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SMNPowerHoldingSAOGUnderTransformation
OfferPrice:RO3.520 Outlook:Subscribe
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SMNPowerHolding SteadyCashflow,Dividendplay
Outlook:Subscribe
IPO
Rating:
Average
Utilitiesplayprovidingfixedreturns Bestportfoliofitforlowriskappetiteinvestors Fairvaluefactoringforhigherdividendpayouts
September26,2011
Issueforlowriskappetiteinvestors
Asacombinedentityoftwoprojectcompanies,theSMNPowerHoldingSAOG (undertransformation)owns
the largestpowergenerationcapacities inSultanateofOman.Keypromotersofthecompany include
Kahrabel (fully owned subsidiary of International Power), Mubadala Power Holding Co and the National
TradingCo.
Power demand to remain intact: As per the latest seven year projections (201117) of OPWP, the
averageelectricitydemandinMainInterconnectedSystem(MIS)isestimatedtogrowfrom1,924MW
in 2010 to 3,464 MW in 2017, reporting a CAGR of about 8.8%. Key drivers for demand include the
estimated economic growth, investment in various tourism projects along with the development of
variousindustrialhubsinSohar,SurandDuqm.
Steadycashflowgeneration:AsperthePPA,therevenueofthecompanyisfixedthroughthePower
andwaterPurchaseagreement(PWPA)withthesingleofftaker,OmanPowerandWaterProcurement
Co(OPWP).Owingtothis,webelievethatthecompanyhasastrongrevenuevisibilityprovidingstable
andreliablecashflowgenerationovertheprojectperiod,whichprovidescomforttotheinvestors.
Strongshareholdersupport: The presence of robust shareholder strength for SMNPower Holding in
the form of International PowerGDF Suez, parent of Kahrabel, which is one of the leaders in global
independent power generation with 72,360 MW (gross) 42,225 MW (net) in operations across the
world. Added, Kahrabel / International Power are the largest private power and water producers in
Oman.
Outlook Steadycashflow,DividendPlay
Overall the stable industry performance along with the steady cash flow generation in the Utilities
sectormakestheissueanattractivedividendplay.WeratetheSMNPowerHoldingIPOasanaverage
issueinourratingsalewiththefairvaluefactoringforhigherdividendpayouts.BasedonourValuation
methodologies(DividendDiscountModel),wehavearrivedatourfairvalueofRO3.877forSMNPower.
Werecommendthelowriskappetiteinvestorstosubscribefortheissuewiththemediumtolongterm
horizon.Wealsobelievethatthe issuewouldbeabestfitfor longonlyfundsand institutions.We
expect the issue to see limited upside on listing, however considering the dividend yield we
recommendtosubscribefortheissue.
KanagaSundar
+96824790614Ext:534
VijaySridharan
+96824790614Ext:533
AbdulazizAlLawati
+96824790614Ext:570
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Index PageNo
IssueHighlights.. 4
ShareholdingDetails.. 6
Backgroundofthecompany. 7
EconomicOutlook 8
OmanPowerSectorAnintroduction.. 9
InvestmentRationale. 11
RisksandConcerns. 14
ConcernsonPostPPAvaluation. 15
ValuationsandRecommendations..... 16
Outlook... 20
FinancialSummary.. 21
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OfferDetails
Table1:TermSheet
IssueDetails KeyTerms
NameoftheCompany
SMNPowerHoldingSAOG(undertransformation).The
companyistheholdingcompanyofthetwopower
projects.
AuthorizedCapital RO70.00million
NominalValue RO1.000
IssuedandPaidCapital(Pre&PostIPO) RO19.964million
NumberofSharesOfferedforsubscription35%(6.987millionshares) oftheCompanystotalshare
capitalaspertheobligationsstipulated.
PurposeoftheIPOComplywiththelistingobligationsstipulatedinPFA
Requires35%availableforpublicsubscription
Allocation
OpentoOmaniandNon OmaniInvestors Totalforeignownershipfollowinglistingshallnot
exceed70%ofthepaidupsharecapital.
AllGCCnationalsaretreatedasOmaninationalsinrespectofownershipofandtradinginshares.
ProposedAllocation
CategoryI RetailInvestors
60%of
the
Offer
(4.192
million
shares),
for
individuals
andjuristicpersonsapplyingforamaximumof5,000
Shares.
CategoryII InstitutionalInvestors
40%oftheOffer(2.795millionShares),forindividuals
andjuristicpersonsapplyingformorethan5,100
Shares.
AnyundersubscriptioninanyCategoryshallbecarried
overtotheotherCategory
OfferPriceforeachShare RO3.520 OfferpriceofRO3.500plus20Baizas
towardsIssueExpenses
Source:IPOProspectus,GBCMResearch
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TermSheetdetailscontd
IssueDetails KeyTerms
TotalOfferSize RO24.595million
MinimumLimitfortheSubscription
CategoryI:100Sharesandinmultiplesof100
thereafter
CategoryII:5,100Sharesandinmultiplesof100
thereafter
Allotmentwould
be
on
a
proportionate
basis
MaximumLimitfortheSubscription
CategoryI:5,000Shares
CategoryII:10%ofthetotalOffersizerepresenting
698,725shares
Allotmentwouldbeonaproportionatebasis
OfferOpeningDate 11September2011
OfferClosingDate 10October2011
ApprovalofCMwithregardstoallotment 22October2011
Listingof
Shares
in
MSM
25
October
2011
SellingShareholders
KahrabelFZE(47.5%oftheoffershares) MubadalaPowerHolding(47.5%oftheoffer) NationalTradingCo(5%oftheoffer)
SubscriptionBanks
BankMuscat
NationalBankofOman
OmanArabBank
Source:IPOProspectus,GBCMResearch
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ShareHoldingPattern PreIPO
S.No Shareholder %Holding
1 KahrabelFZE 47.50%
2 MubadalaPowerHolding 36.63%
3 MDCIndustryHolding 10.88%
4 NationalTradingCo 5.00%
Source:IPOProspectus,GBCMResearch
ShareHoldingPattern PostIPO
S.No Shareholder %Holding
1 KahrabelFZE 30.88%
2 MubadalaPowerHolding 20.00%
3 MDCIndustryHolding 10.88%
4 NationalTradingCo 3.25%
5 Public 35.00%
Source:IPOProspectus,GBCMResearch
Graph1:PreIPOShareholding Graph2:PostIPOShareholding
Source:Prospectus,GBCMResearch
47.50%
36.63%
10.88%
5.00%
KahrabelFZE MubadalaPowerHolding
MDCIndustryHolding NationalTradingCo
30.88%
20.00%
10.88%
3.25%
35.00%
KahrabelFZE MubadalaPowerHolding
MDCIndustryHolding NationalTradingCo
Public
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Backgroundofthecompany
SMN
Power
Holding
SAOG
(undertransformation)
is
the
holding
company
which
owns
two
major
power
projects in Oman namely Rusail Power Company (RPC) and SMN Barka Power Company (SMNBPC). As a
combinedentity,theSMNPowerownsthe largestpowergenerationcapacities inSultanatecurrently.Key
initial promoters of the power projects include Kahrabel (fully owned subsidiary of International Power),
Mubadala Power Holding Co and the National Trading Co. As part of a privatization plan in 2006, the
company had purchased the assets of RPC unit from the Government of Oman (EHC and Ministry of
Finance), which is relatively an old one. On the contrary, SMN Barka is a newly built unit which had
commencedoperationsinNov2009.
