OmanCement 012005

Global Research
Sector
Oman
Oman Cement Sector Report

December 2004
Global Investment House KSCC

Sector Research Souk Al-Safat Bldg., 2nd Floor P Box 28807 Safat .O. 13149 Kuwait Tel: (965) 240 0551 Fax: (965) 240 0661 Email: research@global.com.kw http://www.globalinv.net Global Investment House stock market indices can be accessed from the Bloomberg page GLOH and from Reuters Page GLOB
Omar M. El-Quqa, CFA

Executive Vice President
omar@global.com.kw Phone No:(965) 2400551 Ext.104
Shailesh Dash, CFA

Head of Research
shaileshdash@global.com.kw Phone No:(965) 2400551 Ext.196
Raghu Sarma
Financial Analyst
rsarma@global.com.kw Phone No:(965) 2400551 Ext.273
Dinker G Mattam, CFA

Financial Analyst
dmattam@global.com.kw Phone No:(965) 2400551 Ext 254
Hani Shawky
Financial Analyst
hshawky@global.com.kw Phone No:(965) 2400551 Ext 198
Table of Contents
Section 1 2 3 4 5 6 7 8 8.1 8.2 Sub-Sections Section Title Investment summary The cement sector economy correlation Oman Oman cement industry Comparative financial analysis of Oman cement companies Valuation matrix Summary of recommendations Oman cement company reports Oman Cement Company Raysut Cement Company 24 40 Page 1 3 4 10 15 21 23
Global Research - Oman
Global Investment House

Outlook : Positive
1. Investment summary
1. Construction activity on on-going projects has been robust in Oman. Many residential, commercial and retail developments projects have been announced in recent months. 2. The Oman cement sector has seen a shortage of capacity in the last few months. The high operating levels of the local cement companies and higher imports have not really been able to meet the high local demand, leading to a demand-supply mismatch in the local market. Cement prices, consequently, soared in 2003, maintaining their upward movement in 2004 too. The Oman government took steps to ease the cement shortage by banning exports in June 2004 and capping the prices in the local market in September 2004. The price cap has since been withdrawn in early-December 2004, following which the cement prices have gone up again. 3. The two cement companies in Oman Oman Cement and Raysut Cement have operated at more than 100% capacity utilization levels in 2003 and in the first three quarters of the current year. The average realizations of the two companies too have been higher in the two periods on a year-on-year basis. 4. The high prices and capacity utilizations have translated into healthy growth in toplines and bottomlines for both the companies in 2003, as well as in the first three quarters of the current year their combined sales and net profit growing by 23.6% and 55.1% respectively during the first three quarters of the current year on year-on-year basis. 5. The robust financial performance has reflected in the stock market as well, where the prices of both the stocks have firmed up in recent months. While Oman Cement gained 49.2%, Raysut Cement gained 65.5% on the MSM so far in 2004. 6. Both the cement companies have now announced plans to expand their clinker and cement capacities, indicating expectations of a sustained demand growth in the coming years. Post the expansion, the combined clinker capacity of the two companies would increase by 2.7mtpy, an increase of about 138% over their existing capacities. 7. The planned capacity expansions of the companies, the high cement prices, and the visible earnings potential of these companies all mean that the Oman cement sector is rightly being re-rated. 8. We have analysed the underlying factors for the expected surge in cement demand in Oman in the following pages. We have also carried out detailed analyses and equity valuation of both the listed cement companies in Oman Oman Cement and Raysut Cement in this report.
December - 2004 Oman Cement Sector Report 1
9. Based on our analysis, we recommend a positive outlook on the Oman cement sector, driven, by expectations of sustained growth in future revenues, thanks to a plethora of real estate projects announced/currently underway in the country, high export potential, and sustainable profit margins. 10. We forecast growing revenues and enhanced profitability, and a consequent upside from the current price levels, for both the afore-mentioned companies and, therefore, recommend a 'BUY' on each of these companies. Table 1-1: Recommendation Summary
Company Reuters CMP M-Cap RoAA * Code 150.5 71.3 14.95 15.16 RoAE * P/E * P/BV* Share Potential upside Recommend Value from CMP ation 19.13 25.25 11.6 10.2 2.3 5.033 2.5 5.910 10.6% 24.4% BUY BUY
Oman Cement OCCO.OM 4.550 Raysut Cement RAYC.OM 4.750
Source: Company Annual Reports, Reuters and Global Research. CMP and share value in RO;M-Cap in RO mn RoAA & RoAE in % P/E & P/BV in multiples. * For the year 2004 (P). CMP, M-Cap, P/E and P/BV based on stock prices of December 23, 2004.
Chart 1-1 : Performance of Oman Cement vs. MSM Indices

5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 MSM Indices Oman Cement Share Price (RO) 5.000 4.500 4.000 3.500 3.000 2.500 2.000 1.500 1.000 0.500
Jun- 95 Dec- 95 Jun- 96 Dec- 96 Jun- 97 Dec- 97 Jun- 98 Dec- 98 Jun- 99 Dec- 99 Jun- 00 Dec- 00 Jun- 01 Dec- 01 Jun- 02 Dec- 02 Jun- 03 Dec- 03 Dec- 04
Source: Reuters.
MSM30 Oman Cement
MSM Industrial Index
Chart 1-2 : Performance of Raysut Cement vs. MSM Indices

6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 MSM Indices Raysut Cement Share Price (RO) 5.500 5.000 4.500 4.000 3.500 3.000 2.500 2.000 1.500 1.000 0.500
Jun- 95 Dec- 95 Jun- 96 Dec- 96 Jun- 97 Dec- 97 Jun- 98 Dec- 98 Jun- 99 Dec- 99 Jun- 00 Dec- 00 Jun- 01 Dec- 01 Jun- 02 Dec- 02 Jun- 03 Dec- 03 Dec- 04
MSM30 Raysut Cement
MSM Industrial Index
Source: Reuters.
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2. The cement sector economy correlation

Cement is the preferred building material in any country, used both directly and indirectly as building material (in manufacturing non-reinforced blocks, reinforced systems, etc.). It is used extensively in household and industrial construction. Demand for cement is price inelastic due to lack of substitutes. The cement sector is a significant sector of any national economy more so in the economy of a developing country, due to its unique linkages with the construction sector, including with the real estate sector. Since adequate cement statistics are not available in most countries, we have used the construction sector as the surrogate for the cement sector to understand the impact of cement sector on the economy. Broadly, the construction sector can be categorized into demand for real estate construction (homes, offices, retail spaces, etc.) and infrastructure creation (roads, bridges, ports, power plants, etc.). The real driver of demand for cement is the development of infrastructure, especially the relatively more cement-intensive roads, bridges, etc., which, mainly, is a function of the state of the economy of the country, and the quantum of and growth in the infrastructure spending by the government. Hence, cement demand in the emerging economies is much higher than in the developed countries, where its demand has reached a plateau. The real estate and the construction sectors are considered major components of the development and economic activity of a nation. Spending in these sectors induces growth in other sectors of the economy. To drive this point home, two indicators are of prime importance, viz., value added by construction & real estate to GDP, and public expenditure on construction activities. We have analysed publicly available data on the above two parameters in the case of Oman to understand the dynamics of cement demand in that country. Real estate and infrastructure projects already underway/announced in the country provide further pointers to cement demand in the coming years.
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3. Oman
Gross Domestic Product (GDP) Provisional estimates for 2003 indicate that the GDP of Oman increased to RO8.3bn, a nominal growth of 6.9% as compared to 1.8% in 2002. This positive growth in GDP can be attributed to a number of factors, the most important of which was the improvement in oil prices in 2003. While this led to the income from the oil sector increasing by 5.1% to RO3.4bn during 2003, it declined as a percentage of the GDP to 41.2% from 41.9% in 2002. While oil (excluding LNG manufacturing) continues to be a major contributor to the GDP, its contribution to the GDP has been declining over the years. From 48.7% of the GDP in 2000, its contribution declined to 41.2% in 2003. In absolute terms, it has seen a compounded annual decline of 2.6% since 2000. This has been substituted by increasing contributions from the non-oil sector, which, at RO5.1bn in 2003, has grown at a CAGR of 7.5% during 2000-'03. Table 3-1 : GDP by economic activity at current prices - Oman
2000 A. Petroleum Activities Extraction of Crude Petroleum Extraction of Natural Gas B. Non-Petroleum Activities Agriculture and Fishing Industry Mining and Quarrying Manufacturing (including LNG) Electricity and Water Building & Construction Services Wholesale and Retail Trade Hotel and Restaurants Transport, Storage & Communication Financial Intermediation Real Estate & Business Activities Public administration & Defense Other Services Adjustments # GDP at market prices Nominal GDP growth 3,717.7 3,616.1 101.6 4,080.0 149.9 655.4 18.2 414.7 77.7 144.8 3,274.7 815.9 54.0 450.9 256.4 424.7 715.9 556.9 -158.5 7,639.2 26.5% 2001 3,264.4 3,105.5 158.9 4,555.0 157.3 898.4 20.7 638.4 79.7 159.6 3,499.3 882.3 56.8 499.9 286.3 432.9 757.8 583.3 -149.0 7,670.4 0.4% 2002 3,269.1 3,101.3 167.8 4,704.3 158.4 870.5 16.4 604.5 79.0 170.6 3,675.4 932.1 59.1 535.2 322.4 435.7 772.1 618.8 -166.6 7,806.8 1.8% 2003* 3,436.5 3,224.1 212.4 5,073.3 162.7 1,006.0 13.7 690.2 107.8 194.3 3,904.6 993.9 60.5 576.8 339.8 447.4 817.5 668.7 -167.0 8,342.8 6.9%
Source: Statistical Year Book - 32nd Issue, October 2004, Ministry of National Economy, Oman. Figures in ROmn. * Provisional. # Adjustments include financial intermediation services and import taxes.
Latest data published by the Ministry of National Economy, Oman, has indicated that the Sultanate's GDP at current prices rose by 14.1% in the first six months of 2004 to RO4.62bn as against RO4.05bn during the corresponding period of last year.
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Contribution of the construction & real estate sectors to the economy The building and construction sector contributed RO194.3mn to GDP in 2003, representing 2.3% of the GDP, up from 1.9% in 2000, showing a CAGR of 10.3% during 2000-'03. The real estate and business activities, on the other hand, contributed RO447.4mn to GDP in 2003, a share of 5.4% in the GDP, marginally down from 5.6% in 2000, with a CAGR of 1.8% during the period. Gross capital formation The Gross Capital Formation (GCF), which includes contributions from building & construction, machinery & equipment, and intangible fixed assets, was RO1.3bn in 2003, up 33.7% over 2002. As a percentage of the GDP, it was 15.7% in 2003, up from 12.5% in 2002. The GCF has shown a CAGR of 12.7% during 2000-'03. The GCF of the building & construction sector was RO450.7mn in 2003, up 17.5% over 2002. As a percentage of the GDP, it was 5.4% in 2003, up from 4.9% in 2002. The building & construction GCF has shown a CAGR of 11.7% during 2001-'03. Table 3-2 : Gross Capital Formation at current prices - Oman
2000 GDP at market prices Gross Capital Formation Growth Share of GDP Building & Construction Growth Share of GCF Share of GDP 7,639.2 911.7 11.9% 2001 7,670.4 969.5 6.3% 12.6% 361.4 37.3% 4.7% 2002 7,806.8 977.3 0.8% 12.5% 383.5 6.1% 39.2% 4.9% 2003* 8,342.8 1,306.6 33.7% 15.7% 450.7 17.5% 34.5% 5.4%
Source: Statistical Year Book - 32nd Issue, October 2004, Ministry of National Economy, Oman. Figures in ROmn. * Provisional.
Real estate & infrastructure The real estate sector witnessed high activity in Muscats competitive property market in 2003. The large amount of liquidity available to the banks was among the factors instrumental in driving a great share of investment towards the real estate sector. As per the data contained in the 32nd Issue of the Statistical Year Book, released in October 2004 by the Ministry of National Economy, Oman, a total number of 11,154 plots were distributed by the Government across various regions of Oman in 2003. This was 20.1% more than the 9,287 plots distributed in 2002. The total number of plots offered to Omani nationals at the end of 2003 amounted to 263,750. Of these, 86.6% of the plots were meant for residential purposes, while the rest were meant for commercial, industrial and agricultural uses. The government also leased some plots of land for the establishment of major hotels and tourism centers. Simultaneously, a total number of 7,299 building permits were issued in the country in 2003, down by 1.7% over 2002. The building permits issued have shown a CAGR of 9.5% since 2001. Out of the permits issued in 2003, 7,015 permits, or 96.1%, were for new buildings
December - 2004
consisting of 6,951 (99.1%) new permits and 64 (0.9%) renewals; the balance being for additions, repairs and renewals. A total number of 6,267 permits, or about 90.2% of the new building permits, were for residential buildings which included 4,941 permits, or about 71.1% of the new building permits, for villas. The cost of the new buildings is estimated at RO260.7mn. Expatriates have traditionally driven the mid-to-high end of the property market. Ruwi, Al Wadi Al Kabir and Wattaya are some of the preferred locations of apartment dwellers in South Muscat and the lease rates in these regions have grown steadily. Al Khuwair is gaining popularity as an alternative destination, with new apartments leasing quickly at very high rents. However, with a booming credit culture and houses mushrooming in areas such as Maabela, Azaiba and Mawaleh, supply could soon overtake demand in the near-to-medium-term. Oman is currently building its industrial and commercial base, in an effort to diversify revenue away from reliance on its oil and gas sector. New ports, industrial zones, free trade zones, roads, retail developments, educational and training facilities, power, water and tourism projects are all on the drawing board or are being implemented. New residential & commercial projects Muscat Oasis, a RO11.11mn (US$30mn) residential & commercial complex, is under construction in Oman. The project is offering 400 two & three-bedroom luxury apartments. Further, Oman government has just signed 9 agreements worth RO20.6mn with local contracting companies to implement a number of road and port projects in the country. Oman is developing and executing a number of strategic projects like the Sohar Refinery, the Polypropylene factory, the Omani Indian Fertilizer project & Qalhat LNG Project. Apart from this, it is also aiming to develop a series of infrastructure projects in the country. Oman plans to develop its gas infrastructure and related industry, which should drive its economy and GDP going forward, apart from non-Oil industry. As business activity expands and new capital (domestic and foreign) flows into water and sewerage, waste management, hotels, etc., activity in the real estate & construction sector is also set to rise, and the demand for both commercial and residential real estate should pick up. In early 2004, the government of Oman unveiled its most ambitious tourism project 'The Wave', a RO310mn seafront resort, offering premium residential, leisure and entertainment facility. Two other resorts the 'Barr Al-Jissah' Resort & the 'Muscat Golf & County Club' also provide private housing. Large scale resorts are also being planned in Dhofar. Of course, the local Omanis, with low disposable incomes, may not
December - 2004
be able to buy into such expensive, resort-style housing, as the Omani Government provides land to its citizen for basic housing. Oman is not a highly favored tourist destination as well, especially when compared to Dubai, which attracts tourists & foreigners into its housing projects. Tourist arrivals are, however, expected to pick up as Omani tourism opens up. The government is hoping for a dramatic hike in tourist arrivals to ensure that its real estate projects take off. Therefore, to move the real estate market forward, it is important that the government relaxes measures, so as to allow a larger base of investors to tap into the countrys nascent real estate market. Royal Decree 21/2004 allows GCC nationals to own & rent constructed real estate, purchase and own land (different from leasehold) for residential or investment purposes in Oman. Foreign ownership of real estate is being proposed in Oman, in order to boost investment and encourage residential tourism. A decree to this effect was issued by the Ministry of Housing, Water and Electricity in the 1st week of November 2004. As per the draft law (bye-laws are to be drafted and issued by the year end), any natural entity (expatriates & foreigners) or legal entity (corporate) will be entitled to own real estate in designated integrated tourism-related areas, for residential or investment purposes on a freehold basis. The buyer can buy one or more than one property, given the financial capability and as per the criteria set and defined in the laws. The importance of allowing non-nationals the option of purchasing land may not immediately result in an influx of funds to the Sultanate, however it would undoubtedly boost market confidence, triggering activity from nationals first, subsequently flowing to non-nationals (GCC and foreign buyers). However, large projects like The Wave, the Muscat Golf course project and Al Sawadi Tourism projects are expected to benefit, as suitable laws are expected to be in place by the time they are completed. But truly large-sized fully-integrated projects should begin to develop now, as freehold ownership should attract and enhance fresh investments in the real estate sector from foreigners and domestic players. This would change the landscape of property market in Oman over the coming years. Tourism a new thrust area In addition, with the governments recent thrust to make the country a regional tourism hub, the hospitality sector is turning out to be big business in Oman. International hotel chains have recently started to expand their operations and improve their existing facilities. About 11 new projects are planned in the next few years, including the Shangri-La of Hong Kong, which is building a 4-star hotel in Oman, with the leading Zubair Corporation. The government is providing incentives to investors in tourism projects such as exemption from rent and corporate income tax for the first 10 years and government soft loans at low interest rates. The Muscat Festival 2004, held in February 2004, attracted 1.7mn visitors, as compared to 1.5mn in 2003. This includes locals and tourists from outside the country. Oman, blessed as it is with beautiful scenery and numerous historical sites, is investing
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heavily in the tourism sector, which it hopes will generate employment as well as foreign exchange and drive its growth in the future. As a result, properties, in general, across the Sultanate should see increased value. The government took a 40% equity stake in the luxury Barr Al-Jissah resort outside Muscat in December 2002. More number of smaller hotels are coming up outside the capital area, along with the development of the states historic forts. All these and other new tourism projects will be ploughing billions of Omani Rials into the local economy, activating the construction sector as well as the industries feeding on it. The government of Oman is planning to spend RO64mn to improve the Seeb International Airport over the next 5 years, which will double the size of the terminal and expand annual passenger capacity from 2.5mn to 6.5mn. Table 3-3 : Hotels & motels - Oman
2001 No. of hotels Growth No. of rooms Growth No. of beds Growth 115 5,729 8,625 2002 124 7.8% 6,078 6.1% 9,208 6.8% 2003* 133 7.3% 6,462 6.3% 9,778 6.2%
Source: Statistical Year Book - 32nd Issue, October 2004, * Provisional.
Ministry of National Economy, Oman.
Oman had 133 hotels & motels as at the end of 2003, up 7.3% over 124 hotels in 2002. As at end of 2003, there were a total of 6,462 rooms, up 6.3% over 2002, which included suites, double & single rooms, across one- to five-star categories. The retail sector Oman has been witnessing a retail sector boom in the past three years with a number of large hypermarkets slated to open shop in the country, including some big names such as Carrefour, Sultan Center and Spinneys. Muscat has total area of 190,000 sq. meters in major malls in the capital area, most of which was built during the 90s. Outlook on construction & real estate sectors The Oman government's Vision 2020 statement projects a CAGR of 8.8% in the non-oil GDP till 2020, higher than the CAGR of 7.4% in the GDP. As per the Statement, the buildings, construction and real estate sectors are projected to contribute about 10% to the GDP in 2020. Based on the Oman government's Vision 2020 proclamations and the growth witnessed till 2003, a CAGR of 10.4% could be expected in these sectors during 2003-'20. However, we project a more sedate level of growth of 3-5% in the income from the buildings, construction and real estate activities in Oman in the medium-term.
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Table 3-4 : Outlook on construction & real estate activities - Oman

