Oman. Buy. Oman Cement Company. Investment Update. Investment Summary. Global Research - Oman. April, 2009

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1 Investment Update Oman Tickers: OCCO.OM (Reuters) OCOI OM (Bloomberg) Listing: Muscat Securities Market Current Price: RO0.372 (As on April 13 th, 2009) Investment Summary April, 2009 Buy (OCC) posted revenue of RO63.5mn which was higher by 9% as per our estimates of RO58.3mn for Difference in the forecasted and actual revenue was because of the increase in the price cap during the year as well as import of higher amount of clinker and cement. Company sales volume increased by 14.6% to 2.1mn tons as compared to 1.87mn tons in On the other hand local sales price increased by 12.2% to RO29.7/ton whereas the export price rose by 11.6% to RO36.5/ton. OCC s cost of sales increased by 69% to RO49.65mn in The increase in cost was due to high purchase cost of cement and clinker imported under instructions from the government in order to meet the local demand. The company imported 0.92mn tons of clinker during the year to meet the demand, which is 42% higher as against 0.53mn tons during the previous year. OCC s other income increased by 68% to RO3.2mn in 2008 as against RO1.91mn in This other income portion has over the years added significant amount to the bottom line. OCC reported profit before tax of RO14.1mn in 2008 which was subject to 12% income tax resulting in a profit after tax of RO12.5mn as compared to RO17.6mn in In 2008, the company managed to report net margins of 19.74% as against 35.3% in In terms of quarterly performance of 2008, 1Q-2008 was the most favorable quarter as the company report profit after tax of RO3.9mn and net margins of 34%. Although in the last quarter the company report highest ever revenue but was not able to full transfer it to the bottom line as the net margins were merely 9% in 4Q Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone No:(965) Hettish Kumar Financial Analyst hkumar@global.com.kw Phone No:(965) OCC s assets declined marginally to RO133mn in 2008 as compared to RO134.3mn in The major reason for the fall in assets in 2008 was because of decline in the investment available for sale. Investment available for sale dropped to RO15.2mn as compared to RO21.0mn in OCC announced an expansion of 1.2mn tons in clinker capacity for which a contract has been signed. The duration for construction and erection of the project is 25 months as per the contract and the project is expected to be completed in December st Quarter 1

2 of In order to finance the project, OCC will be partly utilizing loan funds. The total contract value for the Expansion Project is RO62.7mn (US$162mn) and RO20mn of the project cost is to be met from loans. Sohar Praton Concrete Products Company SAOC, a 58.4% subsidiary of OCC went into liquidation and consequently, the parent company s control of the subsidiary passed to the liquidator. Accordingly, the subsidiary is deconsolidated with effect from 12 March On the other hand, Oman Mondi Shuaiba Packaging (OMSP) reported an improved performance during the year Revenue earned by OMSP increased from RO3.5mn to RO6.5mn in As per MEED, over US$105bn worth of projects have been announced by Oman. Keeping in view the liquidity crunch and the cash constraints, even if we discount the projects by more than a half, still there would be ample demand which would be catering to sales growth of the cement companies in Oman. According to OCC, the expected demand for cement in Oman is estimated at 4.63mtpa during The value of OCC s shares derived from the weighted average of the DCF and relative valuation methods is RO0.676 per share. The stock closed at RO0.372 on the Muscat Securities Market at the end of trading on 13th April 2009, which implies that the weighted average value of OCC s shares is at a premium of 82% to the share s current market price. At their current price, OCC s shares have a P/E multiple of 10.6x and 7.2x for 2009 and 2010 respectively. We therefore reiterate our BUY recommendation on the scrip. Table 01: Investment Indicators CMP (13th April 2009) Shares in Issue (mn) M-Cap (RO mn) 52-Week Hi/Lo (RO) RO / Gross Profit Net Profit EPS BVPS ROAE P/E P/BV Year (RO mn) (RO mn) (RO) (RO) (%) (x) (x) 2010 F F A A Source : Company s Annual Reports, Reuters & Global Research. Historical P/E & P/BV multiples based on respective year-end prices, while those for future years are based on current market price in the Muscat Securities Market as on April 13, Chart 01: Share Price Performance Chart 14,000 12,000 10,000 8,000 6,000 4,000 2, (RO) 13-Apr May Jun Jul Aug Sep Oct-08 Index - LHS 13-Nov Dec Jan-09 OCC - RHS 13-Feb Mar Apr-09 Source: Zawya

3 Oman Cement Sector The cement industry in Oman dates back to 1977, when (OCC) was set up, followed by Raysut Cement Company (RCC), which started in OCC is situated in the Muscat Governorate in Northern Oman, while RCC s plant is located in the Dhofar Governorate in Southern Oman. Most of the consumption is concentrated in the northern part of the country as the southern part is less developed and demand for cement is lower. As a consequence of that RCC has established a cement receiving facility at Port Sultan Qaboos in Muscat with a capacity of 15,000 tons cement to cater to the Northern part of the Country. RCC being present in the southern part of the country serves the deficit markets of Yemen and East Africa for which it has established cement receiving facilities at the Ports of Mukalla and Aden. In Oman, construction activity has been in heightened mode since 2003, with cement demand surpassing supply, resulting in cement shortages and price hikes. Consequently, the Omani government decided to impose a ban on cement exports in mid 2004, a move that forced local producers to focus on opportunities at home. Since then the country s cement deficit declined as the demand supply gap reversed into surplus. In nominal terms Oman s building and construction sector value has increased from RO159mn in 2000 to RO762mn at the end of 2007, growing at a CAGR of 25%. Which is further expected to rise to RO838mn in The building and construction sector contribution to the nominal GDP of the country is 4.8% as of 2007 which is expected to touch 5% at the end of Oman ranks below in terms of country s building and construction sector contribution to the GDP when compared with its regional players. UAE ranks at the top at 8% followed by Qatar and Bahrain at 5.7% and 5% respectively. Chart 02: Building & Construction Sector (BCS) as % GDP 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% The increasing difference is because of lower production of oil as compared to BCS sector BCS as % of Nominal GDP BCS as % of Real GDP Source: Ministry of National Economy, Oman On the other hand in real terms, country building and construction material sector contribution to the GDP has increased from 2.1% in 2000 to 6.7% in The difference between the nominal and real terms is because of the decline in the oil production from 299mn barrels in 2003 to 259mn barrels in Nevertheless in the same period nominal GDP continued to increase as the oil price surged from US$27.8/barrel in 2003 to US$65.2/barrel in Going forward we believe that building and construction material contribution to GDP will continue to increased (1) ongoing construction and expansion activities in the real estate and construction sector and (2) decline in the oil production in the country because of depleting reserves.

