Omani Coverage Universe Earnings Estimates - 1Q18 U Capital Research research@u-capital.net Tel: 00968 2494 9034/35/36 1
Earning Estimates 1Q18e 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 (x) P/Bv (x) Div. Yld (%) Banking Bank Muscat 0.384 2.3% 1,131.8 45.71 3.3% -1.8% 112.35 5.5% -8.2% 6.06 0.58 8.1% National Bank of Oman 0.190-0.3% 308.9 10.00-27.3% 5.3% 35.93 5.2% 6.9% 6.74 0.59 7.9% Bank Dhofar 0.196-4.6% 477.9 13.55 8.3% 5.5% 33.86 5.6% 3.2% 9.13 0.77 5.7% Bank Sohar 0.143 3.5% 280.7 6.46 7.8% 6.9% 20.41 33.8% -13.7% 9.81 0.68 3.2% Ahli Bank 0.155-5.9% 231.9 6.64 27.5% -4.0% 13.48 11.6% -10.0% 7.99 0.73 6.1% HSBC Oman 0.104-18.8% 208.0 4.38-23.5% -19.7% 19.60 10.1% -1.9% 11.44 0.63 5.5% Bank Nizwa 0.087-3.3% 130.5 2.95 397.8% 99.8% 7.88 48.5% 34.3% 16.73 0.92 0.0% Alizz Islamic Bank 0.080 21.2% 80.0 0.18 nm 19.4% 4.13 52.3% 7.8% nm 0.72 0.0% Leasing Al Omaniya Fin Services 0.276 0.0% 76.4 1.37 2.8% -60.3% 3.23 3.4% -1.1% 10.70 1.13 7.2% National 0.137 0.3% 68.1 2.96 100.3% -7.6% 6.03 92.9% 75.9% UR UR UR Muscat 0.104-0.7% 31.2 1.00 2.1% -5.8% 2.33-1.4% -1.2% 7.63 0.77 9.3% Taageer 0.109-8.4% 27.6 1.10 21.0% -28.1% 3.24 38.9% 5.9% 6.41 0.69 9.2% United 0.111-23.4% 38.8 0.48-36.9% nm 2.23 4.5% -4.7% 30.52 0.86 0.0% Cement Oman Cement Ltd 0.360-12.2% 119.1 3.29 48.8% 69.3% 14.53-1.2% 2.3% 10.26 0.73 8.3% Raysut Cement Ltd 0.728-6.7% 145.6 1.80-41.6% nm 17.21-11.4% 0.3% 21.00 0.95 4.0% Al Ahlia 0.360 9.09% 36.0 1.47-8.2% NA 9.37 16.1% NA 12.41 0.96 7.8% Vision 0.143-3.38% 14.3 0.74-16.5% NA 7.43 25.1% NA 6.22 0.91 10.5% Oman Qatar 0.135-8.78% 13.5 0.40-54.0% NA 7.00 55.6% NA 7.50 0.86 10.1% Telecom Omantel* 0.880-27.0% 660.0 23.16 NA NA 464.85 NA NA 7.21 0.40 5.7% Ooredoo Oman 0.500-4.9% 325.5 7.65 10.6% -3.5% 69.00 1.8% -0.5% 10.68 1.34 8.3% Others Muscat City Desalination 0.151 30.2% 23.5 0.30 nm NA 4.30 0.23 NA 19.57 1.55 6.2% Voltamp Energy 0.418-14.8% 34.0 0.85 16.4% -10.9% 11.49 18.3% -8.0% 9.45 1.35 3.6% Oman Cables 1.050-7.5% 94.2 1.87-42.5% nm 65.78-3.4% 3.8% 12.09 0.91 4.3% Al Jazeera Steel 0.330 17.9% 41.2 1.58 21.1% -22.4% 24.26 5.0% -10.8% 6.54 0.88 6.7% Source: Bloomberg & U Capital, Price as of 04-Apr-18 *NP is attributable to the equity holders of the parent company *nm = not meaningful and NA = not available 2
Thousands Banking Sector Outlook CBO s Jan 18 data indicates that conventional credit in Oman grew to OMR 20.62bn, +5.3%YoY and +0.5%MoM, with growth pace having picked up from +4.1%YoY and -0.2%MoM in Dec 17. Islamic credit grew by 23.5%YoY and 0.8%MoM, to reach OMR 3.06bn at the end of Jan 18. We believe that the growing demand for Islamic finance products amongst the Omani population is helping Islamic banking to become significantly important in the Omani credit market with a share of 12.9%. We expect Islamic Banking to continue to gain market share of the total credit pie. The total credit within the Omani Banking sector grew by 7.3%YoY as at the end of Jan 18 vs. 6.4%YoY as at the end of Dec 17. We are optimistic on credit growth as Government-led revenue diversification efforts begin to bear fruition over our forecast horizon in addition to the recent lowering of minimum capital adequacy ratio from 12% to 11% (further details in this report). The IMF forecasts Oman s GDP growth at 3.8% for 2018, with an average growth of 2.4% over the period 2018-22 which we believe will translate into a credit growth of ~5% in 2018 with an average growth of 6% over 2019-22e. The primary constraint for lending growth is our expectation of an inhibited liquidity situation driven by reduced revenues of an oil-dependent economy. Recent sovereign borrowings have somewhat assisted in easing liquidity levels, but the effect has been largely tidal as the Government continues to tread on its economic