27 October 2011
Qatar Investment Fund PLC ("QIF" or the "Company")
Interim Management Statement and Q3 Investment Report
Qatar Investment Fund PLC (LSE: QIF), today issues the following Interim Management Statement in accordance with the UK Listing Authority's Disclosure Rules and Transparency Rules, for the period 1 July 2011 to 30 September 2011.
The Company has also issued its Q3 Investment Report for the period 1 July 2011 to 30 September 2011, 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.
Overview of Key Developments in Q3 2011
· By the end of Q3 2011 NAV had increased by 0.21% on a year to date basis versus a -3.3% return for the QE Index.
· Qatar was the best performing stock market in the GCC region having outperformed the Bloomberg GCC200 index by 7.1% since the beginning of the year. It also outperformed the MSCI World index by 8.2% during the period.
· Qatari companies are expected to maintain earnings momentum during H2 2011 after reporting a strong 17% y-o-y growth for H1 2011.
· According to the Qatar Statistical Authority (QSA) Qatar's H1 nominal GDP grew by an estimated 34.8%, while the full year 2011 IMF forecast for real GDP growth was revised to 18.7%.
· Qatar continues to increase its gas exports into new markets in Latin America, Europe and Asia. This year QatarGas delivered its first LNG cargo to PetroChina, sent its first shipment to Greece and secured a long term contract with Argentina's state energy company, ENARSA.
· Official estimates of Liquefied Petroleum Gas (LPG) exports suggest that there will be an increase of c.30.0% in export volumes during 2011 from 8.5 million tonnes in 2010
Performance and Portfolio Structure
As of the 29th of September 2011 the QIF NAV was US$1.040, an increase of 0.77% over the quarter, and a 0.37% outperformance relative to the QE Index. For the first three quarters of the year the NAV rose by 0.21%, significantly ahead of the QE Index which returned a negative 3.31% for the period.
The chart below shows the NAV compared to the share price. At the end of Q3 2011 the share price was trading at a -16.3% discount to NAV.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a chart depicting NAV and share price performance.
Historic Performance against the QE Index:
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting historic performance against the QE index.
Historic Performance against Local and International Indices:
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting historic performance against local and international indices.
Top 5 Holdings
As at 29th September 2011, the top five investments of the Company constituted 60.9% of NAV, down from 62.3% at the end of June 2011.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the top 5 holdings.
The Investment Adviser believes that Qatar remains the most attractive market in the GCC due to a combination of exceptional growth prospects and political stability. The Investment Adviser believes that the valuation, at a forward PER of 10.3x 2012, and a 2011 forecasted dividend yield of 4.4%, remains undemanding.
As of the end of Q3 2011, QIF was invested in 17 companies, of which 16 were listed in Doha and 1 in Muscat.
The country allocation as at 29th September 2011 is shown below:
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a chart depicting the country allocation.
95.8% of the Company's investments are in Qatar, with non-Qatari investments constituting 0.6% of the portfolio and the balance held in cash.
The sector allocation has only evolved slightly this quarter. Exposure to the Banks sector was 57.1% at the end of Q3 2011 compared to 56.2% at the end of Q2 2011, while the allocation to the Services and Industrial sectors was trimmed by 3.9% in favour of cash, which rose from 0.5% to 3.6% over the quarter in anticipation of the Company's dividend payment of 2.7cents per share made in Q4 2011.
The sector allocation as of 29th September 2011 is shown below:
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a chart depicting the sector allocation.
The increased weighting of the Banks sector was mainly due to the positive relative performance of the underlying stocks. The Investment Adviser remains positive on the outlook of the Banks sector and believes that banks continue to represent an attractive leveraged play on the macroeconomic outlook of Qatar. The investment case for Qatari banks is further strengthened by the expected recovery in earnings due to a combination of healthy volume growth and an improvement in asset quality.
The Services sector, which is defined broadly and includes Telecoms and Utilities, accounts for 18.1% of the portfolio. Exposure to the Real Estate sector was 6.4% at the end of Q3 2011. The Industries and Insurance sectors accounted for a further 11.3% and 3.5% respectively, mainly due to holdings in Industries Qatar and Qatar Insurance Company.
