Rating: Buy
Target Price: OMR1.84
Closing Price: OMR1.57

Earnings down 48% Y-o-Y; missed our estimate

Oman Cables (OC) reported 2Q17 net profit of OMR2.5mn, -48% Y-o-Y (-25% Q-o-Q), which missed our estimate of OMR3.2mn by a wide margin. The company reported revenue of OMR57.2mn (-8% Y-o-Y, -16% Q-o-Q) also below our estimate by 11%. Management attributed the weak performance to competitive pressure on its product prices and sales volume. We also assume seasonality (Ramadan and Eid were in 2Q) also impacted its performance. Group EBITDA margin fell to 6.6% (-390bps Y-o-Y, -70bps Q-o-Q), -90bps below our estimate. We see downside potential to our estimates and valuation after the weak results.
 
Copper segment broadly misses…

Parent company (copper segment) reported weaker-than-expected earnings of OMR2.6mn (-45% Y-o-Y, -22% Q-o-Q, 20% below our estimate) as sales volume declined and impacted profit margins negatively. The segment reported revenue of OMR46.1mn (-17% Y-o-Y, -20% Q-o-Q) and an operating margin of 6.8% (vs. 9.8% in 2Q16, 7.2% in 1Q17 and 20bps short of our estimate).
 
…OAPIL revenue beats estimates, but margins continue to slide

OAPIL (OC’s aluminium rod subsidiary) reported stronger-than-expected revenue of OMR11.1mn (+68% Y-o-Y, +6% Q-o-Q), +25% vs our estimate as it was able to win back lost market share. But this came at the expense of its gross margin that declined to an historically low level of 2.8% (versus 9.7% in 2Q16, 4.2% in 1Q17 and our optimistic assumption of 6.1%). It reported an operational loss of OMR0.216mn (the weakest ever) as competition pressure intensified.
 
Balance sheet remains strong

With net debt-to-equity of 0.14x (all debt is linked to working capital), OC’s balance sheet remains strong and this should help it combat any adverse impact operationally. Working capital cycle slightly stretched YTD to 125 days from 116 days, but remains within our medium term estimates.  

Sameer Kattiparambil