IPO Note alizz islamic bank SAOG (Under formation) 14 th October 2012 Al Maha Financial Services LLC www.almahafinancial.com
Content Page No. A brief summary of the Issue... 3 alizz islamic bank An overview... 4 Business plan and strategy... 4 Promoter group and post IPO shareholding structure... 5 Investment Rationale... 6 Challenges & Concerns... 8 Regional Peer Valuations... 9 Valuation... 10 Financial Projections... 11 Al Maha Financial Services LLC www.almahafinancial.com Page 2 of 15
A brief summary of the Issue Offer price RO 0.102 Face value RO 0.100 Offer size RO 40 million Offered shares 400 million Break up of Offer Category I (Retail) - 60% and Category II (Institutional) - 40% Authorized Share Capital RO 200 million Issued and Paid up Capital (Post IPO) RO 100 million Offer period 22nd September 2012 to 21st October 2012 Expected Listing date on MSM 3rd December 2012 Al Maha Financial Services LLC www.almahafinancial.com Page 3 of 15
alizz islamic bank An overview alizz islamic bank will be the second fully Shari a compliant bank to be licensed in the Sultanate. The Bank is currently under formation and has an authorized capital of RO 200 million with issued and paid up capital of RO 100 million post the IPO, through which it seeks to raise RO 40 million from the investing public at an offer price of RO 0.102 per ordinary share (including issue expenses of 2 Baiza per share). The proceeds of the Offer along with the Promoters Share Capital contribution of OMR 60 million will form the Tier I Capital of the Bank and will be used to fund the formation and support the operations of the Bank. Following the announcement of Islamic Banking regulations and final approvals to launch commercial operations, the Bank intends to deploy the Offer Proceeds to develop the facilities, infrastructure, IT and human resources required and to launch its operations. In addition to these pre-commercial launch operating costs, the Bank intends to support its operations from the Offer proceeds until such time as the Bank s cash flows are sufficient to meet these expenses. Business plan and strategy The Bank plans to base its business strategy on the following: Competitively priced and innovative products that are customized to meet the requirements of its targeted markets A distribution network consisting of branches and low transaction cost outlets such as e-banking, telephone banking and ATMs to enhance customer convenience A broad, state-of-the-art technology platform that will promote service efficiency and speed of customer service The Bank identifies its core market segments as corporate, SME and retail with the primary target market being the corporate banking segment whose customer base would include the Government, traders, industrial groups, real estate & construction firms and other companies. The SME banking is intended to be the Bank s secondary target market covering retailers and trading firms, manufacturing, service industry, real estate, transportation, agriculture and related businesses. alizz plans to adopt an integrated, multi-channel distribution model that will be based on modern technology offering choice and convenience to customers, while lowering the cost of delivery and increasing the reliability of service. The Bank would open its first flagship branch during the first year of its operation and steadily increase its branches to 10 over a period of five years. During the same time it also intends to set up 12 kiosks that would be able to deliver most of the service offerings as a branch. Al Maha Financial Services LLC www.almahafinancial.com Page 4 of 15
Promoter group and post IPO shareholding structure 60% of the Bank s Paid-up Capital post issue will be jointly held by Huriah Company LLC (10%), Aabar Investments PJS (20%), First Energy Oman (15%) and Tasameem Real Estate Company LLC (15%). Public 40% Huriah Company LLC 10% Aabar Investments PJS 20% Huriah Company LLC, headquartered in Oman, is an investment vehicle owned by HH Sayyid As ad bin Tarik Al Said. Its investments include shares in public companies in Oman, commercial and agricultural real estate as well as affiliation to investments in oil and gas, telecommunications and other allied development projects. Tasameem Real Estate Company LLC 15% Aabar Investments PJS is an investment company based in Abu Dhabi, UAE. Aabar is Source: Bank s IPO Prospectus, Al Maha Research 95% owned by the International Petroleum Investment Company of Abu Dhabi. The Company has a diversified global investment portfolio and is an experienced financial services investor, with interests in listed, full service commercial banks in Europe and South East Asia. It also has investments in the real estate, automotive, aviation, aerospace, commodities and food security sectors. First Energy Oman 15% First Energy Oman is a wholly owned subsidiary of First Energy Bank B.S.C.