BoththeprojectshavebeenformedundertheBuild,OwnandOperate(BOO)scheme.AsperOmanPower
and
Water
Procurement
Co
(OPWP)
statistics,
the
overall
installed
power
capacity
of
the
two
power
companiescombined formsabout35%ofthe totalcapacityofthecountrysMain InterconnectedSystem
(MIS).Thecompanyalsorepresentsabout33%ofthetotalgeneratedpowerinOmanfor2010,formingthe
biggestone.Aspertheprospectus,for2010thenewplantSMNBarkaoperatedatanaverageavailabilityof
powerofabout92.07%andtheplant loadfactor(PLF)wasat37.5%.WhilefortheRPCPlant,theaverage
availabilitywasat90.8%andthePLFwas59.3%.
SMNPower HoldingStructure
Source:Prospectus,GBCMResearch
Purposeof
the
offer
The holding company plans to go for the IPO to comply with the specified obligations under the project
foundersagreement(PFA)whichrequires35%oftheshareholdingavailableforpublicsubscription.
Proceedsoftheoffer
TheIPOrepresentsapureofferforsalewiththesharesoffereddonotrepresentanyissuanceofnewshares
bythe company.The totalproceeds of the offer which includesthepremium wouldbe going only to the
sellingshareholders.Thereby,theproceedsfromtheIPOwouldnothaveanimpactonthefinancials.
RusailPower
Co
SMNBarka
SMNPowerHoldingSAOG
PowerCapacityof
666MW
PowerCapacityof678MW
WaterCapacityof26.4MIGD
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EconomicOutlook
OmanEconomicGrowthremainsstable
The continuance of robust Government spending towards the development of Infrastructure has led to
incrementalallocationoffundstokeysectorsespeciallytheUtilitiesprojects,whichwouldbethedriversfor
economicgrowth.ThestabilityinOmanseconomyoverthepreviousyearshasledtohigherprivatesector
investmentsinvariouscriticalsectorslikeOil&Gas,Banking,diversifiedindustriesandthePowerandwater
arena.Added,theprevailinghigheroilpricesalongwiththeGovernmenteffortstakentowardsthenewjob
creationwouldinturnkeepupthesteadyGDPgrowthmomentumcontinuingoverthecomingyears.
Thethrustonthedevelopmentofdiversified incomeespeciallythenonoilcontributiontoGDPhas ledto
hugeprojectinvestmentsinIndustrialhubs;Oil&Gasrelatedindustriesandalsotheinvestmentintourism
sector. We have also seen the Governments commitment towards the development of local human
developmentbyincrementalallocationstohealth,educationandotherpersonalsectors,whichwebelieve
would be critical in the longer term. Omans Eighth five year plan too targets continuance of stable
economicgrowththerebyachievingthelongtermobjectivesofOmanVision2020strategy(19962020).
ThrustremainsofProjectspend
Eighth Five Year plan is anticipated to give local economy the right stimulus by offering development
orientedgrowthtocontinueoverthecomingyears.Thesustainable levelsoffiscalspendingandtheclear
focusonnewjobcreationisanticipatedtobringinlongtermbenefitstowardsachievingstabilityingrowth.
ThepresenceoffavorabledemographicsandthecontinuanceofInfrastructurespendisbelievedtoattract
foreign investments in wide variety of industries moving ahead. Economic Diversification efforts and the
creationofworkforceareexpectedtoleadinconsumptionleadgrowthmovingforward.Withtheconsensus
oil price estimates of above USD 90 per barrel in FY2011E, we believe that the project investments
undertakenbyGovernmenttogoonastrongerpaceofgrowth.
OmanNominalGDPGrowthTrend
Source:MoNE,GBCMResearchEstimates
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009P 2010f 201 1p 2011b 2011o
GDPatmarketprices 7,639 7,671 7,807 8,343 9,487 11,883 14,151 16,111 23,288 18,020 21,552 21,813 23,589 25,440
GrowthRate 2 6. 5% 0 .4 % 1 .8 % 6 .9 % 1 3. 7% 2 5. 3% 1 9. 1% 1 3. 8% 4 4. 5% 22 .6 % 19 .6 % 1 .2 % 9 .5 % 1 8. 0%
30%
20%
10%
0%
10%
20%
30%
40%
50%
5,000
10,000
15,000
20,000
25,000
30,000
ROMlns
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OmanPowerSector AnIntroduction
OverallDemandforelectricityinOmanhasbeengrowingatabout67%perannuminrecentyears,fuelled
byrobust industrialactivityandsteadyeconomicgrowth.AspertheOPWP,around2,100to3,000MWof
additional power generation resources to be added to Main Integrated System (MIS) by 2015E. Overall
annual Power consumption is estimated to increase by about 8% every year till 2020, which shows the
stableindustrynature.Governmenthasplannedanaggravatedprogrammetocatertothegrowingdemand
forPowersector.