4 Oman s Cement Capacity Enhancements to Continue Over the years with the increasing oil prices and higher budgetary revenues, the country continued to focus on the diversification and developmental activities which in turn required contribution from the cement sector as well for the construction activities. In view of that, both the cement companies has continued to increase their cement capacities which at the end of 2008 are 4.6mtpa as compared to 2.2mtpa in Chart 03: Oman Cement Sector Capacity (mn Tons) % 6.0% 5.0% 4.0% 3.0% 2.0% F 2010F 2011F 2012F Oman Capacity GCC Capacity Oman as % of GCC Source: Oman & Raysut Cement 1.0% 0.0% Oman Cement increased its capacity from 1.26mtpa in 2003 to 1.87mtpa in The heightened demand prompted OCC to announce a further expansion which will double its clinker capacity to 2.4mtpa. This expanded capacity would help in achieving high local market share and to reduce the company s reliance on imported clinker which incurs lots of cost and reduces the margins. OCC is planning to bring the additional capacity on-stream in On the other hand Raysut Cement also followed the footsteps of Oman Cement. It increased its cement capacity from 0.98mtpa in 2003 to 2.75mtpa in In the meanwhile it has surpassed the capacity of OCC, but with the expansion of OCC both would be able to produce almost equal amounts of cement. Cement capacity of Oman has continued and have tracked the pace of capacity enhancements in the region. Overall in GCC, the cement capacity is expected to increase from 43mtpa in 2003 to 85.9mtpa and 116.3mtpa in 2008 and 2012 respectively. Hence, Oman s contribution to the overall cement capacity of GCC is to decline from the current levels of 5.4% in 2008 to 4.6% in Demand Supply Scenario Country s demand and supply situation has in 2008 almost broke even as the total supply of cement was 4.12mn tons while consumption in the country rose from 3.07mn tons to 4.06mn tons. Cement demand in the country is driven by: Tourism: In 2006, tourism accounted for 0.75% of the GDP with a value of RO103mn, but the government hopes this figure can be increased to 1.4%of GDP in 2010 and 3% by Hence more of the focus would be on developing the infrastructure which in turn would result in favorable situation for the cement industry. Many tourism related projects are expected to come online in the coming 3-4 years.

5 Table 02: Tourism Projects in Oman Project Name Value (US$mn) Project End Majan Gulf Properties - Khasab Resort 780 Q Yenkit Tourism Devp - Integrated Tourism Complex 2,000 Q Muriya - Resorts 850 Q Alfa - Journey of Light Beach Resort 950 Q Ministry of Tourism - Seeb Complex 100 Q Omran - Asian Beach Games Project 180 Q Omran - Duqm Hotel 80 Q Omran - Fort Hotel Resort 300 Q Omran - Jabal Al Akhdar Resort Hotel 150 Q Omran - Oman Convention and Exhibition Centre 400 Q Omran - Ras Al Hamra Resort & Retreat 700 Q Omran / Qatari Diar Real Estate Inv. Co - Ras Al-Hadd Resort 220 Q Sama Dubai - Yiti Resort & Spa (Yiti) 1,400 Q Swiss-Belhotel International / HBG Holdings Ltd 200 Q The Wave Tourism Development 2,000 Q World In / Bolici Group - Hayoot Beach Resort 350 Q ,660 Source: MEED The total cost of these tourism related projects only is worth US$11bn which when translated into cement demand would result in cement demand of 6.5mn tons in the four year period. Overall, the outlook for tourism sector is very bright in the coming years and the Sultanate is leaving no stones unturned to realize exponential growth in this sector. Foreign Freehold Ownership: Earlier, only GCC nationals were the only foreigners allowed to buy land in Oman which extend land ownership rights to GCC national and GCC corporate entities. However, the Royal decree 12/2006, expands foreign ownership rights to include non-gcc nationals as well. Real Estate Investments: Despite the upsurge in property prices till September 2008 the Omani market remained competitive in terms of prices as compared to other GCC countries. Omani land is cheaper than the other GCC countries. This gives the country an advantage in attracting investments from other prosperous GCC countries. As per MEED, at the end of 2008 US$105bn worth of projects has been announced by Oman. On a conservative note even if 50% of the projects go as per schedule atleast US$52.5bn worth of projects would continue as per schedule. Table 03: Oman Cement Demand Expectations Overall Project Announcements in Oman ( ) (US$mn) 105,000.0 Assumed Actual Implementation 50% 52,500.0 Expected Building & Construction Related Projects 40% 21,000.0 Cement Revenue as % of Build & Cons Sector in GCC 12% 2,520.0 Cement Price per Ton as of 2008 in Oman (US$/Ton) 81.5 Resulting Cement Demand ( ) (mn Tons) 30.9 Annual Cement Demand (mn Tons) 4.4 Source: MEED & Global Research