(c), which is an Islamic investment bank, established in 2008 and headquartered in the Kingdom of Bahrain, focusing on the MENA region. First Energy Bank operates in accordance with Islamic principles as a financial partner in project development, joint ventures, mergers and acquisitions and the purchase of assets and asset portfolios. Tasameem Real Estate Company LLC is an investment company, headquarted in the UAE and has investments in several industries ranging from branded restaurants to real estate construction and financial institutions. Tasameem s investments are spread across the UAE, GCC, Europe, Asia and North America. Al Maha Financial Services LLC www.almahafinancial.com Page 5 of 15
Investment Rationale Omani banking sector to continue steady growth supported by strong macro-economic fundamentals Oman has been witnessing a steady economic growth backed by the record government spending budgets in line with the long term Vision 2020. The Sultanate s GDP grew rapidly in the last two years to reach RO27.95bn for 2011. Total revenue of RO 8.75 billion was recorded against an expenditure of RO 6.71 billion and a surplus of RO 2.04 billion as at the end of July 2012, demonstrating the economy s fundamental strength. The IMF projected an economic growth of 5% and fiscal surplus is expected to stay high at around 8% for FY 2012. Huge government budgets and massive spending on infrastructure and employment will continue to act as a catalyst for the steady growth of the banking sector boosting total credit and overall asset growth. Islamic Banking is expected to witness robust growth in Oman as demonstrated in the GCC region, supported by conducive demographics Oman s demographics are favourable for the robust growth of Islamic banking activities with more than 70% of its population being between 15 and 80 years of age and predominantly Muslim. Improving employment and increasing disposable income levels will also drive demand for Islamic banking services, which will be launched in Oman in the coming months. The GCC s Islamic banking growth has been robust with the Islamic banking assets reaching 26% of the GCC s total banking assets in 2010. By 2015 Islamic Banking assets in Oman are expected to exceed RO2bn representing 10% of the total banking assets in Oman, as per industry reports. alizz islamic bank, one of Oman s first fully Islamic banks, expected to capitalize on the unmet domestic demand Islamic banking was recently approved by the CBO and alizz islamic bank being one of the first fully Islamic banks is expected to enjoy the first movers advantage in the market. Customer preference towards local banks that are fully Islamic compared to Islamic banking windows of conventional banks is also expected to benefit the Bank. Oman s banking sector is currently underpenetrated with assets, deposits and credit to GDP ratios below GCC averages, offering great potential for the first Islamic banks to tap the unmet demand by launching various Shari a compliant products and services. Al Maha Financial Services LLC www.almahafinancial.com Page 6 of 15
The Bank projects healthy performance and impressive growth in future alizz is expected to turn profitable from FY 2014 after overcoming some initial start-up challenges faced in the first year of its operations. Going forward, the Bank is also likely to demonstrate faster earnings growth and improving operational efficiency, with better profitability and higher returns to shareholders from 2016. 35% 30% 25% 20% 15% 10% 5% 0% Profit Margin - 2014E to 2017E 11.0% 14.1% 21.5% 30.8% 2014E 2015E 2016E 2017E Net Profit Margin Source: alizz islamic bank IPO prospectus, Al Maha Research 15% 10% 5% 0% Returns - 2014E to 2017E 14.1% 7.5% 3.3% 1.6% 1.3% 1.8% 0.6% 0.8% 2014E 2015E 2016E 2017E Return on Avg. Equity Return on Avg. Assets Strong promoter group to support the Bank, especially during start up The Bank is expected to receive extensive support from First Energy Bank, the parent company of First Energy Oman that will hold 15% of the equity post IPO. First Energy Bank being an Islamic investment bank and established a few years ago, will be able to lend financial, operational and technological expertise along with regional experience to alizz. In addition, the Bank is also likely to benefit from the local, regional and financial services experience of Huriah and Aabar. Attractive value proposition for long term investors Shares of alizz islamic bank are being offered at par value of RO 0.102 per share (including issue expenses of 2 Baiza per share) as the Bank is currently under formation. Thus this offers investors with a long term investment opportunity and benefit from the long term growth potential of one of the first full fledged Islamic banks in the country. Al Maha Financial Services LLC www.almahafinancial.com Page 7 of 15