Oman isalsothe firstcountry intheregiontohavea conceptofprivatepowertherebyproviding hostof
new opportunities for private sector players towards Sector development. This led to the entry of global
majors
like
AES,
International
Power
and
Suez
Energy(largest
investor
in
Oman
Power
Sector).
The
first
publiclyownedpowerplantinOmantobetransferredtotheprivatesectorwastheAlRusailfacility(thisis
partofSMNPowerHolding)soldtoSuezandMubadalaDevelopmentworthc.$550millionin2006.
PowerDemandgrowthremainssteady
The Main Interconnected System (MIS) covers major portion of Sultanate comprising of several power
generation facilities including SMN Power Barka and Rusail Power. Currently there are nine power
generationcompanies,threedistributionunits,onetransmissioncompanyandaruralfirmcoveringremote
areas. Over the last ten years, the overall electricity demand in MIS has grown by 79% annually. During
2010,the
demand
has
increased
by
7%
YoY.
Withthecontinuing investmenttowardsthedevelopmentofdiversifiedeconomicgrowth,webelievethat
the demand for power would grow at a stable pace going forward. According to OPWP data, the overall
powerdemandintheMISgrewataCAGRof9%over2005to2010whichismainlyonthebackofstronger
economicgrowth,increasing populationandthedevelopmentofnewindustrialandtourismprojects.
MIS ElectricityDemandProjections
Source:OPWP,GBCMResearch
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Avergedemand(MW) PeakDemand(MW)
CAGRof8.8%over2010to2017E
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AverageDemandtogrowby8.8%CAGRover20102017E
As per the latest seven year projections (201117) of OPWP, the average electricity demand in MIS is
estimatedtogrowfrom1,924MWin2010to3,464MWin2017,reportingaCAGRofabout8.8%.Keydrivers
for demand include the estimated economic growth, investment in various tourism related projects along
withthedevelopmentofvariousindustrialhubsinSohar,SurandDuqm.TheupcomingtwonewIPPs(Sohar
IIandBarkaIII)arescheduledtobecommissionedinphasesduring2012and2013.Thiswouldadd495MW
in 2012 and 250 MW in 2013 with the total addition of 1,490 MW. On the other hand, the new Sur IPP
(installedcapacityof1,500to1,200MW) isexpectedtobeoperationalbyend2013.Governmenthasalso
initiatedstudiestowardstheinvestmentinSolarPowergeneration,whichcouldbebeneficialinlongerrun.
2011 2012 2013 2014 2015
2016
2017CurrentContractedCapacity (MW)
Ghubrah 475 475 325 235 235 235 235
Rusail 687 687 687 687 687 687 687
WadiAlJizzi 325 245 245 245 157 157 157
Manah 273 273 273 273 273 273 273
AlKamil 297 297 282 282 282 282
Barka1 450 450 435 435 435 435 435
Sohar1 590 590 590 590 590 590 590
Barka2 710 710 679 679 678 678 678
Sohar2 495 745 742 740 739 738
Barka3 495 745 742 740 739 738
Total 3,807 4,717 5,006 4,910 4,817 4,815 4,531
Source:OPWP,
GBCM
Research
DemandfordesalinatedWatercontinuestogrow
AccordingtoOPWPstatistics,theoveralldemandforpotableand industrialwaterintheMISisexpectedto
growfromabout163millionm3/annumin2010to278millionm3/annumin2017,reportingaCAGRof8%.
Thegrowthindemandisonbackoftheassumptionsofincrementalpopulation,steadyeconomicgrowthand
alsothechangeinpolicytowardsloweringtherelianceofgroundwaterresourcesmovingahead.SMNPower
BarkacomesundertheBarkaZonewherethedemandisestimatedtogrowby8%CAGRover201017E.The
BarkaZoneislocatedbetweenSoharZoneandGhubrahZoneallowingPAEWtotransferwithinthezones.
Figuresin000m3/day 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E CAGR(201017E)
PeakWaterDemand
GhubrahZone 258 270 284 299 314 330 330 330 3.6%
BarkaZone 177 197 219 243 269 299 303 307 8.2%
SoharZone 83 101 121 122 139 168 174 214 14.5%
SurZone 40 45 52 59 67 76 77 79 10.2%
AdDuqmZone 1 3 6 12 14 16 18 21 54.5%
TotalAll Zones 559 616 682 735 803 889 902 951 7.9%
Source:OPWP,GBCMResearch
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InvestmentRationale
Leadershipposition
in
Oman
Currently, SMN Power Holding is the largest power company in terms of installed electricity capacity and
generated output in Oman. Overall installed capacity of the holding company stands at about 1,343 MW,
comprisingofSMNBarkawiththecapacityof678MWandRusailPowerwithacapacityof665MW,formingc.
35%ofOmanstotal installedelectricityMIScapacity.Whilethe120,000m3/daywatercapacityofSMNBarka
formsabout20%ofthewaterdemandintheMainSupplyZone.Thepresenceofhighercapacityisbelievedto
provideeconomiesofscaleinthelongerrun,whichwebelievewouldapositiveone.
Asofnow,boththeprojectcompaniesofSMNPowerHoldingoperateunderhigherefficiency,whichiscritical
for the steady revenue growth. With regards to SMN Barka, the reliability factor stands at 98.8% and the
availabilityforpowerisat92.7%levels(end2010),whilethewaterreliabilityandavailabilityisabout90.3%and
84.3%respectively.InthecaseofRusailPower,thereliabilityisat97.7%andavailabilityisat90.8%(end2010).
Robustshareholdersupport
The presence of strong shareholder strength for SMN Power Holding in the form of International PowerGDF
Suez,parentofKahrabel,whichisoneoftheleadersinglobalindependentpowergenerationwith72,360MW
(gross)42,225MW(net) inoperationsacrosstheworld.Added,Kahrabel/InternationalPowerarethe largest
private power and water producers in Oman with the equity participation in Sohar IWPP, Al Rusail, Barka 2
IWPP,AlKamil,AlSuwaidi(underconstruction)andAlBatinah(underconstruction).SMNalsohasthebackupof
Mubadala,theregionalleaderinthePowersectorandtheOmaniestablishmentNationalTradingCo.
