Q1 2015 Investment Report

RNS Number : 7610K

Qatar Investment Fund PLC

21 April 2015

 

21 April 2015

Qatar Investment Fund plc ("QIF" or the "Company")

Q1 2015 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues  its Q1 2015 Investment Report for the period 1 January 2015 to 31 March 2015, a pdf copy of which can be obtained from QIF's website at: www.qatarinvestmentfund.com.

QIF was established to capitalize on the investment opportunities in Qatar and the Gulf Cooperation Council ("GCC") region, arising from the economic growth being experienced in the area. The Company invests in quoted Qatari equities listed on the Qatar Exchange ("QE") in addition to companies soon to be listed, with a possible allocation of up to 15% in other listed companies elsewhere in the GCC region. The Investment Adviser invests using a top-down screening process combined with fundamental industry and company analysis.

QIF Q1 Quarterly Report

3 months ended 31 March 2015

Highlights

Ø Qatar Investment Fund Plc's ("QIF") net asset value (NAV) per share, net of dividends paid, was flat (-0.6%) during the quarter ended March 2015, whilst the Qatar Exchange Index was down 4.7%.

Ø Qatari population rose 5.0% in the quarter.

Ø Government's budget to end 2015 has made maximum allocation to major development projects.

Ø Private sector credit growth remains good (up 6.2%) between December 2014 and March 2015.

Ø US$200 billion allocated to infrastructure related projects in next seven years; new projects worth US$30 billion slated for 2015. 

Ø Profits of listed Qatari companies rose 8.9% in 2014.

Ø Qatar market trades on 2015E PE of 12.6x, less demanding than Saudi Arabia (17.5x), UAE (12.7x) and the overall MENA region (15.0x). Qatar's estimated dividend yield is 5.1% for 2015.

Ø Qatar GDP expected to grow 7% in 2015.

Performance and Portfolio Structure

Embedded image removed - please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the NAV per share compared to the QIF share price.

As at the end of March 2015, the QIF share price was at a 17.2% discount to NAV per share.

Historic Performance against the QE Index

Performance	2007 5M	2008	2009	2010	2011	2012	2013	2014	2015 3M
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	20.6%	-0.6%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	18.4%	-4.7%
QIF Share Price	15.5%	-67.5%	97.3%	23.0%	-2.3%	2.4%	26.4%	17.4%	-8.5%

* NAV is net of dividends paid

Source: Bloomberg, Qatar Insurance Company

Portfolio Structure

Top 10 Holdings

Company Name	Sector	% Share of NAV
Qatar National Bank	Banks & Financial Services	15.8%
Commercial Bank of Qatar	Banks & Financial Services	9.3%
Qatar Islamic Bank	Banks & Financial Services	7.6%
Masraf Al Rayan	Banks & Financial Services	7.4%
Gulf International Services	Industry	6.4%
Qatar Insurance Co	Insurance	6.3%
Doha Bank	Banks & Financial Services	5.6%
Qatar Electricity & Water Co	Industry	5.3%
Barwa Real Estate	Real Estate	5.2%
Qatar Navigation	Transportation	4.5%

Qatar Electricity & Water Co and Qatar Navigation replaced Industries Qatar and Ooredoo in QIF's top 10 holdings. The Investment Adviser continues to reduce exposure to hydrocarbon sector linked companies and has been increasing exposure to companies linked to non-hydrocarbon economic growth.

Country Allocation

At quarter end QIF had 23 holdings: 21 in Qatar and 2 in UAE (Q4 2014: 25 holdings: 21 in Qatar, 3 in UAE and 1 in Oman). Cash was 7.4% of NAV (Q4 2014: 1.2%).

Qatar remains the preferred market for the Investment Adviser in the GCC region because of its stable politics, sizeable hydrocarbon reserves, growth prospects in the non-hydrocarbon sector, infrastructure development, high dividend yield and attractive valuation.

Sector Allocation

Embedded image removed - please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting the overall portfolio allocation by sector as at 31 March 2015.

