Analysts say firm's move to buy UAE cement company Pioneer is 'not fruitful', as Raysut shares drop again.
Raysut a casualty in cement price war
A price war between Oman and the UAE is creating a rocky outlook for shares of Raysut Cement.
The Omani company plans to buy Pioneer Cement Industries, a UAE company, reportedly for about US$180 million, although a final price has yet to be announced.
But the move is "not fruitful" for Raysut, say analysts at Global Investment House (GIH) in Kuwait. GIH downgraded Raysut's stock to "reduce" with a target price of 1.088 Omani rials.
Raysut was down 0.9 per cent to 1.217 rials yesterday, and has fallen 3.5 per cent just in the past four days. In the aftermath of the UAE property crash of late 2008 and last year, contracts for building projects have drastically diminished, creating a surplus of materials such as cement.
UAE cement companies have been increasingly selling their product in Oman, said Hettish Karmani, a senior analyst for GIH.
This has driven prices down in Oman because UAE cement is cheaper.
For the first nine months of this year, cement prices in Oman averaged $70 a tonne compared with an average price of $82.70 a tonne in the same period last year.
Average profit margins for Omani cement companies in 2008 and last year were 40 per cent and 45.6 per cent, respectively, compared with the UAE's 27.5 per cent and 22 per cent.
The difference has been even starker this year. UAE profit margins stand at 11.6 per cent, whereas those of Oman have increased to 50.5 per cent.
Mr Karmani expects the combination of the Pioneer acquisition and lower UAE cement prices to cut into Raysut's total revenue and cause a 20 per cent decline in net income to 22.9m rials this year compared with 28.6m rials last year.
Prospects for Raysut, which exports to Sri Lanka, Pakistan, Somalia and Yemen, are not much brighter beyond this year, Mr Karmani said.