Kahrabelisexpectedtomaintainabout22.75%ofequityineachoftheprojectcompaniesuntilNov2013which
come under the PFA. The major shareholders have developed a wider knowledge of the sector through the
implementationofvariousindependentpowerandwaterplantsacrosstheglobe,whichwebelievewouldgive
theholdingcompanyexpertiseintheeffectiveimplementationandefficientoperationofboththeplants.
MajorPlantCapacitiesinMIS
PlantOwner
Plant
Status
Plant
Type
Capacity
Developer
Contract
Expiry
RusailPower Operational OCGTNaturalgasfired 666MW Kahrabel 2022
UnitedPower Operational OCGTNaturalgasfired 280MWSEI(Divestedto
MENAIF)2020
AlKamilPower Operational OCGTNaturalgasfired 285MW Inter.Power 2017
ACWAPower Operational CCGTNaturalgasfired 427MW/20MIGDAES(Divestedto
ACWA)2018
SoharPower Operational CCGTNaturalgasfired 585MW/33MIGD Kahrabel 2022
SMNBarkaPower Operational CCGTNaturalgasfired 678MW/26.4MIGD Kahrabel 2024
AlBatinahPower Construction CCGTNaturalgasfired 744MW Kahrabel 2028
AlSuwadiPower Construction CCGTNaturalgasfired 744MW Kahrabel 2028
Source:OPWP,IPOProspectus,GBCMResearch
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Revenuevisibilityremainsstrong
As per the PPA, the revenue of the company is fixed through the Power and water Purchase agreement
(PWPA)withthesingleofftaker,OPWP. Intermsofoperatingcosts,thefuel(naturalgas) isthemajorone
which is chargeable to OPWP on an actual usage basis. We believe that the other costs especially the
operations and maintenance charges, general and admin costs, depreciation, finance and tax rate remain
mostlypredetermined forthe projectcompanies.Owing to this,we believethatthecompanyhasastrong
revenuevisibilityprovidingstableandreliablecashflowgenerationovertheprojectperiod,whichprovides
comforttotheinvestors.
Overalloutputoftheinstalledcapacitiesoftheprojectcompanieswouldbecontractedthroughasinglelong
termPWPA
each.
The
agreement
on
the
off
take
gives
low
risk
to
price
and
volume
with
the
revenue
directly
linkedtotheavailabilityoftheplantwiththetariffsbeingfixedduringPPA.Thesamewouldbevalidtillthe
expiry of the PWPA period for Rusail Power which is at March 2022 and for SMN Barka the same is at
November 2024. We also believe that the total electricity and desalinated water demand is anticipated to
growonastablephaseoverthecomingyearsdrivenbyeconomicgrowth,developmentofnewindustrialand
tourismprojects.
Securedoperationalandmaintenancecosts
The
project
companies
(RPC
and
SMNPBC)
has
secured
long
term
operation
and
maintenance
contract
towards the generation of electricity and production of water for supply to OPWP from Suez Tractebel
Operations and Maintenance LLC (STOMO). This would ensure efficient management of spare parts, tools,
materials and consumables required for the operation and maintenance (O&M) of the project companies.
STOMOisrequiredtooperateandmaintaintheSMNBarkaPlantuntil31st
Mar2024,whiletheagreementto
operateandmaintaintheRPCPlantistill31st
Mar2022.WebelievethepresenceofsecuredO&Magreement
gives comfort to the investorstowards the efficientrunningof the plantoperations,which iscritical inthe
longrunofpowerplant.Added,this isexpectedto lowertheoperationalriskoftheprojects intheformof
anyunexpectedincreaseinoperatingandmaintenancecosts.
CommittedGassupplyagreements
BoththeprojectcompaniesofSMNPowerHoldingusenaturalgasastheprimaryfueltobothoftheplants.
Thecompaniesgetacommittedsupplyofgas(subsidizedpriceatUSD1.5perMMBTU)overtheperiodofthe
PWPA based on the longer term contracts (Natural gas sales agreement NGSA) entered by both the
companieswiththeMinistryofOilandGasofOman.However,thecompaniesusedtohaveastrategicback
upoffueloil inventorytocoveruptothreedaysofoperations inemergency.Added,asperthePWPAthe
projectcompaniesdoesnotcarrythe fuelpriceriskwiththe incremental fuelcostsbeingpassedontothe
OPWPtillthePWPAperiod,whichwouldkeeptheoperationalcostsincontrollablelimits.
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Hedgingmechanismtoprotectagainstchangesininterestrates
The project companies (RPCandSMNBarka) has its interest rate set based on 6 months LIBOR (London
Interbank offer rate) and the interest rate volatility is hedged by interest rate swaps as per the hedging
policyofthecompany.Aspartofitsinteresthedging,boththeprojectcompanieshavehedgedat95%levels
currently(increasedfrom80%to95%levelsinMarch2009)untilMarch2013,whichalsofulfilsthefacilities
agreements.
AsfarasRPC isconcerned,theprojectcompanyhasentered intoan interestrateswapagreement inNov
2008 increasingthehedgedamountto95%from80%forfouryearstillMar2013atafixedrateof3.30%
per annum. While SMNBPC has also entered into new hedging agreement increasing the amount hedged
from80%
to
95%
of
the
term
loan
for
the
period
until
Mar
2013
at
a
fixed
rate
of
3.36%
per
annum.
This
wouldinturn improvethestability incashflowstoshareholders intheformofdividends.Onbackofthis,
webelievethedividendoutflowtotheshareholderswouldnothavemajorimpactduetofinancialcoststill
Mar2013.
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RisksandConcerns
EPCrelatedClaims
Duringlatelastyear,SMNBarkahasreachedanagreementwithitsEPCpartner,Doosantowardsthedelay
liquidatedclaimsforfailuretoachievethescheduledEarlyPowerandCommercialOperationDates.Bothof
themhavereachedanagreement(inprinciple)forfinalsettlementwiththebasisthatDoosanwouldpayto
SMN Barka about USD 27 million in respect of delay liquidated damages under the EPC contract and has
agreed to relinquish all costs claims to an extent of USD 38 million. As of now quoting prospectus, SMN
BarkaisalsoassistingDoosanstowardsobtainingadditionalmonetaryrelieffromOPWP.Themanagement
ofthecompanybelievesthisclaimnottohaveanynegativefinancialimpactgoingforward.