Particulars GDP in 2000 (ROmn) Contribution of buildings, construction and real estate sectors in 2000 Contribution of buildings, construction and real estate sectors in 2000 (ROmn) Projected CAGR of GDP till 2020 Projected GDP in 2020 (ROmn) Projected contribution of buildings, construction and real estate sectors in 2020 Projected income from buildings, construction and real estate sectors in 2020 (ROmn) Projected CAGR in buildings, construction and real estate activities till 2020 CAGR in buildings, construction and real estate activities during 2000-'03 Projected CAGR in buildings, construction and real estate activities during 2003-'20
Source: Vision 2020 Statement, Ministry of National Economy, Oman; Global Research.
Amount 7,639.20 6.9% 527.10 7.4% 31,851.77 10.0% 3,185.18 9.4% 4.1% 10.4%
The projected rate of growth of 3-5% in the construction and real estate activities in the coming years augurs well for the local cement industry.
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4. Oman cement industry

History The cement industry in Oman dates back to 1977, when Oman Cement Company (OCC) was set up, followed by Raysut Cement Company (RCC), which was started in 1981. OCC is situated in the Muscat Governorate in Northern Oman, while RCC's plant is located in the Dhofar Governorate in Southern Oman. OCC started with an annual integrated cement production capacity of 0.624 million tones per year (mtpy), which consisted of ordinary portland cement (OPC) and sulphate resistant cement (SRC). OCC has since expanded both its clinker as well as cement capacities. It currently has the capacity to produce 1.2mt of clinker and 1.26mt of cement annually. It's portfolio of products now also includes portland blast furnace slag cement and oil well cement. RCC, on the other hand, started its operations with a 0.21mtpy plant capacity. It currently has clinker capacity of 0.75mtpy and cement capacity of 0.98mtpy. The company's product portfolio currently consists of OPC, SRC, pozzolana well cement and oil well cement. Both the companies are public companies, listed on the Muscat Securities Market (MSM).
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December - 2004
Industry analysis In 2003, OCC dominated the Oman cement market with a 63.4% share in volume-terms, with RCC contributing the rest. In terms of sales, OCC had sales of RO26.55mn (a share of 60.7% of the total sales revenues), while RCC had sales of RO17.17mn (the balance share of 39.3% of the total sales revenues) in 2003. The domestic cement demand in Oman in 2003 was of the order of about 1.965mt in volume-terms (including imports) and RO28.91mn in value-terms, or about 66.1% of the total sales of the two companies. Table 4-1 : Cement production & sale in Oman in 2003
Company Oman Cement % Share Raysut Cement % Share Total Clinker 1,200 61.5% 750 38.5% 1,950 Capacity Cement 1,260 56.3% 980 43.8% 2,240 Production Clinker Cement 1,301 1,593 62.0% 63.3% 799 922 38.0% 36.7% 2,100 2,515 Sale of Cement 1,605 63.4% 925 36.6% 2,530
Source: CompanyAannual Reports. Amounts in '000 tonnes.
As can be seen from the above Table, both the companies worked at capacity utilizations of more than 100% during the year to cope up with the demand boom. Supply and demand The total cement demand in Oman has been estimated at 1.965mt in 2003, showing a CAGR of 12.1% during 2001-'03. The supply on the other had has been estimated at 1.565mt in 2003, showing a higher CAGR of 15.9% during the same period. The clinker capacity during this period has been steady at 1.95mtpy. Capacity expansions planned by both the companies should see both the clinker and cement capacities go up in the coming 3 years. While the clinker capacity of Oman Cement could go up to 2.7mtpy by the middle of 2007, Raysut Cement's capacity is expected to go up to 1.95mtpy by early-2006. Exports During 2003, the two cement companies OCC and RCC exported 524,000mt and 441,000mt cement worth about RO7.70mn and RO7.10mn respectively. Some of the countries which imported from the two companies were Africa, Kuwait, Qatar, Somalia, UAE and Yemen. Thus, exports constituted about 33.9% of the total sales of the two companies that year. The Ministry of Commerce & Industry (MOCI) imposed a ban on cement exports from Oman in June 2004, to keep the cement prices in check. The on-going construction boom in many neighboring GCC countries had led to increasing exports from Oman, bringing domestic supplies and prices under pressure. MOCI's export ban was a step in the direction of bringing normalcy to the market. However, RCC has been exempted from the ban as the company has traditionally relied on exports for a large proportion of its sales revenue.
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The cement surpluses in future after the new capacities go on stream could be expected to be exported, given a limited local demand. Raw material The two companies source a large proportion of the raw materials at low prices. Vast tracts of land containing quarries of limestone, silica, etc. have been given to the two companies on very nominal lease charges. The companies have to spend mostly on the excavation charges. This gives cost advantages to the companies. Energy Both the companies use natural gas as their kiln-feed. Both of them source the gas from the Oman government through long-term supply contracts. The availability of gas has enabled the two companies to derive cost advantages on energy, an important cost element in cement manufacture. While the energy costs of Oman Cement as a percentage of sales were down to 17.4% in 2003, from 20.2% in 2002; those for Raysut Cement were down to 16.6% in 2003, from 34.0% in 2002 (the company had switched to natural gas from oil only in late-2002). Prices In the past, the cement companies in Oman have been impacted by the dumping of cement, mainly from the UAE. This has been more so for Oman Cement, which dominates the Northern part of the country, which, because of its proximity to the UAE, has been more prone to dumping from the UAE. But a resurgence in the construction activity in the UAE over the past year has led to more and more cement getting consumed domestically in that country, simultaneously reducing dumping in Oman. This has firmed up cement prices in the Oman market, in general, and has led to better realizations for Oman Cement, in particular, in recent months. Chart 4-1: Average cement realization in Oman (2000-'04)
23 22 21 20 19 18 17 16 15 14 2000 2001 2002 2003 RCC * As in early-December 2004. 2004 * Average realization (RO/tonne)
OCC Source : Company Annual Reports, industry sources.
The Ministry of Commerce & Industry (MOCI) had imposed a cap on the cement prices at RO1.500 for a 50 kg. bag throughout Oman, except in the Muscat and Dhofar governorates, with effect from September 1, 2004. The price cap, along with the ban on exports, was meant to check price volatility and ensure availability of cement at affordable prices in Oman. The Ministry has since withdrawn the cap on prices from the first week of December 2004. The company realizations are reported to have since risen to RO21-22.5 per tonne.
12 Oman Cement Sector Report December - 2004
Outlook The Oman property market is predominantly a residential projects-driven market. We project cement demand CAGR of over 4% in the country during 2003-06, which is in step with the projected growth of 3-5% in the income from the buildings, construction and real estate activities in Oman in the medium-term. The company realizations are expected to touch RO23-24 per tonne levels in 2005, before softening in the subsequent years, due to a low trajectory growth in domestic consumption, new capacities going on stream both in Oman itself and in the neighborhood UAE, and a possibility of resumption of dumping from that country in later years. Performance of cement companies The financial and stock performance of the listed cement companies in Oman has been tabulatedbelow. Table 4-2 : Financial performance of listed cement companies in Oman
2003 Y-o-Y % Change Company Sales Net Profit Sales Net Profit Oman Cement 26.55 8.83 22.4% 49.6% Raysut Cement 17.17 4.92 27.5% --- * Total 43.72 13.75 24.4% 137.1%
Source : Company Annual Reports, Global Research. In ROmn. * Raysut Cement had a net loss in 2002.
First Three Quarters of 2004 Y-o-Y % Change Sales Net Profit Sales Net Profit 24.92 9.70 30.6% 53.6% 15.33 5.45 13.6% 57.9% 40.25 15.15 23.6% 55.1%
Both the listed companies had combined sales of RO43.7mn, up 24.4%, and net profit of RO13.8mn, up 137.1%, in 2003 over 2002. In the first three quarters of 2004, the two companies together had sales of RO40.3mn, up 23.6%, and net profit of 15.2mn, up 55.1% year-on-year. It is worth noting that the net profit of the two companies in the first three quarters of the current year has been over 10% higher than that in the entire 2003, on sales which have been about 8% lower, pointing not only to the growth momentum but also to the improvement in the profit margins of the companies. Table 4-3 : Oman Cement companies on the MSM
Share Prices % Company End-2003 End-2002 Change Oman Cement 3.050 1.900 60.5% Raysut Cement 2.870 1.130 154.0% P/E 11.4 8.8 CMP 4.550 4.750 % Change 49.2 65.5 P/E# 11.6 10.2
Source : Reuters, Global Research. CMP as on December 23, 2004. Share Price in RO. P/Es in multiples # Based on CMP and 2004 (P) EPS.
In the stock market too, the listed cement companies in Oman performed well in 2004, on the heels of a good performance in 2003. Oman cement industry analysis based on Porters Five Forces model An analysis of the Omani cement industry, based on Porters Five Forces model, is given on the next page.
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(1) Supplier power 1. Supplier concentration: The government owns the quarries for limestone and other raw material and has given them to the incumbent companies on long-term leases on nominal charges. The companies mostly incur excavation costs on the raw material mined. There is, thus, no concentration of suppliers 2. Importance of volume to supplier: Inconsequential in light of the above. 3. Differentiation of inputs: Inconsequential, considering clinker does not have any substitutes. 4. Impact of inputs on cost or differentiation: Raw materials and energy constitute major costs. While raw materials are available to the companies at very low prices, natural gas, the fuel used by both the companies, is available on long-term contracts. Power too is not a constraint. 5. Switching costs of firms in the industry: Inconsequential, as each of the companies has access to most raw materials nearly free of cost. 6. Presence of substitute inputs: No such inputs exist. 7. Threat of forward integration: Inconsequential as the raw materials are mined by the user companies themselves. 8. Cost relative to total purchases in industry: Inconsequential, as raw material is available at very low prices.
(3) Buyer power 1. Bargaining leverage: In the current scenario of high demand, buyers bargaining power could be limited or almost nil. But large 'loyal' consumers could command better prices. 2. Buyer volume: May not be of much consequence due to high demand. 3. Buyer information: Buyers are well-informed. However, lack of adequate warehousing prevents any large-scale storage. 4. Brand identity: Inconsequential. 5. Price sensitivity: Cement is price-inelastic and is totally demanddriven. 6. Threat of backward integration: Minimal due to high capital-intensity and long gestation period of a cement plant. 7. Product differentiation: Cement is used mostly in concrete-making. A small amount is also used in making other products. 8. Buyer concentration vs. industry: About 50% of sales are in bulk. However, most customers, except large consumers, may not have any pricing power. 9. Substitutes available: Cement does not have any substitutes. 10. Buyers incentives: May not be much in the current high-demand scenario.
(2) Barriers to entry 1. Absolute cost advantages: A new entrant may not enjoy any cost advantages without economies of scale. 2. Proprietary learning curve: Potential entrants could be experienced players. 3. Access to inputs: Major raw material are available abundantly in the country, though under government control. Natural gas too is under government control. Stiff limestone/energy pricing could, therefore, be an issue with the new entrants. 4. Government policy: May not be supportive of entry of multi-national companies (MNCs), as most of the existing companies have sizeable government shareholding. Government policy also aimed at ensuring continuous supply of cement at affordable prices. For example, it has banned cement exports recently to keep domestic prices under check. 5. Economies of scale: Is a must for better cost-efficiencies. Large MNCs could have an advantage here. 6. Cyclicality, capital intensity and gestation: Cement is a cyclical industry. It is also highly capital-intensive and involves long gestation periods (about 2-2.5 years). 7. Brand identity: May be inconsequential for a commodity like cement. Though, long usage dictates company loyalty. Most of the existing companies seem to have their regular clients. 8. Access to distribution: Most sales take place in bulk as well as in bags. Distribution could, however, be an issue with a new entrant as setting up new channels in an already-penetrated market may not be easy. 9. Expected retaliation: Rivals may not indulge in price-cuts, as it could prove detrimental to themselves. Longer credit, however, is a possibility. 10. Proprietary products: Cement is not a proprietary product. Chart 4-2 : Porter's Analysis Of Industry Oman cement industry (5) Degree of rivalry 1. Exit barriers: High for both the companies, because of their large investments in existing and new clinker plants. 2. Industry concentration: The two companies dominate in two different regions of Oman, though, neither has any pricing advantages because of it. 3. Cost of imports/inputs: Miniscule, considering about 99% of the required raw materials are abundantly available at very low prices locally. 4. Fixed costs : Inconsequential, as both the plants are of almost the same vintage. 5. Industry growth: The Oman cement industry demand has been projected to grow @ 3% during 2003-'06. Off-take of higher volumes could offset declining prices going forward. 6. Intermittent overcapacity: No over-capacity in the current high demand scenario. Future oversupply could be countered, as at present, with exports. 7. Product differentiation: Different variants exist. But OPC is the most popular variety, contributing a major chunk to the revenues of both the companies. 8. Switching costs: May be inconsequential, as a vast majority of raw materials are available in the close vicinity of each of the plants at very low prices. 9. Brand identity: All existing companies have their own loyal consumers. 10. Diversity of rivals: Both the companies derive all their revenues from the sale of cement.
(4) Threat of substitutes 1. Cement has no substitute.
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December - 2004
5. Comparative financial analysis of companies