6 These projects include various civil, industrial, infrastructure, real estate and construction related projects. Hence of the total if we assume 40% are related to infrastructure, building and real estate related construction projects the total amount of the project would be US$21bn. In the past, cement sector revenues of the GCC have averaged around 12% of the total building and construction sector contribution in the nominal GDP. Hence by calculating the total value of cement in the coming 7 years till 2015, it reveals that Oman would have a minimum cement demand of atleast 4.4mn tons per annum. Cement production of Oman has increased from 2.51mn tons in 2003 to 4.12mn tons in On the other hand cement sold by Omani companies in the country was 4.05mn tons in 2008, which means that the demand and supply situation is running neck to neck. Chart 04: Oman Demand Supply Scenario (mn tons) F 2010F 2011F Supply Demand Surplus / (Gap) Source: Global Research Going forward, with the economic slowdown and lower oil prices we expect Oman cement sector to continue this stiff competition between supply and demand and later on would turn in to a surplus as one of the cement players capacity is expected to come online in Per Capita Cement Consumption in Oman The cement consumption in Oman is directly linked to the scope of infrastructure developments undertaken by the government in recent years. Cement consumption and prices have therefore been highly sensitive to the volume of government-backed construction work in the Sultanate, as supply constraints on locally produced clinker has persisted throughout the past few years. Omani per capita cement consumption is relatively lower than its regional players. UAE takes the lead with per capita cement consumption of more than 3,800kg. Qatar ranks 2nd with per capita cement consumption of more than 2,200kg. In 2006, per capita consumption of Oman surpassed 1000kg mark and is currently standing at 1,499kg at the end of Looking at the pace of development in the country and expected future demand, it is expected that per capita consumption would reach 1,662kg by 2012.

7 Chart 05: Per Capita Cement Consumption & Growth per Capita 1,600 1,400 1,200 1, Per Capita Cement Consumption Growth Source: Company Reports & Global Research 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Majority of the export share has been taken up by Raysut Cement. Oman Cement exports has increased from mere 641ktons in 2003 to as high as 1.2mn tons in 2006 and back to 807ktons in Local and Export Cement Prices Cement prices in Oman continued to increase despite government intervention over the prices. Average realizations for both the companies rose during On an average (local and export price) cement prices for Oman rose from US$71.5/ton to US$81.5/ton. Local cement price on average rose from RO27.5/ton in 2007 to RO31.5/ton in Chart 06: Local & Export Prices (RO/Ton) OCC - Local Price OCC - Export Price Source: Company Reports & Global Research * Amount of export revenue not available before 2006 for OCC RCC - Local Price RCC - Export Price RCC which exports majority of its produce realized higher local prices of RO33/ton as compared to that of OCC at 29.7/ton. On the other hand average export rose from RO30.5/ton in to RO34.5/ton in RCC which exports majority of its produce realized lower export prices of RO32.3/ton as compared to that of OCC at 36.5/ton. Local and export cement prices has reported a CAGR of 6.8% and 7.3% respectively during Government has put certain restrictions on the selling prices of cement. However, the rising cost of inputs in the form of clinker and other important inputs such as services and manpower, may have adverse impact on the future performance of the cement industry in general and OCC in particular. Going forward in 2009 alone we expect the cement price to remain relatively lesser as compared to that of 2008 mainly because of economic slowdown. In the medium to long term we expect prices to recover 2010 onwards.

8 Financial Performance of the Sector Financial performance of the Omani cement sector has remained satisfactory. Combined revenues of the two listed companies increased at a CAGR of 28% during During 2008 alone, the revenue increased by 35% to RO152.6mn as compared to RO112.9mn in Surge in revenue was because of the increase in average realization prices from US$71.5/ ton to US$81.5/ton in 2008 and also because of rise in selling volumes from 4.1mn tons to 4.86mn ton in Cost of sales on the other hand doubled to RO107mn from RO52.7mn in Increase in cost was because of increase in the usage and price of imported clinker and high cost of imported cement. As a result of this gross profit declined by 24% to RO45.5mn (Gross Margins: 30%) as compared to RO60.2mn (Gross Margins: 53%) at the end of Table 04: Oman Cement Sector (RO 000) Sales Revenue 43,721 55,403 71,962 97, , ,603 Cost of Sales 24,578 27,667 36,148 44,604 52, ,142 Gross Profit 19,142 27,736 35,814 53,081 60,184 45,461 Non Core Income 2,395 2,363 4,011 5,211 9,917 3,178 Operating Expense 4,895 5,952 7,163 10,896 13,576 19,108 Operating Profit 13,859 21,236 27,950 41,264 45,455 42,017 Financial Charges 1, Net Profit 13,752 20,208 28,179 41,214 47,739 39,648 Assets 127, , , , , ,631 Equity 89, , , , , ,985 Debt 18,030 15,050 22,603 17,652 9,796 5,696 Liabilities 38,886 37,987 50,240 52,490 45,516 34,646 Source: Company Reports & Global Research Operating expenses increased by 31% to RO19.1mn as compared to RO13.5mn in Increase in operating expense was due to the higher man power cost and also due to higher land lease rentals. With such high operating expense, operating profit reportedly dropped to RO42mn (Operating Margins: 28%) in 2008 as compared to RO45.5mn (Operating Margins: 40%) in The sector is less leveraged and equity amount to 86% of the total assets. Because of less reliance on debt, the financial charges of the sector has dropped to RO0.074mn as compared to RO.101mn in On the other side, other income of the sector which is earned through return on cash balances, foreign exchange transactions, dividend income and result from associates dropped to RO3.1mn as compared to RO9.9mn at the end of On the whole cement sector earnings of Oman reported a CAGR 23.6% during In 2008, net earnings of the sector were RO39.6mn as compared to RO47.7mn in 2007, a drop of 17%. The sector was able to post net margins of 26% in 2008 as compared to 42% recorded in the previous year. The sector posted a revenue growth of 35% whereas cost of sales on the other hand escalated to 103%, a number never touched before and expected not to do so in the years to come.

