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By

Muscat Securities Market


and

Value Creators

Al Maha Research

www.almahafinancial.com of 14

Muscat Securities Market and Value Creators 31 January 2012

Al Maha Financial Services LLC

Contents Page No.

Introduction ................................................................................................................................................................3

Emerging Markets outperform the World Index....................................................................................................4

MSM – Best Performing Market amongst the major Gulf markets........................................................................5

Identifying the „Value Creators‟...............................................................................................................................6

Stock Screening Criteria and Process....................................................................................................................................6

The Value Creators...........................................................................................................................................................8

Sector Classification of Value Creators...................................................................................................................................8

Comparative Performance Analysis........................................................................................................................................10

MSM continues to offer attractive investment opportunities

for long-term Value Creation...................................................................................................................12

Al Maha Research




Introduction

Conventional investing wisdom tells us that with a long time horizon, equity investors earn a

significantly higher return than other asset classes like fixed-income, commodities or cash. In

any portfolio, equity is considered as the growth-asset for its long-term performance. Equity

markets are also the most developed, transparent, well regulated and easily accessible markets

for investors around the globe. Equities not only have historically provided superior returns, they

also constantly provide opportunities for high return investments over a long term compared to

other types of investments.

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather

than participate in it.” – Warren Buffet

While equity investments offer significant return potential and diversification benefits, they are

also more volatile than some other assets like bonds or cash. Higher volatility is a hallmark of

this asset class. It is this high volatility of the markets that can be viewed as a friend rather than a

foe by the long-term value investors. Speculation coupled with fear and greed is the enemy of an

ordinary investor. Whereas, adequate research and knowledge spent into selecting the right

stocks coupled with patience to hold it over a long term despite the ups and downs of the market,

is a proven strategy for superior returns.

Our endeavor through this research exercise is

To gauge the returns of the Muscat Securities Market (MSM) over a long term and

compare it to the returns of major regional markets to ascertain the best performing

market in the region

To identify the value creators in the MSM over the last seven years, that have

significantly outperformed the MSM 30 Index

To conduct a comparative performance analysis of the value creators with other high-

return investments like those in crude oil and gold.

For this exercise, we track the market, stocks’ performance and returns for the investors over the

last seven years starting from the 1st of January 2005 to 31 December 2011. The period after

2005 has been vibrant for MSM, as the market depth and breadth as well as trade intensity

witnessed impressive growth during this period compared to the previous years. Average daily

turnover for the seven years from 2005 to 2011 more than doubled compared to that of 2004 and

average number of regular market securities traded during the period also grew by more than a

third of those traded during 2004.

Al Maha Research




Emerging Markets outperform the World Index

During the last seven year period, the emerging markets have significantly outperformed the

developed markets and the world indices backed by their robust economic growth and

fundamental strength. The Europe, Middle East and Africa Region (EMEA Region) too has been

noticeably outperforming the World Index during this period. The MSCI Emerging Markets

Index returned 68.99% for the period, while the EMEA Index returned a 26.78%.

Source: Morgan Stanley Capital International (MSCI)

0

50

100

150

200

250

300

Jan 01, 2005 Jan 01, 2006 Jan 01, 2007 Jan 01, 2008 Jan 01, 2009 Jan 01, 2010 Jan 01, 2011

Relative Performance of MSCI Equity Indices

Europe, Middle East & Africa Emerging Markets World Index

-

5,000

10,000

15,000

20,000

25,000

30,000

2004 2005 2006 2007 2008 2009 2010 2011

MSM Trading Statistics (2004-2011)

Avg. Daily Volume (in millions)

Avg. Daily Turnover (RO millions)

Avg. Daily Trades

40

45

50

55

60

65

70

2004 2005 2006 2007 2008 2009 2010 2011

Number of Securities traded -

Regular Market (2004-2011)

Source: MSM, Al Maha Financial Research

MSM also witnessed more and more companies being listed, including some of the present blue

chips after 2004 which provide a better representation of the market. In addition, a longer period

smoothens out the effects of periods of significant upsides, downsides and fluctuating trade

activity.

Al Maha Research




MSM – Best Performing Market amongst the major Gulf markets

From the beginning of 2005 through 2011, the financial markets witnessed great volatility and

uncertainties. Irrespective of the maverick movement of the MSM 30 Index, scaling up to 12000

levels in mid 2008 and then falling by almost two thirds to 4200 levels within a year, the Muscat

Securities Market (MSM) Index outperformed all the other major regional indices returning

69.6% to the investor over the period of seven years. The return of the MSM was also in line

with that of the MSCI Emerging Markets Index.