Challenges & Concerns Stiff competition in the banking space for capturing and expanding market share Competition in the banking space is intensifying with bigger conventional banks gearing up to open Islamic banking windows and other non-banking financial companies also gearing up to offer Shari a compliant products and services. Entry of new Islamic banks may also pose challenges in the growth trajectory of the Bank. Creating awareness and attracting specialized personnel will pose a challenge for the Bank The Islamic banking industry is expected to face challenges in view of the lack of awareness about Shari a compliant products and services among the general public as the concept is new for the regulators and operators, according to industry experts. Attracting specialized and skilled personnel for forming Sharia laws as well as running Islamic banking operations. Although the concept if Islamic banking is new to Oman, the industry has been in operation for over three decades in other counties and hence, the regulators and operators may be able to learn from the regional experiences and adapt quickly to the current practices. No previous track record for alizz or other Islamic banks in Oman alizz islamic bank has no prior operating history or track record of performance as it is presently under formation and will commence operations only in the next year. Historic growth of the Islamic banking sector in the GCC and the banking sector in Oman may not be a true representative of the growth potential of the Bank, as the Bank would face various start-up challenges during the initial phase. Al Maha Financial Services LLC www.almahafinancial.com Page 8 of 15
Regional Peer Valuations As Islamic banks in major GCC markets are the closest peers of the Omani Islamic Banks, we carried out a comparative analysis of the valuation of the same. The major GCC Islamic Banks trade at an average Price to Earnings multiple of 14.4 and average Price to Book multiple of 1.4. GCC Islamic Banks Country PE (TTM) PBV Bank Al Jazira Saudi Arabia 14.3 1.5 Al Rajhi Bank Saudi Arabia 13.0 3.0 Bank Al Bilad Saudi Arabia 17.3 2.0 Alinma Bank Saudi Arabia 28.7 1.2 Ajman Bank UAE 33.2 0.9 Abu Dhabi Islamic Bank UAE 6.7 0.9 Sharjah Islamic Bank UAE 7.8 0.5 Al Salam Bank UAE 5.5 0.6 Dubai Islamic Bank UAE 7.5 0.8 Qatar Islamic Bank Qatar 12.8 1.7 Qatar International Islamic Bank Qatar 11.7 1.7 Masraf Al Rayan Qatar 13.9 2.3 Average 14.4 1.4 Median 12.9 1.3 As on 11 October 2012 Source: Gulfbase, Bloomberg, Al Maha Research Al Maha Financial Services LLC www.almahafinancial.com Page 9 of 15
Price to Book Multiple Al Maha Research Valuation The listed commercial banks in Oman (excluding HSBC Bank Oman) currently trade at a PE (TTM) of 11.9 and a PBV of 1.2, which is at a discount to the regional banking peers. The average and median Price to latest book value of the peer banks (excluding HSBC Bank Oman) stay at 1.1 and 1.3 respectively. The banking sector valuations currently remain low in spite of the recent improvement in market sentiment and activity, partly due to the lack of clarity on the regulations and launching of Islamic services by major banks. Hence, we are of the opinion that alizz islamic bank too is likely to be valued in line with its local and GCC peers, commanding a price to book value of 1.2 times its expected book value for FY2013, implying a fair value range of RO 0.113 to RO 0.117 for the Bank. Sensitivity Book Value per share (2013E) 0.090 0.092 0.094 0.096 0.098 0.100 0.102 1.1 0.099 0.101 0.103 0.105 0.108 0.110 0.112 1.2 0.108 0.110 0.113 0.115 0.117 0.120 0.122 1.3 0.117 0.119 0.122 0.125 0.127 0.130 0.132 We opine that the IPO of alizz islamic bank is attractive for the long term, in view of the upside potential of the Bank. We also do not rule out the probability of fluctuations in the share price during the initial period and recommend long term investors to accumulate the stock on dips. Al Maha Financial Services LLC www.almahafinancial.com Page 10 of 15
Financial Projections Income Statement All figures in OMR '000s 2013E 2014E 2015E 2016E 2017E Income from Murabaha, Ijara, Istisna a, dues from banks and other 2,430 10,461 17,892 28,220 41,786 Islamic financing activities Income from Islamic Sukuk 45 127 145 169 199 Fee, commission and other income 1,486 3,083 4,818 7,497 10,521 Income from equity investments 113 380 522 655 851 Operating income 4,074 14,051 23,377 36,541 53,357 Staff costs 1,418 3,139 5,959 8,438 10,104 Other operating expenses 1,992 3,692 4,977 6,101 6,803 Depreciation 759 1,570 2,153 2,537 2,745 Allowance for impairment 1,653 1,595 2,378 3,875 5,369 Operating expense 5,822 9,996 15,467 20,951 25,021 (Loss) Profit from operations before distribution to depositors (1,748) 4,055 7,910 15,590 28,336 Depositor's share of profits 540 2,321 4,213 6,725 9,763 (Loss) Profit before tax (2,288) 1,734 3,697 8,865 18,573 Income Tax 275 (191) (408) (1,014) (2,157) (Loss) Profit for the year (2,013) 1,543 3,289 7,851 16,416 Source: alizz islamic bank IPO Prospectus Al Maha Financial Services LLC www.almahafinancial.com Page 11 of 15