9 Table 05: Oman Cement Sector Ratios Revenue Growth (%) N/A 27% 30% 36% 16% 35% Cost Growth (%) N/A 13% 31% 23% 18% 103% Asset Growth (%) N/A 10% 34% 16% 13% 1% Gross Margins (%) 44% 50% 50% 54% 53% 30% Non Core Income as % of PAT 17% 12% 14% 13% 21% 8% Operating Margins (%) 32% 38% 39% 42% 40% 28% Net Margins (%) 31% 36% 39% 42% 42% 26% Debt as % of Assets (%) 14% 11% 12% 8% 4% 2% Liabilities as % of Assets (%) 30% 27% 27% 24% 18% 14% Equity as % of Assets (%) 70% 73% 73% 76% 85% 86% Return on Equity (%) 15% 20% 20% 25% 23% 18% Return on Assets (%) 11% 14% 15% 19% 19% 16% Source: Company Reports & Global Research Other income earned by the sector contributed 8% to the overall profits of the sector in 2008 as compared to 21% in Drop in the contribution was because of lesser amounts earned through investment portfolio and share of profit from associates. With assets and equity of RO250.5mn and RO216mn, the sector with net income of RO39.6mn was able to give return on assets and return on equity of 16% and 18% respectively. Table 06: Oman Cement Sector Statistics Cement Produced in Oman (000 Tons) 2,515 2,621 2,686 3,609 3,875 4,121 Cement Sold in Oman (000 Tons) 1,889 1,847 2,173 2,589 3,072 4,057 Cement Exports from Oman (000 Tons) ,210 1, Price per Ton in Oman (US$) Cost per Ton in Oman (US$) EV/Ton (US$) Per Capita Cement Consumption (Kg) ,005 1,157 1,499 Source: Company Reports & Industry Sources Enterprise value per ton of the companies rose at a CAGR of 21.8% during However with the decline in the equity markets, the enterprise values declined for both the companies by over 50%. Enterprise value per ton of Oman Cement dropped to US$133 in 2008 as compared to US$305 in While the same for Raysut Cement dropped to US$207 in 2008 as compared to US$442 in 2007.

10 Oman Cement Sector in Charts 61% 55% 49% 43% 37% 31% 25% Gross Margins (%) % 21% 17% 13% 9% 5% Non Core Income as % of PAT % Operating Margins (%) 45% Net Margins (%) 40% 40% 35% 35% 30% 30% 25% 25% 20% % % 5% 4% 3% 2% 1% 0% Financial Charges as % of Loan % 12% 9% 6% 3% 0% Debt as % of Assets EV/Ton (US$) % 86% 82% 78% 74% 70% 66% Equity as % of Assets % Return on Equity (%) 20% Return on Assets (%) 23% 18% 21% 16% 19% 14% 17% 12% 15% % Source: Company Reports & Global Research 10

11 Sector Outlook Oman s 2008 budget surplus soared to RO1.58bn (US$4.1bn) in 2008 compared to RO40.2mn a year earlier as the country s oil revenues jumped up on record-high oil prices. Total state 2008 revenues stood at RO7.9bn compared to RO5.9bn a year earlier while expenditure rose to RO6.4bn in 2008 compared to RO5.9bn a year earlier, according to Ministry of National Economy. Such high revenues would give room to the country for further development and project announcements. Domestic cement demand is expected to remain robust during 2009, fuelled in large part by planned investments in major infrastructure projects, integrated tourism and residential complexes, and general housing growth. The project line-up included the six domestic airports at Sohar, Ras al Hadd, Duqm, Shaleem, Adam and Haima; port developments at Sohar and Duqm; the tourism and residential developments in Ras al Hadd, Sifah, Yiti and Taqah; and the Batinah coastal road rehabilitation program. In fact, up to 10% of the estimated RO800mn in allocations towards infrastructure projects, announced by the government in its 2009 budget, would go towards cement purchases alone. Significant cement demand will also be generated when many Omanis, keen to have their own homes, embark on the development of their government-allotted residential plots. Around 196,000 plots were distributed during the period, against which only around 37,000 building permits have been issued so far. This leaves some 160,000 plots awaiting potential development, not counting the scores of allotments that authorities have began to make to a broader segment of Omani women. Nevertheless, supply would outstrip demand and would create a surplus situation which would put pressure on the cement companies in the country. This surplus would increase the cement players reliance on exports which would be flooded with excess capacity from Pakistan, India and Saudi Arabia. India and Pakistan have relatively lesser room for cutting their prices which in turn can be taken up Omani companies as their gross margins are higher than those of Pakistani and Indian cement companies. Along with that, after the clinker expansion are carried out the cost would give more room for the Omani companies to breach the export market share of other cement companies. 11

12 Revenue to Grow Post Expansion In 2008, the revenue increased to RO63.5mn as compared to RO49.9mn at the end of Such a growth was possible because of higher production and sales volume as well as better realization prices. The clinker produced during the year 2008 was 1.18mn tons as against 1.15mn tons produced during the corresponding period of This represents 98.5% ( %) capacity utilization. While the cement produced during the year 2008 was 2.003mn tons which is 7.4% higher than 1.87mn tons produced during the previous year During the year 264,728ktons of cement was procured as per the instructions of Ministry of Commerce & Industry to meet the local market demand. OCC sales volume increased by 14.6% to 2.1mn tons as compared to 1.87mn tons in Out of the total 2.1mn, local sales volume were 2.07mn tons whereas the exports were down from previous levels of 2007 at 91,251tons to 81,285tons. On the other hand local sales price increased by 12.2% to RO29.7/ton whereas the export price increased by 11.6% to RO36.5/ton. Chart 07: Sales Revenue % (F) 2010 (F) 2011 (F) 2012 (F) Revenue (RO mn) Growth Source: Company Reports & Global Research In 2009, we expect the economic slowdown locally as well as regionally to impact the company which will result in lower sales revenue for the year. We expect a nominal drop in volumes with a 2-3% drop in the local as well as export price. Going forward, we expect OCC to report a CAGR growth of 7.2% during After 2009, we expect the things to come back on track and expect an increase in volume as well as price mainly because of expected economic recovery globally as well as regionally and initiation of delayed and halted projects. Along with that the company would have higher clinker and cement capacity which would enable it to roll out more volumes of cement. Cost Pressure to Ease Cost of the sales increased at a CAGR of 25.3% during In 2008, cost of sales increased by 69% to RO49.65mn. The increase in cost was due to high purchase cost of cement and clinker imported under instructions from the government in order to meet the local demand. The company imported 0.92mn tons of clinker during the year to meet the 35% 30% 25% 20% 15% 10% 5% 0% 12