Regional Equity Market Overview
During the last quarter global equity markets have undergone a correction as a result of heightened concerns relating to the outlook for economic growth in the developed world and policy responses aimed at reducing debt in both the US and the Eurozone. Although developing economies, with their robust government, corporate and household balance sheets, are increasingly driven by the domestic consumer, the GCC markets have not been immune to the recent rise in risk aversion. However, the low correlation of GCC markets with developed markets has been reflected in their recent relative outperformance.
The resilience of GCC markets has largely been driven by the region's macroeconomic stability, healthy banking sectors and large government reserves which were swiftly mobilised in response to the uncertainty.
Although the short term absolute performance of regional markets has been negative, the Investment Adviser believes they continue to look well-placed to outperform developed markets, underlying their attraction as a relative safe haven during times of global market volatility.
During the third quarter the Qatar Exchange, up 0.4%, was the only positive performer in the GCC region. The performance of the other GCC markets is shown below:
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the GCC quarterly equity market performance.
The Investment Adviser believes that Qatar remains the most attractive market in the GCC region. Moreover, the growth prospects of the GCC economies as a whole have generally improved during the course of the year as a result of substantial new spending commitments on the part of the regional governments.
Despite undemanding valuations and a considerable improvement in corporate profitability during 2011 GCC equity markets have been negatively impacted by the perceived increase in regional and in particular political risk.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the GCC valuations.
Qatari companies are expected to maintain earnings momentum during Q4 2011 after reporting a strong 17% y-o-y growth for H1 2011. The Qatari market continues to offer attractive valuations, relative to its earnings growth potential and profitability. Within Qatar, the Investment Adviser remains optimistic about the banking, industrial, energy and utilities sectors.
H1 Corporate Profitability
The majority of the listed Qatari companies were profitable during H1 2011, reporting a combined net profit of QAR17.9bn (US$4.9bn) for the period. This represents an improvement of 16.9% over H1 2010 when reported net profits were QAR15.3bn (US$4.2bn). For Q2 2011 the combined reported net profits were QAR8.9bn (US$2.4bn), an increase of 21.6% compared to the QAR7.3bn (US$2.0bn) reported during the same period in 2010.
During H1 2011, 31 companies recorded higher earnings, against 9 companies which reported a decline in profits, and one company incurred a loss versus H1 2010. The Industrial sector posted the strongest gain in earnings, up 43.0%, with the Insurance and Banking & Financial sector also posting gains during the first half of the year. The services sector reported a decline of 6.6% compared to the same period last year.
Embedded image removed - please refer to the Company's website www.qatarinvestmentfund.com for a table depicting the Qatar corporate profitability.
Banking & Financial Sector
The Qatari banks improved their financial performance during H1 2011 due to robust core earnings which reflect the strong growth in the country's economy. The eight banks reported a growth of 24.8%, reaching QAR7.4bn (US$2.0bn) in H1 2011 compared to QAR5.9bn (US$1.6bn) in H1 2010. The sector accounted for 41.2% of the total profit of the market during the first half of the year.
All the Qatari banks recorded growth in net profit for H1 2011 compared to H1 2010, despite the Central Bank of Qatar's recent restrictions on personal borrowings: lending to expatriates was capped at QAR0.40m (US$0.11m) and borrowing for nationals were limited to QAR2.0m (US$0.55m). The largest bank in the sector, Qatar National Bank, reported an earnings increase of 30.1% over the first half of 2010 which represents just under half of the banking sector profits, at QAR3.5bn (US$1.0bn). Al Khaliji Bank posted the largest earnings increase in the sector with profits rising 122.4% from QAR0.11bn (US$0.03bn) to QAR0.25bn (US$0.07bn) in the same period.
The industrial sector recorded the largest increase in earnings in H1 2011 with an increase from QAR3.4bn (US$0.9bn) to QAR4.9bn (US$1.4bn), representing a 43.0% gain. The sector accounted for 27.4% of the total profit of the market during the first half of the year. The main factors driving this healthy growth included higher oil prices, increased prices of petrochemical products in general, improved capacity utilisation and an increase in production based on the start of new commercial operations. The region's second-largest chemical producer by market value, Industries Qatar, contributed about 85% of the sector's net profit and profitability registered a y-o-y growth of 58.4% at QAR4.2bn (US$1.2bn) compared to QAR2.6bn (US$0.7bn) in H1 2010.
