Rising wheat prices are hurting shares of Oman Flour Mills (OFM), and the company's diversification efforts are not yet paying off.
The Omani market heavyweight, with a 65 per cent market share, buys wheat on the open market, where futures have risen 22.8 per cent since mid-July.
There was a perception among some investors that the company would be able to pass higher prices on to customers, but government caps limit what the company can charge.
Shares of OFM have fallen 11.5 per cent from mid-July, trading at 0.642 Omani rials yesterday.
In its last chairman's report, the company said the government would continue to cap prices with only a marginal increase from last year. But it remains to be seen how that will translate in the company's results.
"The company's bottom line growth depends heavily on the gross margin it achieves, which is contingent on its wheat sourcing policies, timing and flexibility to pass on costs to the end consumer," said Ajit Joshi, an analyst at Bank Muscat. The analyst has a "hold" rating on the stock.
The company over the past year has implemented several initiatives to diversify its business, including building a bakery and buying a poultry business.
The construction of the industrial bakery is under way, and commercial production is expected by the middle of next year.
The company also formed a joint venture with the Sharjah company IFFCO Group, which manufactures and markets consumer goods under a variety of brand names. The joint venture bought Sohar Poultry.
The joint venture is also setting up Atyab Poultry, which will have a capacity to produce of 15,000 tonnes of chicken each year and 2 million eggs. But the margins from that business are expected to remain subdued because of price competition from imported chicken and eggs, Mr Joshi said.
An OFM subsidiary, Modern Poultry Farms, made a net loss in the last quarter because of a lack of demand in the summer months, it said.