13 demand, which is 42% higher as against 0.53mn tons during the previous year. On the other hand in 2008 the company also imported 174k tons of cement to meet the shortfall locally. Chart 08: Gross Profit & Margins (F) 2010 (F) 2011 (F) 2012 (F) Gross Profit (RO mn) Gross Margins Source: Company Reports & Global Research 53.0% 48.0% 43.0% 38.0% 33.0% 28.0% 23.0% 18.0% In 2009, we expect the company would follow the same trend and would continue to import significant amount of clinker at 0.6mn tons and 0.15mn tons of cement to meet their local requirements. Later on we expect the company cost pressure to ease off and anticipate it to increase at a CAGR of 5.4% during Lesser growth in the cost would be due to availability of new clinker capacity which would halt the import of high cost clinker. As a result of availability of additional clinker capacity after 2009 we expect the company s gross profit to increase at a CAGR of 12.9% during as compared to a CAGR growth of 5.8% during OCC enjoyed higher gross margins during averaging around 43%. Such margins would be harder to achieve in the coming years as the but nevertheless OCC s margins would be significantly better than what were reported in Loans & Financial Charges In 2008, OCC financial charges increased to RO66.5k as compared to RO23.0k in While the loan balance declined to RO0.9mn in 2008 from RO2.2mn recorded in the previous year. With the announcement of the expansion by OCC and the need of financing the Company will be partly utilizing loan funds. The total contract value for the Expansion Project is RO62.7mn (US$162mn) out of which RO20mn of the project cost is to be met from loans. Chart 09: Loans & Financial Charges (RO mn) (F) 2010 (F) 2011 (F) 2012 (F) Loans - RHS Financial Charges - LHS Source: Company Reports & Global Research

14 Previously the company has acquired three loan facilities of which the first one from Government of the Sultanate of Oman is interest free and amounts to RO0.9mn. The loan is secured by a first mortgage over the assets of the parent company and the assignment of the insurance policy over plant and machinery as a first beneficiary and is being repaid in annual installments of RO 300,000 which commenced in December Non-Core Income In 2008, OCC non-core income increased by 68% to RO3.2mn as against RO1.91mn in This non-core income portion has over the years added significant amount to the bottom line. In 2008, non-core income as percentage of profit after tax was 26% as compared to 11% in Chart 10: Non-Core Income (F)2010 (F)2011 (F)2012 (F) Non-Core Income (RO mn) Non-Core Income as % of PAT Source: Company Reports & Global Research 30% 25% 20% 15% 10% 5% Going forward, we expect the non-core income portion to continue to cushion the bottom line of the Company and grow at a CAGR of 14.7% during OCC s subsidiary Oman Mondi Shuaiba Packaging has also turned profitable in 2008 and would be adding good amounts to the total. Net Profit In 2008, OCC reported profit before tax of RO14.1mn which was subject to 12% income tax resulting in a profit after tax of RO12.5mn as compared to RO17.6mn in In 2008, the company managed to report net margins of 19.74% as against 35.3% recorded in the previous year. In terms of quarterly performance of 2008, 1Q-2008 was the most favorable quarter as the company report profit after tax of RO3.9mn and net margins of 34%. Although in the last quarter the company report highest ever revenue but was not able to full transfer it to the bottom line as the net margins were merely 9% in 4Q

15 Chart 11: Net Profit (F)2010 (F) 2011 (F) 2012 (F) Net Profit (RO mn) Net Margins (%) Source: Company Reports & Global Research 45% 40% 35% 30% 25% 20% 15% 10% 5% Going forward, we expect OCC to report net profit CAGR of 15.1% during Increase in net profit in the coming years would be on account of increase in the revenue because of the availability of additional clinker capacity and rolling out of higher sales volume. Asset growth to continue In 2008, the asset declined marginally to RO133mn as compared to RO134.3mn in The major reason for the fall in assets in 2008 was because of decline in the investment available for sale. Investment available for sale dropped to RO15.2mn as compared to RO21.0mn in Nevertheless the cost of available for sale investments is merely RO8.0mn which portrays that the Company is still profitable on its investments. Company s shareholders equity decreased a marginal 1.5% to RO117.9mn. The decrease was due to 44.5% decline in fair value reserves to RO7.2mn compared to RO13.07mn in The adjusted book value per share (BVPS) marginally fell to compared to in The company s current liabilities increased by 21% to RO9.32mn with its share in total assets rising from 5.8% in 2007 to 7.0% in This was led by a 66.3% rise in trade and other payables to RO7.1mn in During the same period, non-current liabilities decreased 15.2% to RO5.7mn with its share in total assets falling to 4.3% in Chart 12: Asset (F) 2010 (F) 2011 (F) 2012 (F) Assets (RO mn) Equity as % of Assets Liability as % of Assets Source: Company Reports 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% The share of current assets in the total assets increased to 31.6% in 2008 compared to 23.7% in the previous year. Inventories, contributing 11.5% to the total assets, rose to RO15.2mn in 2008 as imported clinker and finished cement mounted. 15

16 Going forward, we expect OCC to report a CAGR of 5.3% during The liabilities of the company are going to rise on account of requirement of loan for funding the expansion. We expect current ratio of debt as a % of assets to increase from 1% in 2008 to 5% in Performance of the Subsidiaries The company has two subsidiaries which are: Oman Mondi Shuaiba Packaging and Sohar Praton and Concrete Products (SPCP). In 2008, The company divested its investments in the associate, M/s. Al Batna Quarries Co. LLC and sold all its 50,000 shares bought at a price of RO50,000 (20% stake) at a premium price of RO80,000. On the other hand, Oman Mondi Shuaiba Packaging reported an improved performance during the year Revenue earned by the company increased from RO3.5mn to RO6.5mn in Such performance resulted in a profit after tax of RO156,678 in 2008 as against a loss of RO59,414 in Chart 13: Oman Mondi Shuaiba Packaging (RO mn) Revenue (LHS) Profit (RHS) Source: Company Reports (RO 000) (50) (100) (150) Sohar Praton Concrete Products Company SAOC (the subsidiary), a 58.4% subsidiary, is a closely held joint stock Company registered in the Sultanate of Oman and is engaged in manufacturing and marketing pre-cast ready mixed concrete products. On 12th March 2008, Sohar Praton Concrete Products Company went into liquidation and consequently, the parent company s control of the subsidiary passed to the liquidator. Accordingly, the subsidiary is deconsolidated with effect from 12 March Capacity Expansion OCC announced further expansion of 1.2mn tons in clinker capacity for which a contract has been signed with M/s. China National Building Material Equipment Corporation Ltd., China (CNBMEC). The duration for construction and erection of the project is 25 months as per the contract and the project is expected to be completed in December 2009/1st Quarter of In order to finance the Expansion Project, OCC will be partly utilizing loan funds. The total contract value for the expansion project is RO62.7mn (US$162mn) and RO20mn of the project cost is to be met from loans. This expanded capacity is expected to help in achieving high local market share and to target export markets for both grey Portland cement and the specialized Oil-Well Cement. 16