The graph below represents the yearly index returns of the major Gulf markets during the above

period. All indices have been adjusted to base 100 as on 1 January 2005 in order to facilitate

comparison of performance for the seven year period starting 1 January 2005.

Yearly Index Returns (2005-2011)

170

0

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011

MSM TASI DFM ADX KSE Price Index Bahrain QE Index

Source: Gulfbase, Al Maha Financial Research

Al Maha Research




Identifying the ‘Value Creators’

Over the years as MSM gave superior returns compared to major regional markets, there have

been hidden gems that have significantly outperformed the Index as well as investments in other

assets. These stocks have multiplied an investment many fold and have been the ‘Value

Creators’ for long-term investors.

The general myth...

Most investors believe that frontline and large-cap stocks like Bank Muscat, Omantel, etc give

superior returns compared to less liquid, small and mid-cap stocks. Blue-chips like these are also

more popular with institutions, retail investors and traders alike and hence enjoy relatively higher

liquidity.

Our finding is contrary to the myth…

However, findings of our research exercise are contrary to the general myth and reveal that

Value Creators, which have given maximum returns to the investors in the longer term, have in

fact been the unpopular, small and mid-cap stocks. Most of these stocks may not fit very well in

a trader’s short-term perspective; however, they have proved to be silent winners in the long

term.

Stock Screening Criteria and the Process

In order to identify the Value Creators, a five-tier screening process based on various criteria was

used to screen and filter all the 115 stocks presently listed on the MSM. The basic criteria used

for screening was high positive price returns over the seven year period from 2005 to 2011. The

selected stocks were then screened for their financial health and stability, operational

performance and dividend payout history. Other criteria used for screening were free-float,

operating cash flows and stocks’ liquidity.

Al Maha Research




The Five-tier Stock Screening Process

1

• Positive price return for the seven year period

• 63 selected out of 115

2

• Seven year return greater than 25%


3

• Stability and growth in earnings, profitability, returns, leverage and dividend payouts


4

• Free-float more than 25%


5

• Positive operating cashflows in all seven years, liquidity

• 9 companies selected out of 18

Ranking

• Ranking based on total shareholder return in terms of capital appreciation and dividends

Al Maha Research




The Value Creators


Sector Classification of Value Creators

Industrial and Service Sector stocks have led the chase…

During the period, the Industry sector has been the best performing sector returning an

impressive 115.2%; followed by the Service sector returning 69.2%, also in line with the MSM

30 Index. The graph below represents the relative performance of the MSM 30 and the Sector

Indices over the seven year period. All indices have been adjusted to base 1 as on 1 January 2005

in order to facilitate comparison.


Rank Stock

Total Shareholder

Return

(2005-2011)

1 Shell Oman Marketing 517%

2 Oman Oil Marketing 398%

5 Oman Refreshment 389%

4 Al Maha Petroleum Products Marketing 347%

3 Oman Chlorine 296%

6 Muscat Gases 249%

7 Al Anwar Ceramic Tiles 209%

8 Raysut Cement 162%

9 Oman Chromite 75%

0

1

2

3

4

5

6

Jan

2, 2005

Feb

8, 2006

Dec

7, 2006

Oct

3, 2007

Aug

4, 2008

Jun

10, 2009

Apr

14, 2010

Feb

20, 2011

Dec

28, 2011

Relative Performance of MSM 30 and Sector Indices

MSM30 Index Financial Index Industrial Index Services Index

Al Maha Research




Hence it should be no surprise that five of our Value Creators belong to the industrial sector. A

mix of these stocks fairly represents the major industrial sectors of our economy.

Source: Al Maha Financial Research

Oil & Gas marketing sector – major contributor to value creation

Historically, the Oil & Gas Marketing sector has been of prime focus for growth of the economy.

Crude oil has accounted for over 30 percent of Oman's GDP since 1980 and petroleum activities

(crude and natural gas) contributed to around 46% of our total GDP for the year 2010. Hence,

Oil & Gas related companies have largely contributed towards the overall growth and value

creation in the economy and the market.

This is also evident from the superior positive returns provided by all the listed Oil & Gas

companies. Four of the five companies also make it to our value creators list, re-emphasizing the

importance and performance of this sector. The Oil & Gas companies have strong and stable core

business models with healthy cash reserves and zero or low debt. Historically, these companies

have achieved constant positive growth and paid high cash dividends to investors.

