Qatar Investment Fund plc - Report Q2 2011
Investment objective and strategy
Qatar Investment Fund plc ("the Company" or "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" - 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.
Qatar has enjoyed a solid start to 2011, benefiting from higher energy prices and avoiding the political turbulence which has occurred in many countries across the MENA region. The key drivers of economic growth are still in place with US$240bn (over 180% of GDP) of infrastructure projects in the pipeline. The new five-year development plan published on 28 March 2011, outlines a total expenditure plan of US$225bn, with central government investment estimated at US$95bn, hydrocarbon investment expected at US$23bn and the remaining US$107bn to be invested in the non-hydrocarbon sector.
These spending plans are over and above the investment that is likely to be required for the FIFA World Cup in 2022. Even after taking into account the considerable infrastructure spending the Investment Adviser expects higher energy prices to keep both the budget and the current account in double-digit surpluses.
Inflation in Qatar remains well under control at only +1.8% y-o-y in May, despite the implementation of relatively accommodating fiscal and monetary policies. This trend is underpinned by lower housing costs, although this is primarily caused by declining rents, rather than a fall in capital values. However, Ramadan is likely to create some upward pressure on the general level of prices during the month of August.
MSCI extended the review period
On the 22nd June 2011 MSCI announced the extension of the review period for the potential reclassification of the U.A.E. and Qatar MSCI indices from frontier to emerging market status until December 2011. This will give MSCI time to assess the recent market developments such as the addition of the delivery versus payment (DVP) model. An upgrade to emerging market status would most likely lead to increased liquidity and interest from investors around the world. MSCI noted that a potential reclassification for Qatar and the U.A.E. to emerging market status would be implemented in the MSCI Indices at the earliest as part of the November 2012 semi-annual review.
The review period extension will also provide more time for regulators and stock exchanges to address the remaining concerns raised by international institutional investors. MSCI stated that international investors continue to be concerned by the effect of stringent foreign ownership limits that restrict the availability of shares to foreign investors (25% for Qatar and 49% for U.A.E.). This issue is more prevalent in the Qatari market as large companies, such as Industries Qatar, have almost reached their foreign ownership limits, making foreign investment extremely difficult. According to MSCI, under the current conditions, the MSCI Qatar Index would not qualify for emerging market status.
Although the Qatar Exchange announced in May 2011 that foreign ownership limits would remain at 25% for the coming year, officials recently announced that they are continuing discussions with individual companies and relevant government ministers about raising foreign ownership limits across the board. The Investment Adviser believes that if Qatar decides to increase foreign ownership limits it will further enhance its chances of being reclassified from frontier market to emerging market status.
Qatar: Budget surplus for first half to be QAR50bn
The budget surplus for the first half of the current fiscal year (2011-12) is estimated to be QAR50bn (US$13.7bn) due to the recent rise in oil prices. According to local newspaper, Al Sharq, budget estimates were based on oil prices of $55 per barrel, versus an average of US$100 per barrel over the last quarter. This should help boost economic growth above the expected level of 20% for 2011.
Over 25% of global LNG originates from Qatar
According to a report by QNB Capital in 2010, Qatar continued to be the largest liquefied natural gas (LNG) exporter in the world accounting for over a quarter of global LNG exports. Since Qatar became the world's leading LNG exporter in 2006, its market share of global LNG trade has increased from 14.7% to 25.5% at the end of 2010. Qatar is expected to continue to be the leading exporter in 2011 as full production capacity reaches 77m tons by the end of the year.
Demand for LNG exports has risen sharply recently due to the troubles in Japan's nuclear industry and increased appetite for LNG in other Asian markets. This has led to an increase in price and volume of LNG exported, with Asian spot LNG prices averaging $11.60 per million BTU in May, up nearly 30% on prices seen at the start of the year. The latest data based on official import statistics calculated by IHS CERA, part of the energy consultancy HIS, shows prices are still below the highs of $17 per million BTUs seen in mid 2008 before the surge in North American shale gas production increased supply.
In the aftermath of the earthquake and tsunami in Japan and the subsequent shutdown of a quarter of their nuclear production, the country's power companies have agreed to buy an extra 4 million tons of LNG from Qatar over the next year. The strong economic growth in China has led to surging demand of LNG as the country aims to switch away from higher polluting fuels such as oil and coal which can only benefit Qatari exports. Mainly due to greater Asian demand, Qatar's LNG exports are expected to rise to near their full capacity this year, over 30% above the 56m tons exported in 2010.
In 2010, the UK became the largest importer of Qatari LNG, at 10.2m tons, overtaking Japan which imported 7.5m tons in the same period. India and South Korea were also large importers during 2010, importing 7.7m and 7.5m tons respectively. The large inflow in gas to the UK is the result of the joint venture between Qatar Petroleum and ExxonMobil (referred to as Qatargas 2) signed in 2002 which aims to supply up to 14 million tons of LNG annually to the UK. Further, Qatargas have signed a heads of agreement with Enarsa, the Argentinean oil company to supply as much as 5 million tons a year of LNG fuel from 2014.
