oman’s cement sector - al maha financialalmahafinancial.com/reports/sector reports/012827oman...

4 March 2014

Oman’s Cement Sector To ride high on upbeat construction market...

Al Maha Research

www.almahafinancial.com of 15 Al Maha Financial Services LLC

4 March 2014

Oman’s Cement Sector

To ride high on upbeat construction market...

Content

GCC’s expanding construction sector to fuel cement demand ....................................................................................3

Oman’s cement demand to stay buoyant riding on the back of mega projects .....................................................................................4

An overview of Oman’s cement sector ...................................................................................................6

Financial performance of the sector .............................................................................................8

The Road Ahead... ..........................................................................................................................................12

Al Maha Research


4 March 2014



The economic development of a country and the growth of its construction industry are closely

linked, as speeding economic advancement boosts a country’s infrastructure requirement and the

Government’s expansive infrastructure spending stimulates increasing construction activity. This

in turn spells robust outlook for the closely related building material industries as demand for

their products and services relies on the construction sector to a great extent.

GCC’s expanding construction sector to fuel cement demand

The growth prospects of the Gulf Cooperation Council (GCC) economies remain positive as

government spending continues to rise and business activity accelerates. The region’s economic

growth is expected to pick up pace in the current year and strengthen going forward. The

region’s governments have announced several mega infrastructure projects as a result of the

optimistic economic outlook and building up business confidence. Thus the high level of project

spending is expected to drive the growth momentum in the construction activity. GCC

economies like Qatar and UAE are investing heavily in their infrastructure in order to gear up for

hosting the FIFA World Cup 2022 and World Expo 2020 respectively. Saudi Arabia also plans

an USD 100 billion investment in over the next ten years to upgrade and future-proof the

Kingdom’s transportation infrastructure. The Kingdom’s government has also announced the

allocation of about USD 67 billion (SAR 250 billion) for construction of 500,000 housing units.

According to Middle East Economic Digest (MEED), the total value of projects planned or

underway stood at USD 1.87 trillion as of last year, which is expected to rise to about USD 4

trillion in the current decade.

Hence, the construction segment, fuelled largely by government initiatives, is expected to have

grown by 19% in GCC region during 2013 and is expected to maintain the growth momentum

going forward. Such robust infrastructure activities and project pipeline in the region is expected

to drive the demand for building materials like cement, steel, tiles etc. According to industry

experts, cement demand in the GCC region is expected to grow at 7% in the current year, rising

from a 4 to 5% increase witnessed in 2013.

UAE

549

Saudi Arabia

732

Qatar

222Kuwait

188

Oman

116

Bahrain

62

Total value of projects planned or underway (USD Billion)

Source: MEED, Al Maha Financial Research

Al Maha Research


4 March 2014



Oman’s cement demand to stay buoyant riding on the back of mega projects

Akin to the regional scenario, Oman’s construction sector too has been stimulated by the

government’s infrastructure spending and efforts to diversify its hydrocarbon based economy.

Oman’s revenue from the building and construction sector has increased steadily from RO

1,116.5 million in FY 2008 to RO 1,455.9 million for 2012. The sector’s average contribution to

the country’s GDP has been around 5% over the last five years. For the year 2013, the

International Monetary Fund (IMF) projected a growth rate of 5.1% in Oman’s GDP while the

construction industry was forecasted to grow at a higher rate of 6.3% during last year.

Boosting the construction market, the Omani government is investing heavily in developing

transport and social infrastructure along with its core oil and gas sector. Transportation, oil & gas

and power are the main sectors with maximum value of planned project spending in the

Sultanate.

According to the MEED, of the RO 45 billion (approximately USD 116 billion) projects planned

or underway in Oman, transportation sector accounts for a major share focusing on rail, sea,

roads and airports with the 2244-km national rail project being the cornerstone of the

infrastructure programme. The mega rail network will connect the major industrial hubs as well

as also link the GCC railway. Among other major projects are the construction of new airports

and expansion of the existing airports and road network. Six new airports are to be constructed

throughout the country and expansions of the two current airports are also expected. Oman’s

Ministry of Transport and Communications has awarded road projects worth RO 535 million at

the end of the previous year.