diversification path, requiring unyielding support from the domestic banking sector. The recent revisions in regulation concerning liquidity management is bound to have a positive effect on lending growth as well as liquidity management of banks. Deposit growth for conventional banks hovered at +1.2%YoY and 0.2%MoM in Jan 18, with Loan-to-Deposit Ratio (LTD) stretching further to 110.6% from 106.3% a year ago. Omani Banking Sector: Total Credit Private Sector Weighted Average Interest Rates, % 3.65 1.35 24 24 23 23 22 22 21 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 3.63 3.61 3.59 3.57 3.55 3.53 3.51 3.49 3.47 3.45 1.3 1.25 1.2 1.15 1.1 1.05 1 Credit, OMR bn (LHS) YoY, % (RHS) Time Deposits (LHS) All Deposits (RHS) Source: CBO, U Capital Research 3
The banks have been able to grow their lending portfolio without much increase in NPLs, which augers well for the credit risk in the banking sector. The total NPLs at the end of FY 17 were 3.0% (FY 16: 2.7%) of gross loans. The low NPL ratio suggests satisfactory asset quality and a well-contained credit risk. Moreover, the existing loan portfolio of banks is well covered against expected losses through adequate provisions with an average coverage ratio (provisions to NPLs) of ~124% including general provisions, which compares favorably with regional peers. As at the end of FY 17, non-performing loans (NPL) ratio of National Bank of Oman (NBOB) was the highest at 4.1%, which is higher than the average of the rest of the Omani banks in our coverage universe which hovers around 3%. NBOB s provision cover at 103% is well below the peer-group average at 124%. We expect yields on assets to improve in the medium to long term, as the US Fed s benchmark interest rate continues to rise. We have seen some banks with improved annualized yields over the last few quarters. However, spreads continue to be dampened by rising interest costs, due to liquidity crunch as well as deteriorating bank credit ratings. Spread Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18F BKMB 2.8% 2.9% 2.8% 2.7% 2.8% 2.7% 2.7% 2.8% 2.8% NBOB 2.9% 2.8% 2.8% 2.7% 2.5% 2.4% 2.5% 2.3% 2.3% BKDB 3.3% 3.1% 2.7% 2.6% 2.5% 2.3% 2.2% 2.3% 2.3% ABOB 2.1% 2.3% 2.4% 2.4% 2.1% 2.0% 2.1% 2.3% 2.2% BKSB 2.4% 2.0% 2.0% 2.0% 1.8% 1.9% 1.9% 1.9% 1.9% HBMO 2.7% 2.7% 2.8% 2.8% 2.5% 2.6% 2.6% 3.2% 3.2% Simple Avg (not weighted avg on asset size) 2.7% 2.6% 2.6% 2.5% 2.3% 2.3% 2.3% 2.5% 2.5% *NBO includes Islamic Profit Paid; BKNZ & BKIZ is Net Profit Income Source: Company Financials, U Capital Research Weighted Average Interest Rates (%) 3.560 3.540 3.520 3.500 3.480 3.460 3.440 3.420 3.400 3.400 3.200 3.000 2.800 2.600 2.400 2.200 2.000 OMR (LHS) FCY (RHS) Source: CBO, U Capital Research 4
Leasing Sector Outlook The Omani leasing sector has been faced with a challenging operating environment as finance asset growth has slowed down on the back of the Government s austerity measures amidst increasing competition from banks especially Islamic banks. The sector is beginning to see improvement in its net finance income as interest rates have been on the rise and assets are beginning to get due for re-pricing. Additionally, the sector s cost of credit rose sharply in FY17 and is expected to ease going forward. Low oil prices for a primarily oil-dependent economy along with Government s austerity measures continue to weigh down on Oman s economic growth outlook. However, growth is expected to pick up over the medium term following a boost in oil and gas, as OPEC plus production cuts taper off in 2018, and from expected gains in the non-oil sector resulting from the government s economic diversification plan, mainly through Tanfeedh, VAT, and increased in other fees (e.g. Visa fee) and electricity tariffs. The World Bank