• Fair values adjusted post 1Q16, neutral on Oman cement sector We increase our fair value for Raysut Cement Company (RCC) by 17% to OMR1.365 as we raise our earnings estimates for 2016 and beyond following its strong 1Q16 performance. Its share price has rallied 37% since our last update and is trading near to our FV and thus we downgrade our rating on RCC to Neutral. We also raise our FV for Oman Cement Co. (OCC) by 6% to OMR0.518 as we marginally raise our utilisation rate estimates due to its new production facility, which will commence operations in 2H16. As our FV provides limited upside we reiterate our Neutral rating.
• Volume growth limited on demand softness & competition We remain conservative on cement volume growth in Oman for the rest of 2016 and 2017 as we believe the economic slowdown will weaken the investment cycle in Oman and have a negative impact on overall cement demand. We estimate RCC’s sales volume to drop 2% Y-o-Y in 2017 (vs flat trend in 2016) as cement demand cools down in its home and export markets. However, OCC may potentially be able to grow sales volume in 2017, albeit marginally (+3% versus +12% in 2016 on base effect) as it returns to normal operations in 2016 after multiple breakdowns at its clinker and cement facilities over the past two years. Nevertheless, the cement inflow from the UAE is expected to remain intact in the medium term.
• RCC downgraded to Neutral after strong rally; time to take profit We expect RCC to post 2016 earnings of OMR23.0mn (+10% Y-o-Y, largely supported by below-EBIT items) from revenue of OMR94.3mn (flat Y-o-Y) with an EBITDA margin of 34% (-50bps Y-o-Y). RCC’s share price rallied following its 1Q16 earnings beat and it currently trades at a one-year forward P/E of 11.6x, in line with the regional peer group average. Our new FV offers little upside potential; hence, we downgrade RCC to Neutral.
• OCC operations to normalise in 2016; minimal impact from expansion OCC’s new cement capacity (0.9 mt/annum to take total capacity to 3.3 mt/annum) will come online in 2H16, but we expect little short-term impact due to the supply imbalance. We expect OCC to post a 2016 net profit of OMR13.9mn (+19% Y-o-Y) as operations normalise after a few production disruptions over the past two years. For revenue, we expect 12% Y-o-Y growth to OMR58.5mn and the EBITDA margin to soften 70bps Y-o-Y to 35.6%, on additional cost impact from the new production line (until it reaches optimal utilisation). We forecast OCC to pay-out a dividend of 71% in 2016, which implies OMR0.03/share and 6.4% yield. The shares are trading at a 2016e P/E of 11.3x, a marginal discount to the sector average.

Sameer Kattiparambil
Wafaa Baddour, CFA