We have carried out detailed analyses and equity valuation of both the cement companies in Oman Oman Cement and Raysut Cement on the following pages. We start off with a comparative analysis of the financials of the two companies on broad parameters, such as profitability, liquidity and valuation. Profitability analysis Higher demand and hardened cement prices saw the revenues and, consequently, the gross profit margins (GPMs) improve for both the companies in 2003. While the GPM for Oman Cement rose to 50.6% in 2003 from 48.3% in 2002, that for Raysut Cement rose to 62.4% from 47.4% during the period. Table 5-1 : Gross Profit Margins
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 58.40 65.00 58.70 65.00 59.00 65.50 59.50 66.00 59.00 65.50 58.50 65.00 58.00 64.50 Oman Cement 54.59 56.52 Raysut Cement 47.38 62.39
Source: Company Annual Reports and Global Research. Figures in percentages.
A comparison of the major costs of production of the two companies in 2003 shows that raw material constituted 17.7% of the sales of Oman Cement and 9.0% of the sales of Raysut Cement. The raw material costs of Oman Cement were higher mainly because they also included the costs of imported clinker (about 58.9% of the total raw material costs). The energy costs at 17.4% of sales for Oman Cement were marginally higher than 16.6% in the case of Raysut Cement. While there was a decline in the energy costs as a percentage of sales in the case of both the companies in 2003 vis--vis 2002, the dip was massive in the case of Raysut Cement, which saw its energy costs decline by 37.8% in absolute terms and more than halve from 34.0% of sales in 2002 to 16.6% in 2003. This was possible because the company switched to natural gas from oil for its kiln feed towards the end of 2002. The direct labour costs constituted 7.1% of the sales of Oman Cement and 4.7% in the case of Raysut Cement. Oman Cement's direct labour costs were over 131% higher than Raysut Cement's, for an overall staff strength which was about 23% higher. Given that the plants of both the companies are nearly of the same vintage, the direct labour costs in the case of Oman Cement are indeed disproportionately higher than in its competitor, and could be indicative of better employee remuneration in that company. Oman Cement also spent about 1.2% of its sales on repairs & maintenance, and other expenses, whereas Raysut Cement's expenditure under this head was higher at 7.3%. Overall, the cost of production was 43.5% of sales for Oman Cement and a much lower 37.6% for Raysut Cement.
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15
Chart 5-1 : Comparison of major items of cost of production as a % of sales in 2003

20.0% 16.0% 12.0% 8.0% 4.0% 0.0% Raw material Energy Oman Cement
Source: Company Annual Reports.
17.4% 16.6% 17.7% 9.0% 7.1% 4.7% 1.2% R&M and Others
7.3%
Direct labour
Raysut Cement
At the operating level, however, the scene reverses dramatically. While Oman Cement had an operating profit margin (OPM) of 33.4% in 2003, up from 26.6% in 2002; Raysut Cement had an OPM of 29.2%, almost treble of 8.4% in 2002. While Oman Cement's OPM was higher in 2003 mainly due to lower depreciation charges, that of Raysut Cement was mainly due to lower distribution expenses and depreciation charges. Table 5-2 : Operating Profit Margins
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 39.10 33.18 40.58 33.63 39.45 33.18 38.85 37.00 39.25 36.40 39.04 36.07 38.43 34.87 Oman Cement 26.60 33.35 Raysut Cement 8.38 29.15
Among the operating expenses, the general and administrative expenses as a percentage of sales were 2.2% for Oman Cement and 0.8% for Raysut Cement. Oman Cement's staff expenses were 2.6% of its sales, while Raysut Cement had a lower 1.7% spent on its staff expenses in 2003. Raysut Cement spent 18.5% of its sales as distribution expenses, whereas Oman Cement's distribution expenses were much lower at 5.9% of its sales. In general, about 60% of the distribution expenses of Raysut Cement were exports-related, the balance being on domestic sales mainly sales through its Muscat terminal. Likewise, in the case of Oman Cement, almost the entire amount of its distribution expenses were on its exports. The higher distribution expenses of Raysut Cement have proved to be a drag on the operational margins of the company, as these expenses dragged its OPM 4.2% lower than that for Oman Cement in 2003. Depreciation, as a percentage of sales, was almost at the same level for the two companies.
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Chart 5-2 : Comparison of major items of operational expenses as a % of sales in 2003

20.0% 16.0% 12.0% 8.0% 4.0% 0.0% General & administrative expenses Staff expenses Distribution expenses Depreciation 2.2% 0.8% 2.6% 1.7% 5.9% 18.5% 12.4% 12.3%
Oman Cement
Raysut Cement
At the net profit level, the net profit margin (NPM) of Oman Cement was 33.3%, as against 28.7% for Raysut Cement. Table 5-3 : Net Profit Margins
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 39.59 34.17 40.14 35.30 38.76 35.98 38.25 39.59 38.93 40.07 39.03 40.80 39.21 41.49 Oman Cement 27.22 33.26 Raysut Cement (0.73) 28.66
Despite the net profit of Oman Cement being higher than for Raysut Cement in 2003, its return on average equity was lower than the latter because of its higher net worth RO64.1mn, as against RO25.0mn for Raysut Cement in 2003. Table 5-4 : ROAEs
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 19.13 25.25 19.82 19.48 17.70 15.66 16.25 21.09 16.67 19.84 15.37 18.13 14.33 16.79 Oman Cement 9.88 14.15 Raysut Cement (0.45) 21.07
Going forward, the GPM of Oman Cement has been projected to rise in 2004 with higher cement volumes and high realizations. The benefits of higher realizations and expanded clinker capacity are expected to peak in 2007, leading to the highest GPM of 59.5% that year, before declining realizations start hitting at the margins. The GPM of Raysut Cement too has been projected to rise in 2004, on the back of higher cement volumes and high realizations. With the expanded cement capacity expected to go on stream by early-2006, the margins have been projected to rise during 2004-'07, peaking that year, before a decline sets in on the back of declining realizations. The OPM of
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17
Oman Cement has been projected to rise in 2004 and 2005, in line with its GPM, fluctuating thereafter due to higher staff costs and depreciation. The OPM of Raysut Cement too has been projected to firm up in 2005 and peak in 2007, before increasing distribution costs pull them lower in subsequent years. The NPMs of both the companies have been projected to move in tandem with the movement of the OPMs, as well as on the back of assumptions of increasing interest income yields, declining dividend income yields, declining unrealized appreciation on investments and increasing cost of debt. Liquidity analysis The current ratios of the two companies have been shown in the following Table. Helped by an increase in trade receivables, inventories and short-term lending, and a decline in the short-term loans, the current ratio of Oman Cement went up to 2.9x from 2.0x in the previous year. Cash and trading investments increased in the case of Raysut Cement, which, in conjunction with a decline in short-term loans and bank borrowings, saw the current ratio of the company go up to 2.3x from 0.9x in the previous year. The improvement in current ratio in 2003 vis--vis 2002 has been higher in the case of Raysut Cement, thanks mainly to a decline of 67% in the short-term loans and bank borrowings of the company. Table 5-5 : Current Ratios
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 2.93 2.25 4.12 4.01 3.01 3.86 2.91 3.99 2.97 4.25 3.92 4.93 5.01 5.51 6.04 6.04 Oman Cement 1.95 Raysut Cement 0.86
Source: Company Annual Reports and Global Research. Figures indicate ratios.
The operating cycles of both the companies declined in 2003 from their levels in 2002 148 days from 182 days in the case of Oman Cement; and 244 days from 247 days in the case of Raysut Cement. While in the case of Oman Cement, both inventory- and receivable-days declined during the year, in the case of Raysut Cement, there was an increase in inventory-days during the year. This was on the back of a substantial decline in the energy costs leading to a decline in the cost of production for the company during 2003. Table 5-6 : Length of Operating Cycle
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 148 244 141 219 134 220 138 221 138 188 132 207 139 211 140 212 Oman Cement 182 Raysut Cement 247
Source: Company Annual Reports and Global Research. Figures in days.
Despite a decline in the payable-days of Oman Cement, its cash cycle declined to 98 days in 2003, from 127 days in 2002. This indicates that the company had a higher cash
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December - 2004
roll-over and more efficient cash management during the year. The cash cycle of Raysut Cement, on the other hand, went up to 205 days from 186 days in 2002, due to a steep decline in the payable-days of the company in 2003. Table 5-7 : Length of Cash Cycle
Company Oman Cement Raysut Cement 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 127 186 98 205 96 196 91 197 93 198 94 169 90 186 94 189 95 190
Source: Company Annual Reports and Global Research. Figures in days.
Going forward, the current ratio of Oman Cement has been projected to decline till 2006, before reversing the trend and increasing thereafter, thanks, largely, to additions to its trading investments portfolio. The current ratio of Raysut Cement, on the other hand, is projected to go up in 2004, before declining in 2005 and increasing in subsequent years, thanks, once again to additions to the trading portfolio. The length of operating cycle is expected to largely show an increasing trend for Oman Cement, due to marginally increasing inventory-days and receivable-days. An increase in the inventory-turnover and debtor-turnover ratios for Raysut Cement, on the other hand, is expected to lower its operating cycle in 2004 and in subsequent years till 2007, before increasing in the subsequent years. The cash cycles of the two companies are projected to move in step with their operating cycles going forward. Valuation ratios The EPS of Oman Cement increased to RO0.267 in 2003 from RO0.178 in 2002. Thanks to an appreciation in the stock price from RO1.90 at the end of December 2002 to RO3.05 at the end of December 2003, the P/E saw a marginal rise from 10.7x to 11.4x during the year. There was a simultaneous increase in the P/BV of the company from 1.1x at the end of 2002 to 1.7x at the end of 2003. Oman Cement rewarded its shareholders with a 12% dividend in 2002 and 18% dividend in 2003. Table 5-8 : Earnings & P/Es
Company Oman Cement Raysut Cement 2002 0.178 (0.007) EPS 2003 0.267 0.328 2002 10.7 --P/E 2003 11.4 8.8
Source: Company Annual Reports and Global Research. EPS in RO. P/E in multiples.
The EPS of Raysut Cement, on the other hand, increased to RO0.328 in 2003 from (-) RO0.007 in 2002. The P/E of the company was 8.8x at the end of 2003. There was a simultaneous doubling of the P/BV of the company from 0.8x at the end of 2002 to 1.8x at the end of 2003. Raysut Cement rewarded its shareholders with a 10% dividend in 2003.
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Table 5-9 : Book Values & P/BVs

Company Oman Cement Raysut Cement 2002 1.72 1.45 BVPS 2003 1.76 1.57 2002 1.1 0.8 P/BV 2003 1.7 1.8
Source: Company Annual Reports and Global Research. BVPS in RO. P/BV in multiples.
Going forward, the EPS of both the companies have been projected to go up in 2004 and thereafter, factoring in the issue of bonus shares by Raysut Cement in 2005. The EPS growth of Raysut Cement is projected to be more than that for Oman Cement during 2003-'10. Summary of comparative financial performance The two companies compare differently on different parameters, though, historically, Oman Cement would seem to have performed better than Raysut Cement on most of the parameters. On profitability parameters, Oman Cement performed better than Raysut Cement in 2003 because of the high distribution expenses of the latter dragging its numbers down. On the liquidity front, Oman Cement scores, once again. While its current ratio was higher, its cash cycle was lower than those for Raysut Cement. Even though Raysut Cement saw a dramatic improvement in its current ratio during the year, higher inventory-days and lower payable-days together led to a higher cash cycle for the company in 2003. On the valuation parameter, Oman Cement traded at a higher P/E multiple but lower P/BV multiple than Raysut Cement in 2003. Going forward, the GPMs of both Oman Cement and Raysut Cement have been projected to rise till 2007 with higher cement volumes and high realizations. Both the companies could be hit thereafter by declining realizations. The OPMs of Raysut Cement could also be hit by increasing distribution costs in later years. The NPMs of both the companies have been projected to also factor in increasing interest income yields, declining dividend income yields, declining unrealized appreciation on investments and increasing cost of debt going forward. Additions to the trading investments portfolios could improve the liquidity of both the companies going forward. The cash cycle of Oman Cement is projected to lengthen due mainly to longer operating cycle, whereas that for Raysut Cement is projected to shorten due to shorter operating cycle as well as payable-days. Despite this, however, the cash cycle of Oman Cement has been projected to be half that of Raysut Cement in 2010. The EPS of both the companies has been projected to go up in 2004 and thereafter, after factoring in the issue of bonus shares by Raysut Cement in 2005. The EPS growth of Raysut Cement is projected to be higher than that for Oman Cement during 2003-'10.
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6. Valuation matrix
In this section, we make a comparison between the two companies based on two different valuation methods that we have employed. Valuation based on DCF method The free cash flows of the two companies in 2002 and 2003, as well as in the following seven years have been shown in the Table below. The free cash flows of both Oman Cement and Raysut Cement grew in 2003 more in the latter than in the former. Future capacity expansion plans by both Oman Cement and Raysut Cement could, however, adversely impact their free cash flows, as the projections in the following Table suggest. Post the capacity expansions, however, the free cash flow for both the companies grow on the back of growing volumes and the benefits of economies of scale, though declining realizations after 2005 do impact the cash flows thereafter. Table 6-1 : Free Cash Flows
Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 13.12 5.09 0.59 (5.15) 0.99 8.38 1.95 12.26 19.78 14.07 20.28 14.15 20.28 13.80 Oman Cement 11.31 11.44 Raysut Cement 2.67 6.75
Source: Company Annual Reports and Global Research. In ROmn.
Valuation based on peer comparison method The EPS of both the companies have been projected to rise in 2004 and beyond, helped by growing cement volumes and the benefits of scaled-up operations. To a certain extent, the benefits of operational efficiencies have been projected to be offset by declining incomes and appreciation from investment portfolios going forward. Based on the current market prices of the two companies, their P/Es, obviously, show a declining trend going forward. Table 6-2 : Earnings Projections & P/Es
Company Oman Cement Raysut Cement
0.393 0.467 0.460 0.398 0.464 0.423
EPS
0.473 0.643 0.534 0.692 0.537 0.709 0.538 0.721 11.6 10.2 9.9 11.9
P/E(x)*
9.8 11.2 9.6 7.4 8.5 6.9 8.5 6.7 8.5 6.6
2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P)
Source: Global Research. EPS in RO. P/E in multiples.
* Based on closing prices of December 23, 2004.
The P/E for the Oman cement sector has been arrived at as shown below. The sector P/E multiple leads to the peer comparison valuation of the companies.
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Table 6-3 : Sector P/E of cement companies in Oman - 2004 (P)

Company Oman Cement Raysut Cement Total Net Profit for 2004* 12.9 7.3 20.2 No. of shares 33.09 15.00 CMP 4.550 4.750 M-Cap Sector P/E 150.5 71.3 221.8 10.98
Source : Company Financial Reports, Reuters and Global Research. * Net profit in the first three quarters of 2004 annualized. Net profit and market cap in ROmn. Number of shares in million. CMP in RO as on December 23, 2004. Sector P/E in multiple.
Based on the two valuation methods employed DCF and peer comparison, and by assigning fixed weightages to the valuations thrown up by the two methods 80% to the DCF valuation and 20% to the peer comparison valuation, the weighted average valuations of each of the two companies have been arrived at. These have been shown in the Table below. Table 6-4 : Weighted Average Share Values
Method As per DCF Method As per P/E multiple Weighted average value
Source: Global Research. Values in RO.
Weightage 80% 20% 100%
Fair Value Oman Cement Raysut Cement 5.212 6.107 4.315 5.124 5.033 5.910
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December - 2004
7. Summary of recommendations
Oman Cement The company is going for an expansion of its clinker capacity from 1.2mtpy at present to 2.7mtpy, and cement capacity from 1.26mtpy at present to 3.06mtpy. The expanded capacities are expected to go on stream by the middle of 2007. The capital expenditure of about RO50mn is expected to impact it during 2005-'07. With cement prices expected to decline after 2005, the company may, however, not be able to fully reap the benefits of scaled-up volumes in subsequent years. The company's realizations could also be hit after 2007, as we foresee some amount of dumping of cement into Oman from that year, which could impact the company more than it could Raysut Cement. The scaled-up operations could, however, offset the impact of declining realizations to some extent. We see a good upside from its current price levels, and, therefore, recommend a 'BUY' on the stock. Table 7-1: Recommendation Summary
Company Reuters CMP M-Cap RoAA * RoAE * P/E* P/BV * Code 150.5 71.3 14.95 15.16 19.13 25.25 11.6 10.2 Share Potential upside Recommend Value from CMP ation 10.6% 24.4% BUY BUY
Oman Cement OCCO.OM 4.550 Raysut Cement RAYC.OM 4.750
2.3 5.033 2.5 5.910
Source: Company Annual Reports, Reuters and Global Research. CMP and share value in RO;M-Cap in RO mn RoAA & RoAE in % P/E & P/BV in multiples. * For the year 2004 (P). CMP, M-Cap, P/E and P/BV based on stock prices of December 23, 2004.
Raysut Cement Raysut Cement too is going to expand its clinker capacity from 0.75mtpy at present to 1.95mtpy, and cement capacity from 0.98mtpy at present to 2.24mtpy. The expanded capacities are expected to go on stream by early-2006. The company, therefore, has an early-mover advantage over its competitor Oman Cement. The capital expenditure of about RO20mn is expected to impact it mainly in 2005. With cement prices expected to decline after 2005, the company may, however, not be able to fully reap the benefits of scaled-up volumes in subsequent years. But, the company's realizations could still be higher than Oman Cement's after 2007, as the latter could be impacted more by the expected dumping of cement into Oman from that year. The scaled-up operations of the company could also soften the impact of declining realizations to some extent. We, therefore, see a good upside from its current price levels, and, therefore, recommend a 'BUY' on the stock.
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8. Oman cement industry player profiles 8.1. Oman Cement Company

