Oman 2008 Corporate Profitability ...

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  • 1. Market Report Subject : Oman 2008 Results Review Prepared by : Global Investment House “Global” Date : April 2009 • Global : Oman Corporate Profitability witnessed an decrease in 2008 Global Investment House – Kuwait – Oman Corporate Profitability- The overall corporate profitability of corporate listed in the organized market (excluding companies with fiscal year not ending on December 31, 2008) witnessed an decrease of 15.88% amounting to RO475.12mn in 2008 compared to RO564.81mn reported in 2007. Despite the reduction of the period given to furnish audited financial statements to the CMA and the shareholders from 21 days to 14 days prior to the AGM, all of the companies listed on Muscat Securities Market released their annual results for the period ending on December 31, 2008, ensuring 100% compliance. Chart 01: Sector’s composition of annual profitability in 2007 versus 2008 2007 2008 Banking Petrochemical Banking Petrochemical Services 30% 11% 39% Services 9% 7% 13% Industrial Industrial 5% 7% Investment Telecom Investment Telecom Cement Cement 16% 24% -4% 19% 8% 8% Source : Global Research Sector-wise, all the three sectors ended the year 2008 with a negative performance. That was due to their high exposure to equity investments. The consolidated net profit of the services sector registered a decline of 6.56% from RO228.73mn in 2007 to RO213.71mn 2008. Services sector contributed 44.98% of the total corporate profitability in 2008 as compared to 40.50% in 2007. Dhofar Insurance witnessed a massive decline of 53.93% in net profits to reach RO3.35mn in 2008 from RO7.26mn in the same period of 2007, due to decrease in the company’s investments income. Oman Telecommunications Company (Omantel), was the major contributor to the aggregate net profit of the sector contributing 55.50% of the total net profit of the sector amounting to RO118.61mn on December 31, 2008 from RO112.57mn recorded in the previous year. Omantel recorded a modest increase of only 5.37% in its net profit for the year ending in December 2008, due to the 66.90% drop in the company’s 4Q net profit to about RO9.74mn related to impairment loss of RO18.88mn in Pakistani
  • 2. operator Worldcall Telecom as the global financial crisis had an impact on the value of the strategic investment made there. It’s worth mentioning, that Omantel enjoyed high profitability during the first 9M-2008, as it earned RO106.97mn compared to RO82.60mn in the same period of 2007. This was due to continuous double digit revenue growth and prudent cost management. This revenue growth was mainly driven by mobile, Internet and data and wholesale businesses, which all recorded double digit growth. On the other hand, Omantel’s AGM has approved the distribution of 100% cash dividend for the year 2008. Omani banking and investment sector was the second contributor to the total market profitability in 2008 amounting 41.38% compared to 43.96% in 2007. The consolidated net profit of the banking & investment sectors posted a decline of 20.82 % in 2008. The sector’s profitability retreated, due to the significant decrease witnessed in Omani investment companies mainly in the fourth quarter of the year 2008 on the account of investment portfolios losses and high exposure to equity instruments and real estate as well . However, the combined profits of the listed Omani banks increased by 9.20% in 2008 from RO179.50mn in 2007 to RO195.90mn. Ahli Bank of Oman was the major contributor to the aggregate net profit of the banking sector contributing 75.60% of the total net profit of the sector amounting to RO5.93mn on December 31, 2008. The bank also registered the highest growth rate among the banking and investment listed companies with a y-o-y growth rate of 167.44 % in 2008 , that was due to the bank’s ability to successfully complete the transition into a fully fledged commercial bank in 2008 from being erstwhile mortgage bank. On the other hand, Bank Muscat, the largest bank in terms of market capitalization, and who also hold this position in terms of market share of total sector credit and deposits, witnessed 11.24 % annual growth with 2008 net profit of RO93.73mn due to income from core businesses, which was reflected in the operating profit growth in 2008. On a q-o-q basis, the bank reported a strong decline in 4Q net profit amounting to RO3.62mn in 2008 compared to RO21.64mn in the corresponding period of 2007 as the global market conditions substantially changed in the last quarter as a result of the global crisis, which affected the market value of investment portfolio of the bank. Also, high provisions against impairments in investment, which accounted RO10.92mn highlighted the bank’s financial statements, leading to the mentioned erosion in the bottom-line during the fourth quarter. The shareholders of Bank Muscat approved the distribution of 20% cash dividend for the year 2008. National Bank of Oman followed, reporting a modest increase in its net profit for 2008 reaching RO45.40mn from RO44.62mn in 2007. Despite a very turbulent fourth quarter, and after an impairment charge of RO3.70mn on available-for-sale investment in the income statement, the bank reported satisfactory results for the full year with a net profit of RO10.51mn reported during the fourth quarter. Albeit, none of the Omani banks reported a decline in profits, except Bank Sohar, which reported net losses of RO2.26mn in 2008. Bank Dhofar (BDF) and National Bank of Oman (NBO) were the two laggards in terms of profit growth which rose by 3.96% and 1.76% respectively. For the industry sector, the aggregate net profit plunged by 26.20% due to the massive decline in most of the sector’s components. Most of the industrial companies in the region have a high exposure to equity investments and real estate. It’s important to note, that the exceptional adverse circumstances caused by the financial crisis affected the companies’ businesses as the prices of raw material in the international market witnessed a severe reversing trend in the last quarter of 2008 causing high valued inventories. In addition, exceptional provisions on inventories taken have contributed in the decline recorded in most of the major industrial companies. The sector accounted for 13.63% of the total market’s profit in 2008. 2
