Capital market performance in Oman to improve on listing activity and new products

The sultanate is home to a well-developed stock exchange, the Muscat Securities Market (MSM), which was founded in 1988. The equity market has seen a decline in initial public offering (IPO) activity in recent years; however, it witnessed a resurgence in 2017 thanks to government-driven offerings, more of which are set to take place in 2018. On the debt side, there has been a recent uptick in issues and listings, while the sukuk (Islamic bond) market also now appears to be developing.

Capitalisation

The MSM’s overall market capitalisation stood at OR17.95bn ($46.6bn) at the end of 2017, according to figures from the exchange. The regular equity market accounted for OR4.6bn ($11.9bn) of the total, the parallel market for OR3.4bn ($8.8bn), the debt market for OR2.6bn ($6.8bn) and closely held companies for OR7.1bn ($18.4bn). Overall capitalisation was up from OR17.29bn ($44.9bn) at the end of 2016, a rise of 3.8%. The capitalisation figures for the regular and parallel equity markets were both down for the year despite several IPOs having taken place, due to falls in valuations. However, those of both the debt and closely held companies markets were up. Non-Omanis owned 28.07% of the MSM’s market capitalisation at the end of 2017, up from 27.83% at the end of the previous year, according to MSM data.

Equity Market Structure

As of mid-January 2018 a total of 117 equities were listed on the MSM, 28 of which were listed on the regular market, 75 on the exchange’s parallel market and 14 on its “under monitoring” market. By sector of activity, industrial companies were the most heavily represented on the exchange (across all markets), on a total of 42 listed firms, followed by service companies on 38 and finance on 37. However, in terms of the value of their market capitalisation, this order was reversed: financial stocks accounted for 36.4% of the total market capitalisation at the end of 2017, followed by services with 28.2% and industrial companies on 11.1%.

Bank Muscat, the sultanate’s biggest bank by assets, was also the largest stock by market capitalisation at the end of 2017, on a value of OR1.07bn ($2.8bn). It was closely followed by Oman Telecommunications, one of the sultanate’s two main telecoms operators, on OR903.8m ($2.3bn). In third place was Bank Dhofar with a capitalisation of OR501.2m ($1.3bn).

Recent Performance

The MSM30 – the index of the 30 most liquid stocks trading on the MSM – witnessed positive performance in 2016, rising by 7%. Net profits of listed firms were also up by 7% over the year, to OR763m ($2bn). Listed companies paid dividends of OR491m ($1.3bn), including OR424m ($1.1bn) of cash dividends, up 3% on 2015, according to Capital Market Authority (CMA) figures. This gave a dividend yield of 4.5%, down from 4.8% a year earlier and in line with the (unweighted) average for capital markets across GCC member states.

However, in 2017 the MSM30 decreased by 11.8%, closing at 5099.28, as the Omani economy slowed and the GCC financial markets witnessed negative sentiment. Despite the positive performance in 2016, the index also remains down from a peak of 7540 in September 2015, with the downturn having begun in the wake of the sharp fall in international oil prices in late 2014 and 2015. In 2017 all four sectoral indices also fell. The worst performer was the sharia index, a grouping of 15 sharia-compliant companies, which was down 17.9%, followed by services (-13.6%) and industry (-7.8%). The best-performing sector was financial services, which dipped by 2.6%.

Lo’ai Bataineh, CEO of Ubhar Capital, attributed the market’s downturn to developments including recent cuts in government subsidies that led to fuel price rises, as well as the increase in corporate tax from 12% to 15%, which he said had a major impact and, among other factors, would lead to a likely fall in profits at MSM-listed firms of around 8-10%. In addition, the tax changes also extend the country’s withholding tax to stock dividends, reducing effective market returns for investors. Younis Mohammed Al Belushi, investment manager at Al Madina Investment, said that the current poor performance of that market was also related to factors such as geopolitical risk and a lack of liquidity, which was undermining performance across the board.

Some of the sectors that dominate market capitalisation have also been hit by specific developments. The telecoms sector was affected by a rise in royalty fees companies are obliged to pay to the government, from 7% of revenue to 12%, announced at the end of 2016. The change affects Oman Telecommunications, the second-largest listed firm by market capitalisation at the end of 2017, and Ooredoo Oman, the sultanate’s second network operator, which had the fourth-largest market capitalisation of listed firms at the end of 2017, on OR342.4m ($889.1m). The manner in which power companies report deferred tax liabilities has also been affected by the new tax framework, pushing down profits. Industrial firms have additionally been affected by an increase in gas prices imposed two years ago as well a hike in electricity tariffs charged to large consumers brought in at the beginning of 2017, hitting two of their main feedstocks.