OPWPrelatedClaims
AsaresultofdelaysinachievingtheCommercialOperationsdatesoftheBarkaIIProject,SMNBarkafacesa
claim by the OPWP under the PWPA. OPWP claims liquidated damages to an extent of USD 19.3 million.
AlthoughthecompanybelievesthatOPWPmaynotwaivetheintegralityofclaimswithrespecttoliquidated
damages,theyareoptimisticthatadditionalrelieffromOPWPmaybeobtained.Nevertheless,thecompany
is also confident that it will be made whole for the full amount because any amount at which a final
settlementshallbereachedwithOPWPshouldberecoveredbytheSMNBarkathroughabacktobackclaim
againstDoosan.ThesamewouldhaveaneutralimpactonSMNPowerfinancials.
MinistryofOilandGasrelatedClaims
SMN Barka also has a claim arising under the SMN Barka NGSA which is towards the failure to meet the
scheduledfirstgasdeliverydatewhichresulted inadelaytotheProjectofabout61days.Thetotalclaim
amountstoUSD8.47million,aswellasrelatedcostsofaboutUSD6.82million.SMNBarkaisconfidentthat
thesamewouldbemadecompletelyforthefullamountoftheclaimsbecauseanyamountwhichcannotbe
recoveredfromMOGshouldcorrespondtothedelaybyDoosan.
RPC relativelyoldplant
OneoftheprojectcompaniesofSMNPowerHolding isRusailPowerwhichwebelieve isrelativelyanold
plantwiththegasturbinesinstalledinfourphasesbetween1984and2000.Thisfacilitywasboughtbythe
company in 2006 as part of Government privatization process. Added, the company has spent significant
initialexpendituretowardsincreasingtheperformanceoftheplant.In2010,RPChasperformedatechnical
studytoassessthelifespanofthreetransformersinRPCandhasmadeprovisionstoanextentofRO1.34
million, over the remaining period of PPA period, from 2010 to March 2022. We believe that any further
expensestowardstheRPCcouldimpactthecashflowoftheprojectcompanymovingforward.
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ConcernsonPostPPAvaluation
UnlockingValuebeyondPPA
TheoperatingcashflowsoftheprojectcompanyhavebeenestimatedwiththecertaintyforthePPAperiod
whichisNov2024forSMNBarkaandMar2022forRPC.TheprojectionsforpostPWPAperiodcashflowshave
been provided by IPA, an independent consultant (Source: Prospectus). Further quoting the prospectus, the
estimated cash flows post PWPA involve assumptions including demand for power and water, available
capacities,alternativesources,tariffs,availabilityofgas,pricingofgas,offtakearrangementsetc(18different
scenarios). The offer has been valued based on the assumptions and estimates for cash flows given by the
independent consultant. As per the prospectus, the projections have been incorporated for the expected
capex
and
dividend
distributions.
We
perceive
the
concern
of
the
post
PPA
valuation
in
terms
of
various
dynamicmarketfactorsprevailingduringthatperiod,whichmightimpacttheprojectvalueunlockingbeyond
PPAperiod.
Valuation postPPA
Asper IPA+WaterEconomics report,there would beasignificantvalue fromthe Plantspost PWPAperiod
either by extending the offtake agreements under the single buyer approach or by operating in liberalized
marketsforpoweranddesalinatedwater.Aspertheprospectusquotingthe independentadvisors,thebase
caseaverageannual EBITDA projectedby IPA for RPC from the expiry of the PPA periodto 2039 is RO 11.8
millionandforSMNBarkafromtheexpiryofthePWPAperiodto2045isRO39.8million.Webelievethatthe
concernremainsintheformofseveralalteringissuesduringthepostPWPAperiodintheformofavailability
of Gas, pricing of Gas for the project beyond PPA, inflationary scenarios, adverse refurbishment costs etc,
whichcouldimpactthevaluationsofthecompany.
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ValuationsandRecommendation
DividendDiscountModel
As of now, the project companies have not distributed any dividends since the completion under the
financingagreements,whichwereachievedonAug2011.Asperthecompany,thefirst interimdividend is
estimated to be paid by end of Nov 2011, representing a dividend per share of RO 0.193. The second
dividend of RO 0.250 baiza (expected to be announced inMar 2012) would be paid for the 2011E retaining
earningsbasedonthecashflowpositionattheendofMar2012.Postthis,thecompanyexpectstopaythe
dividendstwiceinayear,oncefortheperiodendedSeptemberandoncefortheperiodendedMarch.
Withthe
presence
of
relative
stability
in
cash
flow
generation
(dividend
outflow)
and
the
prevailing
off
take
agreementwiththesinglebuyer,webelievethattheprojectionsofthecashdividendcanbetheaptonefor
thevaluations.WehaveusedtheDividenddiscountmodel(DDM)forourvaluationbasedontwodifferent
scenarioswiththebasescenarioconsideringthedividendssimilartotheoneestimated intheprospectus.
Ontheotherhand,wehavearrivedataprobablescenariowherewehavereducedourdividendpayoutto
about90%levelsbeyond2012E(Pleasefindthedetailedvaluationsheetinthenexttwopages).
CashSweepfacilitymightimpactdividends
Asper
the
facilities
agreement,
the
project
company
RPC
would
have
its
cash
sweep
prepayment
of
starting
fromthe30Sep2016until31Mar2022(endoftermloan).FortheSMNBarka,cashsweepprepaymentof
the Loan will apply starting from the 30 Sep 2018 until the end of the term of the Loan 31 Mar 2024.
However, if the project companies are able to refinance the loan before the commencement of the cash
sweep,thedividenddistributiontotheinvestorswouldbepossiblesubjecttofreecashavailability.
