Securities & Investment Company Oman's power and utilities IPOs analysis

As part of the requirements put in place by the government, power and water generation companies in Oman have to make an initial public offering (IPO) after a certain amount of time post-incorporation. Over the last few years, the utility IPO market has been well received by the public and institutions alike, with IPOs generally substantially oversubscribed, reflecting wide investor interest.

Investor Interest

The main reason for investor interest in Oman’s power utility sector is stable long-term dividends. The attractive dividend yields are supported by long-term power purchase agreement (PPA) contracts with Oman Power and Water Procurement Company (OPWP), the single buyer of electricity. The structure of the contracts, typically 15 years in duration, ensures a stable and predictable cash flow over the length of the contract.

A high rate of demand growth also underpins the attractiveness of the utilities sector. As per OPWP figures, peak demand for electricity in the main interconnected system (MIS) is expected to increase from 5886 MW in 2015 to 9133 MW by 2020, an average growth rate of 11% per annum. To meet this need, the government plans to raise generation capacity and upgrade the transmission network. An expanding population, which is expected to reach 6.6m by 2040, and a growing industrial sector will drive the increasing demand for electricity.

To meet rising electricity needs, two new independent power projects (IPPs) are under way. The Ibri IPP will start power generation in 2018, while Sohar IPP will commence from January 2019. The aggregate capacity of the two new IPPs will be 3240 MW.

On The Market

There are a total of 12 power and water generation companies listed on the Muscat Securities Market (MSM). Despite a major correction in the MSM30 index, down around 27% since September 2014, utilities share prices of have held steady as their earnings have not been affected by the current downturn. Utilities offer a safe investment and an attractive dividend yield of around 5-6%.

IPOS: The most recent IPO from the sector was that of Phoenix Power in 2015. The firm is the largest power plant in Oman with capacity of 2000 MW, representing 28% of the MIS. The company was seeking to raise OR56.3m ($146.2m), but the IPO attracted over OR1bn ($2.6bn), making the issue 18 times oversubscribed. Shares of Phoenix Power were up 40% on the first day after listing.

While no utility companies launched IPOs in 2016, the government is considering privatisation of Muscat Electricity Distribution Company (MEDC) through a listing. This would be part of the state’s long-term drive to privatise and liberalise the market.

Other Moves

Apart from equity offerings, Oman’s electricity sector issued its first bond in the international market in 2015. Oman Electricity Transmission Company, the state-owned transmission firm, issued a 10-year, $1bn bond on the Irish Stock Exchange in May 2015 at a coupon rate of 3.95%.

The purpose of the issue – which was managed by JP Morgan and Bank Muscat – was to repay loans and fund capital expenditure, and was well received by international investors. The success has paved the way for future issuances in the sector.

In 2014 OPWP announced the introduction of a spot market for power, which will operate alongside the current structure of PPAs. This is aimed at liberalising the sector by increasing competition and by providing an alternative way for power producers to sell electricity to OPWP. Spot prices will be determined day-to-day and OPWP will remain the single buyer of electricity in the market. The spot market is anticipated to be operational in 2019.

The government cut electricity subsidies for large consumers, with the revised tariff effective as of January 2017. This is not expected to affect generation firms as their prices are set by long-term PPAs.

 

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The Report: Oman 2017

Capital Markets chapter from The Report: Oman 2017

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