expects economic growth to modestly recover over the medium term with 2018 real GDP growth reaching 3.4%. In 2018, a boost in the hydrocarbon sector will drive the recovery as the Khazzan gas project expands production capacity. As the gradual recovery of oil prices improves confidence and encourages private sector investment, overall GDP growth is projected to rebound to 2.9% by 2019. The government s policy reform agenda remains focused on economic diversification and fiscal consolidation. Moreover, the adoption of a 5% VAT expected in 2019 and higher corporate income tax are expected to narrow the fiscal deficit to 11.4% by 2019. The leasing sector, where roughly 40% of finance assets are comprised of retail car financing, is expected to continue to witness constrained growth in this segment as new vehicle registrations have constantly been dropping as compared to the previous years. Additionally, corporate financing environment is also not entirely conducive as outline above. However, we believe that cost of credit will peak at the end of FY17, with the sector getting some respite from provision expense burden on its net income FY18 onwards. We believe that over the next 12m horizon, net finance income of the leasing companies will begin to see improvement on the back of rising interest rates as further assets become due for re-pricing as well as new assets are booked, resulting in higher yield. We believe that improvement in yield on interest earning assets will outpace the increase in cost of interest-bearing liabilities, resulting in improving net finance margins for the leasing companies. However, we remain cautious on asset quality and credit costs, in addition to our expectation of a tepid growth in net finance assets on the back of the currently subdued macroeconomic outlook. Note: National will be posting its first quarterly net profit in 1Q18 after its merger with Oman Orix Leasing and United is currently facing a management fraud issue for an amount of OMR 1.35mn, as per company disclosure on MSM website. 5
Telecom Sector Overview: Overall, the Omani telecom sector is under pressures due to stiff competition, increasing of non-operating costs such as cost of funding, Royalty deprecation and taxes in addition to regulatory challenges. Both Ooredoo Oman and Omantel are trying to diversify their traditional revenue either through exploring new markets or launching new products. The main focus is towards data business. We don t expect much improvement in the financials in 2018 considering the above mentioned challenges. With respect to Omantel, the estimated profits from Zain will largely offset the higher cost of funding only leaving the loan principle of USD 2.25bn to be paid through the company ability to generate good cash flow. Zain Kuwait is doing good considering improvement in key markets such as Iraq and Saudi in addition to estimated winning of some legal cases. Ooredoo Oman on the other hand does not suffer from cost of funding, yet the company faces special fees such as management and branding fees which form 4.5% of total revenue. Omantel Group: On standalone basis, we expect better performance on quarterly basis at the top level mainly on better contribution from wholesale segment at 18% compared to 14% in 4Q 17. Although some pressure is expected in terms of subscribers numbers, we expect stable ARPUs performance in 1Q 18. We expect the parent company 1Q 18 revenue to stand at OMR 134.8mn, up by 3% on yearly basis. Royalty, depreciation and operating expenses to continue to weigh on operating profit but lower estimated impairment of receivables to ease some pressures resulting in operating profit for the parent company of OMR 24.5mn i.e. an operating profit margin of 18%. Zain Kuwait, the