QIF remains overweight in the banking sector, with a weighting (including financial services) of 50.8% (Q4 2014: 52.0%) vs. 40.5% for the Qatar Exchange (QE) Index. The Investment Adviser favours the Qatari banking sector because of the government's infrastructure development plans, which should fuel lending growth. Qatari banks will also benefit from a rising domestic population and from international expansion. Qatar National Bank remains QIF's largest holding (15.8%).

The second largest exposure is to the industrial sector at 15.2% (Q4 2014: 16.8%).  This is underweight relative to the QE Index (24.3% weight in the QE Index) due to oil price volatility hindering the prospects of hydrocarbon linked industrial companies. Exposure to Gulf International Services increased from 5.3% to 6.4% during the quarter.

QIF's real estate weighting was reduced to 8.8% from 10.3% in the previous quarter, as exposure to Barwa Real Estate lowered to 5.2% from 6.2%. Similarly, the exposure to Telecoms (single holding - Ooredoo) reduced from 6.3% to 3.7%, on the back of a challenging environment in some of the operating countries and emerging market FX depreciation.

Regional Market Overview

Most GCC markets were subdued in Q1 2015, except Saudi which gained 5.3% having fallen 23% in Q4 2014.

The Qatari market's decline of 4.7% in the quarter arose from falling oil prices, weaker earnings estimates, regional geopolitical tensions and stocks going ex-dividend. Sector-wise, real estate was the top performer with a 6.7% gain, followed by the insurance sector with a 5.7% rise. Telecom was the worst performer falling 10.7%.

The Qatari market outperformed its major GCC peers such as Saudi and Dubai. Between 31 July 2007 (since QIF's launch) and 31 March 2015, the QE Index has gained 53.7% and has been among the top 10 performing country indices in the world. The factors behind this performance include lower reliance on oil prices, long term gas contracts and robust infrastructure spending.

Since oil prices started to fall in H2 2014 Qatar has outperformed the Saudi and Dubai markets.  In the past 9 months (from 30 June 2014 to 31 March 2015), the Qatari market gained 1.9% compared to declines of 7.7% and 42.1% respectively for Saudi and Dubai.

The Investment Adviser believes that the Qatari market should continue to perform better than other GCC markets because of its strong fundamentals, infrastructure spending (and visibility on projects being completed on time), non-hydrocarbon sector growth and rising population. According to a Deutsche Bank Report, Qatar is trading on a 2015E PE of 12.6x, less demanding than other GCC markets such as Saudi Arabia (17.5x), UAE (12.7x) and the MENA region (15.0x). Qatar is further supported by its high dividend yield (2015E dividend yield: 5.1%).

Qatar's infrastructure spending to continue despite possibility of running into fiscal deficit

Qatar's long term growth story remains intact, driven by growth in the non-hydrocarbon sector supported by a healthy infrastructure pipeline. Moreover, investors see more visibility of projects being completed on time. The Investment Adviser believes that this view is further strengthened by the recent interim budget announcement by the government, which focuses on mega development projects and investments linked to the 2022 FIFA World Cup. A large chunk of total expenditure is allocated to major development projects in the interim budget.

Qatar's Prime Minister stated that over US$200 billion of spending is planned over the next seven years, underscoring economic diversification despite lower oil prices. The focus is on sectors such as health, education and infrastructure. According to MEED, Qatar should see new infrastructure projects worth US$30 billion in 2015 alone.

The Investment Adviser expects that lower oil prices should have minimal impact on Qatar, although there will be some strain on hydrocarbon exports and government revenues.

According to Barclays research, most of the GCC economies, except Kuwait, are expected to have fiscal deficits in the coming year if crude oil prices remain at low levels. If this happens GCC countries will draw on their existing reserves, sovereign wealth buffers, or may issue debt to fund fiscal deficits. Qatar is expected to run a smaller deficit than Saudi Arabia and Oman.

The IMF expects low oil prices will mean Qatar will have a budget deficit from 2016. Current account surpluses are also expected to shrink from over 32% of GDP in 2012 to 2% of GDP in 2020. This should intensify efforts to diversify the economy and should encourage fiscal consolidation in the medium term. In the coming year, GDP growth is expected to be around 7%, driven by implementation of the public investment program and as the Barzan natural gas field starts production.

