• Consumption story, but upside potential is limited We broadly maintain our fair value (FV) for Shell Oman Marketing (SOMS) at OMR2.150/share as we retain our earnings estimates beyond 2016. Despite weak economic growth and fuel subsidy cuts, we expect SOMS to maintain its throughput in the medium term as population growth in the country helps fuel consumption, albeit at a lower growth rate, in our view. The stock currently trades at 2017e P/E of 12.7x, and our FV provides limited upside potential (13%); hence, we maintain our Neutral rating. Weaker-than-expected sales volume is a key downside risk.
• Expect 2016 earnings to grow 12% Y-o-Y, but recede in 2017 We expect SOMS to report 2016 operating profit of OMR18.8mn (+16% Y-o-Y) over revenue of OMR375mn (+12% Y-o-Y), supported by margin growth at its: i) lubricants division on low base oil price; ii) commercial division through cutting down low-margin business; and iii) other income from inventory revaluation. We expect the company to report an EBITDA margin of 6.0% in 2016 vs. 5.6% in 2015. However, a higher tax rate of 15% will overshadow strong operations; hence, we forecast net profit of OMR15.9mn (+12% Y-o-Y). We expect the EBITDA margin to recede to 5.5% in 2017 on higher fuel price expectation (which is margin-detrimental) and weaker other income; hence, we forecast earnings to decline to OMR15.0mn (-6% Y-o-Y).
• Lower capex supports stable dividend payout We expect management to bring down the CAPEX plan it had been following over the past three years (of adding eight new retail stations per year), as the economy slows down, limiting further scope of expansion. The company maintains a strong balance sheet and an average FCF yield of 6.5%, which we believe would help SOMS to maintain a 75% dividend payout in the short term (2016 DPS of OMR0.119, yield of 6.3%) and to increase it to 80% in the medium term.

Sameer Kattiparambil