17 Chart 14: Clinker Capacity Enhancement Source: Company Reports The company also signed contract for execution of civil works of the project for up gradation and modernization of Packing Plant has been signed with M/s. China National Building Material Equipment Corporation Ltd., China (CNBMEC) and the project is anticipated to be completed in the 2nd quarter of

18 Chart Gallery - 45% Gross Margins (%) 10.0 EV/EBITDA (x) 40% 35% 30% 25% 20% % F 2010F 2011F 2012F F 2010F 2011F 2012F 40% Net Margins (%) 5.00 EV/Revenues (x) 35% % % % % F 2010F 2011F 2012F F 2010F 2011F 2012F 16% Return on Average Assets (%) 20% Return on Average Equity (%) 14% 18% 12% 16% 10% 14% 8% 12% 6% F 2010F 2011F 2012F 10% F 2010F 2011F 2012F Debt as % of Assets (%) 30% Non Core Income as % of PAT (%) 5% 4% 3% 2% 26% 22% 18% 1% 14% 0% F 2010F 2011F 2012F 10% F 2010F 2011F 2012F 2.0 P/Bv Ratio (x) 14.0 P/E Ratio (x) F 2010F 2011F 2012F F 2010F 2011F 2012F Source: Company Reports 18

19 Outlook In 2008 OCC imported clinker and cement to meet local demand under directions of the government, a claim for reimbursement of shortfall in profits below a base level of RO16.1mn after tax will be made during 2009 with the government. OCC has also entered into discretionary portfolio management agreements with two companies appointing them as portfolio managers to handle part of its investments in shares which as of 2008 amount to RO19.5mn. Chart 15: OCC s - FCF (RO mn) & FCF to Sales (%) (5.0) (10.0) (15.0) (20.0) -30% (F) 2010 (F) 2011 (F) 2012 (F) FCF FCF/Sales Source : Company Reports & Global Research -10% -20% The company expanded its share of the Oil Well Cement market in the MENA region in 2008 as more and more drilling companies preferred to standardize on the company s products because of high quality and consistent performance in cementing operations of oil wells. Considering the market demand of new types of cement, OCC has planned to introduce three new products in the year According to OCC, the expected demand for cement in Oman is estimated at 4.63mtpa during In order maintain its market share, OCC installed an additional cement mill of 3,000tpd and is in the process of further expansion by installing new production line of 4,000tpd clinker capacity to meet the competition. With the neck to neck demand supply situation the expansion would pave the way towards a profitable future. 50% 40% 30% 20% 10% 0% 19

20 Valuation & Recommendation DCF Method In order to compute the cost of equity for the Discounted Cash Flow (DCF) method, we have used the Capital Asset Pricing Model (CAPM). The following assumptions have been made in order to arrive at the DCF value of Oman Cement Company. A risk-free rate of 4.50% has been assumed. A market risk premium of 6.0% has been assumed. The beta of the company was quite low when computed on the basis of monthly returns over 5 years to end-march 2009, hence we have taken beta of 1. The cost of equity derived from the above assumptions using the Capital Asset Pricing Model (CAPM) is 10.51%. The cost of debt taken is 6%. Based on the above assumptions, the Weighted Average Cost of Capital (WACC) works out to be 9.61%. Terminal growth rate of 3.0% has been assumed. Based on our future earnings projections and the above assumptions for DCF computations, the DCF value of Oman Cement is RO0.769 per share. Table 07: Oman Cement - Equity Valuation by DCF (RO mn) 2009 (F) 2010 (F) 2011 (F) 2012 (F) Free Cash Flow (3.61) Discounted Cash Flow (3.38) Terminal Value WACC 9.6% Terminal Growth Rate 3.00% Primary Value 26.6 Discounted Terminal Value Value of Investments 46.5 (As at December 2008) Cash 4.7 (As at December 2008) Debt 0.9 (As at December 2008) Equity Value No. of Equity Shares Outstanding (mn) Per Share Value (RO) Source : Global Research 20

21 Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and weighted cost of capital (and, thereby, the underlying betas) is shown in table below. The table provides estimated fair values for OCC s shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives. Table 08 : Oman Cement - Sensitivity Analysis WACC Source: Global Research Relative Valuation Method Terminal Growth Rate 1.0% 2.0% 3.0% 4.0% 5.0% 7.6% % % % % The peer group valuation is performed to compare the intrinsic value of Oman Cement arrived at using the DCF calculation. In order to value Oman Cement using this method, we have used the weighted average price-to-earnings (P/E) multiple for the Oman cement industry, comprising and Raysut Cement Company. The price-earnings multiple of a stock is a reflection of various factors, such as the expected profitability of the company, its growth potential as perceived by the market, predictability and sustainability of its revenues, the quality of its earnings and the quality of its management, among others. To arrive at the peer-set P/E multiple, we have computed the average industry P/E of the two listed cement companies in Oman, based on their current market prices and projected earnings for The weighted average P/E for the GCC cement industry, thus arrived at, is 8x. On the basis of the weighted average P/E for the industry and Oman Cement s projected 2008 earnings, the company s stock valuation comes to RO0.303per share. However, as the price-earnings multiple varies with time and is dependent on several factors, such as market sentiment and other qualitative factors, we have provided a lower weightage of 20% to the peer valuation method, and 80% weightage to the value arrived at using the DCF method. Valuations The value of OCC s shares derived from the weighted average of the DCF and relative valuation methods is RO0.676 per share. The stock closed at RO0.372 on the Muscat Securities Market at the end of trading on 13th April 2009, which implies that the weighted average value of OCC s shares is at a premium of 82% to the share s current market price. Table 09 : Weighted Average Share Value of Oman Cement (RO) Weightage Fair Value As per DCF Method 80% As per Relative Valuation 20% Weighted Average Share Value Source: Global Research At their current price, OCC s shares have a P/E multiple of 10.6x and 7.2x for 2009 and 2010 respectively. We therefore reiterate our BUY recommendation on the scrip. 21