Embedded image removed - please refer to the IMS on the Company's website www.qatarinvestmentfund.com/publications/quarterly-reports/ for a chart depicting Qatar Current Account Balance

The Investment Adviser believes that despite falling oil prices, the Qatari government has sufficient resources to finance its ongoing infrastructure spending. Hence, the Investment Adviser remains positive on the Qatari economy which is underpinned by continued efforts by the government to diversify the economy and thus reduce its reliance on the hydrocarbon sector.

Qatar: corporate profits increased 8.9% in 12M 2014

The profitability of Qatari listed companies rose in 2014, up 8.9% on 2013. In Q4 2014, corporate profits increased 9.1% on Q4 2013, mainly driven by the real estate, banking and transportation sectors.

Sector profitability (net profit/loss in US$000s)

Sectors	12M 2013	12M 2014	% Change	Q4 2013	Q4 2014	% Change
Banking & Financial	4,773,653	5,339,092	11.8%	1,150,679	1,266,682	10.1%
Insurance	848,173	589,737	-30.5%	458,496	280,372	-38.8%
Industrial	3,415,109	3,568,467	4.5%	933,309	999,338	7.1%
Services & Consumer Goods	468,248	512,126	9.4%	127,758	137,355	7.5%
Real Estate	797,539	1,355,225	69.9%	330,896	713,635	115.7%
Telecoms*	708,422	586,355	-17.2%	140,110	15,205	-89.1%
Transportation	489,133	572,267	17.0%	103,064	128,520	24.7%
Total	11,500,276	12,523,270	8.9%	3,244,313	3,541,105	9.1%

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange

Banking and financial services sector profits rose 11.8% in 2014, with the banking sector being the main contributor. Qatar banking sector profits grew 11.7% in 2014, driven by strong growth in lending, particularly to the private sector (up 21.9% in 2014). A recent report by the Boston Consulting Group (BCG) stated that retail banking revenue growth in Qatar (up 12.5% in 2014) beat the GCC average of 7.9% in 2014. The largest bank, Qatar National Bank, posted a profit growth of 10.3% in 2014, while Qatar Islamic Bank reported the highest growth of 19.9% in net profit. Masraf Al Rayan and Commercial Bank of Qatar profits rose 17%. Most of the listed Qatari banks reported double-digit rate of growth. Financial services sector profits increased 31.2%, driven by substantial rise net profit at Dlala Brokerage, further supported by profit rises from Qatar Oman Investment Company and Islamic Holding Group. However, the net income of National Leasing Company experienced a sharp decline in 2014 (down 47.2%).

The net profit of the industrial sector grew 4.5% in 2014. The sector now contributes 28.5% of total net profits of all listed Qatari companies. Sector heavyweight and one of the largest chemical producers in the GCC region, Industries Qatar, saw a 21% profit fall as a result of shutdown programs, coupled with lower product prices and increased operating costs. Qatar Electricity and Water and Gulf International Services reported robust increase in profits. Gulf International Services' profits rose sharply on account of the buy-out of the remaining 30% stake by the company in its drilling segment JV in April 2014.

Insurance sector profit declined 30.5% in 2014, as net profit of Qatar General Insurance and Reinsurance Company declined by over 56%, mainly due to a one-off fair value gain of QAR2 billion reported by the company in 2013 compared to a much lower fair value gain of QAR724.3 million in 2014. Qatar Insurance Company profits rose 33.1% in 2014.

In 2014, profits in the services & consumer goods sector grew 9.4%. The largest profit contributor was Qatar Fuel Company, which posted a marginal rise of 0.9% in profit. Al Meera Consumer Goods reported a 15.5% growth in profit.

Real estate sector profits grew 69.9% in 2014. Profit of Barwa Real Estate Group doubled. Ezdan Holdings reported a 27% profit rise. Other major players in the sector, United Development Company and Mazaya Qatar also reported double digit growth in profits.

The telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar is excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo (formerly Qatar Telecom), reported a 17.2% fall in profit in 2014.

Transportation sector profits climbed 17.0% in 2014, with Gulf Warehousing Company and Qatar Gas Transport Company posting earnings growth of 38% and 22.6%, respectively. The largest profit contributor of the sector, Qatar Navigation, reported a 10.5% rise in its 2014 net profits.

Recent Developments

FIFA related projects get priority in the extended state budget for 2015

Recently, Qatar announced its state budget for the extended period of nine months starting from 1 April to 31 December 2015. The country will be following a new January to December fiscal year from 2016, which required extending the current FY 2014-15 budget to December 2015. Qatar's extended budget also focuses on mega development projects and investments linked to the 2022 FIFA World Cup. The government is committed to continue with its development program, despite falling energy prices in the global markets. The extended budget assumes an oil price of US$65 per barrel; unchanged from the FY 2014-15 budgets. Revenue from extended budget is estimated at QAR169.3 billion, while the expenditure has been estimated at QAR163.8 billion, translating into an estimated budget surplus of QAR5.5 billion. Most of the expenditure would be in the health, education, infrastructure and transport sectors and projects related to the 2022 FIFA World Cup.   

According to the Qatari Ministry of Finance, estimated revenue during the full 21 months period (1 April 2014 to 31 December 2015) is expected to reach QAR395.0 billion and total expenditure during the same period would be QAR382.2 billion, resulting in an estimated surplus of QAR12.8 billion. The Minister of Finance stated that preliminary estimates of the budget for FY 2014-15 (1 April 2014 to 31 March 2015) show a surplus of about QAR137 billion.

In the extended budget, allocation to major projects would be at the maximum of QAR65.6 billion, thus bringing the total allocation during 21 months for this sector to QAR153.1 billion. The state budget has kept aside QAR53.4 billion for current expenditure, increasing total allocation to this sector to QAR124.5 billion in the full 21 months. Total allocation to salaries and wages is expected at QAR35.6 billion in the nine months, thus taking the total allocation to QAR83.1 billion.

Private sector credit growth remained strong

According to Qatar Central Bank (QCB) data, credit growth in Qatar remained strong year to date. Total credit extended by Qatari banks increased 3.5% between December 2014 and March 2015. Public sector credit declined 1.3% during the period, while private sector reported a strong 6.2% rise in credit.

Credit growth in Qatar rebounded from February 2015. The overall credit increased by 1.7% MoM in February 2015 and 3.2% MoM in March 2015 after posting a decline of 1.4% MoM in January 2015. Public sector credit grew 1.5% MoM in February 2015 and 4.5% MoM in March 2015 vs. a 6.9% MoM decline reported in January 2015. Private sector credit growth remained stable at 1.8% MoM in both January and February 2015 and growth accelerated to 2.4% MoM in March 2015. Total deposits grew 3.3% year to date. The banking sector's loans-to-deposit ratio (LDR) stood at 109% at end of March 2015, same as at the end of December 2014.

Going forward, the Investment Adviser expects credit growth to remain strong on the back of infrastructure spending before the 2022 FIFA World Cup, double digit growth in the non-hydrocarbon sector and the expanding population.

Changes in QE Index constituents and weights

Following the semi-annual review of the QE indices, from 1 April 2015, Aamal will replace Medicare in the QE Index, with a weight of 2.76%, while all 43 listed companies will remain part of the QE All Share Index (& related sector index).

The Qatar Exchange caps the maximum weight a single stock can represent at 15% of the QE Index. Based on 31 March 2015 closing prices, Qatar National Bank, whose weight was exceeding 15% has been capped at 15% and excess weight has been distributed proportionately amongst remaining stocks.

Trading of entitlements to rights issues

The Qatar Exchange (QE) has been planning to introduce trading of rights issue entitlements for investors. Currently, investors need to commit additional money to exercise rights, or alternatively receive no compensation if they do not take up their rights to subscribe for shares in rights issues. These rights are generally at a fixed price but may be lower than the market price. However, according to the Qatar Exchange, if these rights entitlements are tradable, investors can sell them and receive a benefit if they choose not to subscribe in the rights issue. The Qatar Exchange also stated that it is currently working with Qatar Financial Markets Authority (QFMA), on forming the mechanism for selling and pricing of rights issue entitlements as a new instrument in the capital market. As a result, the rights holder can either exercise the rights by subscribing in the company's capital increase or can sell the rights fully/ partially.