Reasons For Optimism

As regards the outlook for future performance, Al Belushi said that this would depend largely on geopolitical developments in the region. “In terms of particular sectors, bank profits are likely to be under stress next year due to the implementation of International Financial Reporting Standard 9, though this is already priced in,” he told OBG. “However, the service sector looks attractive, and the rise in steel prices has not been reflected in share prices, which could be an opportunity for investors.” Hettish Karmani, head of research at Ubhar Capital, was optimistic about wider market performance. “The year 2018 will be a better year for the MSM,” he told OBG. “One-off events such as the tax rises have already been factored in, and oil prices are picking up, with OPEC output cuts likely to stabilise or further improve them. GDP growth will also be substantially higher in 2018, thanks to developments such as the full launch of the BP Khazan gas project. Furthermore, banks will do well, as increased oil prices will help liquidity, and the insurance sector will be boosted by the implementation of rules mandating that private companies provide their employees with health insurance,” he said (see Insurance chapter).

According to industry figures, the banking industry looks to be particularly good value at the moment, giving rise to potential for positive performance. The banking capital adequacy ratio is very stable, compared to some other Gulf countries, and the central bank is conservative as regards lending standards. Factors helping to explain the cheap valuation of banks include geopolitical concerns and worries about the economy’s vulnerability to a further oil downturn, suggesting that a prolonged period of oil price stability and the resolution of tensions over issues – such as those related to Iran and the economic blockade imposed on Qatar by the UAE, Saudi Arabia, Bahrain and Egypt in June 2017 – could encourage a resurgence in the stock prices of banks.

Sameer Kattiparambil, associate vice-president for research at stockbroker EFG Hermes, also cited growing activity at Duqm, where a port and a new special economic zone are currently being developed, as another reason for optimism, noting for example the announcement in April 2017 that Oman Oil Company and Kuwait Petroleum International would build a $7bn refinery and petrochemicals complex there as one of several major projects under way or in the pipeline. “Construction contracts for such projects will be divided among local sub-contractors, providing them with growth, and will also give a boost to construction materials companies, which could generate some positive momentum in the market,” he said, describing this as the main positive trend he saw affecting the market over the next one to two years.

Trading & Liquidity

According to figures from the MSM, market turnover during 2017 increased by 3.5% to OR993m ($2.6bn) from OR959m ($2.5bn) in 2016. The three most heavily traded stocks in 2017 based on value were Bank Sohar on a figure of OR105.1m ($272.9m), followed by Bank Muscat with OR101m ($262.3m) and Ominvest at OR87.2m ($226.4m).

In 2009 the government launched the Investment Stabilisation Fund with the aim of boosting confidence and liquidity in the country’s capital markets. However, liquidity has remained fairly tight despite such measures, as a result of factors including the large role played by institutional investors such as pension funds, which tend to adopt a buy-and-hold strategy.

Al Belushi said another factor pushing down liquidity recently was the introduction in 2016 of new capital adequacy requirements for brokerages, which led them to start enforcing so-called T+3 settlement requirements – rules obliging buyers to settle purchases via brokers within three days of the transaction, effectively limiting the ability of retail investors from borrowing to speculate.

However, Karmani said he thought that liquidity in the market was likely to improve in the near future, for similar reasons to those that led him to predict better market performance in 2018 – namely better overall economic performance on the back of higher oil prices and stepped-up gas production.

Brokerage Market

There are currently 17 licensed brokerage firms operating in the sultanate. Of these, Ubhar Capital had the largest market share in 2017, on a figure of 21.6%, according to MSM data, followed by Gulf Baader Capital Markets with 18.5% and United Securities on 11%.

The number of brokerages has fallen in recent years in the face of stiff competition. However, Karmani told OBG that the number remained high for the size of the market, and that it was likely to see a level of consolidation in the near future, in particular among some smaller and less active brokerage firms.

Debt Market

There were 26 bonds and sukuk listed on the MSM as of late 2017, with a combined value of OR2.6bn ($6.8bn). A total of 15 were government bonds, with a market capitalisation of OR2.3bn ($6bn), maturity periods ranging from five to 10 years, and coupon rates from 3.5% to 5.75%. The remaining 11 were corporate issues, valued at a combined OR321.4m ($834.6m), all of which were issued by financial institutions (mostly banks) with one exception, an ijara, or leasing sukuk, issued by Modern Sukuk on behalf of real estate developer Tilal Development Company (TDC). Excluding a number of perpetual bonds issued by banks, these were of shorter average maturity periods than listed government bonds, ranging from three to five years, and offered higher coupons, of between 3.5% and 7.75%.

