QIF Q1 Investment Report
Qatar Investment Fund plc
Quarterly Update to Quarter End March 2011
Report to Shareholders
A FORMATTED VERSION OF THIS REPORT IS AVAILABLE FROM THE COMPANY ADMINISTRATOR, GALILEO FUND SERVICES LIMITED, ISLE OF MAN UPON REQUEST. PLEASE CONTACT enquiries@galileofs.co.im TO REQUEST A COPY.
Qatar Investment Fund plc
Investment Advisers Report - Quarterly Update to Quarter End March 2011
Investment Objective
On 17 March 2011 Epicure Qatar Equity Opportunities plc was renamed Qatar Investment Fund plc. The new name reflects more clearly the purpose of the Company and should assist in building profile. The ordinary shares and warrants have been assigned new ticker codes, QIF and QIFW respectively, and the new website is www.qatarinvestmentfund.com.
Qatar Investment Fund plc ("the Company" or "QIF") exists to exploit 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") (formerly the Doha Securities Market) 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.
Market Update
Business as usual in Qatar
As the political unrest in North Africa and the Middle East unfolded, The Economist newspaper compiled a "shoe thrower's" index which aimed to predict unrest within the region. Qatar was ranked last i.e. the country which was least likely to show signs of political and social upheaval.
The reasons for Qatar's stability are clear. The underlying cause of the regional unrest is a combination of poverty, high youth unemployment, human rights grievances, constraints on freedom of speech, and religious tensions.
Qatar has an unemployment rate of 0.5%, GDP per capita of over US$75,000, making it the wealthiest country (source IMF) in the world and a less diverse population than other countries in the region.
The regional unrest has so far had little enduring impact on Qatari financial markets. Initially the QE Index fell 20% from its 2011 high, before recovering to end marginally down for the quarter. Qatar's five year Credit Default Swaps (CDS) - a form of insurance against default - has become more expensive but continue to be lower than the other GCC countries, which the Company's Investment Adviser thinks is unlikely to change in the short term.
Continued growth in industrial output and the commissioning this year of the country's final liquefied natural gas (LNG) production 'train' should generate another two years of strong export growth.
Qatar's successful bid to host the 2022 World Cup has given an extra boost to a programme of already substantial infrastructure spending, driving domestic demand and leading to renewed population growth.
Qatar's state finances
Qatar unveiled its budget for the 2011-2012 financial year, forecasting a surplus of 22.5bn Qatari Riyals (QR) (US$6.2bn). As in the previous year, revenues were calculated based on a crude oil price of US$55 per barrel.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a table depicting Qatar's Budget Plan for 2011/2012
Source:Qatar Ministry of Finance
The budget for the coming fiscal year is the largest that the State of Qatar has ratified, with total revenues reaching QR162.5bn (US$44.6bn), representing a 27% increase on the previous budget. Expenditure has increased by 19% from QR117.9bn (US$32.4bn) to QR139.9bn (US$38.4bn). This comes against the backdrop of sluggish growth in global economies following the financial crisis. The increase in revenues and public spending, resulting is a surplus of QR22.5bn (US$6.2bn), and based on a US$55 oil price, is relatively conservative, given oil prices currently trades at over US$100 a barrel.
The State has allocated 41% of expenditures to public projects. These include the New Doha Port, the completion of New Doha International Airport and a national rail network. QR19.3bn (US$5.3bn) has been allocated to the education sector, up QR2.1bn (US$0.6bn) on the previous year. QR8.8bn (US$2.4bn) has been earmarked for the health sector, up 3.6% on last year's figure. QR5.2bn (US$1.4bn) has been set aside for housing, an increase of QR2.6bn (US$0.7bn) on last year.
Qatar Development Strategy
The five year National Development Strategy for 2011-2016 predicts gross domestic investment will reach QR820bn (US$225bn) with half of the revenues derived from the non-hydrocarbon sector. Investment by the government is estimated at QR347bn (US$95.3bn), hydrocarbon sector investment is expected to reach QR85bn (US$23.4bn) with the remaining QR389bn (US$107bn) being spent on the non-hydrocarbon sector.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a graph depicting Qatar's five year national development strategy
Source: National Development Strategy 2011-2016 estimates.
The strategy highlights the importance of private investment outside the hydrocarbon sector in driving growth over the period. The baseline scenario assumes that non-hydrocarbon investment will mainly be driven by spending by large government linked Qatari companies, such as Barwa Real Estate, Qatar Diar, Qatar National Bank and Qatalum. With steady growth, the ratio of non-hydrocarbon private investment to total GDP could reach 15% by 2016; nearly double the ratio in 2009.