22 BALANCE SHEET (RO) (F) 2010 (F) 2011 (F) 2012 (F) Cash & Cash Equivalents 1,062,128 2,214,961 4,609,866 4,254,620 5,840,876 6,246,713 6,747,207 Bank Balances 77,579 77, , , , , ,173 Trade Receivables 4,938,447 4,769,308 5,568,367 5,197,290 6,511,501 7,639,488 9,269,955 Other Receivables 1,681,087 1,311,876 1,541,038 1,732,430 2,034,844 2,400,982 3,244,484 Inventories 5,159,343 4,327,600 15,243,498 13,643,836 11,938,053 14,327,325 16,777,505 Short-term Deposits 6,620,000 18,085,650 14,570,000 13,113,000 11,801,700 12,745,836 13,765,503 Held to Maturity Investments 1,131,965 1,050, , , , , ,453 Total Current Assets 20,670,549 31,836,974 42,056,726 38,422,855 38,646,704 43,921,929 50,412,281 Held to Maturity Investments 4,654,936 3,607,819 3,190,494 2,871,445 3,158,589 3,474,448 3,821,893 Long-term Deposits 34,199,661 19,045,080 12,390,075 11,151,068 12,266,174 13,492,792 14,842,071 Employee Loans 54,012 13,464, Investments in Associates 283, , , , , , ,259 Investments Available-for-Sale 13,434,089 21,066,192 15,286,514 13,757,863 15,133,649 16,647,014 18,311,715 Gross Fixed Aassets 106,606, ,717, ,942, ,947, ,947, ,947, ,947,149 Less: Accumulated Depreciation 57,573,788 61,084,969 64,512,246 68,850,221 73,818,371 79,241,522 84,804,672 Net Fixed Assets 49,032,727 44,633,011 59,429,903 73,096,928 81,128,778 79,705,627 77,142,477 Total Assets 122,329, ,264, ,987, ,952, ,051, ,031, ,398,696 Liabilities Short-term Loan 477, , ,000 3,800,000 3,420,000 3,078,000 2,770,200 Bank Borrowings 77, , Trade Payable 1,836,064 1,776,584 2,592,012 2,728,767 2,984,513 3,183,850 3,355,501 Other Payables 1,990,150 2,506,350 4,531,318 4,775,342 5,222,898 5,571,738 5,872,127 Provision for Taxation 3,092,798 2,617,511 1,896,380 1,706,742 1,536,068 1,382,461 1,244,215 Total Current Liabilities 7,474,020 7,734,147 9,319,710 13,010,852 13,163,479 13,216,049 13,242,043 Deferred Taxation 4,395,296 4,202,684 3,873,740 2,351,169 3,447,678 3,768,503 4,426,535 Medium-Term Loan 2,043,312 1,522, ,000 2,600,000 2,340,000 2,083,735 1,827,470 Employee Indemnity Provision 878,286 1,040,494 1,262,327 1,312,820 1,404,717 1,503,048 1,608,261 Proposed Dividend 11,580,545 8,933,563 7,279,200 8,271,818 13,234,908 16,543,636 19,852,363 Paid-up Capital 33,087,271 33,087,271 33,087,271 33,087,271 33,087,271 33,087,271 33,087,271 Share Premium 6,724,145 6,724,145 6,724,145 6,724,145 6,724,145 6,724,145 6,724,145 Statutory Reserve 11,029,090 11,029,090 11,029,090 11,029,090 11,029,090 11,029,090 11,029,090 Voluntary Reserve 13,633,203 15,434,896 16,543,635 17,705,592 19,406,565 21,265,609 23,449,257 Fair Value Reserve 6,528,991 13,065,099 7,250,172 5,721,521 7,097,307 8,610,672 10,275,373 Retained Earnings 24,553,580 31,437,046 35,985,915 38,171,707 40,245,560 40,433,319 40,233,788 Revaluation Surplus 53,880 53,880 31,820 31,820 31,820 31,820 31,820 Total Shareholder s Equity 95,610, ,831, ,652, ,471, ,621, ,181, ,830,744 Total Liabilities & Equity 122,329, ,264, ,987, ,952, ,051, ,031, ,398,696 Source: Company Reports & Global Research 22