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DividendDiscountModel(DDM)ValuationMethodology
BaseCaseScenario
AssumedthedividendpayouttoremainatthesamelevelswhichismentionedintheprospectusDDMModel BaseCase FY2011E* FY2012E* FY2013E* FY2014E* FY2015E*
NetProfitRO000's 3,775 6,245 7,256 7,637 8,518
Payout(%) 234.3% 121.5% 104.6% 99.3% 89.1%
DPSRO 0.443 0.380 0.380 0.380 0.380
DivYieldonOfferPrice 12.6% 10.8% 10.8% 10.8% 10.8%
ExpectedDividends(RO000's) 8,844 7,586 7,586 7,586 7,586
NPVofExpectedDividends 8,399 6,523 5,907 5,348 4,843
Assumptions
CostofEquity 10.4%
TerminalGrowthRate 0.00%
NPV(TerminalValue)RO000's 46,386
Fairvaluepershare(RO) 3.877
OfferPrice(RO) 3.520
Upside(%) 10.1%
Source:GBCMResearchEstimates;*ConsideredtheMarchdividendsasthepreviousyearpayment
*DividendforMarchisexpectedtobepaidfrompreviousyearretainingearningsbasedoncashflowpositionattheendoffirstquarter
InthebasecasescenarioofourDDMvaluationmodel,wehaveassumedadividendpayouttoremainatthe
samelevelsmentionedintheIPOprospectusfrom2012Eto2015E.Onthis,wehavearrivedatafairvalueof
RO3.877.WehaveassumedCostofEquityofabout10.4%levelsandalsoestimatedzeroterminalgrowth.In
our valuation model,we have used the BETA of 0.68 (Source:Bloomberg) taken based on the comparable listed
playerACWAPowerBarka.
SensitivityAnalysis(FairValueRangesbetweenRO3.692toRO3.945)
CostofEquity
TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%
0.0%
4.038
3.945 3.877 3.692 3.541
3.4030.5% 4.168 4.067 3.994 3.794 3.633 3.485
1.0% 4.312 4.203 4.123 3.907 3.733 3.575
1.5% 4.474 4.354 4.267 4.032 3.844 3.674
SensitivityAnalysis(%ChangefromOfferPrice)
CostofEquity
TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%
0.0% 14.7% 12.1% 10.1% 4.9% 0.6% 3.3%
0.5% 18.4% 15.5% 13.5% 7.8% 3.2% 1.0%
1.0% 22.5% 19.4% 17.1% 11.0% 6.1% 1.6%
1.5% 27.1% 23.7% 21.2% 14.5% 9.2% 4.4%
Source:GBCM
Research
Estimates
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ProbableScenario
Wehaveassumedthedividendpayouttoremainatabout90%levelsstarting2012Etill2015E,whichislowerascomparedtothecompanyprojectionsgivenintheprospectus.
DDMModelProbableScenario FY2011E* FY2012E* FY2013E* FY2014E* FY2015E*
NetProfitRO000's 3,775 6,245 7,256 7,637 8,518
Payout(%) 234.3% 90.0% 90.0% 90.0% 90.0%
DPSRO 0.443 0.282 0.327 0.344 0.384
DivYieldonOfferPrice 12.6% 8.0% 9.3% 9.8% 10.9%
ExpectedDividends(RO000's) 8,844 5,621 6,530 6,873 7,666
NPVofExpectedDividends 8,399 4,833 5,084 4,846 4,894
Assumptions
CostofEquity 10.4%
TerminalGrowthRate 0.00%
NPV(TerminalValue)RO000's 46,874
Fairvaluepershare(RO) 3.753
OfferPrice(RO) 3.520
Upside(%) 6.6%
Source:GBCMResearchEstimates;*ConsideredtheMarchdividendsasthepreviousyearpayment
*DividendforMarchisexpectedtobepaidfrompreviousyearretainingearningsbasedoncashflowpositionattheendoffirstquarter
In
our
probable
case
scenario
of
DDM
valuation
model,
we
have
assumed
a
dividend
payout
of
90%
from
2012E
to2015E.Onthis,wehavearrivedatafairvalueofRO3.753.Wehaveassumedcostofequityof10.4%anda
terminalgrowthrateofzero. Inourvaluationmodel,we haveusedtheBETAof0.68 (Source:Bloomberg) taken
basedonthecomparablelistedplayerACWAPowerBarka.
SensitivityAnalysis(FairValueRangesbetweenRO3.567toRO3.821)
CostofEquity
TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%
0.0% 3.914 3.821 3.753 3.567 3.417 3.279
0.5% 4.045 3.945 3.871 3.671 3.509 3.362
1.0% 4.191 4.081 4.002 3.785 3.611 3.453
1.5%
4.354
4.234 4.147 3.911 3.723
3.553
SensitivityAnalysis(%ChangefromOfferPrice)
CostofEquity
TerminalGrowth 10.0% 10.3% 10.4% 11.0% 11.5% 12.0%
0.0% 11.2% 8.5% 6.6% 1.3% 2.9% 6.9%
0.5% 14.9% 12.1% 10.0% 4.3% 0.3% 4.5%
1.0% 19.1% 16.0% 13.7% 7.5% 2.6% 1.9%
1.5% 23.7% 20.3% 17.8% 11.1% 5.8% 0.9%Source:GBCMResearchEstimates
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CompanyComparableValuations
Company P/E P/BVCash
DividendDividendPayout DividendYield
FY10 FY11E FY10 FY11E FY10 FY11E FY10 FY11E FY10 FY11E
SMNPowerHolding* 18.6 2.1 0.443 234.3% 12.6%
AESBarka 5.3 5.3 1.4 1.3 0.095 0.125 73.5% 95.8% 6.9% 9.1%
AlKamilPower 6.3 6.1 0.9 0.9 0.080 0.160 31.1% 60.4% 4.9% 9.9%
UnitedPower 7.7 8.2 0.6 0.6 0.200 0.120 151.6% 96.6% 19.6% 11.8%
SoharPower 10.0 9.5 1.5 1.5 0.160 0.160 97.5% 93.1% 9.7% 9.7%
Source:CompanyReports,GBCMResearchEstimates;Closingpriceupdatedasof25Sep2011
*ForSMNPower ConsideredtheMarchdividendsasthepreviousyearpayment;*DividendforMarch isexpectedtobepaidfrompreviousyear
retainingearningsbasedoncashflowpositionattheendoffirstquarter
*SMNPower FY2011EarningsincludesoneoffexpensesformingaboutRO0.124/share;NormalizedEPSfor2011EworksouttobeRO0.313,Onthe
basis,thecompanytradesatPEof11.2X,whichisstillexpensivetothecomparables.