Company background Oman Cement Company (SAOG) (OCC) was formed in 1978. OCC is situated in the Muscat Governorate in Northern Oman. It is larger than its competitor Raysut Cement Company. OCC's cement plant at Rusayl was completed in 1983 with an annual integrated cement production capacity of 0.624mt, which consisted of ordinary portland cement and sulphate resistant cement. OCC has since expanded both its clinker as well as cement capacity. It currently has a capacity to produce 1.2mt of clinker and 1.26mt of cement annually. The company has also gradually expanded its portfolio of products to now include portland blast furnace slag cement, pozzolana well cement and oil well cement. Equity shareholding & liquidity The company has a paid-up capital of RO33.09mn, consisting of 33.09 million shares with a face value of RO1 each. The shareholding pattern of the company as on September 30, 2004 was as under: Chart 8.1-1: Oman Cement - Shareholding Pattern
30.40%
49.00%
20.60%
Ministry of Commerce & Industry Others (With <10% holding each)

* As on September 30, 2004.
Ministry of Finance
As part of its divestment programme, the Government of Oman divested about 4.125 million shares in the company through a public offer in July 2003. The Company's shares are listed on Muscat Securities Market (MSM), Muscat, Oman, where it is a component of the MSM30 Index. The high/low prices of the stock on the MSM over the last 12 months to November 2004 were RO4.950/2.900. It has had a turnover of about 15.3% (annualized) on the MSM till November 2004.
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Table 8.1-1: OCC on MSM

Year 2001 2002 2003 2004* Trades 310 734 3,801 3,828 Volume 347,655 1,277,585 4,881,383 4,628,958 Turnover 1.1% 3.9% 14.8% 15.3% Value 0.43 2.29 12.18 19.25 M-Cap 40.86 59.35 82.58 137.57
Source : MSM, * Data till end of November 2004. Turnover annualized. Trades and volumes in numbers. Value and M-Cap in ROmn.
Business description The company produces various types of cement, such as ordinary portland cement, sulphate resisting cement, oil well cement and blast furnace slag cement. The company produced about 1.3mt of clinker and 1.59mt of cement in 2003, running at capacity utilization levels of 108.4% and 126.4% respectively. Chart 8.1-2: Oman Cement - Sales Break -Up in 2003
16.0%
84.0%
OPC
Source : Company.
SRC & Others
In 2003, OPC constituted about 84% of the company's sales; SRC and other types contributing the balance 16%. About 71% of its sales in 2003 were in the domestic market. Most of its exports in 2003 were to Africa and the UAE. About 60% of its sales comprise bagged sales, bulk cement constituting the rest. The realizations on bagged cement are, on an average, about RO2 per tonne higher than on bulk sales. The customers of the company include ready-mix companies as well as small traders. Most of its sales take place in the Northern part of Oman. The company had, in the past, been impacted by the dumping of cement from the UAE, which is close to its target market and, therefore, more prone to dumping from that country. This has resulted in its average realizations being lower than those for its competitor Raysut Cement. However, the on-going construction boom in the UAE has, of late, reduced dumping of cement in Oman, leading to better realizations for the company.
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Chart 8.1-3: Oman Cement - Sales Break -Up in 2003

29.0%
71.0%
Domestic
Exports
Source : Company.
Quarries of main basic raw material, viz., limestone and silica, are available in abundance in the plant's vicinity. The limestone deposits, for example, are about 4 kms. away from the plant. The government leases the quarries for limestone and other raw material at very nominal lease charges to the company, the latter spending mostly on excavation costs. This, needless to add, leads to better margins for the company. The company has a multi-feed clinker unit, though it is currently using natural gas as its fuel. The company has a captive power generation plant of 30 MW to take care of all its power requirements. Expansion plans The company has decided to expand its current capacities. This includes setting up a 5,000 tonnes per day (tpd) (1.5mtpy) clinker facility and a 3,000 tpd (0.9mtpy) grinding facility at Rusayl, combined with a 3,000 tpd (0.9mtpy) grinding facility at Sohar in the Al-Batinah region. We estimate the capital outlay for the project at RO50mn, to be met through internal accruals and debt. The new capacities are expected to go on stream by mid-2007. Organization structure The day-to-day management of the company is supervised by the chief executive officer. The company seems to have a relatively flat organization structure, resulting in an efficient management of the company.
26
December - 2004
Past financial performance Income The company reported operational revenues of RO26.5mn for the year ended December 2003, a rise of 22.4% from RO21.7mn in the previous year. The growth in revenues in 2003 was on the back of a growth both in the volumes sold 1.605mt, up 5.1% from 1.527mt in 2002, as well as the average realization RO16.5 per tonne in 2003, up from RO14.2 per tonne in the previous year. Among the main items of non-operating income during 2003, the dividend income was RO0.23mn, at an average yield of 5.7% of the investments portfolio, and 114.7% higher than that in the previous year. There was also a reversal of previously recognized impairment in the fair value of investments available-for-sale of RO0.46mn, at an average of 11.3% of the investments available-for-sale portfolio, and up 36.0% year-on-year. The company holds shares in banking, investments, industrial and services industries as a part of its available-for-sale investments portfolio. The market value of the portfolio appreciated by 64.9% during the year. The investment in associates eroded by RO0.06mn during the year. The company has 20% equity holding in Al Batinah Quarries Company, which is engaged in quarrying, and 25% equity holding in Sohar Praton Concrete Products, which is engaged in the manufacture of concrete blocks. The book values of both the investments eroded in 2003. Interest income was RO0.72mn during the year, down by 0.2% year-on-year, with the average yield during the year declining to 3.6% from 4.2% in the previous year. Expenditure The cost of production went up by 17.2% to RO11.5mn in 2003. The two major items of production costs raw materials and energy went up by 48.0% and 5.6% to RO4.7mn and RO4.6mn, respectively. The raw material costs were higher mainly because they also included the costs of imported clinker (about 58.9% of the total raw material costs in 2003). The direct labour costs were up 3.1% to RO1.9mn, and repairs & maintenance, and other expenses were down 29.4% to RO0.3mn. As a percentage of sales, the raw material costs went up to 17.7% from 14.7% in 2002, primarily on the back of higher imports of clinker during the year, whereas the energy costs were down to 17.4% from 20.2% in 2002. The direct labour and R&M expenses declined as a % of sales in 2003. Table 8.1-4: Oman Cement - Major items of cost of production as a % of sales
21.0% 18.0% 15.0% 12.0% 9.0% 6.0% 3.0% 0.0% Raw material 2002
Source : Company Annual Reports.
14.7% 17.7%
20.2% 17.4% 8.4% Energy 7.1% 2.1% 1.2% R&M and Others
Direct labour 2003
December - 2004
27
Among the operating expenses, the general and administrative expenses went up by 6.4% to RO0.60mn in 2003 from RO0.56mn in 2002. Staff expenses were up 2.3% to RO0.68mn from RO0.67mn the previous year. The staff strength of the company was 364 employees in 2003, marginally higher than 362 in 2002. Distribution expenses in 2003 were up by 14.4% to RO1.6mn from RO1.4mn in 2002. Depreciation was down 4.8% to RO3.3mn in 2003 from RO3.5mn in the previous year. As a % of sales all the items of expenditure declined in 2003 vis--vis in 2002, on higher sales. Table 8.1-5: Oman Cement - Major items of operational expenses as a % of sales
17.0% 13.0% 9.0% 5.0% 2.6% 2.2% 1.0% General & administrative expenses Staff expenses Distribution expenses Depreciation 3.1% 6.3% 5.9% 16.0% 12.4%
2.6%
2002
Source : Company Annual Reports.
2003
The finance charges during the year were RO0.08mn, down by 63.9% year-on-year, with the average cost of debt declining to 1.4% from 2.3% in 2002. The company repaid debt worth RO3.4mn during the year. Gross and operating profits At the operating level, the gross profit grew by 28.4% to RO13.4mn in 2003 from RO10.5mn in 2002. The lower rise in the cost of production saw the gross profit margin (GPM) increasing to 50.6% in 2003 from 48.3% in the previous year. The operating profit simultaneously went up 53.5% to RO8.9mn in 2003 from RO5.8mn in 2002. Simultaneously, the operating profit margin (OPM) went up from 26.6% in 2002 to 33.4% in 2003. Net profit The net profit of the company went up by 49.6% to RO8.8mn in 2003 from RO5.9mn in 2002. The net profit margin, following the trend seen in the GPM and OPM, increased from 27.2% to 33.3% during the period. The EPS rose to RO0.267 in 2003 from RO0.178 in 2002. Profitability ratios The return on average assets shot up from 7.2% in 2002 to 10.7% in 2003, following the healthy rise in the net profit during the year. Simultaneously, the return on average equity saw a rise from 9.4% to 13.1%.
28 Oman Cement Sector Report December - 2004
Dividends The company paid an 18% cash dividend in 2003, up from 12% in the previous year. The company follows a policy of paying out about 70-80% of its net profits. However, the future capacity expansion projects could see lower dividend payouts in the coming years. Performance in the first nine months of 2004 The first nine months of 2004 saw excellent performance by the company. Sales went up by 30.6% to RO24.9mn, from RO19.1mn in the corresponding period of the previous year. Continued high demand saw cement prices hardening during the period, averaging at about RO20.1 per tonne, up 22.9% from the average realization of RO16.3 per tonne in the corresponding period of 2003. The net profit for the first nine months of 2004 was up by 54.7% to RO9.7mn, from RO6.3mn in the same period of 2003. This was thanks to lower costs of production and operational expenses, despite lower other and investment incomes, and a provision of RO0.4mn towards a possible loss on a guarantee that the company gave on behalf of its associate company Sohar Praton Concrete Products (SPCP) to its bankers. Assets and liabilities structure The asset structure of the company has changed in 2003, in tune with the expanding business of the company. The improved performance in 2003 saw the total assets go up by 3.5% to reach RO84.0mn. While the accounts receivable were up by 61.8% to RO1.6mn, inventories were up 15.3% to RO4.4mn, on the back of higher sales during the year. Investments in certificates of deposits and bonds went up during the year in short-term instruments by 70.1% to RO2.9mn, and in long-term instruments by 11.9% to RO8.8mn; long-term deposits were up 47.5% to RO5.9mn, while investments available-for-sale were up 62.0% to RO5.0mn. The net fixed assets declined by 7.3% to RO49.3mn during the year, on the back of a decline in the gross fixed asset investments during the year due to low additions (RO0.1mn), higher disposals (RO0.5mn) and a compensation of RO0.7mn received from a contractor as damages for unsatisfactory performance of a portion of the plant. On the liabilities side, the trade payables went up by 1.4% to RO1.6mn during 2003. While the short-term loans declined by 57.0% to RO1.5mn, the medium-term loans saw a decline of 35.2% to RO2.7mn in 2003. The deferred tax liability rose by 8.9% to RO5.5mn at the end of the year.
December - 2004
29
SWOT analysis
Strengths - Raw material is available abundantly at very low prices. Energy too is adequately available and secured over a long-term. - The company almost monopolises the relatively larger Northern Oman cement market. - The company is a direct beneficiary of the construction developments taking place in Northern Oman. - The company also has a lucrative, diversified investments portfolio. Weaknesses - The government can have a say in fixing the cement prices, as in the recent past. - It has also been impacted in the past by dumping from the UAE, though the threat has receded in recent times. - It does not have the locational advantage of a port close to it. Most of its exports are by road. - The government's export ban applies to the company, though in the present context of adequate domestic demand, the impact could be nominal.
Opportunities - On-going construction boom in Oman, though limited, and in the neighboring countries presents it with good opportunities. - Future expanded clinker/cement capacity could give it greater economies of scale, thereby, boosting its margins going forward. However, additional capacities could also bring along softening of cement prices.
Threats - Pricing pressure expected going forward, due to expanded capacities in the region and limited local demand. - The threats of dumping, mainly from the UAE, could re-surface once all the on-going/announced capacity expansions in the region go on stream by 2007. This could only add to the pricing pressure.
Earnings outlook We have made the following assumptions in our earnings projections for the company till 2010: 1. Average cement price of RO20.1 per tonne has been assumed in 2004. The cement prices have been assumed to peak at RO23.0 per tonne in 2005, declining steadily thereafter to touch RO17.0 per tonne in 2010, in response to additional clinker/cement capacities going on stream in mid-2007 and expected dumping of cementthereafter. 2. An increase in sales revenue to RO32.84mn in 2004 from RO26.55mn in 2003 has been assumed, in continuation of the growth momentum seen in the first three quarters of the current year. Correspondingly, the net profit has been assumed to touch RO13.00mn in 2004, up from RO8.83mn in 2003. The sales in later years have been assumed to be marked by relatively lower clinker capacity utilization on expanded capacities and lower realizations.
30
December - 2004
3. The new clinker/cement capacities are expected to go on stream by the middle of 2007. The full benefits from this enhanced capacity, therefore, are expected to accrue to the company only from 2008. Accordingly, clinker capacity utilization levels of 85%, 90% and 95% of the expanded capacity have been assumed in 2008, 2009 and 2010 respectively. The cement production and sales too have been assumed to fluctuate in these years accordingly. 4. The GPM of the company has been projected at 58.4% in 2004, in line with the results of the first three quarters. The GPMs, thereafter, have been assumed to go up steadily to peak at 59.5% in 2007 on the back of high volumes and lower cost of production assumed. Thereafter, even though the volumes get scaled up thanks to the enhanced capacities going on stream, the declining realizations begin to hit at the margins. The GPMs in 2008-'10 have been projected at 59.0%, 58.5% and 58.0%respectively. 5. Most operating costs have been assumed to decline as a percentage of sales in 2004 and 2005, increasing thereafter primarily due to increasing depreciation costs. 6. The average cost of debt has been assumed at 1.5% in 2004, going up by 50bps in each subsequent year, in line with the expected hardening of interest rates going forward. 7. The surplus cash generated in any year has been assumed to be invested mainly in investments available-for-sale, and to a lesser extent in trading investments. While the interest income has been assumed to go up over the years in step with the expected hardening of interest rates, dividend yield and unrealized investment gains have been assumed to taper down, assuming a more sober stock market performance in the forthcoming years. Based on the above assumptions, we have projected the net profit of the company at RO13.0mn in 2004, going up to RO17.8mn in 2010. The corresponding movements in the margins, earning per share and book value per share have been shown in the Table below. Table 8.1-2 : Oman Cement - Earnings and valuation ratios
Company Net profit (ROmn) GPM (%) OPM (%) NPM (%) ROAA (%) ROAE (%) EPS (RO) BVPS (RO) 2002 5.90 54.59 26.60 27.22 7.23 9.88 0.178 1.716 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 8.83 56.52 33.35 33.26 10.69 14.15 0.267 1.757 13.00 58.40 39.10 39.59 14.95 19.13 0.393 1.991 15.23 58.70 40.58 40.14 15.91 19.82 0.460 2.291 15.34 59.00 39.45 38.76 14.20 17.70 0.464 2.589 15.66 59.50 38.85 38.25 12.91 16.25 0.473 2.853 17.68 59.00 39.25 38.93 13.33 16.67 0.534 3.110 17.78 58.50 39.04 39.03 12.57 15.37 0.537 3.335 17.81 58.00 38.43 39.21 11.93 14.33 0.538 3.526
Source : Company Annual Reports and Global Research.
December - 2004
31
Valuation
DCF Method In order to compute the cost of equity for the Discounted Cash Flow (DCF) method, we have used the Capital Asset Pricing Model (CAPM). The following assumptions have been made in order to arrive at the equity value of Oman Cement. 1. A risk-free rate of 5.50%. Since Kuwait has a higher country risk rating than Oman does, we have added the difference of 0.75% between the country risk premiums for Kuwait (1.88%) and Oman (2.63%) to the discount rate currently prevailing in Kuwait of 4.75%. This gives us the risk-free rate for Oman of 5.50%. The country risk premiums have been sourced from the study done by Prof. A Damodaran and available on the website of the NYU Stern School of Business. 2. An equity risk premium of 6.75% keeping in view the cyclicality of the cement industry. 3. Oman Cement had a Beta of 1.0029, based on monthly returns over a period of five years to November 2004. We have assumed the Beta at the same level for the WACCcalculations. 4. The cost of equity derived by using the Capital Asset Pricing Model (CAPM) is 12.27%. 5. The cost of debt has been assumed at 1.50%, the projected rate for 2004. 6. The above two together give a WACC of 11.78%. 7. Terminal growth rate of 3%, which is lower than the long-term GDP growth rate of Oman. Based on our future earnings projections and the above assumptions for DCF computations, the DCF value of Oman Cement is RO5.212 per share. Table 8.1-3 : Oman Cement - Equity valuation by discounted cash flows
2004(P) 2005(P) 2006(P) 2007(P)
Years (No.) Free Cash Flow Discount Factor (x) Discounted Cash Flow Terminal Value Cost of Capital (CAPM Method) Terminal Growth Rate Primary Value Discounted Terminal Value Value of Investments Cash Debt Equity Value No. of Equity Shares Outstanding Per Share Value (RO)
Source : Global Research.
2008(P)
4.25 19,780,392 0.62 12,321,411
2009(P)
5.25 20,283,005 0.56 11,302,836
2010(P)
6.25 20,279,665 0.50 10,109,867 237,860,681
0.25 13,117,042 0.97 12,756,845 11.78% 3.0% 49,136,545 118,578,873 7,350,000 (Sep 30, 2004) 952,000 (Sep 30, 2004) 3,555,000 (Sep 30, 2004) 172,462,418 33,087,271 5.212
1.25 592,024 0.87 515,082
2.25 3.25 988,321 1,954,991 0.78 0.70 769,245 1,361,259
All figures in RO, except where otherwise indicated.
32
December - 2004
Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and cost of capital is provided as below. The table provides estimated fair values for Oman Cements shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives. Table 8.1-4 : Oman Cement - Sensitivity Analysis
Terminal Growth Rate 1.0% Cost of Capital 9.8% 10.8% 11.8% 12.8% 13.8%
Source: Global Research
2.0% 6.218 5.434 4.815 4.314 3.902
3.0% 6.929 5.958 5.212 4.623 4.147
4.0% 7.887 6.636 5.712 5.003 4.442
5.0% 9.245 7.550 6.359 5.480 4.804
5.668 5.017 4.491 4.057 3.695
Valuation based on peer comparison The peer group valuation is performed to compare the intrinsic value of Oman Cement arrived at using the DCF calculation. In order to value Oman Cement using this method, we have used the weighted average price-to-earnings (P/E) multiple of the Oman cement sector. The price-earnings multiple of a stock is a reflection of various factors, such as the expected profitability of the company, its growth potential as perceived by the market, predictability and sustainability of its revenues, the quality of its earnings and the quality of its management, among others. The weighted average P/E of the two listed cement companies in Oman, based on the projected financial results for the year ending December 2004 and their current market prices, is 10.98x. On the basis of this weighted average P/E and Oman Cement's projected 2004 earnings, the companys stock valuation comes to RO4.315 per share. However, as the price-earnings multiple varies with time and is dependent on several factors, such as market sentiment and other qualitative factors, we have provided a lower weightage of 20% to the peer valuation method and 80% weightage to the value arrived at using the DCF method. Weighted value The value of Oman Cements shares derived from the weighted average of the DCF and peer comparison methods is RO5.033 per share. The stock currently trades at around RO4.550 on the MSM, which implies that the value of Oman Cements shares, arrived at using the weighted average of the two methods, is 10.5% higher than its current market price. At the current price, Oman Cements shares have a P/E multiple of 17.0x the 2003 earnings, and forward multiples of 11.6x and 9.9x the estimated 2004 and 2005 earnings respectively. We, therefore, recommend a 'BUY' on the Oman Cement stock at its prevailing price levels.
December - 2004
33
Table 8.1-5 : Weighted Average Share Value of Oman Cement