Qatari companies, excluding state owned Qatar Petroleum, plan to spend over QR130bn (US$35.7bn) over the next 6 years. This includes QR100bn (US$27.5bn) in residential and business construction projects run by Barwa Real Estate and Qatar Diar. Qatar Foundation plans to invest QR19bn (US$5.2bn) in health and education, especially in Sidra Hospital and the Education City. Qatar Petroleum will continue to invest heavily over the medium term and has planned expenditure of QR88bn (US$24.2bn). After a number of LNG projects were completed in 2010 the focus will shift to the petrochemical sector with QR7bn (US$1.9bn) being allocated to Industries Qatar to expand capacity in areas such as low-density polyethylene, ammonia and urea production. The government also continues to invest in infrastructure with QR237bn (US$65bn) of spending planned.
Qatar's overall real GDP growth rate is expected to average 6.9% between 2011 and 2016. Non-hydrocarbon growth is likely to be driver of the economy, with this sector of the economy showing GDP growth averaging 9.1% during 2011-2016. The catalyst for growth beyond 2016 is likely to be activity generated by preparations for the FIFA World Cup in 2022.
The make up of the non-hydrocarbon GDP growth between 2011 and 2016 can be seen below.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a graph depicting make up of the non-hydrocarbon GDP growth between 2011 and 2016
Source: National Development Strategy 2011-2016 estimates.
Macro Update
Stock Market Performance
After the initial euphoria which surrounded Qatar's winning bid to host the 2022 FIFA World Cup, market sentiment deteriorated in the wake of the political upheaval in the Middle East & North Africa (MENA). Since the start of unrest in Tunisia, regional markets have come under severe pressure. Having at one stage being up 7.0% since the start of 2011 the Qatar market was down 13.6% at the peak of regional political unrest. The Qatar market recovered to close down 2.6% for the quarter.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a table depicting regional stock market performances in the MENA region.
Source: Qatar Insurance Company, Bloomberg
Although investors shied away from GCC markets in the first quarter due to the perception of heightened geopolitical risks, the Investment Adviser believes that these developments will over time benefit the Gulf economies. Higher oil and petrochemical prices are reinforcing the financial positions of regional governments and companies.
The Investment Adviser anticipates that the forthcoming Q1 2011 results will have a positive effect on the market, particularly as Qatar continues to demonstrate robust economic growth.
Valuations
The Investment Adviser believes, especially after the recent sell off, that the Qatari stock market continues to be undervalued and provides attractive opportunities in the short, medium and long term. This view is supported by a combination of relatively low P/E ratios, high dividend yields and attractive EPS growth prospects, compared to others in the MENA region as can be seen below.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a table depicting P/E ratios, dividend yields and EPS growth prospects in the MENA region .
Source: Deutsche Bank
The Investment Adviser expects strong EPS growth to continue across the GCC region as companies return to profitability in 2010 after the financial crisis in 2008 and 2009.
Corporate profitability & activity
During the year the number of companies listed on the QE was reduced from 44 to 43 due to a combination of listings and acquisitions. Qatar Shipping Company and Qatar Real Estate were delisted during the second quarter of 2010 after being acquired by Qatar National Navigation and Barwa Real Estate respectively. The Company benefited from these activities as it held positions in both of the acquirers. Mazaya Qatar Real Estate Development was the only new company, which listed during Q3 2010 with a market capitalization of QR1.0bn (US$0.3bn)
The 43 companies listed on the Qatar Exchange posted a net profit of QR29.9bn (US$8.2bn) for 2010, a 9% decline compared to 2009 net profits of QR32.9bn (US$9.0bn). 32 companies recorded higher earnings than the previous year with the remaining 11 firms showing flat or negative earnings growth in 2010.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a table depicting net profits by sector.
Source: Qatar Exchange
The large drop in net profits in the service sector was mainly due to Ezdan Real Estate Company accounting, in 2009, for a QR8.3bn (US$2.3bn) one-off valuation gain on investment properties and projects under development that year. If this one-off gain is excluded the service sector net profit would have risen 26.0% in 2010, and the overall profit of the market would have increased 21.7%.
The banking sector recorded the largest rise in earnings in 2010 with an increase from QR9.8bn (US$2.7bn) to QR12.3bn (US$3.4bn), a 24.9% increase. This accounted for over 40% of the total net profit of the market during the period. The largest firm in the sector, Qatar National Bank, showed an earnings increase of 35.8% over the last financial year and represents just under half of the banking sector profits, at QR5.7bn (US$1.6bn). Al Khaliji Bank recorded the largest earnings increase in the sector with profits rising 155.1% from QR0.17m (US$0.05bn) to QR0.43m (US$0.12bn).
The insurance sector reported an increase of 7.0% in 2010 net profits, reaching QR889m (US$244m) compared to QR831m (US$228m) in the previous year. The sector accounted for 2.9% of the total profits of the market. The biggest insurance company in terms of market capitalisation, Qatar Insurance, recorded a profit in 2010 of QR590m (US$162m) with a growth of 9.0% compared with a net profit of QR541m (US$149m) in 2009. This company contributed around 66% of the sector's total net profit.
