update : oman cement company saog al maha …almahafinancial.com/reports/company...

Al Maha Research

www.almahafinancial.com of 10 Al Maha Financial Services LLC

Update : Oman Cement Company SAOG

14 March 2016

Positioned for the long term, near term challenges continue...

Target Price: RO 0.466 Rating: Neutral

Share Holding Pattern as on 16 Feb. 2016

Key Updates

Well positioned to cater to the steady domestic

demand

Capacity expansion to help increase sales volumes

Easing competitive pressure to favour realizations

Financial position remains strong with low leverage

and healthy liquidity

Attractive dividend yield, dividend track record to be

maintained

Impact of higher costs on profitability likely to

continue in the near term; increasing utilization levels

to support performance in the longer run

Limited scope for expansion in valuations

Outlook & Rating

Oman Cement Company exhibits growth potential for

the long term supported by its capacity expansion plan,

favourable demand supply scenario and easing

competitive pressure. However, its overall profitability is

expected to be impacted in the near term owing to higher

costs and expenses; mainly attributed to clinker imports,

gas prices, taxes and other costs. We hold a neutral

outlook on the stock in view of the above aspects.

At the market price of RO 0.450 per share, Oman

Cement trades at EV/EBITDA of 7.5x and PE of 13.62,

based on FY16E earnings. We assign a ‘neutral’ rating

to the stock, in view of the limited scope for expansion in

valuations from the present levels, with a target price of

RO 0.466 implying an upside potential of 3.6% from the

current price.

FY14 FY15 FY16E FY17E

P/E 10.82 13.01 13.59 13.34

EV/EBITDA 5.98 7.54 7.53 7.22

Div Yield 7.0% 6.5% 5.2% 5.2%

RoAE 8.2% 7.3% 6.8% 6.9%

Key Ratios

Ministry of

Finance

51.0%

Public

Authority of

Social

Insurance

5.9%

Civil Service

Pension Fund

8.9%

Ministry of

Defence

Pension

Fund

5.7%

Others

28.5%

Relative Performance

MSM Ticker OCOI

Stock Price (RO, as on 14-Mar-16) 0.450

Face Value (RO) 0.100

52-wk High / Low Closing (RO) 0.550 / 0.430

Equity Cap. (RO Mn) 33.087

Market Cap. (RO Mn) 148.892

MSM 30 OCOI

OCOI over

MSM

1 Month -0.8% 4.7% 5.4%

3 Month -1.1% 0.9% 2.0%

6 Month -8.1% -2.2% 5.9%

12 Month -15.2% -12.5% 2.7%

Movement of OCOI vs. MSM 30 Index

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0

0.2

0.4

0.6

0.8

1

1.2

MAR

16, 2015

AUG 18, 2015 MAR

10, 2016

Mil

lion

s

Volume (RHS) OCOI MSM

All figures in RO‘000s Key Financials

Al Maha Research



14 March 2016

Well positioned to cater to the steady domestic demand

Oman Cement is a dominant player in the local market with majority of its production catering to the

domestic demand. Construction activity is mainly stimulated by government spending and although the

Sultanate’s budget for 2016 forecasts a 16% year-on-year decline in expenditure to RO 11.9 billion, it

aims to stimulate economic growth and spending on high-priority socio-economic and development

projects continues. The government would continue to spend on projects such as roads, ports, airports,

railways and tourism related facilities to broaden the economy. Oman plans to borrow anywhere between

$5 billion and $10 billion from abroad, as per latest reports, indicating expenditure to be maintained to

support economic growth. As about half of Oman’s cement demand being met by imports, the demand

supply dynamics remain favourable for Oman Cement. The Company is well placed to cope with

competition and cater to the steady demand in the Sultanate with higher production and focus on its home

market.