As per DCF Method As per P/E multiple Weighted average value
Source: Global Research In RO.
Weightage 80% 20%
Fair Value 5.212 4.315 5.033
Recommendation The company is going for an expansion of its clinker capacity from 1.2mtpy at present to 2.7mtpy, and cement capacity from 1.26mtpy at present to 3.06mtpy. The expanded capacities are expected to go on stream by the middle of 2007. The capital expenditure of about RO50mn is expected to impact it during 2005-'07. With cement prices expected to decline after 2005, the company may, however, not be able to fully reap the benefits of scaled-up volumes in subsequent years. The company's realizations could also be hit after 2007, as we foresee some amount of dumping of cement into Oman from that year, which could impact the company more than it could Raysut Cement. The scaled-up operations could, however, offset the impact of declining realizations to some extent. We see a good upside from its current price levels, and, therefore, recommend a 'BUY' on the stock.
34
December - 2004
BALANCE SHEET
2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
OMAN CEMENT CO . SAOG
Amounts in Rials Omani
Assets: Bank & cash equivalents 660,428 Trade receivables 2,091,205 Other Receivables 691,690 Inventories 4,603,312 Short term Deposits (> 3 months) 10,999,995 Short-term loans 0 Investment Portfolios for trading 117,595 Total Current Assets 19,164,225 1,095,339 956,423 610,067 3,851,960 4,500,000 1,675,030 25,961 12,714,780 7,858,540 4,000,000 0 395,362 3,080,754 97,139,391 43,993,148 53,146,243 81,195,679 8,793,393 5,900,000 51,026 332,803 4,992,331 96,100,223 46,842,180 49,258,043 84,025,237 12,500,000 10,500,000 53,067 426,803 6,874,442 97,100,223 50,126,588 46,973,635 89,962,761 12,500,000 10,500,000 55,190 321,803 8,983,426 113,100,223 53,699,995 59,400,228 101,461,969 12,500,000 10,500,000 57,397 243,053 9,425,954 130,100,223 57,956,003 72,144,220 114,557,752 10,000,000 8,000,000 59,693 183,991 15,281,822 147,100,223 62,807,011 84,293,212 127,921,000 7,500,000 5,500,000 62,081 139,694 28,937,603 148,100,223 67,825,418 80,274,805 137,433,578 5,000,000 3,000,000 64,564 139,694 41,558,790 149,100,223 72,729,226 76,370,997 145,595,768 814,888 1,554,053 512,470 4,440,959 4,493,180 2,850,000 32,091 14,697,641 1,778,769 1,979,471 629,832 4,678,750 3,500,000 0 67,992 12,634,814 1,645,961 2,078,192 727,367 5,149,759 0 0 100,043 9,701,322 1,409,641 2,168,658 650,597 5,334,898 0 0 123,334 9,687,127 1,593,266 2,243,151 672,945 5,450,856 0 0 142,064 10,102,282 1,570,759 2,488,870 622,217 6,122,620 0 0 4,214,929 15,019,395 1,785,026 2,496,575 624,144 6,216,473 0 0 8,339,505 19,461,723 1,774,360 2,488,870 622,217 6,271,952 0 0 12,513,561 23,670,960 2,500,000 500,000 67,147 139,694 53,625,291 150,100,223 77,666,033 72,434,190 152,937,281
December - 2004
3,380,800 1,593,120 1,560,699 0 6,534,619 0 5,061,142 4,132,950 757,783 3,970,473 0 5,509,509 2,677,650 774,809 5,955,709 0 5,605,592 2,677,650 805,801 5,955,709 0 4,891,163 4,798,644 838,033 5,955,709 0 4,285,485 8,498,644 871,555 5,955,709 1,455,300 1,615,067 1,075,668 876,868 5,022,903 0 1,759,210 1,310,050 0 3,069,260 0 1,931,160 1,287,440 0 3,218,600 0 2,000,587 1,333,724 0 3,334,311 0 2,044,071 1,362,714 0 3,406,785 0 3,765,923 12,198,644 906,417 6,617,454 0 2,295,982 1,530,655 0 3,826,637 0 3,329,353 9,898,644 942,674 8,271,818 33,087,271 6,724,145 11,029,090 7,573,268 171,366 2,153,572 60,738,712 81,195,679 84,025,237 33,087,271 6,724,145 11,029,090 8,456,303 642,672 4,145,176 64,084,657 33,087,271 6,724,145 11,029,090 9,756,482 1,360,683 9,891,078 71,848,749 89,962,761 33,087,271 6,724,145 11,029,090 11,279,056 2,001,719 17,638,539 81,759,821 101,461,969 33,087,271 6,724,145 11,029,090 12,813,268 2,467,538 25,490,736 91,612,049 114,557,752 33,087,271 6,724,145 11,029,090 14,378,926 2,842,136 32,964,208 101,025,776 127,921,000 33,087,271 6,724,145 11,029,090 16,147,111 3,570,782 40,606,053 111,164,452 137,433,578
Long-term loans Long-term deposits Employee loans Investments in associates Investments available-for-sale Gross fixed assets less: accumulated depreciation Net fixed assets Total Assets
5,051,191 0 0 450,000 1,165,699 96,881,889 40,563,282 56,318,607 82,149,722
Liabilities: Short-term loan Accounts payable Other payables Taxation Total Current Liabilities
5,283,399 1,401,393 1,530,021
8,214,813
0 2,331,177 1,554,118 0 3,885,295 0 2,937,104 7,598,644 980,381 9,926,181
0 2,351,982 1,567,988 0 3,919,970 0 2,581,470 5,598,644 1,019,596 11,580,545
Deferred income Deferred taxation Medium-term loan Employee Indemnity Provision Proposed Dividend
864,280 4,263,643 6,649,470 757,949 2,646,982
Owner's Equity: Paid-up equity capital Share premium Statutory reserve Voluntary reserve Fair value reserve Retained earnings Total Shareholder's Equity
33,087,271 6,724,145 11,029,090 6,982,828 119,165 810,086 58,752,585
33,087,271 6,724,145 11,029,090 16,543,636 4,816,545 48,067,476 120,268,162 145,595,768
33,087,271 6,724,145 11,029,090 16,543,636 6,557,102 54,295,813 128,237,056 152,937,281
35
Total Liabilities
82,149,722
OPERATING STATEMENT
2001 21,357,307 21,691,035 26,549,755 32,841,227 37,927,000 39,578,000 40,937,500 45,421,875 45,562,500 45,421,875 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
Sales Revenue
Cost of Production 10,910,369 11,840,805 (937,672) (560,630) (647,705) (667,979) (1,174,652) (1,374,300) (3,489,675) (3,468,870) 4,660,665 5,769,026 (840,021) (223,230) 41,795 41,420 992,403 722,097 86,570 108,276 (2,431) (332,459) 336,127 457,038 59,334 39,645 (4,298) (54,638) 3,355 (62,559) (140,000) (105,000) (78,750) (59,063) (44,297) (683,030) (1,572,000) (3,301,072) 8,854,028 (80,683) 55,127 720,396 232,489 (788,189) (1,543,538) (3,284,408) 12,840,635 (51,080) 45,333 849,390 359,006 (758,540) (910,294) (1,782,569) (1,781,010) (3,573,408) (4,256,008) 15,390,092 15,612,148 (74,763) (166,216) 53,098 55,409 866,250 920,000 320,518 279,491 (941,563) (1,842,188) (4,851,008) 15,904,305 (310,459) 57,313 922,500 374,598 (999,281) (2,043,984) (5,018,408) 17,828,796 (386,703) 63,591 775,000 728,646 15,006,859 (596,729) 19,179,277 (722,507) 22,263,149 23,351,020 (758,540) (791,560) 24,357,813 (818,750) 26,798,906 (908,438) 26,654,063 (911,250) (1,002,375) (2,050,313) (4,903,807) 17,786,318 (349,946) 63,788 525,000 830,508 -
(10,446,938) (9,850,230) (11,542,896) (13,661,951) (15,663,851) (16,226,980) (16,579,688) (18,622,969) (18,908,438) (19,077,188) 26,344,688 (908,438)
36
4,606,522 (40,000) (704,403) 3,862,119 6,694,780 (790,381) 5,904,399 10,179,191 (1,348,843) 8,830,348 13,962,618 (960,829) 13,001,789 16,489,840 16,622,083 (1,264,096) (1,279,965) 15,225,744 15,342,118 16,889,193 (1,232,609) 15,656,584 18,965,033 (1,283,186) 17,681,847 55,217 3,862,119 386,212 74,056 2,646,982 8% 810,086 5,904,399 590,440 3,970,473 12% 2,153,573 8,830,348 883,035 5,955,709 18% 4,145,177 810,086 2,153,573 4,145,177 13,001,789 1,300,179 5,955,709 18% 9,891,079 9,891,079 17,638,540 15,225,744 15,342,118 1,522,574 1,534,212 5,955,709 5,955,709 18% 18% 17,638,540 25,490,737 25,490,737 15,656,584 1,565,658 6,617,454 20% 32,964,209 32,964,209 17,681,847 1,768,185 8,271,818 25% 40,606,054
(999,281) (2,043,984) (4,936,807) 17,456,177 (296,939) 63,591 275,000 1,160,371 -
Gross Profit Less: General & Administrative Expenses Less: Staff Costs Less: Distribution expenses Less: Depreciation Operating Profit Finance charges Other Income Interest income Dividend income Profit on disposal of plant & equipment Income from associates Previously recognised impairment reversed Add/ (less) provision for investments Less: provision for doubtful debt Gain/(Loss) extraordinary item Profit Before Taxation Board of Directors Remuneration Tax Net Profit
18,855,668 (1,071,538) 17,784,129
18,658,200 (849,319) 17,808,881
P&L Appropriation Account: Op Balance of Retained Earnings Adjustments Net Profit for the year Trfr to Statutory Reserve Trfr to Voluntary Reserve Trfr to Fair Value Reserve Proposed Dividend Proposed Dividend Cl Balance of Retained Earnings
40,606,054 17,784,129 396,524 9,926,181 30% 48,067,477
48,067,477 17,808,881 11,580,545 35% 54,295,814
December - 2004
CASH FLOW STATEMENT

2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
7,739,554 3,862,119 704,403 3,468,870 (722,097) (108,276) 237,813 40,000 1,164 54,638 4,298 (336,127) (14,583) 159,310 81,011 30,992 32,232 33,521 62,559 (3,355) (457,038) (46,215) 90,183 140,000 105,000 78,750 59,063 44,297 3,301,072 (720,396) (232,489) 73,210 50,000 4,642
9,560,801 5,904,399 790,381
12,301,364 8,830,348 1,348,843
December - 2004
3,489,675 (992,403) (86,570) 836,366 40,000 140 (186,971) 2,431 332,459 3,145 (346,535) 81,295 34,862 36,257 2,167,092 1,368,188 592,042 206,862 (320,974) 2,100,356 (415,981) 1,731,399 111,704 817,647 (144,413) (166,808) (41,542) (40,000) (40,000) (40,000) (19,716) (81,177) (73,157) 9,613,386 11,606,716 10,848,074 (1,298,591) (434,832) (542,785) (402,046) (542,780) (237,791) 144,143 234,382 (517,926) (196,256) (471,009) 171,950 (22,610) (83,123) (13,696) (185,138) 69,427 46,285 (140,326) (96,841) (115,959) 43,484 28,990 (446,903) (194,991) (671,764) 251,911 167,941
14,519,088 17,109,950 18,071,444 19,095,317 21,227,295 21,327,832 21,290,838 13,001,789 15,225,744 15,342,118 15,656,584 17,681,847 17,784,129 17,808,881 96,083 (714,429) (605,678) (519,562) (436,570) (392,249) (355,634) (876,868) 3,284,408 3,573,408 4,256,008 4,851,008 5,018,408 4,903,807 4,936,807 (849,390) (a866,250) (920,000) (922,500) (775,000) (525,000) (275,000) (359,006) (320,518) (279,491) (374,598) (728,646) (830,508) (1,160,371) 51,080 74,763 166,216 310,459 386,703 349,946 296,939
Operating Operating Activities (a) Net Profit Deferred tax liability Tax paid Depreciation Interest income Dividend income Finance charges Proposed remuneration to Directors Amortization of bond premium Other amortizations Share of results of associate cos. Gain on sale of property, plant and eqpt Income from Sale of Investments Gain on derivatives Provisions for stores, etc. Indemnity Gain/ Loss from revaluation of investments 37,707 (44,827) (9,632) (93,853) 35,195 23,463
39,215
Working Capital (b) Dec/(inc.) in receivables Dec / (inc) in Inventories Inc/(dec) in accounts payable Inc/(dec) other current liabilities Fair value loss on derivatives
(11,173) 9,632 (55,479) 20,805 13,870
Income tax paid Directors' remuneration paid Employees' benefits paid Total Operating
14,117,042 16,592,024 17,988,321 18,954,991 20,780,392 21,283,005 21,279,665
37
CASH FLOW STATEMENT

