Corporate Earnings Estimates - 3Q17

Transcription

1 Omani Coverage Universe Corporate Earnings Estimates - 3Q17 U Capital Research research@u-capital.net Tel: /35/36 1

2 Earning Estimates 3Q17e Company Name Current Market Price (OMR) YTD Chg. (%) Market Cap (OMR mn) Net Profit (OMR mn) YoY % QoQ % Revenue (OMR mn) YoY % QoQ % P/E 2017e (x) P/Bv 2017e (x) Div. Yld 2017e (%) Banking Bank Muscat % 1, % 6.7% % 3.6% % National Bank of Oman % % 11.8% % 3.7% % Bank Dhofar % % 7.2% % 5.1% % Bank Sohar % 5.8% % 6.1% % Ahli Bank % % -6.7% % 0.9% % HSBC Oman % 59.8% % -4.6% % Bank Nizwa % % % 9.7% Alizz Islamic Bank % 71.0 (1.18) % 1.4% nm 0.65 Leasing Al Omaniya Fin Services % % -2.6% % -3.1% % Muscat % % -9.0% % -1.8% % Taageer % % -10.7% % -1.4% % United % % 36.8% % 0.2% % Cement Oman Cement Ltd % % -3.3% % -6.5% % Raysut Cement Ltd % % 57.5% % -3.7% % Telecom Omantel % % 8.9% % -0.7% % Ooredoo Oman % % 3.6% % -1.0% % Others Voltamp Energy % % -1.4% % -5.0% % Oman Cables % % % 0.7% % Al Jazeera Steel % % 37.4% % 7.1% % Source: Bloomberg & U Capital, Price as of 02-Oct-17 *nm = not meaningful 2