Capacity expansion to help increase sales volumes

Oman Cement has recently completed an expansion project to add a fifth cement mill of 150 TPH (tonnes

per hour) capacity. The mill is expected to commence trial production in the first quarter of this year and

become fully operational by 2017. This would add around one million tonnes to the plant’s existing

annual capacity of 2.74 million tonnes. Supported by higher production, sales volumes are expected to

grow by almost 40% over the next couple years as utilization level of the new plant improves. With

steady demand and easing pressure on realizations, higher volumes will support top line going forward.

Easing competitive pressure to favour realizations

As the regional oil producing economies re-adjust their spending and fiscal budgets in line with the

declining oil prices, the infrastructure and construction activity in the Gulf region may see a marginal

slowdown in the near term. However, diversification efforts and strategic spending on infrastructure is

expected to continue. In addition, events like the Expo 2020 in Dubai and the FIFA World Cup in 2022 in

Qatar will also enhance demand for building materials including cement in the coming years that will ease

the competitive pricing pressure in Oman favouring realizations for local producers. In addition, last year,

certain transport restrictions were imposed limiting the maximum load on each truck which also adds to

the costs along with other increased costs of production for regional cement producers making imports

less attractive. This coupled with the continuing ban on cement exports by Saudi manufacturers is

expected to further ease the competitive pricing pressure faced by local producers.

Key Updates

Al Maha Research



14 March 2016

Financial position remains strong with low leverage and healthy liquidity

Oman Cement maintains a very low leverage with average total debt to equity ratio of just 0.09 over the

last five years. Although witnessed an increase, as the Company is investing in expansion and up-

gradation of its plants and facilities, its debt to equity ratio stands at 0.14, which is lower compared to the

average debt to equity ratio of its regional peers. Oman Cement’s interest coverage position is

comfortable too, at over forty times owing to its low cost of debt. It also maintains a healthy short term

financial position with five years’ average current ratio of over 3 times and currently at 2.7x, again better

than the average of comparable companies. Majority of the Company’s investments, totally worth around

RO 50 million as at the end of FY 2015, are held in cash, bank deposits and bonds while around a third of

its investments are held in available for sale and held for trading equity market investments.

Attractive dividend yield, dividend track record to be maintained

Oman Cement has been paying consistent cash dividends and average payout for the last five years is

around 75%. For the last financial year 2015, the Board has recommended a cash dividend of 30 Bz per

share, equaling a yield of 6.67% at the current market price, subject to shareholders’ approval at the

forthcoming Annual General Meeting. Owing to its sound financial position and healthy operating cash

flows, the Company is expected to maintain a similar payout in the coming years, offering consistent cash

dividends to investors.

Impact of higher costs on profitability likely to continue in the near term; increasing utilization levels

to support performance in the longer run

In order to increase cement production by almost one million tonnes per annum with the addition of the

fifth line, the Company would need to resort to clinker imports that would strain its profit margins.

Starting from the 1st of January 2015, price of gas was increased from USD 1.50 per MMBTU to USD

3.00 per MMBTU which had a substantial impact on the cost of production and going forward an increase

of 3% each year would also add to an increase in costs. Increases in other costs too like land lease rentals,

higher fees and corporate taxes raised to 15% from 2016 would impose a downward pressure on

profitability. However, effective measures of cost control as well as higher productivity and cement

production are expected to mitigate the impact of escalated costs, as per the management. Post completion

of Line-2 pollution control by the end of the second quarter and maintenance of Kiln-2 this year, we

expect utilization levels of the clinker kilns to be restored to historic levels, supporting profitability in the

coming years.

Limited scope for expansion in valuations

Oman Cement currently trades at a PE of 13.6x one year forward earnings, which is in line with its

historic average valuation of 13 times for the last ten years. Compared to its regional peers too, Oman

Cement trades at a premium with respect to its FY 2015 earnings, offering limited scope for a re-rating in

the near term.