Transportation

66%

Water

3%

Oil & gas

pipelines

15%

Commercial

4%

Power sector

7%Industrial

5%

Construction projects in Oman - Sectorwise breakdown by value

Source: MEED, Al Maha Financial Research

Rail - 45%

Airports - 6%

Roads & Bridges - 9%

Ports - 6%

Al Maha Research


4 March 2014



Major projects already under construction or in advanced stages of planning, engineering or

design include the following:

Besides the transportation sector, Omani government’s focus on tourism development activities

is leading to demand for new hotels and properties. Oman's hospitality sector is planning to add

3,000 hotel rooms due for completion by the end of 2014 in anticipation of increasing number of

visitors. Private developers are also planning to investment in tourism and developing

destinations such Duqm, Musandam and Salalah by opening up new hotels and resorts.

With the scale of the ongoing development, the construction activity in the country will

accelerate increasing the consumption levels of cement going forward. The next few years will

see domestic demand for cement continue to rise as the government rolls out major infrastructure

projects and private investors push ahead with their investment plans. The growth in construction

segment mainly driven by mega infrastructure projects along with many tourism and industrial

projects will lead to a larger off-take of cement.

ProjectsValue

(RO mn)

Expected year of

completion

Oman Convention & Exhibition Centre 385 2016

Sohar Airport 193 2014

Salalah Port Expansion 173 2014

Oman's national rail network NA 2018

Duqm city, drydocks and refinery 7,700 2014-2018

Ghubrah Independent Water Project 146 2014

Batinah Expressway 997 NA

Muscat & Salalah International Airport Expansion 2,002 2014

Salalah Medical City 385 2016

NA: Data Not Available

Source: Thomson Reuters, Al Maha Financial Research

Al Maha Research


4 March 2014



An overview of Oman’s cement sector

Oman being a growing economy with a key focus on infrastructure development, the cement

sector’s growth is closely linked to the nation’s economic development.

Major market players

A bulk of the cement demand is met by the two major local players, Oman Cement Company

and Raysut Cement Company. The two companies have a combined annual clinker production

capacity of 6 million tonnes and cement production capacity of 7.2 million tonnes. Besides the

local companies, a chunk of the domestic demand is also met by foreign players which currently

account for nearly two million tonnes of cement sales in the Sultanate.

Cement production and capacity utilization

The local cement producers have been operating at optimum capacities to meet the local cement

demand and achieve maximum efficiency in order to compete with the foreign producers. The

two companies operate at a utilization of 80% of their total 7.2 million metric tonne annual

capacity, producing 5.8 million tonnes of cement last year. Due to higher demand from the

booming construction and economic activity in the years 2008 and 2009, the two companies

imported clinker and cement to meet the demand in addition to their output and operated near

maximum utilization levels. In the year 2011, the cement capacity almost doubled as the two

companies added additional capacities and also as Raysut Cement acquired Pioneer Cement LLC

in the UAE. However, due to the planned up-gradation and modernization efforts as well as

some temporary shutdowns, the combined utilization of the two companies stood at 69% during

2011. As the cement demand improves and the plant up-gradation and expansion is completed,

the companies are expected to record higher production and utilization levels with the

modernized facilities in the coming years.

4.0 4.0 4.0

7.2 7.2 7.2

4.13.7 3.8

5.0

6.1 5.8104%

94% 96%

69%

84% 80%

0%

20%

40%

60%

80%

100%

120%

-

1

2

3

4

5

6

7

8

2008 2009 2010 2011 2012 2013

Mil

lio

n M

T

Annual production and capacity utilization (FY 2008-13)

Capacity Production Utilization % (RHS)

Sources: Company reports, Al Maha Financial Research

Al Maha Research


4 March 2014



Cement sales and realizations

Dependent on the construction activity, cement sales have closely followed the trend witnessed

in the domestic construction sector over the last six years. The combined annual cement sales

stood around 5 million metric tonnes (MT) during the two years 2008 and 2009. However, after a

slowdown in construction and economic activity sales volume declined to about 4 million MT in

2010. In addition, as the UAE construction market came to a standstill, Oman faced an

oversupply of competitively priced cement from UAE, where local supply outstripped demand

by 6 million tonnes of cement. This impacted the local realizations to a great extent and prices

dropped by around 14% during 2011, from over RO 30 per MT to around RO 26 per MT.