The profitability of the insurance sector slowed in H1 2011, with the sector's cumulative net profit increasing by only 1.7% compared to H1 2010. The five insurance companies reported a cumulative net profit of QAR0.55bn (US$0.15bn) in H1 2011 against QAR0.54bn (US$0.15bn) in H1 2010, with 3 companies posting gains and 2 generating losses for the period. The largest company in the sector in terms of market capitalisation, Qatar Insurance Company, reported a 1.8% growth in net profits to QAR0.34bn (US$0.09bn) for the period and contributed almost 63% of the sector's net profit.
The services sector reported a decline in net profits of 6.6% in H1 2011, down from QAR5.3bn (US$1.46bn) in H1 2010 to the current level of QAR5.1bn (US$1.40bn). Of the 21 services companies, 16 companies reported gains, while 5 companies recorded lower earnings over the period.
The largest absolute contributor was Barwa Real Estate, which generated a gain in net profits of 50.1%, an increase from QAR498m (US$137m) in H1 2010 to QAR753m (US$207m) in Q1 2011. This increase was more than offset by the large fall in earnings reported by Qatar Navigation & Qatar Telecom which saw net profits fall by 56.1% and 19.5% respectively over the first half of the year.
The GCC economies remain well positioned by global standards to deal with any renewed economic instability. The recovery of oil prices from their 2008 lows has restored fiscal balances and replenished reserves, with the IMF expecting the aggregate budget surplus of the GCC countries to increase from US$136bn in 2010 to US$304bn in 2011.
According to the Qatar Statistics Authority, Qatar's economy grew 41.8% at current prices in the second quarter of this year compared to last year on the back of increased production of gas and gas-related products as well as high energy prices. Estimated nominal gross domestic product increased substantially to QAR153.7bn (US$42.2 billion) from QAR108.4bn (US$29.9bn) in the second quarter of last year.
Qatar continues to increase its gas exports into new markets in Latin America, Europe and Asia. New shipments from QatarGas this year include delivery of its first LNG cargo to PetroChina and its first shipment to Greece. These contracts continue to reduce current spare capacity which has been falling since early 2011 as global demand for liquefied natural gas (LNG) has increased. Qatar has also secured a long-term agreement to supply the Argentine state company, Energia Argentina Sociedad Anonima (ENARSA), with the delivery of 5 million tonnes per year of LNG for 20 years starting in 2014. Further, official estimates of Liquefied Petroleum Gas (LPG) exports suggest that there will be an increase of c. 30.0% in export volumes during 2011 from 8.5 million tonnes in 2010.
Total credit extended by Qatari banks continued to accelerate, rising to 18.7% y-o-y in August 2011 from 13.9% y-o-y in July 2011. The increase in total credit was largely driven by the private sector, in line with QCB rate cuts which brought the benchmark lending rate down by a cumulative 100 bps to 4.5%. The latest data from the Qatar Central Bank shows that private sector credit jumped by 18.8% y-o-y in August 2011, the highest level in 26 months, after a 17.0% y-o-y increase during the previous month. Growth in bank lending to the public sector has also strengthened to 18.4% y-o-y in August 2011, up from 8.4% y-o-y in July 2011, reflecting higher working capital and project financing requirements by quasi-government entities. Going forward, the Investment Adviser believes that lower rates will continue to encourage private sector credit growth, especially in the context of recently higher inflation (2.1% y-o-y in August 2011), implying lower lending rates in real terms.
No significant negative surprises are expected during the Q3 2011 reporting season, and most companies should improve on previous quarterly figures. Further profit growth is also expected through Q4 2011. The Investment Adviser believes that global economic and regional political concerns have resulted in investors ignoring strong local economic fundamentals, and that the Qatari stock market remains undervalued, providing highly attractive investment opportunities in the short term and medium term.
For further information, please contact:
Ian Dungate/Suzanne Jones +44 (0) 1624 692600
Galileo Fund Services Limited
Andrew Potts/Callum Stewart +44 (0) 20 7459 3600
Joe Winkley/Neil Winward +44 (0) 20 7710 7800
William Clutterbuck/Sam Turvey +44 (0) 20 7379 5151