The industrial sector reported an increase of 13.2% in 2010 net profits, reaching QR7.0bn (US$1.9bn) compared to QR6.2bn (US$81.7bn) in 2009. The sector contributes just under a quarter of the cumulated net profits of the market. The largest constituent of the sector, Industries Qatar, registered a profit growth of 12.4% in 2010 to QR5.6bn (US$1.5bn), compared to a net profit of QR5.0bn (US$1.4bn) in 2009. The 2009 net profits of the company included an extraordinary gain of QR1.2bn (US$0.3bn), resulting from government support for changes in iron prices. Excluding this, earnings growth would have been 47%. The company contributed around 80% to the total sector's net profit.
As mentioned above the service sector was adversely affected by the results of Ezdan Real Estate. Excluding this one-off gain in 2009 profit from the sector increased 26.0%, rising from an adjusted QR7.7bn (US$2.1bn) in 2009 to QR9.7bn (US$2.7bn) at the end of 2010. The largest contributor was Qatar Telecom, which generated a small gain in net profit of 2.2%. The main drivers of growth in the sector came from Qatar Navigation, Barwa Real Estate and Qatar Electricity & Water which reported earnings growth of 129.4%, 83.6% and 23.1% respectively.
The Investment Adviser does not expect to see any major negative surprises in the Q1 2011 corporate results and expects that most companies will not only track their last quarter results, but also improve profitability in the second half of 2011.
Market Overview
NAV Performance
As of the 31 March 2011, the Company's fully diluted net asset value (NAV) was US$1.0397, an increase of 0.19% compared to the NAV at 30 December 2010 of US$1.0377. During the same period the QE Index fell 2.6 %, giving an outperformance of 2.8% over the period.
The total market value of the Company was US$243m at the end of Q1 2011.
The NAV performance of the Company compared to the share price is shown below. At 31 March 2011 the share price discount to NAV was -12.3%.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a graph depicting NAV performance.
Source: Bloomberg
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a graph depicting historic performance against the QE Index.
Country allocation
As at 31March 2011, the Company was invested in eighteen companies, of which sixteen are listed in Qatar, one in the UAE, and one in Oman. This compares to 31 December 2010 when the Company was invested in fifteen companies in Qatar, three in UAE and one in Oman.
Qatar and the UAE have not seen protests or demand for political and economic reform. Over 99% of the Company's investments are in these 2 countries and the Investment Adviser believes that the current dynamics of these countries are such that unrest is unlikely.
The Company has a small holding (0.8%) in Oman, where some demonstrations have occurred. The rulers of the country have been active in addressing the issues raised by the protesters and the Investment Adviser thinks it is unlikely that the situation will dramatically worsen.
Industry allocation
The Company's industry allocation is largely unchanged compared to the previous quarter. The Company's largest sector exposure continues to be to the banking sector. Exposure to the banking sector was 53.8% at the end of the first quarter compared to 54.8% at the fourth quarter 2010.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund..com for a pie chart depicting the industry allocation of the Company.
Source: Qatar Exchange
The Investment Adviser has a positive outlook on the Qatari banking sector and believes that banks remain a leveraged play on macroeconomic activity in a country at Qatar's stage of development. Assuming a continuation of strong growth in the Qatari economy, the outlook for Qatari banks remains positive. The Investment Adviser believes that the key drivers of earnings growth in the sector are increased volumes and improvements in asset-quality. The benign economic environment, IMF expectations of 26% nominal GDP growth for 2011, and the Qatari banks' own research supports the Investment Advisor's stance on the sector. To date, the banks have not had issues with non performing loans.
The recent political upheaval across the MENA region has resulted in downward pressure on the share price of Qatari banks. This strengthens the investment case as valuations become more attractive. The Investment Adviser believes that the banks are due for a re-rating since the World Cup spending plan addresses the risk in Qatari banks' growth strategy beyond 2012.
Over the next five years, the Investment Adviser expects government spending on large infrastructure projects to remain the main driver for loan growth. Although such spending currently benefits only the public sector, the Investment Adviser believes it should start to filter into the private sector from the latter part of this year.
The Company has a 20.6% weighting in the broadly defined service sector, which includes companies ranging from the telecommunications to utilities, and which continues to be a driver of economic growth. The Real Estate sector accounts for 6.7% of the portfolio, the main component being Barwa Real Estate which showed a strong performance in 2010, a trend the Investment Adviser believes will continue through 2011.