However, although realizations remained under pressure from the foreign competitors, cement

sales having been growing since 2011 on account of increasing demand, increase in exports and

higher production capacity to cater efficiently to the domestic market. For the year 2013, the two

companies recorded a combined sales volume of 5.8 million metric tonnes at an average

realization of RO 24.99 per metric tonne.

Going forward, we expect cement sales to continue the growth trend in line with the projected

increase of 6% in the demand for cement. Higher production owing to the capacity expansion

and better operating efficiency on account of the cost advantages derived from the up-gradation

and expansion of operations and processes will enable the local companies to compete with

foreign producers and achieve higher sales. We also expect the realizations to stabilize at the

current levels and show marginal improvement in the coming years as the competitive pressure

eases and the excess capacity is absorbed by the commencement of various mega projects

announced in the region.

4.9 5.1

3.8

5.1

6.15.8

31.22 31.01 30.95

26.5525.49 24.99

0

5

10

15

20

25

30

35

-

1

2

3

4

5

6

7

2008 2009 2010 2011 2012 2013

RO

per

MT

Mil

lio

n M

T

Annual sales volume and realizations (FY 2008-13)

Sales Realisation (RHS)


Al Maha Research


4 March 2014



Financial performance of the sector

Revenue growth supported by increasing sales volume

Influenced greatly by the state of construction activity, revenues of the sector are cyclical in

nature. During the positive years of 2008 and 2009, revenues of the sector reached an average of

around RO 156 million per year supported by the higher volumes as well as healthy realization

levels of around RO 31 per metric tonne. Export revenue comprised about 15% of the total

revenue during the two years as the companies focused on catering to the expanding demand in

the local market. However, revenue of the Omani cement sector plummeted by 25% in 2010 on

year-on-year basis to RO 118 million as a result of the competitive pressure on the sales volume.

In the following years, although realizations have remained relatively low around RO 25 per MT

due to severe competition, a steady recovery of the local and regional construction activities led

to a growth in sales volumes. Hence, Omani cement revenues grew to an average of RO 145

million for the last three years. Revenues have also been supported by higher exports of the

locally produced cement to neighboring GCC countries, Yemen and East Africa. Total cement

exports amounting to an average of RO 41 million each year over the last three years equals 28%

of the total cement revenues during the period.

The top line of the cement sector declined by 5.7% y-o-y during the year 2013, mainly due to

lower production and sales volumes. Unexpected breakdown of one of the cement mills at Oman

Cement Company and shutdown of a plant at Pioneer Cement, subsidiary of Raysut Cement for

maintenance works brought down the total production levels and hence revenues.

However, going forward, we expect Omani cement revenues to show steady growth mainly

driven by higher volumes and supported by marginal improvement in the price realizations.

127 136

95 98113 104

2622

2336

4145

0

20

40

60

80

100

120

140

160

180

2008 2009 2010 2011 2012 2013

in R

O M

illi

ons

Revenues (FY 2008-2013)

Local Sales Exports


Al Maha Research


4 March 2014



Reviving earnings and profitability

Besides changes in the sector’s income and operational efficiency, earnings of the Omani cement

sector have been volatile over the last six years owing to various factors like changes in the

market valuation of investments, results of associates, financing costs, etc. The combined

operating profit of the two local companies dropped significantly by around 22% y-o-y in the

year 2010 mainly resulting from a decline in the revenues. Consequently net profits too declined

by around 23% y-o-y to reach RO 40.7 million for FY 2010. During 2011, despite a turnaround

in income; rising manpower, raw material and production costs impacted profitability margins

greatly and further drove down the operating profit of the sector by 16% y-o-y to RO 33.9

million. Moreover, higher financing costs and a drop in investment fair values led to a net profit

of RO 27.7 million for the year, a y-o-y decline of 32%.