The future outlook of this sector continues to remain positive with Oman’s investment in the oil

and gas sector expected to exceed RO 6.6 billion during the period of the Eighth Five Year Plan

(2011-2015) and estimated at RO 1.3 billion (13% of total estimated expenditure) for the year

2012.

Rank Stock Sector

3 Oman Chlorine Chemical

5 Oman Refreshment Food & Beverage

7 Al Anwar Ceramic Tiles Construction Materials Support

8 Raysut Cement Cement

9 Oman Chromite Mining

Al Maha Research




Comparative Performance Analysis

“In the long run, a portfolio of well chosen stocks and/or equity mutual funds will always

outperform a portfolio of bonds or a money-market account.” – Peter Lynch

During the past decade, assets like energy-related commodities and precious metals have given

high-returns to investors. For the seven year period under consideration, investment in Gold

would provide an investor with a handsome return of 258% while Crude Oil returned 134%.

However, most of MSM’s Value Creators have performed better than investments in Gold and

Crude, pleasantly surprising the market and hence increasing confidence in wise equity

investments.

Majority of our Value Creators have outperformed the returns of Gold and Crude Oil, during the

period as shown below.

Most stocks display superior performance compared to Gold and Crude Oil…

Comparative 7 Year Returns (2005-2011)

Source: MSM, Energy Information Administration (EIA), www.onlygold.com

75%

134%

162%

209%

249%

258%

296%

347%

389%

398%

517%

0% 100% 200% 300% 400% 500% 600%

Oman Chromite

Crude Oil

Raysut Cement

Al Anwar Ceramic

Muscat Gases

Gold

Oman Chlorine

Al Maha Petroleum

Oman Refreshment

Oman Oil

Shell Oman

Al Maha Research




It is also interesting to note that all the Oil & Gas related stocks have also significantly

outperformed the performance of the underlying commodity.

Relative performance of Oil related stocks to Crude Oil


616.7

498.3446.6

234.4

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011

Shell Oman Oman Oil Al Maha Petroleum Crude Oil

Al Maha Research




MSM continues to offer attractive investment opportunities for long-term Value

Creation...

The performance of the above listed value creators and the market lay down clear examples of

superior equity performance on careful and rational stock selection, for the long-term,

irrespective of short-term market fluctuations. The Muscat Securities Market represents a

comparatively smaller but dynamic market that has been gaining in importance in the recent past.

The MSM is one of the very well regulated, transparent and investor-friendly markets in the

region. It currently trades at attractive valuations compared to other major GCC markets and also

offers the high dividend yield to investors in the region. MSM’s relatively low Market

Capitalization to Gross Domestic Product (GDP) also reflects the temporary under pricing of the

market to the economic scenario.

As witnessed in the past, the market’s performance will continue to be driven by the country’s

macro-economic stability, steady growth and planned development measures. According to the

International Monetary Fund (IMF), Oman's economy is projected to keep expanding in the

medium term as a result of a massive investment and development programme put forth by the

Eighth Five Year Plan (2011-2015). The IMF expects real GDP growth at five per cent in 2012,

far higher than the average three per cent targeted by the five-year blueprint. Oman has also had

very low debt and is expected to maintain its low debt to GDP in future. The demographics of

the Sultanate too are conducive to stable growth with younger population and an increase in their

disposable income levels. Oman’s ambitious Vision 2020 aims to diversify the economy,

reducing its dependence on revenue from hydrocarbons and focus on various other sectors like

infrastructure, tourism, logistics, manufacturing and other industries, offering investors more

opportunities for long-term investments.

Hence, despite the temporary fluctuations of the market, the high long-term returns of MSM

equity have been closely tied to the overall economic development, fundamental strength and

operational performance of businesses. The positive future outlook driven by the continuing

strength of these factors makes MSM equity a stable long-term value investment opportunity

rather than a short-term market play.

Al Maha Research




Contacts Telephone E-mail

Research:

Suresh Kumar 24827137 [email protected]

Radhika Gadhia 24827138 [email protected]

Khushboo Badlani 24827140 [email protected]

Portfolio Management :

S.V. Uppiliappan 24827169 [email protected]

Brokerage:

Abdullah Al Hinai 24827188 [email protected]

Mahmoud Al Hamsaidi 24827144 [email protected]

Nasser Al Banna 24827177 [email protected]

Operations & Customer service :

Zakia Al Ghammari 24827134 [email protected]

Muna Al Hashmi 24827139 [email protected]


PO Box 1065 PC 117, Al Wadi Al Kabir, Sultanate of Oman Tel: 00 968 2482 7171, Fax: 00968 24827121

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