On a PE (FY11E EPS) and PBV (FY11E BV) basis, the SMN Power Holding IPO issue looks pretty expensive ascomparedtothelistedpeergroup.Thetotalprofitofthecompanyisestimatedtoremainlowerfor2011Eand
2012Eonthebackofoneoffanticipatedexpenses(NonrecurringitemspersharestandsatboutRO0.124bz).EPSis
estimated
to
normalize
beyond
2012.
The
existing
listed
comparable
players
clearly
remain
cheaper
at
the
currenttradinglevels.
EstimatedaverageOmanUtilitiessectordividendyieldfor2011Eworksoutbeabout10%levelsascomparedtothe estimated dividend yield of 12.6% for SMN Power Holding Co. We believe that the issue commands a
premiumowingtothepresenceofhigherdividendspostIPOperiod.
DividendPayoutratioofSMNPowerHoldingremainshigherduringtheinitialyearswiththecompanypayingoutfromitspreviousyearretainedearnings.Theriskremainsintheformofanyunexpectedcostsinthedueclaims
and the higher maintenance costs / unscheduled outages which could lead to decline in earnings moving
forward,thereby
impacting
the
dividend
payout
to
the
new
shareholders.
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.
Outlook
Steady
cash
flow,
Dividend
Play
OverallthestableindustryperformancealongwiththesteadycashflowgenerationintheUtilitiessectormakes
theissueanattractivedividendplay.WeratetheSMNPowerHoldingIPOasanaverageissueinourratingsale
with the fair value factoring for higher dividend payouts. Based on our Valuation methodologies (Dividend
DiscountModel Basescenario),wehavearrivedatourfairvalueofRO3.877forSMNPower.
We recommend the low risk appetite investors to subscribe for the issue with the medium to long term
horizon.Wealsobelievethattheissuewouldbeabestfitforlongonlyfundsandinstitutions.Weexpectthe
issuetoseelimitedupsideonlisting,howeverconsideringthedividendyieldwerecommendtosubscribefor
theissue.
Onarelativevaluationbasis,theexistinglistedcomparableplayersremaincheaperthanSMNPower.However,
wemaynotabletoaccumulatethesecounters inthemarketbecauseofthe illiquidnature inthesecondary
market.Hencewerecommendtheinvestorslookingatadividendyieldstorymaycapitalizethroughsubscribing
for the issue.Wealsofeel that the stockmightfind supportwith thehigherdividendyieldprotecting the
downsidefromtheofferprice.
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IncomeStatementHighlights
FiguresinRO000s 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Revenue Group 24,969 30,814 36,310 78,322 79,342 83,026 85,335 87,700 90,201
Operatingcosts (21,869) (25,764) (29,868) (49,525) (52,531) (54,314) (56,572) (59,041) (61,847)
Grossprofit 3,100 5,050 6,442 28,797 26,811 28,712 28,763 28,659 28,354
G&Aexpenses (686) (580) (547) (1,142) (8,257) (8,278) (8,295) (8,313) (8,333)
OperatingProfit(EBIT) 2,414 4,095 4,886 19,771 18,554 20,434 20,468 20,346 20,021
Financecharges (3,286) (4,256) (8,341) (15,511) (13,594) (13,044) (12,190) (11,633) (10,303)
Profit(loss)beforetax
andextra.items(872) (161) (3,455) 4,260 4,960 7,390 8,278 8,713 9,718
Profit(loss)beforetax (819) 139 15,865 4,197 4,960 7,390 8,278 8,713 9,718
Netprofit(loss) (921) (31) 13,741 1,189 3,775 6,245 7,256 7,637 8,518
Source:CompanyProspectus,GBCMResearch
CashFlow
Highlights
FiguresinRO000s 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Cashfromoperations 8,225 (6,663) 42,342 22,640 17,560 33,422 32,088 32,209 32,140
Provisionforre.costs 4,740
Financechargespaid (3,133) (3,978) (7,074) (15,244)
Incometaxpaid (147) (65) (148) (159) (206) (131) (139) (134) (133)
Otherincomes 300 5
Netcashfromoperations 9,685 (10,406) 35,125 7,237 17,663 33,503 31,973 32,080 32,004
Netcashfrominvesting (145,650) (68,903) (46,737) 3,989 335 (263) (388) (308) (31)
Repaymentoftermloans (11,282) (11,966) (12,591) (13,119) (13,566)
Interestpaid (13,742) (12,737) (12,000) (11,516) (10,083)
Proposeddividends (3,845) (8,784) (7,586) (7,586) (7,586)
Shareholderloans (9,957)
Netcashfromfinancing 138,599 77,863 16,961 11,825 (28,413) (43,444) (32,177) (32,221) (31,235)
Netchangeincash 2,634 (1,446) 5,349 23,051 (10,415) (10,204) (592) (449) 738
Cashatthebeginning 2,634 1,188 6,537 29,588 19,173 8,969 8,377 7,928
Cashattheendoftheyear 2,634 1,188 6,537 29,588 19,173 8,969 8,377 7,928 8,666
Source:CompanyProspectus,GBCMResearch
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BalanceSheetHighlights
FiguresinRO000s 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Financeleasereceivables 48,243 46,290 43,134 40,305 40,357 37,333 34,088 30,636 26,957
Property,plantandequip 114,934 186,910 231,448 223,523 215,514 207,500 199,479 191,450 183,411
Deferredtaxasset 92 4,657
Others 1,406 1,551 1,445 1,084 975 865 756 646