3 Banking Sector Outlook CBO s July 17 data indicates that conventional credit in Oman grew to OMR 20.05bn, +3.5%YoY and -0.3%MoM, indicating slower than expected growth. Previously, we expected credit growth in Oman to remain within the 6-7% bracket for conventional banking, but now we have reduced it to about 5-%YoY, on the back of a challenging operating environment amidst poor macroeconomic indicators. Islamic credit, however, grew by 30%YoY and 1%MoM, to reach OMR 2.78bn. We believe that growing demand for Islamic finance products amongst the Omani population will further constrain conventional credit growth. Within the listed Omani banks, Bank Muscat, Bank Dhofar & Ahli Bank have rapidly built up Islamic windows, which are showing superior performance. Other conventional banks, however, lag in Islamic credit growth. The primary constraint for lending growth is our expectation of an inhibited liquidity situation driven by reduced revenues of an oildependent economy. Recent sovereign borrowings have somewhat assisted in easing liquidity levels, but the effect is expected to be largely tidal as the Government continues to tread on its economic diversification path, requiring unyielding support from the domestic banking sector. Deposit growth for conventional banks hovered at +2.3%YoY and +0.7%MoM in July 17, with Loan-to-Deposit Ratio (LTD) still stretched beyond 100%, having fallen slightly to 106.4% as compared to the previous month. Consequently, we expect banks other operating income to waver as new loan origination fee declines, unless banks can find innovative ways to sustain growth in this important contributor to operating income. On a brighter side, we expect yields on assets to improve in the medium to long term, as the US Fed s benchmark interest rate continues to rise. Even in Q2 17, we have seen some banks with improved annualized yields. However, spreads continue to be dampened by rising interest Interest Yield Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17F BKMB 3.7% 3.8% 4.0% 4.1% 4.2% 4.2% 4.2% NBOB 4.1% 4.1% 4.3% 4.4% 4.3% 4.3% 4.4% BKDB 4.9% 4.9% 5.2% 5.2% 5.2% 4.8% 4.8% ABOB 4.1% 4.4% 4.5% 4.8% 4.8% 4.8% 4.7% BKSB 4.2% 4.3% 4.5% 4.6% 4.7% 4.8% 4.8% HBMO 3.0% 3.1% 3.2% 3.2% 2.9% 3.0% 3.0% BKNZ 4.5% 4.8% 5.0% 5.0% 4.8% 5.1% 5.1% BKIZ 3.5% 3.5% 3.6% 3.7% 3.7% 3.7% 3.7% Simple Avg (not weighted avg on asset size) 4.0% 4.1% 4.3% 4.4% 4.3% 4.3% 4.3% *NBO includes Islamic Income; BKNZ & BKIZ is Profit Rate Earned Interest Cost Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17F BKMB 0.9% 1.0% 1.2% 1.4% 1.4% 1.5% 1.5% NBOB 1.2% 1.3% 1.4% 1.6% 1.8% 2.0% 1.8% BKDB 1.3% 1.5% 2.2% 2.3% 2.5% 2.5% 2.5% ABOB 2.0% 2.1% 2.2% 2.4% 2.7% 2.8% 2.7% BKSB 1.9% 2.3% 2.6% 2.7% 3.1% 3.0% 3.0% HBMO 0.3% 0.4% 0.4% 0.4% 0.4% 0.5% 0.5% BKNZ 1.3% 1.4% 1.7% 1.8% 1.8% 2.3% 2.3% BKIZ 1.5% 1.6% 2.5% 2.5% 2.6% 3.0% 3.0% Simple Avg (not weighted avg on liabilities size) 1.3% 1.5% 1.8% 1.9% 2.0% 2.2% 2.2% *NBO includes Islamic Profit Paid; BKNZ & BKIZ is Profit Rate Paid Spread Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17F BKMB 2.8% 2.9% 2.8% 2.7% 2.8% 2.7% 2.6% NBOB 2.9% 2.8% 2.8% 2.7% 2.5% 2.4% 2.5% BKDB 3.6% 3.4% 3.0% 2.9% 2.8% 2.3% 2.3% ABOB 2.1% 2.3% 2.4% 2.4% 2.1% 2.0% 2.0% BKSB 2.4% 2.0% 2.0% 1.9% 1.6% 1.8% 1.8% HBMO 2.7% 2.7% 2.8% 2.8% 2.5% 2.6% 2.6% BKNZ 3.2% 3.4% 3.3% 3.2% 3.0% 2.8% 2.8% BKIZ 2.0% 1.9% 1.1% 1.2% 1.1% 0.7% 0.7% Simple Avg (not weighted avg on asset size) 2.7% 2.7% 2.5% 2.5% 2.3% 2.1% 2.2% *NBO includes Islamic Profit Paid; BKNZ & BKIZ is Net Profit Income ** 3

4 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 costs, due to liquidity crunch as well as deteriorating bank credit ratings. We have observed a simple average spread decline of 50bps over Q1 16-Q2 17, due to rising cost of funds, and in spite of higher yields on assets. It goes without saying that banks have prudently been trying either to curtail operating expenses at current levels, or even reduce them in some cases, given the restricted income growth outlook Monthy Conventional Bank Deposits % 5.0% 4.0% 3.0% 2.0% 1.0% Monthly Coventional Bank Credit % 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Monthly Deposits Raised (Withdrawn), OMR mn YoY %, (RHS) Monthly Credit Disbursal, OMR mn YOY % Chg, RHS Source: U Capital Research, Company Financials We believe that banks are also prudently trying to manage costs of risk, once again as macroeconomic situation warrants careful monitoring of non-performing assets (NPA). So far, sector-wide NPA ratio is well-maintained below 2.5%. On the back of the reasons outlined above, net profit for banks is expected to remain under pressure over the short to medium term. 4

