Fundamental Analysis Of Oman’s Investment Market And Decision Making

Muscat Securities Market and its principal index, which is MSM -30

Discuss about the Oman’s Investment Market and Decision Making.

When evaluating a long term investment decision, investors spend more time on the fundamental factors such as analysing a company, the market and the company’s stock. Fundamental analysis refers to the process of evaluating the intrinsic value of a security/ stock by considering all components of the market and company. Fundamental analysis considers both the tangible assets such as land, equipment and buildings and the intangible assets such as trademarks, branding, intellectual property, trademarks and patents in analysing the security investment. For instance, when reviewing a stock market, fundamental analysis considers all the economic factors and industry conditions. Fundamental analysis helps investors compare the price assigned to a stock and its current price in the market. The comparison helps investors to decide whether or not a stock is worth buying in because it is under-priced or it’s worth selling because it is overpriced.

Fundamental analysis uses key ratios as tools of determine stock valuation in the market. The fundamental analysis tools focus on stock growth, market value and earnings. Some of the factors that fundamental analysis focuses to establish are Earnings per Share (EPS), Price to Earnings Ratio (P/E), Projected Earnings Growth (PEG), Price to Sales Ratio (P/S), Price to Book Ratio (P/B), Dividend Payout Ratio, Dividend Yield, and Return on Equity (ROE) (Tracy, 2012, p. 45).

This report focuses on analysing the price and performance of stock for several companies operating in in the Muscat Securities Market. The analysis evaluates the viability of investing in the respective stock. Some of the companies under evaluation are Dhofar Insurance, Global Financial Investment, National Finance, Al-Oula Company, Al Hasan Engineering, Computer Stationery Ind., Construction Material Industry, Muscat Gases, Muscat City Desalination, and United Power. The report is divided into three parts, namely country analysis, industry analysis, and company analysis. Lastly company analysis has been evaluated using key ratios such as EPS, DPS, ROI, PE ratio and NPR.

Muscat Securities Market and its principal index, which is MSM -30

The Muscat Securities Market was founded in 21^st June 1988 by the Royal Decree. The Muscat Securities is the only market in Omani that deals with the stock exchange. It has the responsibility to control and regulate the Omani’s market security (Muscat Securities Market, 2018). The market also collaborates with other stakeholders to develop infrastructures that support the development of the financial sector in the country.

Methodology

The Muscat Securities Market uses a MSM 30 index, which represents 30 most liquid, profitable and capitalize companies listed on the market. The leading objectives of the MSM 30 index is to determine the price movement of stocks of the listed companies. The objective analysis offers a guide to the investors during their investment processes and decision making (Muscat Securities Market, 2018). To fully serve its objectives, the MSM 30 index has the following features. First, it comprises of freely available shares only. Second, the capping is rated at 10% to offer a wider representation of smaller companies in the market. And third, the capping and free float of shares reviewed and revised on a quarterly basis to ensure a fair representation (Muscat Securities Market, 2018).

Data Collection

Data collection is a vital part of any research or analysis. The accuracy and reliability of the research finding highly depend on the quality of data collected. Therefore, to observe reliability and accuracy of the results, secondary data collection method was chosen. Data from the Muscat Securities Market was obtained from online searches and the official website. Although, the MSM has at least thirty listed companies, only ten companies were chosen to be studied in this report. The sampling was done randomly based on the industry/ business sectors that the companies operated in. The companies chosen for the study were Dhofar Insurance, Global Financial Investment, National Finance, Al-Oula Company, Al Hasan Engineering, Computer Stationery Ind., Construction Material Industry, Muscat Gases, Muscat City Desalination, and United Power. It was easier to obtain data of the companies’ performance in the Oman market because they are all listed in the MSM.

For a comprehensive country analysis, data such on Oman’s GDP, Interest rates, oil prices, Exchange rates, Consumer Price Index (CPI), and Product Price Index (PPI) was considered. Secondary data on these economic parameters of Oman was obtained from online websites, peer-reviewed sources and online databases.

Period of study

The data collected was for a period of one year between 2017/2018 years on a daily basis.

Application of Fundamental  Analysis:

This section covers the analysis of the secondary data collected from the MSM as well as the country’s economic parameters. The fundamental analysis has considered country analysis, industry analysis and company analysis as the most appropriate tools to evaluate the stock price and performance for respective companies in the MSM.

Country Analysis

Oman in the smallest member of the United Arab Emirates (UAE) based on its population. The country is also the smallest kingdom in the region and has been ruled by Sultan Qaboos Al-Said since 1970. Oman heavily depend on its oil resources to generate revenues; approximately 80% of the government revenues comes from oil resources. Likewise, gas and tourism industry also play a key component in revenue generation and diversification of the government strategies (Arabian Business, 2018, p. 56).