Shell recently announced the company's Gas-to-Liquids (GTL) plant in Qatar is expected to be fully operational by the middle of 2012. The development of GTL allows gas to be converted, at source, into high value fuels such as pure diesel which can be shipped in conventional tankers, unlike LNG which needs to be maintained at minus 160c. GTL is an innovative technology that will help Qatar monetise its gas reserves in a way that maximises value.
Stock market performance
After the initial political upheaval in the region during the first quarter of the year, protests have subsided in most of the region and at the time of writing no further governments have fallen. Investors continued to shy away from stocks throughout the GCC due to the geopolitical risks in the MENA region with uncertainty prompting some investor selling and the withdrawal of some foreign capital.
During the second quarter the majority of GCC markets showed some negative performance. Abu Dhabi and Saudi Arabian markets were the best performers, up 3.7% and 0.9% respectively. All the other GCC markets failed to rebound from the recent sell offs. During the period Dubai returned -2.5% and Qatar was down 1.1%.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting GCC quarterly equity market performance.
The Omani market continued to slip during the second quarter and has fallen 12% over the first half of the year, becoming the worst performing market in the region. Last quarter's best performing market, Bahrain, was the worst performing market in the GCC during the second quarter, down 7.4% as protests continue in the country.
The Investment Adviser believes that a re-rating of the GCC markets is overdue, as they has been struggling since 2008 to make a meaningful recovery while both developed and emerging markets have shown strong performance.
Despite considerable improvement in first quarter profits in the GCC, investors largely ignored favourable earnings reports due to the perception of increased regional risk. Robust second quarter earnings could be a catalyst for the re-rating of what the Investment Adviser believes are fundamentally attractive stocks.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting GCC valuations
Qatari companies are expected to maintain earnings momentum during the second quarter of 2011 after reporting a strong 12.6% y-o-y growth for the first quarter. The Investment Adviser believes the Qatari market continues to offer attractive valuations, relative to its earnings growth potential and profitability. Within Qatar, the Investment Adviser is optimistic about companies in the banking, industrial, energy and utilities sectors.
Qatar's growth outlook over the medium-term will largely be fuelled by large capital expenditure programs by the government. The knock-on effect of government spending, coupled with population growth, will be a boost in non-hydrocarbon GDP growth with the construction, banking, utilities, transport and manufacturing sectors likely to benefit the most.
The Investment Adviser believes that the Qatari stock market is undervalued and provides highly attractive opportunities, especially after the recent sell off, in both the short term and medium to long term. The Investment Adviser expects to see GDP growth resume across the GCC region, with the pace of expansion building momentum as the year goes on.
The profitability of companies listed on the QE witnessed reasonable growth during the first quarter of 2011. The results were supported by measures taken by the government to accelerate development and achieve the goals that have been identified to counter the effects of the global financial crisis. These goals include building a strong economic base and creating a climate of economic stimulus within the country.
The 42 listed companies on QE posted a net profit of QAR9bn (US$2.5bn) for Q1 11, representing a 12.6% increase over the QAR8.0bn (US$2.2bn) profits seen in Q1 10. During Q1 11, 30 companies recorded higher earnings than Q1 10, with the remaining companies showing flat or negative earnings growth for the first quarter. Vodafone Qatar was excluded from this comparison since the company's fiscal year ends on March 31 of each year.
The main drivers of growth in the overall profitability of Qatari stocks during the period were the robust earnings seen in the financial sector and the strong results announced by Industries Qatar.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the financial performance of market sectors in Q1 11
Banking & financial sector
The banking sector recorded a rise of 24.0% in Q1 11 net profits, reaching QAR3.6bn (US$1bn) compared to QAR2.9bn (US$0.8bn) in Q1 10. This accounted for 40% of the total net profit of the market during the period and was mainly on the back of strong core operating earnings.
The largest firm in the sector, Qatar National Bank, showed an earnings increase of 34.9% over Q1 10 and represents just under half of the banking sector profits, at QR1.7bn (US$0.5bn). Al Khaliji Bank recorded the largest earnings increase in the sector with profits rising 105.4% from QR0.06m (US$0.02bn) to QR0.12m (US$0.03bn).
The industrial sector recorded the largest increase in earnings in Q1 11 with an increase from QAR1.5bn (US$0.4bn) to QAR2.5bn (US$0.7bn), a 60.1% increase. The sector contributes just over a quarter of the aggregated net profits of the market. Several factors supported the sector, including higher oil prices and increased petrochemical prices.
Industries Qatar (IQ), the Gulf's second-largest chemical producer by market value, reported a 72.3% jump in Q1 11 net profits compared to the same period last year, representing its highest quarterly net profits since Q3 08. IQ reported a quarterly net profit of QAR2.1bn (US$0.6bn), the highest profit among all QE listed companies, compared with QAR1.2bn (US$0.3bn) a year earlier. The company accounts for 85% of the sector's net profit and 23% of the total market's net profit. The growth was mainly due the increase in revenues which was QAR4bn (US$1.1bn) in Q1 11 compared with QAR2.7bn (US$0.7bn) in Q1 10.