Balance Sheet All figures in OMR '000s 2013E 2014E 2015E 2016E 2017E Assets: Cash and balances with the CBO 54,979 21,649 34,454 50,301 72,259 Due from banks - 29,071 32,218 46,059 44,030 Investments classified as fair value through profit or loss 5,000 7,671 9,743 12,086 16,285 Islamic finance receivables 125,051 245,712 396,335 619,256 888,363 Investments in Sukuk 3,000 3,356 3,897 4,532 5,428 Other assets 320 932 1,708 2,256 2,596 Property and equipment 5,148 6,389 7,173 6,577 4,887 Deferred tax assets 275 84 - - - Total Assets 193,773 314,864 485,528 741,067 1,033,848 Equity and Liabilities: Liabilities Customers current accounts 34,113 75,770 153,128 267,222 406,455 Investment account holders 63,352 140,716 229,692 361,536 496,779 Other liabilities 421 948 1,665 2,460 3,235 Income tax payable - - 59 1,043 2,260 Deferred tax liability - - 265 236 133 Total Liabilities 97,886 217,434 384,809 632,497 908,862 Shareholder's Equity Share capital 100,000 100,000 100,000 100,000 100,000 Legal reserve 300 454 783 1,568 3,210 (Accumulated losses) Retained earnings (4,413) (3,024) (64) 7,002 21,776 Total Equity 95,887 97,430 100,719 108,570 124,986 Total Equity and Liabilities 193,773 314,864 485,528 741,067 1,033,848 Source: alizz islamic bank IPO Prospectus Al Maha Financial Services LLC www.almahafinancial.com Page 12 of 15
Key Ratios 2013E 2014E 2015E 2016E 2017E Earnings Per Share (RO) -0.002 0.002 0.003 0.008 0.016 Book Value Per Share (RO) 0.096 0.097 0.101 0.109 0.125 PE - 66.10 31.01 12.99 6.21 PBV 1.06 1.05 1.01 0.94 0.82 Return on Avg. Equity 1.6% 3.3% 7.5% 14.1% Return on Avg. Assets 0.6% 0.8% 1.3% 1.8% Net Profit Margin -49.4% 11.0% 14.1% 21.5% 30.8% Source: alizz islamic bank IPO Prospectus, Al Maha Research Al Maha Financial Services LLC www.almahafinancial.com Page 13 of 15
Al Maha Financial Services LLC PO Box 1065 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: 00 968 2482 7171, Fax: 00968 24827121 Contacts Telephone E-mail Customer service & Operations: Zakia Al Ghammari 24827134 zakia@almahafinancial.com Muna Al Hashmi 24827139 muna@almahafinancial.com Halima Al Mahrooqi 24827181 halima@almahafinancial.com Pravin Sivan 24827129 pravin@almahafinancial.com Research: Suresh Kumar 24827137 suresh@almahafinancial.com Radhika Gadhia 24827138 radhika@almahafinancial.com Khushboo Badlani 24827140 khushboo@almahafinancial.com Portfolio Management: S.V. Uppiliappan 24827169 uppiliappan@almahafinancial.com Brokerage: Abdullah Al Hinai 24827188 abdullah@almahafinancial.com Mahmoud Al Hamsaidi 24827144 mahmoud@almahafinancial.com Nasser Al Banna 24827177 nasser@almahafinancial.com Al Maha Financial Services LLC www.almahafinancial.com Page 14 of 15
DISCLAIMER: The research report has been prepared by Al Maha Financial Services LLC for private circulation amongst selected clientele for information purposes only and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe any investment. This Report is not directed to, or intended to be used by, any person or entity who (or which) is a citizen of (or domiciled) in any jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the company to any registration or licensing requirements within such jurisdiction. Al Maha Financial Services LLC will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. Al Maha Financial Services LLC and its affiliates including analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to companies mentioned herein or inconsistent with any recommendation and related information and opinions. Al Maha Financial Services LLC and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. The information contained in this report has been obtained from the sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, Al Maha Financial Services LLC makes no guarantee, representation or warranty, whether expressed or implied, and accepts no responsibility or liability to its accuracy and completeness of the data, being provided. Opinion expressed is our current opinion as of the date appearing on this material only. We do not undertake to advise you as to any change of our views expressed in this document. The investments discussed in this report may not be suitable for all the investors. Investors must take their own decision based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of Al Maha Financial Services LLC. Al Maha Financial Services LLC www.almahafinancial.com Page 15 of 15