However, during the year 2012, profitability of the sector witnessed a turnaround and also held

steady for the last year; supported by the cost advantages arising from the new facilities added

and also an improvement in the performance of investments and associates. Hence, in addition to

an increase in revenues, operating profit of the sector registered an impressive growth of 36% y-

o-y and net profit grew by 49% y-o-y to reach RO 46 million and RO 41.4 million respectively.

Similarly, the cement sector reported an operating profit of RO 44.9 million and a net profit of

RO 43.6 million for the last year.

The revival in margins which started in 2012, continued during the last year as well with the

sector recording a healthy gross margin of 34%, operating margin of 31% and a net margin of

42.0

51.5

40.2

33.9

46.0 44.9

39.6

52.9

40.7

27.7

41.443.6

-

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013

RO

Mil

lio

ns

Operating and net profit (FY 2008-2013)

Operating profit Net profit


Al Maha Research


4 March 2014



30%. With the gross and operating margins remaining steady, net margin improved from that of

28% for the previous year due to savings in finance costs, better results of associates and higher

investment gains.

In the coming years, as revenues show steady growth, we expect the sector’s profitability to

remain healthy and possibly witness some improvement on account of better utilization and

higher production, thus reducing the need to resort to imports. Easing competition should also

help ease the pressure on margins in the longer term. However, any increases in the price of gas

and withdrawal of government subsidy may have an adverse impact on the sector margins.

Healthy returns

Closely following the sector earnings, the return on average equity improved to over 15% in the

last two years from a low of 11% reached in 2011. Similarly, return on average assets too grew

to 11.2% in 2013 from a low of 7.6% as of 2011. The sector’s return on average equity (RoAE)

averaged to 16.5% for the six year period from 2008-2013 while return on average assets

(RoAA) averaged to 12.6% during the same period.

30%

35%

39%

29%

34% 34%

28%

33%34%

26%

31% 31%

26%

34% 35%

21%

28%30%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2008 2009 2010 2011 2012 2013

Profitability margins (FY 2008-2013)

Gross margin Operating margin Net margin


Al Maha Research


4 March 2014



Low leverage

The debt levels of the Omani cement sector remained nearly nil in the initial years of the six year

period since 2008. However, as the companies started to avail debt facilities to fund their

expansion, including acquisition and modernization, leverage of the sector inched up to a debt to

equity ratio of 0.3 in 2010 and remained almost flat thereafter. As of the last year, the debt to

equity ratio stood at 0.24. Recently, Oman Cement has decided to fund their new cement mill

project, costing approximately RO 15 million by raising more debt. However, the overall

leverage in the sector is expected to remain low supported by cash rich balance sheets.

18.6%

23.1%

16.3%

11.0%

15.8% 15.4%

15.9%

20.1%

12.7%

7.6%

11.1%

11.2%

0%

5%

10%

15%

20%

25%

2008 2009 2010 2011 2012 2013

Returns (FY 2008-2013)

RoAE RoAA Avg. RoAE Avg. RoAA

0.03 0.03

0.30 0.30

0.270.24

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2008 2009 2010 2011 2012 2013

Leverage (FY 2008-2013)

Avg. Debt to equity Debt to equity



Al Maha Research


4 March 2014



Steady dividend payments by the companies

Backed by their financial strength and healthy cash positions, the two companies have been

paying steady cash dividends to their shareholders over the years. They have maintained a

combined average payout ratio of 67% for the last six years from 2008 to 2013 and going

forward too we expected the companies to continue their regular dividend payments.

The Road Ahead....