5 Leasing Sector Outlook The Omani leasing sector is expected to witness re-structuring, with the impending National (NFCI) and Oman Orix Leasing (ORXL) merger, which will create the largest NBFC in Oman, with total assets in excess of OMR 398mn. In August 17, the companies disclosed that they have received in-principle approval from the CBO. We are still awaiting further disclosure on proceedings of the same. We have not included NFCI and ORXL in our estimates. In terms of finance asset growth, the leasing sector is expected to witness slower growth, hand in hand with the banking sector, on account of the macroeconomic situation. The total gross finance assets of all leasing companies, excluding NFCI and ORXL, posted a contraction of 2.1%YoY and 0.2%QoQ in Q2 17. We expect this contraction to continue into Q3 17. We expect constrained revenue growth as interest costs also continue to rise, till the time assets are renewed at higher rates. NPA as % of Gross Asset Provision Cover (x) 12.3% 10.2% % 6.8% 1.7% UFCI MFCI TFCI Sector AOFS Source: U Capital Research, Company Financials AOFS MFCI Sector TFCI UFCI Cost of risk for the sector is expected to continue to rise, as some companies are already seeing alarming growth in non-performing-finance assets (NPAs). In Q2 17, for all leasing companies excluding National and Oman Orix Leasing, a total NPA of OMR 51.9mn (c6.8% of Sector Gross assets) was recorded, up by +35%YoY and 14%QoQ. Net profit outlook for leasing companies is hence weak, in our view. 5

6 Telecom Sector Overview: Various changes, challenges and developments are taking place in the Omani Telecom Sector. The strategic move by Omantel of acquiring 9.84% stake in Mobile Telecommunication Company (Zain Group) which involved massive investment of OMR 325.4mn, the announcement delay of the third operator till November which opens door for many scenarios, the growing dominance of data over voice which requires quick adoption of new technologies, the increasing threat by over-thetop (OTT) providers and demand for their services that is fueled by high number of expats and the development of telecom regulations, are some factor that are currently shaping the telecom industry in Oman. We see slower annual growth at top level by existing providers on factors like the stiff competition from existing players thus lower ARPUs and expected shifting of some subscribers to the third operator. On the other hand, pre-paid mobile market share is 91.1% resulting in more difficulty to retain customers taking into account the simplicity of shifting between operators. The increase of both royalty fees (7% to 12%) and income tax (12% to 15%) at the beginning of 2017 have added further pressures on margins. We do not see notable changes in both CAPEX and dividends as those are the survival tools to balance between business support and compensating investors. EBIT Margin 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17e ORDS 29.4% 28.1% 29.4% 22.1% 24.8% 24.8% 25.2% OTEL 30.2% 24.8% 23.4% 18.6% 19.3% 15.7% 16.4% NP Margin 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17e ORDS 19.1% 18.4% 18.4% 12.7% 10.2% 10.1% 10.6% OTEL 26.0% 23.5% 20.6% 18.8% 18.0% 12.6% 13.8% Omantel: We see slight decline in revenues for 3Q 17 as we do not expect large capacity sales i.e. Indefeasible right of use (IRU ) and lesser number of subscribers due to summer time in addition to some pressures on ARPUs on competition. The key factor will be the cost of funding of the recent acquisition of stake in Zain which depends on the way of funding and loan tenor. The deal looks attractive in the long term especially when it comes to receiving dividends and importing technology. However, we do not see much appreciation of the investment as the company already paid high amount of premium. Ooredoo Oman: We believe the company will continue investing in its own fiber optic network bearing into account the competitive advantage of the other operator in this field. Ooredoo Oman faces additional challenges, including but not limited to, the possible winning of Zain as the third operator license which suits Omantel more as the use of its infrastructure by Zain is likely to happen in this case, thus additional line of revenue to Omantel. Moreover, Ooredoo Oman pays branding fees of 1.5% of revenues. However, top line is expected to be lower in 3Q 17 due to pressures on ARPUs and number of subscribers especially the pre-paid segment. We do not see notable changes at margins level. 6

