Following the lack luster performance in the 2nd quarter, due to the headwinds from the fallout from the outbreak of war between Russia and the Ukraine, we see no let off in the 3rd quarter as the service sector companies continue to shine at the expense of many import/export companies that continue to face increased raw material input and transportation costs.
In the financial sector, we see the banks and leasing companies, continuing to post improved performance, primarily as a result of lower loan impairment charges, in addition to improved net interest income, as asset portfolios have remained high, due to the lack of repayments, because many large companies are still negotiating loan restructures, combined with favorable liquidity that has kept funding costs low. However, since the restructuring (of problem loans) has been delayed, the full impact on impairment provisions may be still to come. Furthermore, internationally, banks have started increasing impairment provisions ahead of impending recessions. After benefiting from increased values of their investment portfolios in the 1st quarter, the insurance companies are finding it challenging to deliver premium income growth in the current operating environment. The improvement in the other category is due solely to Ominvest that posted a profit of RO 48 million compared to just RO 25 million in the prior year, due primarily to the inclusion of the recently acquired insurance activities of RSA Middle East.
The industrial sector, comprising of construction and manufacturing companies has been hit the hardest. In the construction sector, with the exception of Oman Cement, all companies have posted deteriorating results with two companies (Al Hassan Engineering and Aluminum Production) posting combined losses of RO 7 million. Also, as a result of terminating long-term charter vessels combined with increases in raw material prices, Raysut Cement alone posted losses of RO 16.3 million, compared to losses of just RO 2.2 million in the prior year. The manufacturing sector exhibits a very mixed story with those escaping high input costs (such as Gulf Mushrooms, Oman Cables, Oman Chromite and Oman Chlorine) posting substantial profit increases, contrasting with those companies that rely heavily on imported inputs that must grapple with the dual external challenges of higher costs of imported raw materials and shipping to customers, either within Oman or in the overseas markets they export to. A situation that continues to be aggravated by the ongoing conflict between Russia and the Ukraine. Whilst most of the food related companies have been hit hard, Oman Flour Mills is the most detrimentally affected, with increases in wheat prices reducing profits to RO 1.1 million compared to RO 5.8 million in the prior year.
Finally, as we look at the service sector, the major story is the continuous rebound of Omantel. Within the oil and gas sector, the three petrol station owners continue to reap the benefits from the ending of lockdowns and drivers returning to the highways. Although not a major sector for listed companies, the six hotels within the tourism sector are still waiting to see the return of mass tourism and business demand is still to rebound. Never mind the poor contribution to Oman of the spoils of the FIFA World Cup being held in Qatar, as hotel bookings have not materialized and planned daily flights between Muscat and Doha have already been pared back. The performance of the energy sector has been essentially flat compared to the prior year, as company restructures have been able to meet the challenge of the introduction of the spot market for electricity prices.
[This article by Karl Jackson, an Audit and Assurance Partner with Crowe Oman karl.jackson@crowe.om is based on financial data published by the Muscat Stock Exchange]
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