Application of Fundamental Analysis

According to the 2018 World Trade Organization (WTO) index, which analysis the global economic freedom for the respective countries, Oman scored 61.0 which labelled as the 93^rd economic freest country in the world. Overwhelming freedom was registered under judiciary effectiveness and business freedom while labour freedom and fiscal health scored low. In the Middle East and North Africa region, Oman was ranked 8^th among the 14 countries based on economic performance (Wippel, 2013, p. 112).

The country has been experiencing financial deficit since 2014 as a result of fluctuating oil prices. The government has invested heavily in enhanced oil recovery techniques to boost the country’s production. Likewise, the government has focused on economic diversification and fiscal reform as a way of reducing over-reliance on oil reserves and hydrocarbon. Investors have been complaining about unnecessary bureaucracy and unfriendly regulatory environment which negative impact business performance (Khan, 2016, p. 96). The government is focusing on reducing the red tape as one way of attracting foreign investors into the economy. Since the introduction of the flexible requirement for investors, the country has witnessed the increased number of foreign investors. The openness of the government scored an above average index from the 2018 WTO global index (Nebel, 2016, p. 67).

Lastly, the Omani’s banking sector is still evolving, although its commercial banks registered promising performance in 2018. The financial sector is providing credit at market rates as a mechanism of attracting more investors. The government is also providing subsidized loans to attract more investment hence promoting investment.

An evaluation of Omani’s performance between 2017 and 2018 was based on three economic factors that is Gross Domestic Product (GDP), Interest Rates, and Exchange Rates.

GDP refers to the total value produced by a country’s population and companies in a given fiscal year. By comparing two GDPs from two consecutive periods, one can tell whether or not the economy is growing. Likewise the economic growth rate indicates whether the economy is growing quickly of slowly. Economists have suggested that an ideal growth rate for any country should be between 2% and 3% (Khan, 2016, p. 71). GDP has a direct impact on job growth, investments and personal finance. Investors use the GDP and economic growth rate when deciding on whether or not to invest in a country, adjust financial and asset allocation for a given investment, and withdraw the investment opportunities in a given country. Likewise, GDP and growth rate trends are used to estimate future investment performance (Trading Economics, 2018).

Country Analysis

The GDP of Oman grew by 5.1% in 2016 which was a positive growth from the -14.1% in 2015. The growth rate was followed by 3.9% in 2017. The highest growth rate to be to be recorded in Oman was 13.1% in 2008. The government projected that the economy would grow by 5.2% in 2018 (Trading Economics, 2018). Some of the initiatives that had been taken by the government towards achieving the growth were economic diversification and establishment of the Muscat airport. The airport expected to boost the hospitality and tourism industry. Likewise, new investors would be attracted to invest in the land new the airport.  

Oil production is the main contributor to the country’s GDP. The energy sector contributed to 87% of the budget revenues, 60% of total exports as well as 51% of the GDP. However, with the shrinking of the oil reserves, the government is focused on diversifying its economy through developing hospitality, tourisms, and gas industries. The trend shows a promising future on the country’s economic growth (Trading Economics, 2018).

Interest Rates

Interest rate shows that ability of people and company to afford the loans in an economy. The higher the interest rates, the higher the cost of affording loans and the less the ability of people to acquire credit. In other words, a country’s economy can only grow when the interest rate is low (English, 2011, p. 83).  Oman has recorded an average interest rate of 1.5% between 2008 and 2018. The highest ever interest rate to be recorded was 5% in 2008 while the lowest was 1% in 2012. In 2017, the interest rate was 2.38%, while the 1st quarter of 2018 registered an interest rate of 2.41% (Arabian Business, 2018). The trend shows that the affordability of credit loans decreases with time. Loans and credit are becoming expensive, which is not good for economic growth and attraction of more investors in the economy. However, the increase in the rates were caused by fluctuating oil prices. The interest rate is expected to drop with stabilization of the oil prices in the global market. Likewise, compared to other countries in the UAE, Oman still enjoy low interest rate (IECONOMICS, 2018).

Exchange Rates

The exchange rate is an important factor in determining a nation’s level of economic health. Therefore, exchange rates play an important role in a nation’s level of trade in the global free market economy. Exchange rate affects the return of the investors’ portfolio (English, 2011, p. 76).

Gross Domestic Product (GDP)

The higher a country’s currency, the more expensive its exports are and the cheaper the imports in foreign markets. In other words, the higher the exchange rate, the higher the competitive level of a given currency.