23 INCOME STATEMENT (RO) (F) 2010 (F) 2011 (F) 2012 (F) Sales Revenue 49,710,230 49,911,507 63,522,594 63,233,698 74,271,809 79,668,943 84,588,343 Cost of Sales (26,757,379) (29,460,849) (49,652,665) (49,800,000) (54,467,368) (58,105,263) (61,237,895) Gross Profit 22,952,851 20,450,658 13,869,929 13,433,698 19,804,441 21,563,680 23,350,449 General & Administrative Expenses (2,020,866) (2,638,844) (2,898,425) (2,845,516) (3,342,231) (3,585,102) (3,806,475) Operating Profit 20,931,985 17,811,814 10,971,504 10,588,182 16,462,210 17,978,578 19,543,973 Finance Charges (74,778) (23,022) (66,517) (233,501) (230,251) (262,098) (263,684) Other Income 38, , , , , , ,176 Interest Income 1,682,953 2,259,010 1,626,176 1,463,558 1,609,914 1,770,906 3,718,902 Dividend Income 624, , , , , , ,968 Share of Result of Associates (27,782) (16,616) 47,003 54,053 62,161 71,486 82,209 Impairment Loss in an Associate/Asset - (1,219,299) Profit Before Taxation 23,174,851 19,696,342 14,108,034 13,121,702 19,212,418 20,998,093 24,664,544 Taxation (2,742,763) (2,425,928) (1,567,435) (1,567,446) (2,298,452) (2,512,336) (2,951,023) Minority Interest 123, ,309-65,310 95, , ,959 Net Profit 20,555,920 17,618,723 12,540,599 11,619,566 17,009,735 18,590,438 21,836,480 P&L Appropriation Account: Op Balance of Retained Earnings 17,633,797 24,553,580 31,437,046 35,985,915 38,171,707 40,245,560 40,433,319 Adjustments , Net Profit for the year 20,555,920 17,618,723 12,540,599 11,619,566 17,009,735 18,590,438 21,836,480 Transfer to Voluntary Reserve 2,055,592 1,801,693 1,108,739 1,161,957 1,700,973 1,859,044 2,183,648 Proposed Dividend 11,580,545 8,933,563 7,279,200 8,271,818 13,234,908 16,543,636 19,852,363 Closing Balance of Retained Earnings 24,553,580 31,437,046 35,985,915 38,171,707 40,245,560 40,433,319 40,233,788 Source: Company Reports & Global Research 23

24 CASH FLOW STATEMENT (RO) (F) 2010 (F) 2011 (F) 2012 (F) Operating Operating Activities 25,280,514 21,959,295 16,380,673 12,220,294 20,735,736 21,799,646 23,490,274 Net Profit 20,555,920 17,618,723 12,540,599 11,619,566 17,009,735 18,590,438 21,836,480 Deferred Tax Liability 2,742,763 2,425,928 - (1,522,571) 1,096, , ,031 Tax Paid - - 1,567,435 (189,638) (170,674) (153,607) (138,246) Depreciation 3,689,029 3,862,787 3,950,036 4,337,975 4,968,150 5,423,150 5,563,150 Impairment of Assets - 784, Interest Income (1,682,953) (2,448,701) (2,153,151) (1,463,558) (1,609,914) (1,770,906) (3,718,902) Dividend Income (624,406) (694,764) (948,424) (726,109) (722,288) (794,517) (873,968) Finance Charges 12,271 80,825 66, , , , ,684 Proposed Remuneration to Directors 110, Amortization of Bond Premium (2,090) (2,884) (5,457) Other Amortizations - 270, Share of Results of Associate Cos. 27,782 16,616 (47,003) (54,053) (62,161) (71,486) (82,209) Gain on Sale of Property, Plant and Equip - - (3,820) Gain from Sale of Investments - - (50,649) Provisions for Stores, etc. 486, ,574 1,204, Minority Interest (123,832) (348,309) - (65,310) (95,769) (104,681) (122,959) Indemnity 89, , ,039 50,493 91,897 98, ,213 Working Capital 537,122 1,386,846 (10,149,386) 2,160, ,459 (3,335,220) (4,452,110) Dec/(inc.) in Receivables 640,132 - (1,119,479) 179,685 (1,616,625) (1,494,124) (2,473,970) Dec / (inc) in Inventories 658, ,169 (12,120,449) 1,599,662 1,705,782 (2,389,272) (2,450,180) Inc/(dec) in Accounts Payable (1,153,875) 456,720 3,114, , , , ,651 Inc/(dec) Other Current Liabilities 391, , , , ,389 Inc/(dec) Other Current Assets - 269,957 (23,594) Income Tax Paid (2,745,845) (3,093,827) (2,617,511) Financial Charges Paid (88,000) (80,825) (66,517) Employee Benefits Paid (67,990) (59,967) (32,803) Total Operating 22,915,801 20,111,522 3,514,456 14,380,421 21,528,195 18,464,426 19,038,164 Investing Capex (236,105) (518,396) (19,807,857) (18,005,000) (13,000,000) (4,000,000) (3,000,000) Advance for Purchase of PPE (7,078,035) , Dividend Income 1,405, , , , ,968 Maturity of Long-Term Loans 4,664,981 1,131,966 1,050, Interest Income - 2,714,280 2,215,150 1,463,558 1,609,914 1,770,906 3,718,902 Dividend Received 622, , , Loans ,328 (325,195) (357,715) (393,486) Recall of Short-term Deposits 17,196, Long-term Deposits (9,617,320) 3,688,931 10,170,655 1,239,008 (1,115,107) (1,226,617) (1,349,279) Proceeds from Disposal of Property - - 3, Short-term Deposits (20,815,000) (13,407,717) 13,489,140 1,457,000 1,311,300 (944,136) (1,019,667) Investments in Associates/Subsidiaries (115,624) (343,728) 80,000 22,990 (3,072) (271) 3,276 Investments Available for Sale - (1,095,995) (35,249) IPOs & Rights Issue Subscriptions (523,007) Capital Reduction in AFS Investments 2, Total Investing (14,493,470) (7,135,895) 8,114,083 (12,722,966) (10,799,872) (3,963,317) (1,166,286) Financing Cash Flow from Discontinued Operations - 57, Rights Issue of Shares 181, Dividend (8,271,818) (11,580,545) (8,933,563) (7,279,200) (8,271,818) (13,234,908) (16,543,636) Term-loan Repayments (259,550) (300,000) (300,000) 5,500,000 (640,000) (598,265) (564,065) Finance Charges (12,271) - - (233,501) (230,251) (262,098) (263,684) Total Financing (8,362,389) (11,822,794) (9,233,563) (2,012,700) (9,142,068) (14,095,271) (17,371,384) Net Change in Cash 59,942 1,152,833 2,394,975 (355,245) 1,586, , ,494 Net Cash at Beginning 1,002,186 1,062,128 2,214,961 4,609,866 4,254,620 5,840,876 6,246,713 Discontinued Operations - - (71) Net Cash at End 1,062,128 2,214,961 4,609,866 4,254,620 5,840,876 6,246,713 6,747,207 Source: Company Reports & Global Research 24