InvestmentinJV 250 250 250 250 250
Goodwill 15,889 15,739 15,739 15,739 15,739 15,739 15,739 15,739 15,739
Totalnon
current
assets
179,158
255,002 291,872 281,012 272,944 261,797
250,421
238,831 227,003
Inventories 2,673 2,660 2,794 2,689 2,689 2,689 2,689 2,689 2,689
Tradeandotherreceivables 934 8,522 42,320 40,243 42,604 7,508 8,009 8,425 8,583
Financeleasereceivables 3,778 4,120 6,389 5,249
Cashandbank 2,634 1,262 6,537 29,588 19,172 8,969 8,376 7,928 8,665
Totalcurrentassets 10,019 16,564 58,040 77,769 64,465 19,167 19,073 19,042 19,938
Totalassets 189,177 271,566 349,912 358,781 337,409 280,964 269,494 257,873 246,941
Equityandreserves
Sharecapital 500 500 500 500 19,964 19,964 19,964 19,964 19,964
Legal
reserve
543 1,168
1,893
2,657 3,509Retainedearnings (921) (952) 12,622 13,811 13,668 10,504 9,448 8,735 8,816
Shareholdersfunds (421) (452) 13,289 14,478 34,175 31,636 31,305 31,356 32,289
Hedgingdeficit (3,322) (37,742) (17,189) (23,827) (23,827) (23,827) (23,827) (23,827) (23,827)
Totalequity (3,743) (38,194) (3,900) (9,349) 10,348 7,809 7,478 7,529 8,462
Liabilities
Longtermloan 173,489 246,032 228,701 240,117 240,578 229,055 216,885 204,163 190,969
Shareholderloans 9,957
HedgingInstruments 3,679 42,667 19,412 27,080 27,080 27,080 27,080 27,080 27,080
Total
non
current
liabilities
179,137
292,306 252,158 273,338 285,593 265,494
254,394
242,795 230,849Cur.portionlongtermloan 5,247 40,080 11,282
Tradeandotherpayables 13,783 12,207 61,574 53,788 41,468 7,661 7,622 7,549 7,630
Shareholderssub.loan 29,722
Totalcurrentliabilities 13,783 17,454 101,654 94,792 41,468 7,661 7,622 7,549 7,630
Totalliabilities 192,920 309,760 353,812 368,130 327,061 273,155 262,016 250,344 238,479
Totalequityandliabilities 189,177 271,566 349,912 358,781 337,409 280,964 269,494 257,873 246,941
Source:CompanyProspectus,GBCMResearch
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RatioAnalysis
Keyratios 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E
Profitabilityratios
GrossProfitMargin 12.4% 16.4% 17.7% 36.8% 33.8% 34.6% 33.7% 32.7% 31.4%
EBITMargin 9.7% 13.3% 13.5% 25.2% 23.4% 24.6% 24.0% 23.2% 22.2%
PBTMargin 3.5% 0.5% 9.5% 5.4% 6.3% 8.9% 9.7% 9.9% 10.8%
NetProfitMargin 3.7% 0.1% 37.8% 1.5% 4.8% 7.5% 8.5% 8.7% 9.4%
ReturnonEquity 218.8% 6.9% 103.4% 8.2% 11.0% 19.7% 23.2% 24.4% 26.4%
ReturnonAssets 0.5% 0.0% 3.9% 0.3% 1.1% 2.2% 2.7% 3.0% 3.4%
PerShare
Ratio
EPS (1.842) (0.062) 27.482 2.378 0.189 0.313 0.363 0.383 0.427
BookValuepershare (0.842) (0.904) 26.578 28.956 1.712 1.585 1.568 1.571 1.617
Dividendpershare 0.443 0.380 0.380 0.380 0.380
Investmentratios**
Price/Earnings (1.91) (56.77) 0.13 1.48 18.62 11.25 9.68 9.20 8.25
Price/Bookvalue (4.18) (3.89) 0.13 0.12 2.06 2.22 2.24 2.24 2.18
Dividendyield(%) 12.6% 10.8% 10.8% 10.8% 10.8%
DividendPayoutRatio 0.0% 0.0% 0.0% 0.0% 234.3% 121.5% 104.6% 99.3% 89.1%
Activity&
Efficiency
ratios
Assetturnover 0.13 0.11 0.10 0.22 0.24 0.30 0.32 0.34 0.37
Inventoryturnoverratio 9.34 11.58 13.00 29.13 29.51 30.88 31.73 32.61 33.54
DaysofInventory 44.61 37.68 34.14 19.82 18.68 18.07 17.35 16.62 15.87
DaysReceivables 13.65 100.95 425.41 187.54 195.99 33.01 34.26 35.06 34.73
DaysPayables 230.04 172.94 752.46 396.42 288.13 51.48 49.18 46.67 45.03
CashConversioncycle (171.78) (34.31) (292.90) (189.06) (73.45) (0.41) 2.43 5.02 5.57
Liquidityratio
Quickratio 0.53 0.80 0.54 0.79 1.49 2.15 2.15 2.17 2.26
Currentratio 0.73 0.95 0.57 0.82 1.55 2.50 2.50 2.52 2.61
Leverageratio
Debt/Equityratio (412.1) (555.9) 20.2 17.4 7.0 7.2 6.9 6.5 5.9
Source:CompanyProspectus,GBCMResearchEstimates;CalculatedonOfferpriceofRO3.520
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StockRating
Methodology:
Buy Upsidemorethan20%
Accumulate Upsidebetween10%and20%
Neutral Upsideordownsidelessthan10%
Reduce Downsidebetween10%and20%
Sell Downsidemorethan20%
NotRated Stocksnotinregularresearchcoverage
|InstitutionalBrokerage TalalAlBalushi,(+968)24790614 560|InstitutionalSales HunainaBanatwala,(+968)24790614 559|
Disclaimer:Thisdocumenthasbeenpreparedand issuedbyGulfBaaderCapitalMarketsSAOC ("theCompany")on thebasisofpublicly
availableinformation,internallydevelopeddataandothersourcesbelievedtobereliable. Whileallcarehasbeentakentoensurethatthe
factsstatedareaccurateand theopinionsgivenare reasonable,neitherGulfBaaderCapitalMarketsSAOCnoranyemployeeshallbe in
anywayresponsibleforthecontentsofthisreport.TheCompanymayhaveapositionandmayperformbuying/selling foritselforitsclientsin
anysecuritymentionedinthisreport. Thisisnotanoffertobuyorselltheinvestmentsreferredtherein.