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4 March 2014
Oman’s Cement Sector To ride high on upbeat construction market...
Al Maha Research
www.almahafinancial.com Page 2 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
www.almahafinancial.com Page 3 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
www.almahafinancial.com Page 4 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
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4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
www.almahafinancial.com Page 6 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
www.almahafinancial.com Page 7 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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)
Sources: Company reports, Al Maha Financial Research
Al Maha Research
www.almahafinancial.com Page 8 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
Sources: Company reports, Al Maha Financial Research
Al Maha Research
www.almahafinancial.com Page 9 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
Sources: Company reports, Al Maha Financial Research
Al Maha Research
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4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
Sources: Company reports, Al Maha Financial Research
Al Maha Research
www.almahafinancial.com Page 11 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
Sources: Company reports, Al Maha Financial Research
Sources: Company reports, Al Maha Financial Research
Al Maha Research
www.almahafinancial.com Page 12 of 15 Al Maha Financial Services LLC
4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
Sources: Company reports, Al Maha Financial Research
Al Maha Research
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4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
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4 March 2014
Oman’s Cement Sector
To ride high on upbeat construction market...
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
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Oman’s Cement Sector
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