7 Cement Sector Overview: Less CAPEX required as existing companies are able to increase utilization rates to face any increase of demand (we do not see it in the short term). At present, the demand for cement in Oman is around 8mn tons of which 55% - 60% is covered by local companies. Slight pressures were seen on realizations, a good factor especially with increasing competition. The coordination between Oman Cement and Raysut Cement is increasing with the upcoming joint cement plant at Duqum Free Zone. We believe this is a must step to face both internal and external competition. Challenges such as increasing cost of productions due to higher power tariffs, maintaining selling prices and mitigating the negative impact of higher taxes to be kept in mind. Focusing on new dynamic business model especially export lines will lessen the concentration risk. EBIT Margin 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17e Oman Cement 21.6% 19.9% 26.0% 22.0% 22.2% 22.2% 22.0% Raysut Cement 33.1% 22.3% 20.3% 19.8% 23.2% 9.6% 10.3% NP Margin 1Q'16 2Q'16 3Q'16 4Q'16 1Q'17 2Q'17 3Q'17e Oman Cement 24.3% 20.7% 23.6% 22.4% 15.0% 19.1% 19.7% Raysut Cement 32.0% 19.6% 18.2% 18.5% 15.9% 8.5% 14.0% Oman Cement: Despite the return of Kiln 2 production after the completion of Pollution Control Equipment upgrade which should enhance the utilization rates in addition to our stable outlook about realizations (Estimated at OMR 24.2/ton), we do see lower sales in 3Q 17 due to seasonality factor. The company will continue providing higher sales discounts to retain market share. Higher power costs impact is seen lower in the case of Oman Cement compared to its main rival as the company has its own power generator. The company used to buy electricity from the government before hike in gas prices. Later, the company started utilizing its power generator fully. We expect margins to be within same level of 2Q 17. Raysut Cement: Export model is working well for the company as we have seen increased contribution to revenues in recent quarters. This is important to mitigate local risks risen by lower sold volumes and realizations. For 3Q 17, we expect lower sales of cement due to seasonality. We see selling prices at OMR 27.8mn for the parent company (local market only). Pressures from higher power costs to keep lesser margins on annual basis. The key supportive factor in 3Q 17 is the gain from selling an investment which shall result in OMR 1.2mn as additional investment income. 7

8 Other Commodities companies Oman Cables Industry: Despite massive improvement in raw material prices during 3Q 17 (copper and aluminium) which should support group revenue, the seasonal impact on sold volumes and lower performance by OAPIL on disruption in supply of liquid metal to OAPIL from Sohar Aluminium due to the unexpected event (the company contribution to the group revenue stood at 17.4% in 1H 17), will result in only slight improvement in revenues. Cost of sales to revenue will be higher due to high electricity tariffs. Margins to remain stable for the upcoming period taking into account the recovery in the subsidiary operations and cost control. Oman Cables enjoys strong track of dividends which is expected to remain. Voltamp Energy Co.: So far, the company performance is going in line with our view and estimates. Its ability to increase utilizations without actual need for huge CAPEX, the dynamic sector and growing demand for power generators electric transformers is an asset during low oil price era. Voltmap is getting the benefit of being in non-oil sector as more focus from the government and its entities towards diversification. The commitment by the government to support local companies - like the agreement with the PDO was welcomed by all parties. Moreover, opening export doors especially with Qatar will result in strong long term order book and reduce volatility in business. We expect additional EPS of OMR from Qatari contract over assuming same current level of net profit margin of 8%. In 3Q 17, we expect slight decline in revenues compared to 2Q 17 due to seasonality factor. Margins are seen to improve overtime on better export and local deals. Al Jazeera Steel Products Co.: We expect more concentration on new export markets, a trend we have noticed recently. Thus for 3Q 17, same volumes sales are estimated as seen in 2Q 17 despite seasonality. Higher raw material prices will ease pressures on finished product prices in 3Q 17. Cost of sales to revenue to remain high. The proximity to Sohar port will enable the company to get some business from Qatar (if any). Moreover, the full operation of the Merchant Bar Mill is already diversifying the business. Better margins are seen for 3Q 17 but below 2016 average. The company recent acquisition of its joint venture partner's stake in Saudi will result in more solid source of income. 8