main subsidiary, is expected to report within its historical quarterly performance posting OMR 330mn of revenue for 1Q 18. The group revenue is expected at OMR 464.8mn. The group operating profit is estimated at OMR 105mn. Cost of funding remains the killer of the non-operating performance and we expect OMR 11mn in 1Q 18 for the parent company alone assuming an annual interest of 5.5%. At group level we expect the net profit attributable to the parent company to stand at OMR 23.2mn (including 21.9% of Zain Kuwait net profit for the quarter). Ooredoo Oman: We believe Ooredoo Oman is doing well considering 2017 performance despite hike in royalty, tax and deprecation. The company also is subject to branding fees of 1.5% and management fees of 3% which are calculated based on the top line directly. Any improvement or changes to those percentages will result in stronger performance. We expect healthy performance for 1Q 18 based on growing subscribers database especially mobile prepaid and broadband subscribers. We estimate the monthly blended ARPU at OMR 6.5/user thus resulting in total revenue of OMR 68.99mn, up by 1.8% YoY. No unusual expenses to be seen in 1Q 18, thus expect EBIT margin at 25.7% versus 2017 average of 25.9%. We estimate net earnings at OMR 7.65mn, up by 10.6% on annual basis and a net profit margin of 11.3%. Ooredoo Oman is a low debt company with good cash position. The company efforts to free the dependency on Oman Broadband Company and focus more on developing a native network shall strength its home broadband segment. 6
Cement Sector We believe the worse has happened and companies are forced to accelerate efforts towards finding solutions. Our major arguments are based on: 1- Strong macros and healthy sector status. 2- The implications of the current and coming cost saving initiatives 3- Higher capacity utilization without need for immediate large Capex 4- Attractive opportunities at the export front We estimate total production to increase at CAGR of 4.9% during 2018 2022 at 6.9mn tons of cement assuming full utilization by end of the study horizon. We see sales of cement to be 5.7mn tons in 2018, an increase of 5.7% on yearly basis and to register a CAGR of 4.9% during the coverage period. We expect cement dumping to continue in the short run. This will likely be eased due to hike in raw material and power costs. In addition to imposing of VAT which will result in higher production cost thus higher prices abroad and consequently lesser challenges to Omani cement players. We do not see threat from lifting ban on cement exports by Saudi Arabia due to logistic difficulties and higher transportation costs. Total revenue to increase at a compounded annual growth rate (CAGR) of 5.3% during 2018 2022. We estimate diminishing role of power costs in the total operating costs during the forecasted period. We assume energy expenses as % of revenue to drop by about 512 BPS and 100 BPS for Oman Cement and Raysut Cement respectively in 2018-22. Oman Cement: We estimate revenue of OMR 14.5mn down by 1.3% on pressures on selling prices despite better sales of volumes. Operating margin is expected at 20% versus FY 17 of 18.8%. The company already managed to maximize the usage of the current power plant which resulted in better cutting costs of the imported gas however, other items such as depreciation and admin costs remain as pressures factors. Better performance to be at earnings before tax on dividend income. We expect profit before tax at OMR 3.87mn in 1Q 18 down by 7% on yearly basis. However, the lack of 1Q 17 deferred tax adjustments will result in better performance in 1Q 18 with net profit of OMR 3.3mn, up by 48.8% on yearly basis. The company attempts to strengthen its export segment and implement cost