2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
(549,102) 1,253,164 (3,353,350) 849,390 86,570 (858,648) 6,508,548 (4,000,000) (1,900,000) (4,600,000) 1,245 12,251 6,499,995 (6,501,728) (2,123) (2,208) 2,497,704 2,500,000 108,276 230,389 693,180 2,497,612 2,500,000 2,497,517 2,500,000 866,250 920,000 922,500 775,000
38
2,000,009 6,250 195,265 (361,194) (2,638,781) (5,514,585) (735,338) (8,888,704) 363,488 296,940 660,428 434,911 660,428 1,095,339 (280,451) 1,095,339 814,888 963,881 814,888 1,778,769 (132,808) 1,778,769 1,645,961 (236,320) 1,645,961 1,409,641 183,625 1,409,641 1,593,266 (22,506) 1,593,266 1,570,759
(302,049) (114,948) (1,000,000) (16,000,000) (17,000,000) (17,000,000) (1,000,000) (1,000,000) (1,000,000) 762,411 669,946 359,006 320,518 279,491 374,598 728,646 830,508 1,160,371 1,650,000 (5,911,518) (3,764,466) 525,000 275,000
2,497,417 2,500,000
Investing Capex ( e) Dividend income Maturity of long-term loans Purchase of loans Share of results of associate cos. Interest income Dividend received Compensation for plant & equipment Loans Recall of short-term deposits Long-term deposits Proceeds from disposal of Investments Proceeds from disposal of property Short-term deposits Investment Portfolios for trading Investments in associates Investments available for sale Total Investing
993,180 3,500,000 (4,000,000) (4,000,000) (4,000,000) (234,000) (1,012,731) (1,200,000) (1,500,000) - (5,500,000) (13,000,000) (11,500,000) (10,500,000) (2,841,640) (3,529,559) (5,691,072) (12,815,355) (15,802,716) (16,205,198) (11,498,741) (10,146,975) (9,067,211)
Financing Dividend Term-loan repayments Finance charges Total Financing
(2,630,697) (4,135,899) (5,955,709) (5,955,709) (5,955,709) (5,955,709) (6,617,454) (8,271,818) (9,926,181) (5,448,083) (3,380,800) (1,455,300) 2,120,994 3,700,000 3,700,000 (2,300,000) (2,300,000) (2,000,000) (251,385) (82,267) (51,080) (74,763) (166,216) (310,459) (386,703) (349,946) (296,939) (8,330,165) (7,598,966) (7,462,088) (3,909,478) (2,421,925) (2,566,168) (9,304,157) (10,921,764) (12,223,120) 214,267 1,570,759 1,785,026 (10,666) 1,785,026 1,774,360
Net Change in Cash Net Cash at beginning Net Cash at end
December - 2004
RATIO ANALYSIS
2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
Liquidity Ratios Current Ratio (x) Quick Ratio (x) Inventory stock (days) Receivables outstanding (days) Length of operating cycle (days) Payables outstanding (days) Length of cash cycle (days) 2.33 1.77 161 36 197 49 148 1.95 1.36 157 26 182 55 127 2.93 2.04 131 17 148 51 98 4.12 2.59 122 20 141 45 96 3.01 1.41 115 20 134 43 91 2.91 1.31 118 20 138 44 93 2.97 1.37 119 20 138 45 94 3.92 2.32 113 19 132 43 90 5.01 3.41 119 20 139 45 94 6.04 4.44 119 20 140 45 95
December - 2004
0.27 0.41 0.36 54.59 26.60 27.22 7.23 9.88 17.84 0.32 0.54 0.43 56.52 33.35 33.26 10.69 14.15 26.69 0.37 0.70 0.48 58.40 39.10 39.59 14.95 19.13 39.30 0.37 0.64 0.49 58.70 40.58 40.14 15.91 19.82 46.02 0.35 0.55 0.46 59.00 39.45 38.76 14.20 17.70 46.37 0.32 0.49 0.43 59.50 38.85 38.25 12.91 16.25 47.32 0.33 0.57 0.43 59.00 39.25 38.93 13.33 16.67 53.44 0.31 0.60 0.39 58.50 39.04 39.03 12.57 15.37 53.75 2.3 10.2 7.5 2.3 14.2 6.6 2.8 21.2 7.2 3.0 18.6 8.1 3.2 18.7 8.5 3.1 18.6 8.3 3.1 18.6 8.2 3.2 19.2 8.6 3.1 18.3 8.2 0.20 0.14 0.28 0.12 0.11 0.25 0.06 0.08 0.24 0.04 0.04 0.20 0.06 0.04 0.19 0.09 0.04 0.20 0.12 0.03 0.21 0.09 0.03 0.19 0.06 0.03 0.17 0.178 1.716 67.2 1.900 10.7 1.1 0.267 1.757 67.4 3.050 11.4 1.7 0.393 1.991 45.8 4.550 11.6 2.3 0.460 2.291 39.1 4.550 9.9 2.0 0.464 2.589 38.8 4.550 9.8 1.8 0.473 2.853 42.3 4.550 9.6 1.6 0.534 3.110 46.8 4.550 8.5 1.5 0.537 3.335 55.8 4.550 8.5 1.4
Profitability Ratios Total Asset Turnover (x) Total Net Fixed Asset Turnover (x) Equity Turnover (x) Gross Profit Margin (%) Operating Margin (%) Net Profit Margin (%) Return on Average Assets (%) Return on Average Equity (%) Return on Common Capital (%)
0.26 0.38 0.36 51.08 21.82 18.08 4.70 6.57 11.67
0.30 0.63 0.37 58.00 38.43 39.21 11.93 14.33 53.82
Activity Ratios Inventory Turnover Ratio (x) Debtor Turnover Ratio (x) Creditors Turnover Ratio (x)
3.1 18.2 8.1
Leverage Ratios Debt / Equity (x) Current Liabilities / Equity (x) Liabilities / Total Assets (x)
0.04 0.03 0.16
Ratios Used for Valuation EPS (RO) Book Value Per Share (RO) Dividend Payout (%) Market Price (RO) * P/E Ratio (x) P/BV Ratio (x)
0.117 1.696 68.5 1.350 11.5 0.8
0.538 3.526 65.0 4.550 8.5 1.3
* Market price for 2004 and subsequent years as per closing price on MSM on December 23, 2004.
39
8.2. Raysut Cement Company

Company background Raysut Cement Company (RCC), was set up as a joint stock company in Oman in 1981. It is the second biggest cement company in Oman, after Oman Cement, with a current clinker capacity of 0.75mtpy and cement capacity of 0.98mtpy. The companys plant is located at Salalah, in Southern Oman. The company produces ordinary portland cement (OPC), sulphate resistant cement (SRC), oil well cement and pozzolana cement. Equity history The company has a paid-up capital of RO15mn, consisting of 15 million shares with a face value of RO1 each. The shareholding pattern of the company as on September 30, 2004 was as under: Chart 8.2-1 : Raysut Cement - Shareholding Pattern*
11.7% 10.0% 58.3% 10.0% 10.0%
Islamic Development Bank Dolphin International Others (With <10% holding each)
Abu Dhabi Fund Sindbad International Trading
Source: Companys Annual Report.
As on September 30,2004.
The company has proposed a rights issue to take place in 2005, issuing 5 million shares of face value of RO1 each, at a premium of RO2 per share, aggregating RO15.0mn. The rights offer is to part-finance the company's RO20mn expansion project, which the company has embarked upon sometime ago. Post the rights issue, the paid-up capital of the company will be increased to RO20mn from the current RO15mn. The company is currently listed on the Muscat Securities Market (MSM), Muscat, Oman, where it is traded quite actively. The high/low prices of the stock on the MSM over the last 12 months to November 2004 were RO5.250/2.820. It has had a turnover of about 40.9% (annualized) on the MSM till November this year
40
December - 2004
Table 8.2-1: RCC on MSM

Year 2001 2002 2003 2004* Trades 321 923 4,484 3,617 Volume 760,948 1,087,289 6,507,732 5,625,695 Turnover 5.1% 7.2% 43.4% 40.9% Value 0.53 1.04 14.21 22.95 M-Cap 10.42 14.31 32.75 61.20
Source : MSM, * Data till end of November 2004. Turnover annualized. Trades and volumes in numbers. Value and M-Cap in ROmn.
Business description RCC produces and markets four different types of cement OPC, SRC, oil well cement and pozzolana cement. The company produced 0.799mt of clinker and 0.922mt of cement in 2003, running at capacity utilization levels of 106.5% and 122.9% respectively. Chart 8.2-2 : Raysut Cement - Sales Break-Up in 9M2004
5.2% 5.9%
5.2%
83.7%
OPC Oil-Well Cement
SRC Pozzolana cement
Source: Company.
During the first three quarters of 2004, the percentage contribution to sales of the different categories of cement were as shown in the chart above. As is seen in the chart, OPC contributed about 84% to the total sales. Over 54% of its sales comprised bulk sales, bagged cement constituting the rest. The realizations on bagged cement are on an average about RO1-1.5 per tonne higher than on bulk sales. Its main customers include ready-mix companies as well as retail traders. Chart 8.2-3 : Raysut Cement - Sales Break-up
In 2002 In 2003
44.1%
55.9%
41.4% 58.6%
Domestic
Exports
Domestic
Exports
December - 2004
41
Although the domestic sales of the company have shown a healthy growth in recent years, a high proportion of its sales come from exports. While export sales constituted 41.4% of the total sales in 2003, they were 52.8% of the total sales in the first nine months of the current year. The proximity of the Raysut cement plant to Salalah port has helped the company achieve significant export volumes. In fact, almost its entire output is routed through the Salalah port. It has three terminals through which its products are distributed two in Yemen (Mukalla and the newly commissioned Aden terminals) and one in Oman (in Muscat). RCC's efforts to penetrate international markets have also been helped by it receiving the ISO 9002 certification and the American Petroleum Institute (API) certificate (for its oil well cement). Among the countries which the company exports its cement to are Kuwait, Qatar, Somalia, and Yemen. Exports to Yemen constitute about 60% of its total exports. The government had banned cement exports from Oman in June 2004 to keep domestic cement prices under check. However, RCC has been exempted from the ban as a large proportion of its sales revenue comes from exports. Despite the export realizations being lower than those in the domestic market, Raysut Cement's average realizations in the past have been higher than those for its competitor Oman Cement, as it has been impacted by dumping from the UAE to a much lesser extent than has Oman Cement. Reduced dumping has, however, narrowed down this difference in recent months. Quarries of main basic raw material, viz., limestone and silica, are available in abundance in the plant's vicinity. About 99% of the raw material needed is locally available. The company has acquired the mining rights from the government for a period of 25 years starting from October 1, 1984. The government leases the quarries for free to the company, the latter only spending on excavation costs. This, needless to add, leads to better margins for the company. Thus, it has no supply constraints on its rawmaterials. The company has a multi-feed clinker unit, though it is currently using natural gas as its fuel. It has a 5-year contract with the Government of Oman for the supply of natural gas at a fixed price. The switch from oil to natural gas as kiln-feed in late-2002 led to substantial savings on its energy costs from 2003 the energy costs as a percentage of sales coming down to 16.6% from 34.0% in 2002. It sources power from the national power grid to fully meet its requirements. Expansion plans The company is expanding its clinker capacity by 1.20mtpy to 1.95mtpy and cement grinding capacity by 1.26mtpy to 2.24mtpy, by setting up a new line in Salalah, in Southern Oman. The new capacities are expected to go on stream by early-2006. The company is expected to incur a capital expenditure of RO20mn on the expansion project, expected to be met through a combination of debt and internal accruals, including the proposed rights offer. The general contractor for the semi-turnkey
42
December - 2004
expansion project currently underway is Tianjin Cement Industry and Research (TCDRI), Tianjin, China. The core components for the new plant will be supplied by KHD Humboldt Wedag AG, Germany. Organization structure The day-to-day management of the company is taken care of by the general manager. All the functional heads report directly to him. Thus, the company seems to have a relatively flat organization structure, which could be expected to lead to more efficient decision-makingandimplementation. Charts 8.2-4: Organisation chart of Raysut Cement
General Manager
Technical Advisor
Manager Finance
Source : Company
Manager Administration
Manager Marketing
Manager - Plant Operations
Past financial performance Income The companys operational revenues grew to RO17.2mn for the year ended December 2003, a rise of 27.5% from RO13.5mn in the previous year. About 59% of its revenues came from domestic sales during the year, while the balance came from exports. The revenues grew in 2003 on the back of a growth both in volumes sold 0.925mt, up 22.2% from 0.757mt in 2002, as well as the average realization RO18.6 per tonne in 2003, up from RO17.8 per tonne in the previous year. Among the non-operating income during 2003, the dividend income was RO0.13mn, at an average yield of 9.0% of the investments portfolio, 128.3% higher than that in the previous year. There was also an increase in the fair value of investments for trading, which appreciated by RO0.38mn, an average appreciation of 28.8% of the trading investments portfolio, and up 385.8% year-on-year. The company holds shares of Bank Dhofar and Dhofar Insurance as a part of its trading portfolio. The market value of these companies appreciated by 33.2% and 36.2% respectively during the year. Income from associates accounted for RO0.46mn during the year, an average return of 88.2% of the investments in associates, and up 360.0% year-on-year. The company has 49% equity holding in Mukalla Raysut Trading & Industrial Company, a limited liability company incorporated in Yemen, and involved in marketing its cement in Yemen.
December - 2004
43
Expenditure The cost of production went down by 8.9% to RO6.5mn in 2003. The two major items of production costs raw materials and energy went up by 115.5% and down by 37.8% to RO1.5mn and RO2.8mn, respectively. The company's switch to natural gas from oil in late-2002 has been reflected in lower energy costs in 2003 than in 2002. As a percentage of sales, the raw material costs went up to 9.0% from 5.3% in 2002, whereas the energy costs were down to 16.6% from 34.0% in 2002. The direct labour costs were up 7.1% to RO0.8mn, and repairs & maintenance, and other expenses were up 21.4% to RO1.3mn during the year. Both the direct labour and R&M expenses declined as a percentage of sales in 2003 on higher sales. Table 8.2-5 : Raysut Cement - Major items of cost of production as a % of sales
35.0% 31.0% 27.0% 23.0% 19.0% 15.0% 11.0% 7.0% 3.0%
34.0% 16.6% 5.3% 9.0% Energy 2002 5.6% 4.7% Direct labour 2003 7.7% 7.3%
Raw material
R&M and Others
Among the operating expenses, the general and administrative expenses went down by 8.7% to RO0.13mn in 2003 from RO0.14mn in 2002. Staff expenses were up 2.5% to RO0.29mn from RO0.28mn the previous year. The staff strength of the company increased to 297 employees in 2003, as against 275 in 2002. The distribution expenses at RO3.2mn in 2003 were up 18.3% over that in 2002. In general, about 60% of the distribution expenses were exports-related, the balance being on domestic sales mainly sales through the Muscat terminal. Depreciation was down 1.3% to RO2.1mn in 2003. As a percentage of sales, all the items of expenditure declined in 2003 vis--vis in 2002, on higher sales. Table 8.2-6 : Raysut Cement - Major items of operational expenses as a % of sales
21.0% 18.0% 15.0% 12.0% 9.0% 6.0% 3.0% 0.0%
20.0% 18.5% 1.1% 0.8% 2.1% 15.9% 12.3% 1.7% Distribution expenses Depreciation
General & administrative expenses