9 Muscat Al Jazeera Steel Ooredoo Oman National Bank of Oman Taageer Omantel Raysut Cement Ltd Bank Muscat Al Omaniya Fin Services Oman Cement Ltd Bank Dhofar Oman Cables Ahli Bank HSBC Oman United Voltamp Energy Bank Sohar Bank Nizwa Raysut Cement Ltd Ooredoo Oman Oman Cement Ltd Ahli Bank Omantel Bank Muscat National Bank of Oman Taageer Oman Cables Al Omaniya Fin Services Muscat United Alizz Islamic Bank Bank Dhofar HSBC Oman Al Jazeera Steel Bank Nizwa Bank Sohar Voltamp Energy YTD Change (%) % -25.8% -14.3% -14.3% -14.2% -12.8% -8.3% -5.7% -5.1% -3.5% -3.3% -3.2% -1.4% -0.4% 8.5% 9.6% % Source: U Capital & Bloomberg Dividend Yield e (%) 1 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 8.7% 8.2% 7.7% 7.2% 7.2% 6.9% 6.6% 6.6% 6.5% 6.2% 5.7% 5.7% 5.4% 4.2% 4.0% 3.5% 3.1% Source: U Capital & Bloomberg 9

10 National Bank of Oman Bank Muscat Taageer Muscat Al Jazeera Steel Ahli Bank Bank Dhofar Ooredoo Oman Voltamp Energy Oman Cables Oman Cement Ltd Bank Sohar Omantel HSBC Oman Al Omaniya Fin Services Raysut Cement Ltd United Bank Nizwa Bank Muscat National Bank of Oman Alizz Islamic Bank HSBC Oman Al Jazeera Steel Taageer Muscat Bank Dhofar Oman Cement Ltd Ahli Bank Bank Sohar United Bank Nizwa Raysut Cement Ltd Al Omaniya Fin Services Oman Cables Ooredoo Oman Voltamp Energy Omantel P/Bv 2017e (x) Source: U Capital & Bloomberg P/E 2017e (x) Source: U Capital & Bloomberg 10

11 Voltamp Energy Omantel Ooredoo Oman Muscat Oman Cables Taageer National Bank of Oman Ahli Bank Al Jazeera Steel Bank Muscat Al Omaniya Fin Services Bank Dhofar Bank Sohar Raysut Cement Ltd Oman Cement Ltd United HSBC Oman Bank Nizwa Alizz Islamic Bank Omantel Voltamp Energy Oman Cables Ooredoo Oman Al Jazeera Steel Oman Cement Ltd Raysut Cement Ltd Muscat Taageer United Al Omaniya Fin Services National Bank of Oman Bank Muscat Ahli Bank Bank Dhofar Bank Sohar HSBC Oman Bank Nizwa Alizz Islamic Bank ROA 2017e (%) 15.0% 12.0% 9.0% 6.0% 9.4% 9.2% 8.1% 7.6% 6.1% 5.4% 5.2% 3.0% 3.0% 2.5% 2.3% 2.0% 1.6% 1.5% 1.4% 1.0% 0.8% 0.8% 0.4% -3.0% -0.9% Source: U Capital & Bloomberg ROE 2017e (%) % 12.0% 8.0% 4.0% -4.0% -8.0% 14.5% 14.0% 12.8% 11.6% 11.5% 11.5% 10.5% 10.2% 9.8% 9.3% 9.1% 8.2% 8.1% 6.7% 6.6% 5.9% 5.7% 2.0% -4.0% Source: U Capital & Bloomberg 11

12 Ubhar Capital SAOC (U Capital) Website: PO Box 1137 PC 111, Sultanate of Oman Tel: /35 Fax: Disclaimer: This report has been prepared by U Capital Research, and is provided for information purposes only. Under no circumstances is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such, and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. All opinions and estimates included in this document constitute U Capital Research judgment as of the date of production of this report, and are subject to change without notice. This report may not be reproduced, distributed or published by any recipient for any purpose. 12