The insurance sector reported a decrease of 12.4% in net profits for Q1 11 compared to Q1 10, declining to QAR323m (US$89m) from QAR368m (US$101m) in same period last year. The sector accounted for 3.6% of the total profits of the market. The biggest insurance company in terms of market capitalisation, Qatar Insurance, recorded a profit in the first quarter of QAR204m (US$56m), a 5.7% decline compared with a net profit of QAR217m (US$60m) in Q1 10. This company contributed around 63% of the sector's total net profit.
The services sector reported a decrease in net profits from QAR3.2bn (US$0.9bn) in Q1 10 to QAR2.7bn (US$0.7bn) in Q1 11, a drop of 17.2%. Of the 21 listed companies in the service sector, excluding Vodafone Qatar, 14 companies reported earnings growth in Q1 11, while 7 companies reported contractions in earnings.
The largest contributor was Barwa Real Estate, which generated a q-o-q gain in net profit of 161.7%, an increase from QAR210m (US$58m) in Q1 10 to QAR548m (US$151m) in Q1 11. This increase of QAR338m (US$93m) was more than offset by the large fall in earnings reported by Qatar Navigation & Qatar Telecom which saw net profits fall by QAR509m (US$140m) and QAR451m (US$124m) respectively on a q-o-q basis.
The Investment Adviser does not expect to see any major negative surprises in the Q2 11 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.
As at 30th June 2011, the Company's fully diluted net asset value (NAV) was US$1.0320, a decrease of 0.74% compared to the NAV at 31st March 2011 of US$1.0397. During the same period the QE Index fell 1.12%, giving an outperformance of 0.38% over the period.
During the first six months of the year the Company's NAV was down 0.55% compared to the negative 3.69% return of the QE Index over the same period.
The total market value of the Company assets was US$240m at the end of Q2 2011.
The NAV performance of the Company compared to the share price is shown below. At 30th June 2011 the share price discount to NAV was -15.9%.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the NAV performance
The historic performance of NAV against the QE Index is as follows:
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the historic performance
As at 30th June 2011, the Company was invested in sixteen companies, of which fifteen are listed in Qatar and one in Oman. This compares to 31st March 2011 when the Company was invested in sixteen companies in Qatar, one in U.A.E. and one in Oman. Around 99% of the Company's investments are in Qatar, with non Qatar investments constituting 0.7% of the portfolio and the remainder in cash.
The Company's industry allocation is largely unchanged compared to the previous quarter apart from an increase in the banking sector which continues to be the largest sector exposure. Exposure to the banking sector was 56.2% at the end of the second quarter compared to 53.8% at the end of the first quarter of 2011.
The increase in allocation to the banking sector resulted from the participation in the recently concluded rights issue of Qatar National Bank. The company raised QAR12.7bn (US$3.5bn) through the issuance of 127 million shares at QAR100 per share, representing a 25% rights issue. The rights issue was priced at a 33% discount to the last cum-rights price of QAR149.5 per share.
The Investment Adviser maintains a positive outlook on the Qatari banking sector and believes that banks remain a leveraged play on the macroeconomic outlook of the country. Based on a continuation of strong growth in the Qatari economy, the Investment Adviser believes the outlook for Qatari banks remains positive. The investment case for Qatari banks is further strengthened by a recovery in earnings due to a combination of healthy volume growth and an improvement in asset quality.
The recent political upheaval across the MENA region has resulted in continued downward pressure on the share price of Qatari banks. This negative trend was reinforced by recent changes in retail lending regulations by Qatar Central Bank (QCB), which capped lending to expats at QAR400,000 (c.US$110,000), limited borrowing for nationals to QAR2m (US$0.55m) and most importantly capping personal loan rates at 6.5% compared to current rates of up to 9%.
Total assets in the Qatari banking sector have witnessed a compound annual growth rate (CAGR) of 30% between March 2007 and March 2011, reaching QAR577.2bn (US$158.6bn). As at March 2011 the year-on-year (y-o-y) growth of the banks' total assets in the country was 18.4%, slightly below the 21.0% growth seen in the previous year from March 2009 to March 2010. Total assets of conventional banks in the country grew by 17.3% y-o-y to reach QR410.6bn (US$112.8bn) as at March 2011, compared to March 2010, while Islamic banks grew assets by 35.8% to reach QAR126.8bn (US$34.8bn) in the same period. This should be compared against a backdrop of international banks decreasing their balance sheets as a result of the current economic climate.
The services sector, which is broadly defined and includes companies in telecommunications and utilities, accounts for 19.6% of the portfolio holdings. The Company's exposure to the real estate sector stood at 6.5% at the end of the second quarter of 2011 compared to 6.7% at the end of first quarter 2011.
The industries and insurance sectors accounted for a further 13.6% and 3.6% respectively. Exposure to these sectors is through investments in Industries Qatar and Qatar Insurance Company respectively.
Portfolio breakdown - top five holdings
As at 30th June 2011, the top five investments of the Company constituted 62.3% of NAV, up from 58.8% at the end of March 2011. The main movements in the portfolio over the quarter have been the increase of the Qatar National Bank and Qatar Islamic Bank positions, while reducing exposure to Doha Bank.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the top five holdings