Staff expenses
2002
2003
44
December - 2004
The net finance charges during the year were RO0.94mn, down by 36.9% year-on-year, with the average cost of debt declining to 5.6% from 9.1% in 2002. The company repaid debt worth RO2.5mn during the year. Gross and operating profits At the operating level, the gross profit grew by 67.9% to 10.7mn in 2003 from RO6.4mn in 2002. The decline in the cost of production, particularly in the energy costs, saw the gross profit margin (GPM) increasing to 62.4% in 2003 from 47.4% in the previous year. The operating profit simultaneously went up by 343.4% to RO5.0mn in 2003 from RO1.1mn in 2002. Simultaneously, the operating profit margin (OPM) went up to 29.1% in 2003 from 8.4% in 2002. Net profit The net profit of the company went up to RO4.9mn in 2003 from a net loss of RO0.1mn in 2002. The net profit margin, following the trend seen in the GPM and OPM, increased from (-) 0.7% to 28.7% during the period. The EPS rose to RO0.328 in 2003 from (-) RO0.007 in 2002. Profitability ratios The return on average assets shot up to 11.1% in 2003 from (-) 0.2% in 2002, following the healthy rise in the net profit during the year. Simultaneously, the return on average equity saw a rise to 20.4% from (-) 0.5%. Dividends The company paid a 10% cash dividend, with a dividend payout ratio of 30.0%, in 2003. It had not paid any dividend in the previous year. Performance in the first nine months of 2004 The first nine months of 2004 saw the company turn in a good performance. Sales went up 13.6% to RO15.3mn, from RO13.5mn in the corresponding period of the previous year. Continued high demand saw cement prices hardening during the year, averaging at about RO20.5 per tonne, up 10.8% from the average realization of RO18.5 per tonne in the corresponding period of 2003. The net profit for the first nine months of 2004 was up 57.9% to RO5.4mn, from RO3.5mn in the same period in 2003, thanks to lower increase in the cost of production and operational expenses, a 50.6% decline in the finance costs and a 44.5% increase in the value of trading investments during the period. Assets and liabilities structure The asset structure of the company has changed over the last year, as a result of changes in its various constituents. While the accounts receivable were down by 18.0% to RO1.7mn, inventories were down 9.0% to RO3.4mn. The trading investments portfolio went up by 33.7% to RO1.5mn during the year. The company's investment portfolio consists of listed equity securities of Bank Dhofar and Dhofar Insurance, both of which gained in value thanks to the booming stock markets. The company's
December - 2004
45
investment in its associate Mukalla Raysut Trading almost doubled to RO0.7mn, thanks to an increased share of profits from the latter. But, most of these increases were more than nullified by an increase of 11.1% in the accumulated depreciation to RO21.5mn during the year. The net result was a 0.5% decline in the total assets to RO44.2mn during the year from RO44.4mn in 2002. On the liabilities side, the trade payables declined during 2003 to RO0.4mn, down 57.8% from those in 2002. The short-term loans declined by 56.4% to RO1.7mn during the year. There was also a decline of 90.3% in the bank borrowings to RO0.2mn. The medium-term loans declined by a marginal 2.8% to RO12.2mn during 2003. The deferred government grant declined by 21.7% during the year to RO1.2mn, thanks to the amortization of the amount and its recognition as a part of the net financing costs during the year. The deferred tax liability went up by 46.2% to RO0.42mn during the year. SWOT analysis
Strengths Raw material is available abundantly at very low prices. Energy too is adequately available and secured over a long-term. A sizeable part of its sales are from exports, which cushion it against relatively low domestic demand. It is also exempt from the government's recent export ban. It has the advantage of being in the proximity of Salalah port through which its exports as well as domestic sales are routed. About 30% of its output is exported to the high-growth Yemen market. The company does not face pricing pressure resulting from dumping from the neighboring UAE, unlike Oman Cement. The company also has a lucrative, diversified investments portfolio. Opportunities On-going construction boom in Oman, though limited, and in the neighboring countries presents it with good opportunities. - Future expanded clinker/cement capacity could give it greater economies of scale, thereby, boosting its margins going forward. However, additional capacities could also bring along softening of cement prices. Weaknesses The company is more active in the relatively smaller Southern Oman cement market. Thus, it benefits relatively lesser from the construction developments taking place in Northern Oman. The high distribution costs of the company have been a drag on its OPMs. The government can have a say in fixing the cement prices, as in the recent past.
Threats Pricing pressure expected going forward, due to expanded capacities in the region and limited local demand.
46
December - 2004
Earnings outlook We have made the following assumptions in our earnings projections for the company till 2010: 1. Average cement price of RO20.5 per tonne has been assumed in 2004. The cement prices have been assumed to peak at RO23.0 per tonne in 2005, declining steadily thereafter to touch RO18.0 per tonne in 2010, in response to additional clinker/cement capacities going on stream in early-2006. The realizations have been assumed to be higher by RO1.0 per tonne over Oman Cement's during 2008-'10, as the latter is impacted more by dumping than is Raysut Cement. 2. An increase in sales revenue to RO20.49mn in 2004 from RO17.17mn in 2003 has been assumed, in continuation of the growth momentum seen in the first three quarters of the current year. Correspondingly, the net profit has been assumed to touch RO7.00mn in 2004, up from RO4.92mn in 2003. The sales in later years have been assumed to be marked by relatively lower clinker capacity utilization on expanded capacities and lower realizations. 3. The new clinker/cement capacities are expected to go on stream by early-2006. The full benefits from this enhanced capacity, therefore, are expected to accrue to the company only from 2007. Accordingly, clinker capacity utilization levels of 80%, 85%, 90% and 95% of the expanded capacity have been assumed in 2007, 2008, 2009 and 2010 respectively. The cement production and sales too have been assumed to fluctuate in these years accordingly. 4. The GPM of the company has been projected at 65.0% in 2004, in keeping with the results of the first three quarters. The GPMs, thereafter, have been assumed to go up steadily to peak at 66.0% in 2007 on the back of high volumes and lower cost of production assumed. Thereafter, even though the volumes get scaled up thanks to the enhanced capacities going on stream, the declining realizations begin to hit at the margins. The GPMs in 2008-'10 have been projected at 65.5%, 65.0% and 64.5% respectively. 5. Most operating costs have been assumed to decline as a percentage of sales in 2004 and 2005. The OPMs have been assumed to fluctuate thereafter primarily on the back of increasing distribution expenses. 6. The average cost of debt has been assumed at 4.5% in 2004, going up by 50bps in each subsequent year till 2009, in keeping with the expected hardening of interest rates going forward. 7. The surplus cash generated in any year has been assumed to be invested mainly in investments available-for-sale, and to a lesser extent in trading investments. The dividend yield and unrealized investment gains have been assumed to taper down, assuming a more sober stock market performance in the forthcoming years. Based on the above assumptions, we have projected the net profit of the company at RO7.0mn in 2004, going up to RO14.4mn in 2010. The corresponding movements in the margins, earning per share and book value per share have been shown in the Table below.
December - 2004
47
Table 8.2-2 : Raysut Cement - Earnings and valuation ratios

Company 2002 2003 2004(P) 2005(P) 2006(P) 2007(P) 2008(P) 2009(P) 2010(P) 4.92 62.39 29.15 28.66 11.12 21.07 0.328 1.568 7.00 65.00 33.18 34.17 15.16 25.25 0.467 1.928 7.96 65.00 33.63 35.30 13.71 19.48 0.398 2.464 8.45 65.50 33.18 35.98 12.05 15.66 0.423 2.682 12.87 66.00 37.00 39.59 16.73 21.09 0.643 3.070 13.84 65.50 36.40 40.07 16.16 19.84 0.692 3.457 14.17 65.00 36.07 40.80 15.12 18.13 0.709 3.810 14.41 64.50 34.87 41.49 14.18 16.79 0.721 4.126 Net profit (ROmn) -0.10 GPM (%) 47.38 OPM (%) 8.38 NPM (%) -0.73 ROAA (%) -0.22 ROAE (%) -0.45 EPS (RO) -0.007 BVPS (RO) 1.447
Source : Company Annual Reports and Global Research.
Valuation
DCF Method In order to compute the cost of equity for the Discounted Cash Flow (DCF) method, we have used the Capital Asset Pricing Model (CAPM). The following assumptions have been made in order to arrive at the equity value of Raysut Cement. 1. A risk-free rate of 5.50%. Since Kuwait has a higher country risk rating than Oman does, we have added the difference of 0.75% between the country risk premiums for Kuwait (1.88%) and Oman (2.63%) to the discount rate currently prevailing in Kuwait of 4.75%. This gives us the risk-free rate for Oman of 5.50%. The country risk premiums have been sourced from the study done by Prof. A Damodaran and available on the website of the NYU Stern School of Business. 2. An equity risk premium of 6.75% keeping in view the cyclicality of the cement industry. 3. Raysut Cement had a Beta of 1.743, based on monthly returns over a period of five years to November 2004. We have assumed the Beta at the same level for the WACCcalculations. 4. The cost of equity derived by using the Capital Asset Pricing Model (CAPM) is 17.27%. 5. The cost of debt has been assumed at 4.50%, the projected rate for 2004. 6. The above two together give a WACC of 13.23%. 7. Terminal growth rate of 3%, which is lower than the long-term GDP growth rate of Oman. Based on our future earnings projections and the above assumptions for DCF computations, the DCF value of Raysut Cement is RO6.107 per share.
48
December - 2004
Table 8.2-3 : Raysut Cement - Equity valuation by discounted cash flows

2004(P)
Years (No.) Free Cash Flow Discount Factor (x) Discounted Cash Flow Terminal Value Cost of Capital (CAPM Method) Terminal Growth Rate Primary Value Discounted Terminal Value Value of Investments Cash Debt Equity Value No. of Equity Shares Outstanding Per Share Value (RO)
Source : Global Research.
2005(P)
2006(P)
2007(P)
2008(P)
2009(P)
2010(P)
0.25 5,087,129 0.97 4,931,552 13.23% 3.0% 37,062,445 63,929,855 2,584,000 (Sep 30, 2004) 2,120,000 (Sep 30, 2004) 14,091,000 (Sep 30, 2004) 91,605,300 15,000,000 6.107
1.25 2.25 3.25 (5,146,467) 8,378,914 12,260,641 0.86 0.76 0.67 (4,406,196) 6,335,574 8,187,571
4.25 5.25 6.25 14,066,398 14,147,962 13,801,047 0.59 0.52 0.46 8,295,994 7,369,247 6,348,702 138,973,130
All figures in RO, except where otherwise indicated.
Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and cost of capital is provided as below. The table provides estimated fair values for Raysut Cements shares based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives. Table 8.2-4 : Raysut Cement - Sensitivity Analysis
Terminal Growth Rate 1.0% Cost of Capital 11.2% 12.2% 13.2% 14.2% 15.2%
Source: Global Research
2.0% 7.260 6.397 5.690 5.100 4.602
3.0% 7.953 6.929 6.107 5.434 4.872
4.0% 8.838 7.590 6.615 5.832 5.191
5.0% 10.007 8.434 7.246 6.317 5.571
6.703 5.960 5.341 4.817 4.370
Valuation based on peer comparison The peer group valuation is performed to compare the intrinsic value of Raysut Cement arrived at using the DCF calculation. In order to value Raysut Cement using this method, we have used the weighted average price-to-earnings (P/E) multiple of the Oman cement sector. The price-earnings multiple of a stock is a reflection of various factors, such as the expected profitability of the company, its growth potential as perceived by the market, predictability and sustainability of its revenues, the quality of its earnings and the quality of its management, among others.
December - 2004
49
The weighted average P/E of the two listed cement companies in Oman, based on the projected financial results for the year ending December 2004 and their current market prices, is 10.98x. On the basis of this weighted average P/E and Raysut Cement's projected 2004 earnings, the companys stock valuation comes to RO5.124 per share. However, as the price-earnings multiple varies with time and is dependent on several factors, such as market sentiment and other qualitative factors, we have provided a lower weightage of 20% to the peer valuation method and 80% weightage to the value arrived at using the DCF method. Weighted value The value of Raysut Cements shares derived from the weighted average of the DCF and peer comparison methods is RO5.910 per share. The stock currently trades at around RO4.750 on the MSM, which implies that the value of Raysut Cements shares, arrived at using the weighted average of the two methods, is 24.4% higher than its current market price. At the current price, Raysut Cements shares have a P/E multiple of 14.5x the 2003 earnings, and forward multiples of 10.2x and 11.9x (post-rights issue) the estimated 2004 and 2005 earnings respectively. We, therefore, recommend a 'BUY' on the Raysut Cement stock at its prevailing price levels. Table 8.2-5 : Weighted Average Share Value of Raysut Cement
As per DCF Method As per P/E multiple Weighted average value
Source: Global Research In RO.
Weightage 80% 20%
Fair Value 6.107 5.124 5.910
Recommendation Raysut Cement too is going to expand its clinker capacity from 0.75mtpy at present to 1.95mtpy, and cement capacity from 0.98mtpy at present to 2.24mtpy. The expanded capacities are expected to go on stream by early-2006. The company, therefore, has an early-mover advantage over its competitor Oman Cement. The capital expenditure of about RO20mn is expected to impact it mainly in 2005. With cement prices expected to decline after 2005, the company may, however, not be able to fully reap the benefits of scaled-up volumes in subsequent years. But, the company's realizations could still be higher than Oman Cement's after 2007, as the latter could be impacted more by the expected dumping of cement into Oman from that year. The scaled-up operations of the company could also soften the impact of declining realizations to some extent. We, therefore, see a good upside from its current price levels, and, therefore, recommend a 'BUY' on the stock.
50
December - 2004
BALANCE SHEET
2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
RAYSUT CEMENT CO . SAOG
Assets: Bank & cash equivalents Trade receivables Other Receivables Inventories Investment for trading Total Current Assets 87,450 2,079,790 139,584 3,774,181 1,114,037 7,195,042 348,100 177,500 56,046,728 19,396,355 36,650,373 44,371,015 695,120 177,500 56,193,664 21,543,794 34,649,870 44,151,750 695,120 2,126,428 59,393,664 23,739,953 35,653,711 48,195,483 695,120 9,071,102 74,193,664 26,144,525 48,049,139 67,874,006 695,120 14,112,956 76,193,664 28,851,497 47,342,167 72,376,860 695,120 20,634,218 77,193,664 31,612,469 45,581,195 81,392,985 695,120 27,346,866 78,193,664 34,409,441 43,784,223 89,857,567 695,120 34,288,325 79,193,664 37,163,719 42,029,945 97,573,359 1,785,335 1,706,398 213,616 3,434,475 1,489,436 8,629,260 1,737,530 2,132,895 280,644 3,830,791 1,738,364 9,720,225 1,490,336 2,223,123 308,767 4,149,830 1,886,589 10,058,645 1,522,905 2,252,426 321,775 4,107,459 2,022,052 10,226,617 1,385,946 3,027,397 445,205 5,509,863 4,114,039 14,482,452 1,269,079 3,122,003 473,031 5,875,043 7,292,201 18,031,358 1,420,973 3,140,368 475,813 5,995,248 9,527,566 20,559,969 1,311,346 3,140,368 475,813 6,080,895 11,820,353 22,828,776 695,120 41,959,474 80,193,664 39,952,997 40,240,667 105,724,036
15,112 1,930,271 338,199 3,696,072 1,385,632 7,365,286
December - 2004
3,847,525 1,690,373 967,677 1,839,713 8,345,288 12,568,365 1,469,044 288,000 0 12,218,220 1,150,480 421,000 1,500,000 12,218,220 920,384 711,405 1,500,000 10,209,040 736,307 1,042,949 2,000,000 8,199,860 589,046 1,395,100 3,000,000 1,678,972 164,587 408,074 1,588,428 3,840,061 0 164,587 491,127 1,768,058 2,423,772 0 164,587 497,115 1,945,233 2,606,935 0 164,587 510,657 1,887,211 2,562,455 0 164,587 666,027 2,573,288 3,403,902 6,190,680 471,237 1,931,167 4,000,000 0 164,587 718,061 2,774,326 3,656,974 4,181,500 376,989 2,507,765 5,000,000 15,000,000 3,000,300 3,028,810 0 0 671,208 21,700,318 44,371,015 44,151,750 15,000,000 3,000,300 3,521,010 492,200 246,100 2,762,379 25,021,989 15,000,000 3,000,300 4,220,981 1,192,171 596,085 6,412,164 30,421,703 48,195,483 20,000,000 13,000,300 5,016,689 1,987,879 993,939 10,279,968 51,278,774 67,874,006 20,000,000 13,000,300 5,861,851 2,833,041 1,416,520 13,518,687 56,630,399 72,376,860 20,000,000 13,000,300 6,600,000 4,119,601 2,059,800 19,616,298 65,395,999 81,392,985 20,000,000 13,000,300 6,600,000 5,503,435 2,751,717 26,278,887 74,134,339 89,857,567
Investments in an associate Investments available for sale Gross fixed assets less: accumulated depreciation Net fixed assets Total Assets
361,143 177,500 55,586,590 17,248,637 38,337,953 46,241,882
Liabilities: Short-term loan Bank borrowings Accounts payable Other current liabilities Total Current Liabilities
3,630,798 3,023,695 1,400,873 1,524,987 9,580,353
0 164,587 732,753 2,831,089 3,728,429 2,239,218 301,591 3,098,245 6,000,000
0 164,587 743,220 2,871,534 3,779,341 1,485,790 241,273 3,698,786 7,000,000
Medium-term loan Deferred government grant Deferred tax liability Proposed dividend
13,244,370 1,330,027 288,000 0
Owner's Equity: Paid-up equity capital Share premium Statutory reserve Voluntary reserve Asset replacement reserve Retained earnings Total Shareholder's Equity
10,000,000 3,000,300 3,028,810 0 5,000,000 770,022 21,799,132
20,000,000 13,000,300 6,600,000 6,666,667 3,333,333 32,605,575 82,205,875 97,573,359
20,000,000 13,000,300 6,600,000 6,666,667 3,333,333 39,918,546 89,518,846 105,724,036
51
Total Liabilities
46,241,882
OPERATING STATEMENT
2001 17,170,940 (6,457,174) 10,713,766 (130,907) (286,691) (3,182,137) (2,109,364) 5,004,667 133,801 19,485 (938,681) 460,000 (487,500) (5,850,000) (2,760,972) 12,026,528 1,022,082 32,500 (431,716) 139,024 613,249 13,401,667 (536,067) 12,865,600 10,279,968 13,518,687 12,865,600 738,149 1,286,560 643,280 20% 4,000,000 100,000 19,616,298 (517,969) (6,388,281) (2,796,972) 12,569,434 1,187,746 34,531 (337,096) 69,512 890,810 14,414,938 (576,598) 13,838,341 19,616,298 13,838,341 1,383,834 691,917 25% 5,000,000 100,000 26,278,887 375,399 5,054,671 (133,000) 4,921,671 671,208 4,921,671 492,200 492,200 246,100 10% 1,500,000 100,000 2,762,379 2,762,379 6,412,164 497,855 7,290,118 (290,405) 6,999,714 592,899 8,288,616 (331,545) 7,957,072 677,317 8,803,776 (352,151) 8,451,625 (184,383) (348,279) (3,790,098) (2,196,159) 6,797,641 248,928 20,487 (587,597) 312,804 (225,400) (383,180) (4,057,200) (2,404,572) 7,580,648 444,674 22,540 (560,682) 208,536 (234,896) (422,813) (4,228,125) (2,706,972) 7,792,872 677,317 23,490 (506,245) 139,024 13,316,561 14,651,000 15,385,677 (7,170,456) (7,889,000) 20,487,016 22,540,000 23,489,583 32,500,000 34,531,250 34,734,375 34,734,375 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
Sales Revenue (6,401,811) (7,084,456) 5,268,652 (930,236) (143,344) (302,600) (279,627) (2,422,941) (2,690,741) (2,157,610) (2,137,377) (544,735) 1,128,630 91,480 58,603 15,208 27,236 (1,626,167) (1,488,097) 23,600 100,000 377,450 (2,462) 344,832 (1,318,332) (58,000) (1,376,332) 2,146,354 (1,376,332) 0% 770,022 (98,814) 0% 671,208 770,022 77,276 (98,814) (98,814) 6,379,719
11,670,463 13,464,175
Cost of Production
(8,103,906) (11,050,000) (11,913,281) (12,157,031) (12,330,703)
52
6,999,714 7,957,072 8,451,625 699,971 795,707 845,162 699,971 795,707 845,162 349,986 397,854 422,581 10% 10% 15% 1,500,000 2,000,000 3,000,000 100,000 100,000 100,000 6,412,164 10,279,968 0013,518,687
21,450,000 (325,000)
22,617,969 (345,313)
22,577,344 (347,344) (521,016) (6,425,859) (2,754,278) 12,528,847 1,176,824 34,734 (224,725) 69,512 1,176,824 14,762,017 (590,481) 14,171,536 26,278,887 14,171,536 1,163,232 581,616 30% 6,000,000 100,000 32,605,575
22,403,672 (347,344) (555,750) (6,599,531) (2,789,278) 12,111,769 1,463,936 34,734 (130,375) 69,512 1,463,936 15,013,511 (600,540) 14,412,971 32,605,575 14,412,971 35% 7,000,000 100,000 39,918,546
Gross Profit Less: General & Administrative Expenses Less: Staff Costs Less : Distribution Expenses Less: Depreciation Operating Profit Dividend income Other Income Net financing costs Income from associates Profit on disposal of investments Gain/(Loss) on revaluation of investments Profit Before Tax Tax Net Profit P&L Appropriation Account: Op Balance of Retained Earnings Adjustments Net Profit for the year Trfr to Statutory Reserve Trfr to Voluntary Reserve Trfr to Asset replacement reserve Proposed Dividend % Proposed Dividend Directors' remuneration Cl Balance of Retained Earnings
December - 2004
CASH FLOW STATEMENT