The Company industrial exposure is through its investment in Industries Qatar which accounts for 13.6% of the portfolio. The majority of the Company's exposure to the insurance sector is through Qatar Insurance Company, with a small investment in Doha Insurance. The two positions combined represent a 4.8% weighting in the portfolio.
Portfolio Breakdown Top Five Holdings
As at 31 March 2011, the top five investments of the Company constituted 58.8% of NAV, down from 61.9% at the end of December 2010. The main movements in the portfolio over the quarter have been the trimming of the Qatar National Bank and Commercial Bank of Qatar positions, while adding over 1% to the Rayan Bank position.
Embedded image removed - please refer to the Company's website www.epicure-qatarequity.com for a table depicting the top five holdings of the Company.
Source: Qatar Insurance Company
Qatar Investment Fund plc
NAV Update
NAV at launch US$ 0.96
NAV as at 31 March 2011 US$ 1.04
Inception Date 31 July 2007
The NAV is estimated net of fees and expenses every week and announced through the regulatory news service of the London Stock Exchange.
As at 31 March 2011
Market Price -Shares US$0.91
Market Price -Warrants US$0.11
Key Features
Domicile Isle of Man
Shares in Issue 233,399,307 (excluding 121,855 ordinary shares held in Treasury)
Warrants Issued 34,271,000
Maturity Continuation vote at 2012 Annual General Meeting
Year End 30 June
Management Fee 1.25% of NAV
Performance Fee
15% of any outperformance relative to the QE Index, capped at 1.5% of NAV
Investment Manager Epicure Managers Qatar Limited
Investment Adviser Qatar Insurance Company S.A.Q
Administrator Galileo Fund Services Limited
Custodian Anglo Irish Bank Corporation, International PLC
Nominated Adviser and Joint Broker Panmure Gordon (UK) Limited
Joint Broker Oriel Securities Limited
Auditor & Tax Adviser KPMG I.O.M.
Legal Adviser Stephenson Harwood
Ordinary Shares
ISIN IM00B1Z40704
SEDOL B1Z4070
Bloomberg ticker QIF
Valoren 3268997
Warrants
ISIN IM00B1Z40G96
SEDOL B1Z40G9
Bloomberg ticker QIFW
Valoren 3271492
Exchange Rate US$1.00=QR3.64
Webpage: www.qatarinvestmentfund.com
Contacts
Qatar Investment Fund plc
Leonard O'Brien
T: +41 (22) 908 1190
Nominated Adviser & Joint Broker
Panmure Gordon (UK) Limited
Moorgate Hall
London, EC2M 6XB
T: +44(0) 207 459 3600
Joint Broker
Oriel Securities Limited
125 Wood Street
London EC2V 7AN
Tel: +44 207 710 7600
Administrator & Registrar
Galileo Fund Services Limited
Millenium House
46 Athol Street
Douglas
Isle of Man, IM1 1JB
T: +44(0)1624 692600
F: +44 (0)1624 692 601
E: enquiries@galileofs.co.im
Custodian
Anglo Irish Bank Corporation (International) PLC
Jubilee Buildings
Victoria Street
Douglas
Isle of Man, IM1 2SH
PR/ Media Contact
William Clutterbuck
The Maitland Consultancy Limited
Orion House
5 Upper St Martin's Lane
London
WC2H 9EA
T: +44 20 7379 5151
E: wclutterbuck@maitland.co.uk
W: www.maitland.co.uk
Disclaimer
The contents of this document have been prepared by Qatar Insurance Company S.A.Q as Investment Adviser to the Qatar Investment Fund PLC ("the Company"). This document has been prepared solely for information purposes and for the use of the recipient. It does not constitute an offer or an invitation by or on behalf of the Investment Adviser or the Company to any person to buy or sell any security or investment product. Any reference to past performance is not necessarily a guide to the future. The information and analyses contained in this publication have been compiled, or arrived at from sources believed to be reliable, but the Investment Adviser does not make any representation as to their accuracy or completeness, and does not accept liability for any loss arising from their use. The investments discussed in this report may not be suitable for all investors. and are provided for information purposes only. The ordinary shares and warrants in the Company have not been, and will not be, registered under the United States Securities Act of 1933 as amended (the "Securities Act") or qualified for sale under the laws of any state of the United States or under the applicable laws of any of Canada, Australia, Republic of South Africa or Japan and, subject to certain exceptions, may not be offered or sold in the United States or to, or for the account or benefit of, US persons (as such term is defined in Regulation S under the Securities Act) or to any national, resident or citizen of Canada, Australia, Republic of South Africa or Japan. None of the Company, the Manager or any of their respective members, directors, officers or employees, nor any other person, accepts any liability whatsoever for any loss, however arising, from any use of such information or opinions.
Qatar Investment Fund plc
Registered Office
Millenium House
46 Athol Street
Douglas
Isle of Man, IM1 1JB
This information is provided by RNS
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