Oman Cement Company (OCC) – Investment Update
Global Investment House – Kuwait – Oman Cement Company – Investment Update Report –Total revenue of the Oman Cement Company (OCC) was RO50.01mn for the year ended December 2007, an increase of 1% from RO49.71mn in the previous year. A modest growth in revenue can be attributed to 2% decline in the sales volume of the company. However, average realizations firmed up to RO26.63/ton from RO26.0/ton in the previous year. The net profit of the company declined by 15% to RO17.6mn in 2007 from RO20.6mn in 2006. The net profit margin simultaneously declined from 41% in 2006 to 35% in 2007. As a result, the EPS declined to RO0.53 in 2007 from RO0.62 reported in the previous year.
The value of Oman’s shares derived from the weighted average of the DCF and relative valuation methods is RO9.88 per share. The stock closed at RO8.612 on the MSM at the end of trading on April 10, 2008. The value of the stock has a potential upside of 15% from its current price level. At current price, Oman’s shares are trading at a P/E multiple of 13.1x and 12.3x for 2008 and 2009 respectively. We, therefore, recommend a ‘BUY’ on the stock.
Financial Performance
The consolidated total revenue of the company was RO50.01mn for the year ended December 2007, an increase of 1% from RO49.71mn in the previous year. A modest growth in revenue can be attributed to 2% decline in the sales volume of the company. Average realizations firmed up to RO26.81/t from RO26.0/t in the previous year. Over 95% of sales were in the domestic market in 2007, the same as in 2006.
The total cost of sales of the company was RO29.73mn during 2007, 11% higher than in the previous year. The increase in cost of sales can be attributed to the increase in input cost of clinker purchased from outside and also because of increase in energy consumption.
The gross profit declined by 12% to RO20.27mn in 2007. As a result of a steeper increase in the cost of sales as compared to that in the sales revenue, the gross profit margin decreased to 41% in 2007 from 46% in 2006.
The net profit of the company declined by 15% to RO17.27mn in 2007 from RO20.43mn in 2006. The net profit margin simultaneously declined from 41% in 2006 to 35% in 2007. As a result, the EPS declined to RO0.53 in 2007 from RO0.62 reported in the previous year.
The company has a balanced shareholders dividend policy based on the results achieved taking into consideration the circumstances of the industry and market as well. The company proposed a cash dividend of 27% in 2007. In 2006, the company distributed a 35% cash dividend.
The subsidiary company, M/s. Sohar Praton Concrete Products (SAOC) despite of the efforts made by the Management to improve the performance, continue to incur loss and Extra Ordinary General Meeting of the subsidiary has decided to go for liquidation.
The total assets of the company rose by 10% to RO134.2mn at the end of 2007. While the current assets increased by 54% at the end of the year, account receivables witnessed a decline of 3% to RO4.76mn at the end of the year. Simultaneously, inventories decreased by 16% to RO4.32mn at the end of the year. Short-term deposits rose handsomely during the year to RO18mn, 173% higher, while long-term deposits amounted to RO19mn, down 44% at the end of the previous year. The net fixed assets declined by 9% to RO44.6mn in 2007.
On the liabilities side, the account payables decreased by 3% to RO1.77mn at the end of 2007. Short-term loans rose by 46% to RO0.7mn at the end of the year. On the other hand, medium-term loans decreased by 25% to RO1.52mn at the end of the year. The paid-up equity capital of the company remained unchanged during the year at RO33.1mn.
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 project is expected to be financed by way of debt (50%) and remaining by liquidating fixed deposits and also through cash flow from operations. The capacity expansion full effect would come by 2010, till then we believe the company has to take proactive measures in the coming years control its cost and increase its margins.