The Oman currency has a higher exchange rate compared to the USD. Between 2017 and 2018 One USD traded at 0.385 OMR. The currency remained stable against the USD over the last ten years amid the fluctuations in the oil price. The exchange rate reached its highest at 0.417 in 1971 and the lowest in 0.345 at 1985 (IECONOMICS, 2018).

This section analysis the oil industry and hospitality industry, which are the backbone of the country’s economic diversification strategy.

Oil and gas industry

The Oman’s oil production grew by 7.1% in 2017 and is expected to grow further by 6.9% in 2018. The increase was registered irrespective of the reduction of the global oil production and the decrease of the country GDP growth. The demand for Oman’s oil products is expected to increase if the Asian region and China in particular. Other emerging markets for the country’s oil products are Japan, Korea and Thailand (IBP Inc., 2015, p. 107).

Although the price of oil is expected to increase in the future, the country is focused on engaging in non-oil related economic activities. The company is using funds realized from oil activities to expand its non-oil sectors. Therefore, the stable prices of oil are expected to continue benefiting Oman in improving its infrastructures and exports as well as economic diversification to attract more non-oil investors (Kechichian, 1995, p. 67).

Hospitality industry

The Oman’s hospitality industry grew by 6.2% between 2015 and 2018 to reach USD 1 billion for the first time. The growth was as a result of 6.3% increase in the number of tourists arriving in the country per annum and 5.3% rise in the number of hotels. The number of tourists visiting the country is expected to double by 2014. The building of a new airport in Muscat besides developing tourist spots and private investments will boost the demand from the tourism sector (Baporikar, 2012, p. 113).

However, fluctuation of the oil price and over-dependent on oil has weakened the economic growth hindering the government’s ability to expand the hospitality market. Likewise, the inability of the UAE governments to attract a continuous flow of tourists in the region have an adverse impact of the growth of the hospitality market (Pablos, 2011, p. 99).

Interest Rates

Company Analysis

This section covers the calculation of ideal ratios such as EPS, DPS, PE ratio, Profitability ratios (NPM) on the ten selected companies listed in the MSM 30. The analysis of the ten companies is divided into Risk-Return analysis and financial ratio analysis.

Returns are defined as the gains or losses generated an investment in a given period. On the other hand, risks factors that are likely to hinder the achievement of an expected return of security. According to the Risk-Return analysis, the higher the risks, the higher the expected return while the lower the risk, the lower the expected returns. The risk-return analysis of the ten companies has been summarized in the table below;

SNO.	NAME OF THE COMPANY	RETURNS	RISK
1	MSM INDEX	-0.05	0.43
2	DHOFAR INSURANCE	-0.979	1.0279
3	GLOBAL FINANCIAL INVESTMENT	0.0249	1.6871
4	NATIONAL FINANCE	0.03417	1.4281
5	AL-OULA COMPANY	-0.2417	1.7582
6	AL HASAN ENGINEERING	-0.1347	0.7614
7	COMPUTER STATIONERY IND.	0.0642	1.9423
8	CONSTRUCTION MATERIAL INDUSTRY	-0.1478	1.7531
9	MUSCAT GASES	-0.09831	1.6247
10	MUSCAT CITY DESALINATION	-0.9648	2.985
11	UNITED POWER	-0.04589	1.0687

On average, a single stock in the MSM Index is associated with a 0.43 % risk and -0.05% returns. Compared to the returns, the risks associated with investing in the stock of the ten companies were high. Only three companies had positive returns associated with their stock. In other words, is an investor had to invest in the stocks of the ten companies, only stocks from Global Financial Investment, National Finance, and Computer Stationery Ind. would have generated positive returns. The Computer Stationery Ind. had the highest return of 0.0642%, while the Muscat City Desalination had the lowest return of -0.9648. Based on risk-return analysis, the stocks of the ten companies were not worth investing in because the returns could not match the associated risks (Tracy, 2012, p. 56).

Financial ratios that such as EPS, DPS, PE ratio, Profitability ratios (NPM). The financial ratios were summarized in the table below;

S.NO	NAME OF THE COMPANY	EPS	DPS	ROI	P/E	NPM
1	DHOFAR INSURANCE	0.024	0.013	9%	16.0000	62%
2	GLOBAL FINANCIAL INVESTMENT	0.053	0.034	10%	3.4906	14%
3	NATIONAL FINANCE	0.036	0.015	11%	2.8889	13%
4	AL-OULA COMPANY	0.004	0.001	6%	29.0000	28%
5	AL HASAN ENGINEERING	0.068	0.054	8%	5.2941	24%
6	COMPUTER STATIONERY IND.	0.009	0.005	5%	20.6667	7%
7	CONSTRUCTION MATERIAL INDUSTRY	0.098	0.062	14%	1.6429	26%
8	MUSCAT GASES	0.047	0.024	16%	10.2128	14%
9	MUSCAT CITY DESALINATION	0.047	0.021	10%	6.0000	13%
10	UNITED POWER	0.072	0.067	11%	11.6667	19%

Earnings Per Share (EPS) Ratio

EPS is calculated by dividing a Net Income by the number of the ordinary shares. The ratio shows a company’s profitability. The higher the EPS, the higher the profitability level. The Construction Material Industry had the highest EPS (0.098) while Al-Oula Company has the lowest EPS (0.004). Therefore, Construction Material Industry had the highest profitability while Al-Oula Company had the lowest (International Business Publications, 2009, p. 21).