  • 3. Oman Cables Industry witnessed the highest profitability decline among the sector decreasing by 59.60% to reach RO6.10mn in 2008. The company’s performance in the nine months ending on September 2008, reflected growth over the same period in the previous year both in Sales and Net Profit. However, the exceptional adverse circumstances caused by the global financial crisis affected the company’s business and some of the major clients deferred or withheld substantial portions of their prospective order book in the last quarter of 2008. This was further compounded by the international metals market that had a sudden huge reversing of the price trend which became evident in the fourth quarter of 2008. The combined effect of the market slow down and declining copper price seriously impacted the fourth quarter results & made the company book a onetime loss adjustment of RO12.90mn. National Aluminum Products reported net losses of RO1.16mn in 2008 compared to net profits of RO1.05mn recorded in 2007, that was due to product price fluctuations on the international market. Also, the financial crisis caused a rise in the raw material prices and consecutively the finished product prices’ plunged which posted unprecedented difficulties and challenges for the company. Construction Materials Industries reported net losses of RO0.11mn compared to net profits of RO0.25mn. Cement sector earnings after years of high digit growth, ended in 2008 on a grim note thanks to economic slowdown and the dwindling equity and real estate markets. The boom which the cement sector witnessed in the previous year on account of acute demand by the real estate, construction and other projects continued as the sector was able to roll out more volume and earn higher revenues. Cost on the other hand continued to put pressure on the cement companies pushing down its margins as well as profits. Raysut Cement, a heavy weight company, was the major contributor to the total net profit of the industrial sector contributing 41.84% of the total net profit of the sector amounting to RO27.11mn on December 31, 2008 down from RO30.12mn recorded on December 31, 2007 declining by 10.00 %, as production disruption in 2008 has led to cement imports affecting margins and earnings growth. Also, Oman Cement witnessed high drop in its net profit during 2008 reaching RO12.58mn compared to RO18.02mn in 2007, shedding 30.18% because of the drop in equity and real estate market in which most of the cement players were invested. Regarding the petrochemical sector, it was enjoying higher profitability growth on the back of sky high oil prices during the first 9M period of 2008 and the leading players were the major beneficiary of such growth in the sector. The aggregate profit of the sector surged by 27.77%, as all the petrochemical companies witnessed a positive performance during 2008. Shell Oman Marketing, sixth large cap company in the Omani market, recorded 12.61% rise in its annual profits to reach RO12.50mn in 2008 compared to RO11.10mn in 2007. The company took the opportunity to reiterate its commitment to sustainable development in the country through numerous social and environmental endeavors. During the year 2008, Shell Oman opened eight new retail sites, whilst at the year-end two further sites were under construction. The company is not expected to start any new projects until the uncertainty surrounding the economy clears away as the oil market normally follows the economic trend of the country which is expected to see some uncertainty due to the volatility of the global oil prices. Despite the fluctuations in crude prices witnessed sharply in the fourth quarter of 2008, Renaissance Services recorded a noticeable growth of 51.06% in 2008 contributing almost 50.02% of the total profitability of the petrochemical sector supported by marine logistics which primarily focus on production and operations of existing fields that have its stable demand. The company’s net profit for 2008 reached RO26.19mn comparing to RO17.34mn including a capital gain of RO4.8mn from the divestment of the group's former Technology business. Also, the company focused on oil & gas business, which enhanced capex to cater diverse exploration needs and balanced between the long and 3
  • 4. the short term contracts which provides scope for long term growth. However, The company has had a prudent interest rate hedge policy in place over the years. Due to the extreme fall in interest rates over the last quarter of the current year, there has been a material change in the fair value of the interest rate swaps. As a result, the company has taken a charge of the negative fair value of RO2.70mn directly to the income statement under finance costs. Table 01: Top 20 Companies in Terms Of Market Capitalization(excluding companies with fiscal year not ending on December 31, 2008) Source : Companies’ financials and Global research Outlook Overall, the corporate profitability of the Omani companies listed in Muscat Stock Market during 2008, was dismal. The outlook for 2009 will be a challenging one. We are expecting profits for the Banking sector to decrease by 20-30% in 2009. The Industry segment is expected to be under pressure as a result of shrinking exports and lower demand, while Services is expecting to witness a flat to marginally positive performance. 4