FY 2011 FY 2012 FY 2013 FY 2014 FY2015

Dividend per share (RO) 0.030 0.035 0.035 0.030 0.030

Payout 78% 66% 77% 75% 85%

Al Maha Research



14 March 2016

We have used the following methodologies to revise our fair value for Oman Cement, assigning equal

weights to the two in our valuation matrix:

Discounted Cash Flow

Enterprise Value to EBITDA multiple

Discounted Cash Flow (DCF)

Figures in RO ‘000s except per share data

Our revised DCF fair value of Oman Cement works out to be RO 0.471 per share.

Base Data for Valuation

Beta 0.83

Risk Free Rate 3.50%

Risk Premium 7.00%

Cost of Equity 9.30%

Cost of debt 2.25%

Tax Rate 15.00%

Total Debt 22,510

Equity Value 148,892

WACC 8.33%

Terminal Growth 2%

2016E 2017E 2018E 2019E 2020E

Net Operating Profit After Tax 9,355 9,471 11,504 12,539 13,181

Add: Depreciation and Amortization 7,559 8,200 8,080 7,962 7,840

Less: Change in working capital 114 3,379 2,395 2,425 2,340

Less: Capex 15,298 9,284 7,638 7,681 7,897

Free Cash Flow 1,502 5,008 9,551 10,395 10,784

Present Value of Free Cash Flow 1,409 4,337 7,636 7,671 7,346

Terminal Value 173,871

Present Value of Terminal Value 118,432

Enterprise Value 146,831

Less :Net Debt (9,147)


No of shares 330,873

Equity Value Per Share 0.471

Valuation

Al Maha Research



14 March 2016

Enterprise Value (EV) to EBITDA Multiple

Our EV to EBITDA valuation is based on the last ten years’ historic average one year forward EV to

EBITDA multiple of the Company and the peer group average EV to EBITDA.

Comparable Company Valuations


Our revised fair value for Oman Cement using EV to EBITDA valuation based on FY 2016 earnings

equals RO 0.461 per share.

Company Country PE EV/EBITDA

Oman Cement Co SAOG Oman 12.86 7.82

Raysut Cement Co SAOG Oman 8.95 5.87

Qatar National Cement Co QSC Qatar 10.51 7.65

Saudi Cement Saudi Arabia 10.45 8.19

Yamama Cement Co Saudi Arabia 9.09 5.70

Southern Province Cement Co Saudi Arabia 10.90 9.48

Yanbu Cement Co Saudi Arabia 9.75 7.48

Qassim Cement Co/The Saudi Arabia 9.97 7.47

Arabian Cement Co/Saudi Arabia Saudi Arabia 7.68 5.17

Tabuk Cement Co Saudi Arabia 14.83 12.21

National Cement Co UAE 13.21 7.62

Gulf Cement Co PSC UAE 10.11 4.90

Union Cement Co UAE 8.64 4.21

10.53 7.21Peer Average

Enterprise Value to EBITDA

One year forward EV/EBIDTA (Previous 10 Years Avg.) 8.22

Peer Group Average 7.21

Benchmark multiple 7.72

EBITDA (2016E) 18,565

Enterprise Value 143,295

Net Debt (9,147)


Number of Shares 330,873

Equity Value Per share 0.461

Source: Bloomberg

Al Maha Research



14 March 2016

Weighted Average Valuation Matrix:

Outlook & Rating

Oman Cement Company exhibits growth potential for the long term supported by its capacity

expansion plan, favourable demand supply scenario and easing competitive pressure. However, its

overall profitability is expected to be impacted in the near term owing to higher costs and expenses;

mainly attributed to clinker imports, gas prices, taxes and other costs. We hold a neutral outlook on the

stock in view of the above aspects.

At the market price of RO 0.450 per share, Oman Cement trades at EV/EBITDA of 7.5x and PE of

13.62, based on FY16E earnings. We assign a ‘neutral’ rating to the stock, in view of the limited scope

for expansion in valuations from the present levels, with a target price of RO 0.466 implying an upside

potential of 3.6% from the current price.