Dividend Per Share (DPS) Ratio

The DPS also shows the profitability level of a company. The higher the DPS ratio, the higher the profitability. The ratio calculated by dividing the total amount of declared dividends with total number of ordinary shares (Tracy, 2012, p. 68). The United Power had the highest DPS (0.067) while Al-Oula Company had the lowest DPS (0.001).

Exchange Rates

Return on Investment (ROI)

The ratio is used to determine the efficiency of an investment. It measures the amount of a company’s return that was derived from its investments. ROI is calculated by dividing the return from the investment from the cost of such an investment (Tracy, 2012, p. 73). The Muscat Gases registered the highest ROI of 0.067%, while Computer Stationary IND. Registered the lowest ROI of 5%.

Price/ Earnings ratio (P/E)

The P/E ratio indicates the market price of a stock based on the earnings. The ratio is calculated by dividing the market price per share by earnings per share (Tracy, 2012, p. 74). The Al-Oula Company had the highest P/E (29) while Construction Material Industry had the lowest P/E (1.6429).

Net Profit Margin (NPM)

The NPM indicates a company’s profitability after expenses and costs have been deducted. NPM is calculated by dividing the net income by sales (Tracy, 2012, p. 82). Dhofar Insurance had the highest NPM of 62%, while the Computer Stationery India. Had the lowest NPM of 7%.

Raking of the investment choices

The ranking is based on the Net profit Margin based on three reasons. First, NPM is the bottom line of calculating the profitability of a company and is mostly used by investors when making investment decisions. Second, it is the basis of calculating other profitability ratios. And three, it shows the true amount of dividend earned by a single shareholder in a given financial year. The ranking has been summarized as shown in the table below;

S.NO	NAME OF THE COMPANY	RANK
1	DHOFAR INSURANCE	1
2	GLOBAL FINANCIAL INVESTMENT	6
3	NATIONAL FINANCE	8
4	AL-OULA COMPANY	2
5	AL HASAN ENGINEERING	4
6	COMPUTER STATIONERY IND.	10
7	CONSTRUCTION MATERIAL INDUSTRY	3
8	MUSCAT GASES	8
9	MUSCAT CITY DESALINATION	6
10	UNITED POWER	5

Based on the NPM, the Dhofar is ranked number One followed by Al-Oula Company while Computer Stationery Ind. is ranked last.

Conclusion

This report focused on analysing the price and performance of stock for several companies operating in in the Muscat Securities Market. The analysis evaluated the viability of investing in the respective stock. Some of the companies under evaluation were Dhofar Insurance, Global Financial Investment, National Finance, Al-Oula Company, Al Hasan Engineering, Computer Stationery Ind., Construction Material Industry, Muscat Gases, Muscat City Desalination, and United Power. The report analyzed the Omani’s country analysis, industry analysis, and company analysis. Key ratios such as EPS, DPS, ROI, PE ratio and NPM were used to conduct fundamental analysis.

The report shows that Oman has experienced unstable economic growth in the past decade. However, the government is focused on economic diversification as a mechanism of boosting economic growth. With the proposed building new Muscat airport as well as investing in the hospitality industry, the country is slowly becoming a good destination for investors. Based on the fundamental analysis, the investor should make investment decision on the chosen MSM 30 companies based on the ranking above.

The recommendation is based on the risks, returns and financial ratios associated with each investment opportunity. The NPM is the bottom line of calculating the profitability of a company and is mostly used by investors when making investment decisions because it is the basis of calculating other profitability ratios. The five companies that have been recommended to the investors for stock market investment are Dhofar Insurance, Al-Oula Company, Construction Material Industry, Al Hasan Engineering and United Power.

References List

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Tracy, A., 2012. Ratio Analysis Fundamentals: How 17 Financial Ratios Can Allow You to Analyse Any Business on the Planet. London, UK: Bidi Capital Pty Ltd.

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Wippel, S., 2013. Regionalizing Oman: Political, Economic and Social Dynamics. London: Springer Science & Business Media.