saving initiatives are critical for the business stability. We believe 2017 challenges have been reflected on the stock price, thus at current levels, the stock is attractively placed. The company has solid balance sheet and sound returns and yields. We estimate the current dividend policy not to be distracted in the short to medium term. Raysut Cement: Pressures are seen on export front as well as local front. We expect total group revenue at OMR 17.2mn in 1Q 18 down by 11.4% on yearly basis. Cost of sales to revenue ratio will be higher on yearly basis considering the hike in depreciation and cost of employees. Other costs to remain largely within their historical levels. Thus, operating margin is seen at 12% in 1Q 18 versus 2017 average of 8.9%. The company net earnings are estimated at OMR 1.8mn in 1Q 18 down by 41.6% on yearly basis. Despite the flexibility in the business model due to exports compared with its competitor, yet the unstable situation in major export markets like Yemen, which historically accounted for half of the parent company's external sales, has restricted the full utilization of this advantage. We believe any update on this regard will notably support the company export earnings. Moreover, we expect an aggressive strategy to be implemented by Pioneer Cement Co. as the company seeks for better market share in the Northern part of the country. The future expansions either locally or internationally shall support the stability of the company business. 7
Sector Performance of insurance sector is expected to remain challenging in the coming quarter as auto segment is witnessing decline because of low new car sales and also because of the performance of the equity market of Oman, in which some companies are invested. However, the sector is supposed to get respite from the mandatory health insurance which is slowly and gradually being adopted by many companies in private sector. Recently, CMA announced that the mandatory health insurance for the private sector will be introduced in stages, starting with large organizations i.e. international companies, followed by Grade 1 companies and so on. companies have tremendous opportunities in light of this development as only 10% of expatriate workers in the Sultanate were covered by healthcare insurance in 2016 - figures that attest to the growing importance of healthcare insurance in the country. Other Companies Oman Cables Industry: Higher copper prices and stability of the subsidiary production to support top earnings in 1Q 18. As per recent data, copper prices in 1Q 18 were almost 15% higher than 2017 which shall help the sales value of the parent company. In terms of volumes, we believe that despite challenges, sales to be stable at least for the medium term. Accordingly, revenue is estimated to stood at OMR 65.78mn in 1Q 18. Further, cost of sales to sales ratio to see improvement as the return of Sohar Aluminium (the main source of the OAPIL raw materials) will result in lower cost of production. In 2017, the subsidiary posted losses thus contributing negatively to the group performance, an issue not to continue in our view. Accordingly, we expect EBIT margin of 3% in 1Q 18 versus 2017 average of 3.4%. Profit attributable to non-controlling interests is forecasted at OMR 1.87mn resulting in net margin of 2.8%. Al Jazeera Steel Products Co.: We expect good performance in 1Q 18 considering the continuity of demand for steel in view of better oil prices and GCC governments 2018 expansionary general budgets. Utilization rates are seen at 66% and expect sales to be 99k tons. We estimate realization of OMR 245/ton resulting in revenues of OMR 24.3mn, up by 5% YoY. Cost of sales to revenue ratio to remain high, yet operating margin will be over better than