Macroeconomic Update

The Qatari economy continued to grow in Q4 2014, with real GDP rising 6.7% compared to Q4 2013, the fastest in the last four quarters, according to Ministry of Development Planning and Statistics (MDP&S). The growth was mainly driven by double digit growth in electricity, construction, trade, hotels, transport & communication and domestic services. This was also supported by healthy population growth in Q4 2014. The hydrocarbon sector reported a growth of 1.3% in Q4 2014 compared to Q4 2013, while non-hydrocarbon sector growth was 10.3% during the same period. This confirms that the Qatar economy is diversifying away from the hydrocarbon sector.

In 2014, Qatar's real GDP grew 6.2% compared to 2013, on the back of strong 11.5% growth reported by the non-hydrocarbon sector, which partially offset contraction in the hydrocarbon sector (down 1.5%). The main contributors to growth in the non-hydrocarbon sector include construction (+18.0%); finance, insurance, real estate and business services (+13.6%); and trade, hotels and restaurants (+14.1%). Construction sector growth was mainly driven by the implementation of major infrastructure projects, such as the development of Lusail, Barwa City and Education City, while services sector growth was on account of rapid population growth.

Looking ahead, Qatar's economic growth is expected to be 7% in 2015 and 7.5% in 2016 according to QNB estimates. Again, the non-hydrocarbon sector (with growth over 10%) would be the main contributor to the country's GDP growth. Additionally, the hydrocarbon sector is anticipated to show some improvement in the medium term with expected growth of 0.8% in 2015 and 1.8% in 2016. This incremental growth would be largely contributed by the increased gas production due to the Barzan gas project, which is expected to start in the second half of 2015. Economic diversification efforts towards the non-hydrocarbon sector would continue in the coming years with share of non-hydrocarbon sector in the nominal GDP expected to rise to 68.5% in 2017. 

Qatar's population grew 5.0% between December 2014 and March 2015, to reach 2.35 million. Population growth is expected to remain strong as large government spending should continue to attract expatriate workers.

Valuations

Market	Market Cap.	PE (x)		PB (x)	Dividend Yield (%)
	US$ Mn	2015E	2016E	2015E	2015E
Saudi Arabia	523,200	17.5	14.1	2.8	3.7
UAE	190,196	12.7	11.4	1.9	4.6
Qatar	140,614	12.6	11.6	2.5	5.1
Kuwait	97,694	12.3	10.9	1.7	4.4
Oman	17,277	10.4	10.4	1.7	5.5
Bahrain	22,642	9.2	8.9	1.3	5.9
Egypt	28,857	16.7	10.7	2.6	3.1
Jordan	21,633	11.8	9.8	1.3	4.6
Overall MENA	1,042,112	15.0	12.6	2.4	4.2

Source: Bloomberg Finance LP, Deutsche Bank, Prices as of 30th March 2015

Outlook

Qatar's economy is growing well with much of this growth coming from the non-hydrocarbon sector.

Rising population, helped by an influx of expatriates, should drive domestic consumption, benefiting companies in the consumer, transportation, communication and banking sectors.

The infrastructure pipeline, backed by firm political support to continue with infrastructure development, despite falling energy prices, should underpin economic progress. This should reassure investors about Qatar's medium to long-term growth prospects. Moreover, strong fiscal balances, low inflation levels and high current account surpluses provide further economic impetus.

As a result, the Qatari market is expected to remain attractive to investors, particularly given its high dividend yield and attractive valuation.

For further information:

Qatar Investment Fund plc - [phone]

Nick Wilson

Panmure Gordon - [phone]

Andrew Potts

Maitland - [phone]

William Clutterbuck

Robbie Hynes

 

END

 

 

MSCURRNRVSASUAR