Global values OCC at RO0.676/share and reiterates BUY on the stock- Global Investment House – Kuwait – Oman Cement Company – Investment Update
Oman Cement Company (OCC) posted revenue of RO63.5mn which was higher by 9% as per our estimates of RO58.3mn for 2008. Difference in the forecasted and actual revenue was because of the increase in the price cap during the year as well as import of higher amount of clinker and cement.
The value of OCC’s shares derived from the weighted average of the DCF and relative valuation methods is RO0.676 per share. The stock closed at RO0.372 on the Muscat Securities Market at the end of trading on 13th April 2009, which implies that the weighted average value of OCC’s shares is at a premium of 82% to the share’s current market price. At their current price, OCC’s shares have a P/E multiple of 10.6x and 7.2x for 2009 and 2010 respectively. We therefore reiterate our BUY recommendation on the scrip.
Oman Cement Company (OCC) posted revenue of RO63.5mn in 2008 as compared to RO49.9mn in 2007, higher by 27%. Sales revenue increased because of the combined effect of volumes as well as prices. Company sales volume increased by 14.6% to 2.1mn tons as compared to 1.87mn tons in 2007. On the other hand local sales price increased by 12.2% to RO29.7/ton whereas the export price rose by 11.6% to RO36.5/ton.
OCC’s cost of sales increased by 69% to RO49.65mn in 2008. The increase in cost was due to high purchase cost of cement and clinker imported under instructions from the government in order to meet the local demand. The company imported 0.92mn tons of clinker during the year to meet the demand, which is 42% higher as against 0.53mn tons during the previous year.
OCC’s other income increased by 68% to RO3.2mn in 2008 as against RO1.91mn in 2007. This other income portion has over the years added significant amount to the bottom line.
OCC reported profit before tax of RO14.1mn in 2008 which was subject to 12% income tax resulting in a profit after tax of RO12.5mn as compared to RO17.6mn in 2007. In 2008, the company managed to report net margins of 19.74% as against 35.3% in 2007.
In terms of quarterly performance of 2008, 1Q-2008 was the most favorable quarter as the company report profit after tax of RO3.9mn and net margins of 34%. Although in the last quarter the company report highest ever revenue but was not able to full transfer it to the bottom line as the net margins were merely 9% in 4Q-2008.
OCC’s assets declined marginally to RO133mn in 2008 as compared to RO134.3mn in 2007. The major reason for the fall in assets in 2008 was because of decline in the investment available for sale. Investment available for sale dropped to RO15.2mn as compared to RO21.0mn in 2007.
Sohar Praton Concrete Products Company SAOC, a 58.4% subsidiary of OCC went into liquidation and consequently, the parent company’s control of the subsidiary passed to the liquidator. Accordingly, the subsidiary is deconsolidated with effect from 12 March 2008. On the other hand, Oman Mondi Shuaiba Packaging (OMSP) reported an improved performance during the year 2008. Revenue earned by OMSP increased from RO3.5mn to RO6.5mn in 2008.
Taking into account the rising demand scenario in Oman and the GCC, OCC has entered into an agreement with M/s CBMEC, China- to build its 3rd production line with a clinker production capacity of 4000tpd. The project cost is estimated at approximately US$162mn or RO62.3mn. The company has been given gas supply assurance from the government. The project is expected to be completed by FY2009 and the additional impact of this should reflect in the books by FY2010. OCC will be able to reach a cement capacity of approximately 2.6mtpa by end of 2009 which currently stands at 1.87mtpa. The capacity expansion full effect would come by 2010, till then we believe the company has to take proactive measures to control its cost and increase its margins.
As per MEED, over US$105bn worth of projects have been announced by Oman. Keeping in view the liquidity crunch and the cash constraints, even if we discount the projects by more than a half, still there would be ample demand which would be catering to sales growth of the cement companies in Oman. According to OCC, the expected demand for cement in Oman is estimated at 4.63mtpa during 2009.