2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
8,914,287
9,907,760
10,423,333
14,720,000
15,300,938
15,217,859
14,835,781
December - 2004
6,999,714 2,196,159 (248,928) (497,855) 587,597 (312,804) 290,405 (100,000) 7,957,072 2,404,572 (444,674) (592,899) 560,682 (208,536) 331,545 (100,000) 3,512,529 3,158,913 6,900,869 (627,159) (493,525) (396,316) 83,053 179,630 8,287,129 (254,227) (118,352) (319,039) 5,988 177,175 9,653,533 (20,031) 765,951 757 91,480 (488,538) 346,409 2,885 58,603 113,043 (148,136) (3,200,000) (14,800,000) 100 133,801 248,928 444,674 112,980 312,804 208,536 (1,700,000) (6,500,000) (2,000,000) 677,317 139,024 (4,500,000) (1,000,000) 1,022,082 139,024 (6,000,000) 838,157 32,402 98,745 (4,338,268) (20,646,790) (5,683,659) (2,000,000) (7,838,894)
Operating Operating Activities 3,512,529 3,158,913 6,900,869 Cash receipts from customers 12,293,475 13,303,188 17,551,617 Cash paid to suppliers & employees (8,780,946) (10,144,275) (10,650,748) Net Profit Depreciation Dividend income Gain/(Loss) on revaluation of investments Net financing costs Income from associates Deferred tax liability Directors' remuneration
8,451,625 12,865,600 13,838,341 14,171,536 14,412,971 2,706,972 2,760,972 2,796,972 2,754,278 2,789,278 (677,317) (1,022,082) (1,187,746) (1,176,824) (1,463,936) (677,317) (613,249) (890,810) (1,176,824) (1,463,936) 506,245 431,716 337,096 224,725 130,375 (139,024) (139,024) (69,512) (69,512) (69,512) 352,151 536,067 576,598 590,481 600,540 (100,000) (100,000) (100,000) (100,000) (100,000) (44,419) (1,459,359) (234,540) (69,897) (34,734) (42,311) (898,402) (122,432) (21,147) 42,371 (1,402,404) (365,180) (120,205) (85,646) 13,542 155,370 52,033 14,692 10,468 (58,022) 686,077 201,038 56,764 40,444 10,378,914 13,260,641 15,066,398 15,147,962 14,801,047
Working Capital Dec/(inc.) in receivables Dec / (inc) in Inventories Inc/(dec) in accounts payable Inc/(dec) other current liabilities Total Operating
(1,000,000) (1,000,000) (1,000,000) 1,187,746 1,176,824 1,463,936 69,512 69,512 69,512 (6,000,000) (6,000,000) (6,500,000) (3,000,000) (2,000,000) (2,000,000) (8,742,742) (7,753,664) (7,966,552)
Investing Capex Proceeds from disposal of Investments Proceeds from disposal of property Dividend income Income from associates Sale / (Purchase) of investments available for sale Purchase of investments held for trading Total Investing
53
CASH FLOW STATEMENT

2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
54
(938,681) (3,775,943) (3,996,665) (47,805) 1,785,335 1,737,530 1,737,530 (247,195) 1,737,530 1,490,336 1,490,336 32,569 1,490,336 1,522,905 1,522,905 (136,958) 1,522,905 1,385,946 1,385,946 10,746,062 (4,662,686) (5,558,705) 3,223,671 (1,602,923) 1,620,748 164,587 1,785,335 (587,597) (230,096) (6,440,523) (116,867) 1,385,946 1,269,079 1,269,079 (560,682) (184,077) (506,245) (147,261) (431,716) (117,809) (337,096) (94,247)
2,824,490 9,475,942 (2,925,963) (3,147,219) (12,313,204)
(1,500,000) (1,678,972)
5,000,000 10,000,000 (1,500,000) (2,009,180)
(2,000,000) (2,009,180)
(3,000,000) (2,009,180)
(4,000,000) (2,009,180)
(5,000,000) (1,942,282)
(6,000,000) (753,428)
Financing Paid-up equity capital Share premium Dividend paid Term loan received Term loan paid Bank borrowings Net financing costs Deferred government grant Loan repaid by an associate Total Financing (224,725) (75,398) (7,242,405) 151,894 1,269,079 1,420,973 1,420,973
(1,627,292) (1,488,097)
(130,375) (60,318) (6,944,122) (109,627) 1,420,973 1,311,346 1,311,346
(2,408) 25,171 (4,555,663) (1,785,655)
Net Change in Cash Net Cash at beginning Net Cash at end Bank borrowings Cash at bank and in hand
(204,977) 1,405,660 (2,803,606) (3,008,583) (3,008,583) (1,602,923) 3,023,695 1,690,373 15,112 87,450
December - 2004
RATIO ANALYSIS
2001 2002 2003 2004 (F) 2005 (F) 2006 (F) 2007 (F) 2008 (F) 2009 (F) 2010 (F)
Liquidity Ratios Current Ratio (x) Quick Ratio (x) Inventory stock (days) Receivables outstanding (days) Length of operating cycle (days) Payables outstanding (days) Length of cash cycle (days) 0.77 0.38 211 60 271 80 191 0.86 0.41 192 54 247 61 186 2.25 1.35 204 40 244 39 205 4.01 2.43 185 34 219 23 196 3.86 2.27 185 35 220 23 197 3.99 2.39 186 35 221 23 198 4.25 2.64 159 30 188 19 169 4.93 3.32 174 33 207 21 186 5.51 3.91 178 33 211 22 189
6.04 4.43 179 33 212 22 190
December - 2004
0.25 0.30 0.54 45.15 -4.67 -11.79 -2.98 -6.31 -13.76 0.30 0.36 0.62 47.38 8.38 -0.73 -0.22 -0.45 -0.79 0.39 0.48 0.74 62.39 29.15 28.66 11.12 21.07 32.81 0.44 0.58 0.74 65.00 33.18 34.17 15.16 25.25 46.66 0.39 0.54 0.55 65.00 33.63 35.30 13.71 19.48 45.47 0.33 0.49 0.44 65.50 33.18 35.98 12.05 15.66 42.26 0.42 0.70 0.53 66.00 37.00 39.59 16.73 21.09 64.33 0.40 0.77 0.49 65.50 36.40 40.07 16.16 19.84 69.19 1.7 6.0 4.6 1.9 6.7 6.0 1.8 9.1 9.4 2.0 10.7 15.9 2.0 10.3 16.0 2.0 10.5 16.1 2.3 12.3 18.8 2.1 11.2 17.2 0.77 0.44 0.53 0.76 0.38 0.51 0.56 0.15 0.43 0.40 0.08 0.37 0.20 0.05 0.24 0.14 0.05 0.22 0.09 0.05 0.20 0.06 0.05 0.17 (0.092) 2.180 0.0 0.700 --0.3 (0.007) 1.447 0.0 1.130 --0.8 0.328 1.568 30.5 2.870 8.8 1.8 0.467 1.928 21.4 4.750 10.2 2.5 0.398 2.464 25.1 4.750 11.9 1.9 0.423 2.682 35.5 4.750 11.2 1.8 0.643 3.070 31.1 4.750 7.4 1.5 0.692 3.457 36.1 4.750 6.9 1.4
Profitability Ratios Total Asset Turnover (x) Total Net Fixed Asset Turnover (x) Equity Turnover (x) Gross Profit Margin (%) Operating Margin (%) Net Profit Margin (%) Return on Average Assets (%) Return on Average Equity (%) Return on Common Capital (%)
0.37 0.81 0.44 65.00 36.07 40.80 15.12 18.13 70.86
0.34 0.84 0.40 64.50 34.87 41.49 14.18 16.79 72.06
Activity Ratios Inventory Turnover Ratio (x) Debtor Turnover Ratio (x) Creditors Turnover Ratio (x)
2.0 11.1 16.8
2.0 11.1 16.7
Leverage Ratios Debt / Equity (x) Current Liabilities / Equity (x) Liabilities / Total Assets (x)
0.03 0.05 0.16
0.02 0.04 0.15
Ratios Used for Valuation EPS (RO) Book Value Per Share (RO) Dividend Payout (%) Market Price (RO) * P/E Ratio (x) P/BV (x)
0.709 3.810 42.3 4.750 6.7 1.2
0.721 4.126 48.6 4.750 6.6 1.2
55
* Market price for 2004 and subsequent years as per closing price on MSM on December 23, 2004.
The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.
Disclosure Checklist Company Recommendation Oman Cement BUY Raysut Cement BUY
Ticker OCCO.OM RAYC.OM
Price RO4.550 RO4.750
Disclosure 1,10 1,10
1.
Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year , Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures.
This material was produced by Global Investment House KSCC (Global),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities.Global may, from time to time,to the extent ermitted by law,participate or invest in other financing transactions with the issuers of the securities (securities),perform services for or solicit business from such issuer,and/or have a position or effect transactions in the securities or options thereof.Global may,to the extent permitted by applicable Kuwaiti law or other applicable law or regulation,effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document.Accordingly,no representation or warranty,express or implied,is made as to and no reliance should be placed on the fairness,accuracy,completeness or correctness of the information and opinions contained in this document.Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith.This document is not to be relied upon or used in substitution for the exercise of independent judgement.Global shall have no responsibility or liability whatsoever in respect of any inac-curacy in or ommission from this or any other document prepared by Global for,or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice.Past performance is not indicative of future results.This document does not constitute an offer or invitation to subscribe for or purchase any securities,and neither this document nor anything contained herein shall form the basis of any contract or commitment what so ever.It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law.Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations.
Global Research
Global Investment House Tel: (965) 2400551, ext 132 - Fax: (965) 2400661 research@global.com.kw www.globalinv.net

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Global Research

Oman Cement Sector Report

Global Investment House KSCC

Omar M. El-Quqa, CFA

Shailesh Dash, CFA

Dinker G Mattam, CFA

Global Research - Oman

Global Investment House

Oman Cement Sector Report

Global Research - Oman

Global Investment House

Oman Cement OCCO.OM 4.550 Raysut Cement RAYC.OM 4.750

Chart 1-1 : Performance of Oman Cement vs. MSM Indices

MSM30 Oman Cement

MSM Industrial Index

Chart 1-2 : Performance of Raysut Cement vs. MSM Indices

MSM30 Raysut Cement

MSM Industrial Index

Oman Cement Sector Report

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2. The cement sector economy correlation

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Oman Cement Sector Report

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Oman Cement Sector Report

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Oman Cement Sector Report

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Oman Cement Sector Report

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Source: Statistical Year Book - 32nd Issue, October 2004, * Provisional.

Ministry of National Economy, Oman.

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Table 3-4 : Outlook on construction & real estate activities - Oman

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4. Oman cement industry

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Source: CompanyAannual Reports. Amounts in '000 tonnes.

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OCC Source : Company Annual Reports, industry sources.

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Oman Cement Sector Report

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(4) Threat of substitutes 1. Cement has no substitute.

Oman Cement Sector Report