41% in FY16. (Tier 1 Capital ratio FY16: 12.77%; FY15: 12.68%). The decline arose due to reduction in Tier II capital as during the month of December 2016, the bank has repaid the unsecured subordinated loan amounting to OMR 50 mn upon maturity. Income Statement Operating Income Operating Profit Net Provisions & Taxes (17.3) (23.0) (25.7) (29.5) (31.9) Net Profit Balance Sheet Assets 3,593 3,952 4,239 4,532 4,857 Shareholders' Equity Net Loans & Islamic Financing 2,729 2,989 3,228 3,454 3,695 Customers' Deposits & Islamic Invest 2,592 2,885 3,122 3,360 3,623 Key Ratios Cost to Income 44.4% 44.6% 44.4% 44.8% 44.7% Loans to Customer Deposits 105.3% 103.6% 103.4% 102.8% 102.0% ROAE 1.2% 1.1% 1.2% 1.1% 1.1% Dividend yield 7.0% 5.9% 6.0% 6.0% 6.0% EPS (OMR) BVPS (OMR) P/E (x)* P/BV (x)* Source: Company Reports, U Capital Research Note: EPS from 2015 onwards adjusted for interest payable on Tier 1 perpetual bond *P/E and P/B from 2017 onwards calculated on price of 03/28/