Valuation Metric Weights Fair Value (RO)

Discounted Cash Flow 50% 0.471

Enterprise Value to EBITDA 50% 0.461

Weighted Average Fair Value 100% 0.466

Current Market Price 0.450

Up side 3.6%

Al Maha Research



14 March 2016


Forecasting Assumptions:

1. The kilns are assumed to reach 90% capacity utilization by 2017 and increase going forward, post their

up-gradation and maintenance to be completed in 2016.

2. As the Company had higher clinker inventory as at the end of 2015, clinker imports during 2016 are

expected to be lower than the last two years however increase going forward as capacity and utilization

levels of the cement mills increase.

3. The overall utilization of the cement mills including the fifth line is assumed to reach 80% by FY 2017,

increasing to 90% by 2020.

4. Realizations are expected to be steady at current levels as competitive pressures show signs of easing and

demand for cement is expected to continue.

5. Working capital requirement is assumed to be lower in the current year due to clinker inventory, but

increase going forward as production increases.

6. Finance costs are estimated at a rate of 2.25% as the Company has availed loans over the years at a fixed

rate of 1.7% over 3 months USD Libor.

7. Balance facility of RO 7.5 million for pollution control of Line-2 and the fifth cement mill is assumed to be

drawn down in the current year.

FY 2013 FY 2014 FY 2015 FY 2016E FY 2017E FY 2018E FY 2019E FY 2020E

Revenue 52,423 51,344 52,182 59,656 71,416 76,384 79,189 81,413

EBITDA 19,075 19,329 18,967 18,565 19,343 21,615 22,714 23,347

Net Profit 15,086 13,149 11,703 10,958 11,165 13,320 14,536 15,343

Total Equity 161,675 159,765 160,255 160,737 165,120 171,559 177,555 182,927

EBITDA Margin 36.4% 37.6% 36.3% 31.1% 27.1% 28.3% 28.7% 28.7%

Net Profit Margin 28.8% 25.6% 22.4% 18.4% 15.6% 17.4% 18.4% 18.8%

Return on Equity 9.3% 8.2% 7.3% 6.8% 6.8% 7.8% 8.2% 8.4%

Earning per Share (RO) 0.046 0.040 0.035 0.033 0.034 0.040 0.044 0.046

Book Value per Share (RO) 0.489 0.483 0.484 0.486 0.499 0.519 0.537 0.553

Revised Financials

Al Maha Research



14 March 2016

Al Maha uses a three-tier rating system based on absolute upside or downside potential for all

stocks under its coverage.

"Buy": The share price to settle at or more than 15% above the current market price and we

expect the stock to reach the target price in a 9 to 12 month time horizon.

"Accumulate": The share price to settle between 5% and 15% above the current market price

and we expect the stock to reach the target price in a 9 to 12 month time horizon.

"Neutral": The share price to settle up to 5% above the current market price and we expect the

stock to reach the target price in a 9 to 12 month time horizon.

Definitions:

"Time horizon": Our analysts make recommendations on a 9 to 12 month time horizon. In other

words, they expect a given stock to reach their target price within that time.

"Target price": This may be identical to estimated fair value per share, but is not necessarily

the same. There may be very good reasons why a share price is unlikely to reach fair value

within our time horizon. In such a case we set a target price which differs from estimated fair

value per share, and explain our reasons for doing so.

Please note that the achievement of any price target may be impeded by general market and

economic trends and other external factors, or if a company’s profits or operating performance

exceed or fall short of our expectations.

Al Maha Rating System

Al Maha Research



14 March 2016

Al Maha Financial Services LLC

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Tel: 00 968 2482 7171, Fax: 00968 24827121

Contacts Telephone E-mail

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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]

Asset Management:

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Shailendra Kumar Singh 24827169 [email protected]

Brokerage:

Mahmoud Al Hamsaidi 24827144 [email protected]

Halima Al Mahrooqi 24827181 [email protected]

Nasser Al Banna 24827177 [email protected]

Al Maha Research



14 March 2016

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