Cement demand to strengthen driven by the upbeat construction activity

As the regional governments chart out massive fiscal budgets with great focus on infrastructure

spending for their economic growth and to prepare for hosting two international events, the

construction sector is expected to remain buoyant in the region. The value of contracts awarded

across sectors is expected to double from an estimated RO 2.6 billion during the last year to

about RO 4.88 billion in 2014, according to industry reports. With a rise in the number and scale

of construction projects in the Sultanate and the region, demand for cement too is expected to

grow in line with the growth in the construction sector. Oman’s long-term plans and initiatives to

develop transport infrastructure and industrial zones will provide the required stimulus for the

continuing growth of the cement industry in the Sultanate. Hence according to industry sources,

cement demand in Oman is expected to rise in line with that in the region, at an average annual

rate of 6% through 2016.

Dumping from foreign producers to ease going forward

After the slump in the UAE construction sector, the local cement market has been facing

dumping of surplus capacity from the UAE producers. In spite of a pick-up in the UAE

69%

61%

79%72%

64%

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2008 2009 2010 2011 2012 2013

Dividend Payout (FY 2008-2013)

Dividend payout Average payout


Al Maha Research


4 March 2014



construction sector, excess capacity continues and the same has been putting pressure on

realizations and margins. However, going forward, as the UAE commences various big-ticket

real-estate projects; the cement supply is expected to be absorbed locally thus reducing dumping

in Oman. Moreover, with Saudi Arabia opening up its market for cement imports, UAE cement

companies are expected to shift their export activity away from Oman. Thus the reducing

dumping and competitive pressure would have a positive impact, although marginal, on the

revenues and market share of the local cement producers.

Expansion and up-gradation plans to tap the growing demand and increase efficiency

With a positive outlook for cement demand, the two local cement producers are expanding their

capacity and operational processes to meet the domestic and international demand. Oman

Cement is upgrading its Kiln-1 which is expected to be completed by the first half of the current

year and the Company is also adding a new cement grinding mill with a capacity of 150 tonnes

per hour that is expected to be operational by the end of next year. In addition to adding capacity,

Oman Cement is also creating supporting infrastructure of cement silos and bulk dispatches and

plans to modernize Line-2. Raysut Cement too is expanding its domestic and international

operations by building two cement terminals in Duqm port, Oman and in Berbera Port, Somalia.

The Company is also establishing a grinding plant in Yemen through local partners and is

expanding production capacity and processes of its UAE subsidiary Pioneer Cement. The

capacity and operational expansion will enable companies to boost production and cater to the

increasing demand in the coming years while also supporting their current profitability levels and

reducing dependence on imports.

Companies to show healthy growth and better financial performance

As construction activity and hence cement demand picks up in the region, easing foreign

competition in the local market, Omani cement producers will see a growth in their sales

volumes as well as an improvement in realizations. The companies’ expansion plans and cost

control efforts will enable them to increase operational efficiency and compete aggressively in

the market to cater to this increase in demand. Thus the growth in top line is expected to

translate into steady bottom line growth supported by positive business outlook.

Hence, we are of the opinion that the local cement companies, Oman Cement and Raysut

Cement will benefit from the increased cement demand to arise from the massive

infrastructure spending. Thus the optimistic demand outlook will result in an impressive

performance and profitability of the companies would be reflected in the market going

forward.

Al Maha Research


4 March 2014



Contacts Telephone E-mail

Customer service & Operations:

Zakia Al Ghammari 24827134 [email protected]

Muna Al Hashmi 24827139 [email protected]

Pravin Sivan 24827129 [email protected]

Research:

Suresh Kumar 24827137 [email protected]

Radhika Gadhia 24827138 [email protected]

Khushboo Badlani 24827140 [email protected]

Portfolio Management:

Shailendra Kumar Singh 24827135 [email protected]

Brokerage:

Mahmoud Al Hamsaidi 24827144 [email protected]

Halima Al Mahrooqi 24827181 [email protected]

Nasser Al Banna 24827177 [email protected]

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

Al Maha Research


4 March 2014



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