x Abu Dhabi, UAESunday 21 January 2018

Omani bank not a draw despite profit growth

Bank Dhofar post solid profits but analysts say the stock is still too expensive.

Despite an attractive increase in full-year profit at Oman's Bank Dhofar, analysts remain negative on the stock because of its sky-high valuation.

Trading on 18 times full-year earnings, the stock continues to look expensive against the sector average of just 15.

Further putting off investors is the company's high price compared with the book value of its assets, a measure used to compare banks.

Kanaga Sundar, an analyst at Gulf Baader Capital Markets in Muscat, calculates Dhofar's price-to-book ratio at 2.7 times earnings, which compares to an average of just 1.9 for the sector.

"At current [trading] levels the stock is really stretched," Mr Sundar said. Dhofar's price was up slightly yesterday at 0.75 Omani rials, still above Mr Sundar's target price of 0.67 rial, after the company reported a 2.8 per cent rise in fourth-quarter profit on the previous three months. It also reported a full-year profit of 33.3 million rials, up 31 per cent on 2009.

But the shares have struggled to make any ground since their peak in October, falling 4 per cent since then as investors balked at the steep cost of buying.

"The main reason for the high valuation is that fund managers who track the [Muscat index] have to buy in," Mr Sundar said.

Unfortunately for investors, this means they get a stock with low liquidity at a high price, while a forecast dividend yield of 2.7 per cent is not hugely attractive either.

Oman's banking sector is about to experience a boost, however. The government recently committed to strong infrastructure spending, and consumer confidence levels are set to improve.

Overall, Mr Sundar said he expected the sector to display loan growth of 12 per cent in the current fiscal year and felt Bank Dhofar's figures would be in line with peers.

That figure compares with marginal lending growth of 5.7 per cent in the past fiscal year.

"Despite the presence of subdued credit last year, Bank Dhofar has managed to show improved operating performance on back of efficient liability management," Mr Sundar added.