FY 17 average at 8.3%. We forecast net profit of OMR 2mn in 1Q 18, up by 20% YoY. We look positively at the company efforts to diversify its products and targeted markets. Saudi, UAE and Iraq and key markets in our view. However, the recent US Government decision to implement 25% tariff on imported steel from many countries including Oman which came into effect from March 23, 2018 shall add some pressures on the company top line at least in the short term considering that North America formed 13.8% of the company total revenues in 2017. Voltamp Energy Co. Key factor about the company for 2017 2018 is the focus on the export front. The company through Voltamp Transformer SAOC has received two contracts for the supply of Distribution Transformers to the Qatar General Electricity and Water Corporation (KAHRAMAA) for a value of OMR 34mn. The transformers will be supplied during 2018 and 2019, resulting in roughly yearly income of OMR 17mn which is 39% of total 2017 revenues. Due to this contract and other solid segments, we expect Voltamp Energy revenue for 1Q 18 to stand at OMR 11.5mn, up by 18% on yearly basis. Higher cost of sales due to increase raw material prices will continue to pressurize operating margin. However, the company efforts to reduce other costs to support absorbing some of this pressure. We expect operating profit margin at 10% in 1Q 18 compared to FY 17 average of 9%. We see further pressure from investments considering the local market performance so far in this year and expect net profit to stand at OMR 0.85mn in 1Q 18 up by 16.4% on yearly basis. 8
Omantel Bank Muscat National Bank of Oman HSBC Oman Bank Sohar Taageer Alizz Islamic Bank Ahli Bank Oman Cement Ltd Muscat Bank Dhofar Oman Qatar Al Jazeera Steel National Vision Oman Cables United Bank Nizwa Raysut Cement Ltd Al Ahlia Al Omaniya Fin Services Voltamp Energy Ooredoo Oman Muscat City Desalination National Vision Oman Qatar Muscat Taageer Oman Cement Ltd Ooredoo Oman Bank Muscat National Bank of Oman Al Ahlia Al Omaniya Fin Services Al Jazeera Steel Muscat City Desalination Ahli Bank Bank Dhofar Omantel HSBC Oman Oman Cables Raysut Cement Ltd Voltamp Energy Bank Sohar Dividend Yield (%) 14.0% 13.2% 12.0% 10.0% 8.0% 6.0% 4.0% 10.5% 10.1% 9.4% 9.2% 8.3% 8.3% 8.1% 7.9% 7.8% 7.2% 6.7% 6.2% 6.1% 5.7% 5.7% 5.5% 4.3% 4.0% 3.6% 3.2% 2.0% 0.0% Source: U Capital & Bloomberg P/Bv (x) 2.0 1.6 1.2 0.8 0.4 0.40 0.58 0.59 0.63 0.68 0.69 0.72 0.73 0.73 0.77 0.77 0.86 0.88 0.90 0.91 0.91 0.91 0.92 0.95 0.96 1.13 1.35 1.35 1.55 - Source: U Capital & Bloomberg 9
Al Jazeera Steel Voltamp Energy Ooredoo Oman Oman Cement Ltd Vision Oman Cables Al Ahlia Raysut Cement Ltd Oman Qatar National Al Omaniya Fin Services Muscat Taageer Omantel Bank Muscat Muscat City Desalination Ahli Bank National Bank of Oman Bank Dhofar United Bank Nizwa Bank Sohar HSBC Oman Alizz Islamic Bank National Bank Muscat Vision Taageer Al Jazeera Steel National Bank of Oman Omantel Oman Qatar Muscat Ahli Bank Bank Dhofar Voltamp Energy Bank Sohar Oman Cement Ltd Al Omaniya Fin Services Ooredoo Oman HSBC Oman Oman Cables Al Ahlia Bank Nizwa Muscat City Desalination Raysut Cement Ltd United P/E (x) 36.0 32.44 30.0 24.0 18.0 12.0 6.0 5.75 6.06 6.22 6.41 6.54 6.74 7.21 7.50 7.56 7.99 9.08 9.45 9.81 10.26 10.70 10.76 11.44 12.09 12.41 16.73 19.57 21.00 - Source: U Capital & Bloomberg ROA (%) 12.0% 9.0% 9.3% 7.9% 7.8% 6.0% 3.0% 0.0% 5.9% 5.4% 5.3% 3.7% 3.6% 3.3% 3.1% 2.8% 2.7% 2.6% 2.0% 1.6% 1.6% 1.4% 1.2% 1.1% 1.0% 1.0% 0.9% 0.7% 0.2% Source: U Capital & Bloomberg 10
Ubhar Capital SAOC (U Capital) Website: www.u-capital.net PO Box 1137 PC 111, Sultanate of Oman Tel: +968 2494 9034/35/36 Fax: +968 2494 9099 Email: research@u-capital.net 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. 11