The year 2016 saw six listings on the market, split evenly between government and corporate issues, including one perpetual bond, raising OR336.2m ($873m), OR300m ($779m) of which was accounted for by government instruments. As of late November 2017 there had been seven further listings year-to-date (including one of a bond issued the previous year), comprising four government bonds, two perpetual bonds, a conventional bond and a sukuk. The government listings were worth OR600m ($1.6bn) and the corporate listings OR336.2m ($873m), pointing to a significant increase in debt issues from both sectors, though the corporate debt market in particular remains small. Kattiparambil said that this was in part due to the fact that financing was available from banks, which private companies tend to prefer due to the costs and increased transparency requirements involved in issuing and listing bonds.

Trading levels in the market tend to be low, due to its overwhelming dominance by institutions such as pension funds that adopt a buy-and-hold strategy and the relative lack, in contrast to the equities market, of an active speculative retail market. However, Al Belushi told OBG in November 2017 that the market had seen increased activity over the last six months or so. “The levels are not high, but represent a notable increase,” he told OBG. “The rise is partly a result of the fact that the equity market is currently risky for investors, and bond yields are close to equity dividends despite the lower risks involved.”

The TDC sukuk was the first Islamic bond to be listed on the MSM when it was issued in 2013. The instrument, which has an issue value of OR50m ($129.8m) and a coupon of 5%, is due to mature in 2018. While the market was quiet for several years afterward, another listing followed in June 2017, in the form of an OR44.6m ($129.8m) issue – also with a 5% coupon – by Meethaq, the Islamic banking window of Bank Muscat. The instrument also has a five-year tenor.

Increasing Appetite

In addition to publicly listed instruments, the market also sees private placements of debt, including a private $76m sukuk issue by local conglomerate MB Holding that took place in mid-2016.

Al Belushi told OBG that the firm was currently working on several such private placements, focusing on sukuk. “Investment appetite is good: interest rates are going up, and investors are becoming more risk averse and looking for secured investments with good rates,” he said, adding that there was particularly strong interest from the GCC at the moment. “GCC investors often want to put money in the stock market, but it isn’t very liquid so fixed income and particularly sukuk are attractive to them,” he said. “GCC countries are likely to continue to invest in fixed income here and indeed to step up investments,” he told OBG.

Other local debt issues have entered the pipeline and appear set to follow. In March 2017 Maisarah Islamic Banking Services, the Islamic window of Bank Dhofar, told local media that it was arranging a series of sukuk issues on behalf of local real estate, construction, logistics and hospitality conglomerate Golden Group, worth a total of OR200m ($519.3m). Furthermore, in November 2017 the CMA approved the programme and said that the first issue would be a private placement worth OR50m ($129.8m), with a profit rate of 6.5% and a tenor of five years.

The government and local firms are also issuing debt on international markets. In May 2017 the government raised $2bn through a sukuk issue that was oversubscribed by a factor of nearly 3.5. This followed a $5bn, three-part conventional bond offering earlier in March of that year. Industry players noted that the government was able to mitigate the budget deficit and simultaneously ease pressure on the rial by issuing various types of financial instruments in 2017.

In November 2017 power firm Mazoon Electricity also issued a $500m, 10-year sukuk that was oversubscribed by a factor of more than 10. The instrument is listed on the Irish Stock Exchange.

Product Development

The MSM’s investment product offering is largely limited to basic conventional capital markets products such as equities, bonds and sukuk, and mutual funds. However, its product range is expanding. In March 2017 the CMA said that it had produced draft regulations on the introduction of real estate investment trusts (REITs), covering conventional and sharia-compliant trusts. In early 2018 the government announced it would allow the establishment of REITs, which will be licensed and supervised by the CMA. Al Belushi told OBG that interest in the investment class had been piqued by their high initial demand in Saudi Arabia and there was strong appetite for REITs in the country, both from potential listers and investors. Indeed, several institutions are preparing to list once the regulations are in place. He said that his firm also expected strong interest in derivatives, and particularly options, from institutional investors. “Pension funds take large positions in companies and being able to hedge their risks would be very attractive to them.”

Another product currently lacking from the market is exchange-traded funds (ETFs) – investment funds that usually track an index (as opposed to being actively managed) and that are bought and sold like stocks. Kattiparambil said that the introduction of ETFs had been under discussion for several years, and he believes specific product approval from the CMA could be attained without changing the regulations. However, there do not currently appear to be any active plans for their introduction.

Outlook

After a recent slowdown, the resumption of IPO activity in 2017 is set to continue in coming years, as more power companies float on the market and the government seeks to divest stakes from some state-owned entities through listings (see analysis). New investment vehicles such as REITs, which are being launched, will further help to boost activity on the MSM. Private Omani companies such as family-owned businesses are likely to wait for market conditions to improve before they start to consider public offerings. However, such an improvement may soon be on the horizon, as factors such as the recent partial recovery in oil prices, expected higher GDP growth in 2018 and the return of liquidity to the banking sector, which accounts for a significant part of market capitalisation, appear to augur better market performance in the coming months and years.