26 April 2012
Qatar Investment Fund PLC ("QIF" or the "Company")
Interim Management Statement and Q1 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 January 2012 to 25 April 2012.
The Company has also issued its Q3 Investment Report for the period 1 January 2012 to 25 April 2012, 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 Q1 2012
· The NAV per share as of 29 March 2012 was US$1.081, an increase of 2.9% for the first quarter compared to a 0.1% rise in the QE Index.
· Q1 2012 saw some significant moves within equity markets generally, and GCC markets in particular, with a classic reversal during which recent laggards became the leaders. As a case in point the Dubai index rose 22% after 2 years of negative performance.
· The publication of full year 2011 figures during the first quarter showed an increase of 27% in the overall profitability of Qatar's listed corporate sector.
· The Washington based Institute for International Finance (IIF) forecasts real GDP growth of 8.2% in 2012, underpinned by the strength of the non-hydrocarbon sector.
· The Qatar Exchange (QE) launched two new Indices, including a total return index and an all-share index. The QE also amended the index calculation methodology to limit any single stock to a maximum of 15% of the index, and has also added new sector definitions to better represent the full spread of quoted industries.
· The Investment Adviser believes that Qatari companies will continue to deliver sustained growth in profitability, and that the combination of highly visible GDP growth, dynamic earnings outlook, and domestic stability make Qatar one of the most attractive investment destinations amongst emerging and frontier markets.
Performance and Portfolio Structure
On 29 March 2012 the QIF NAV reached US$1.08, an increase of 2.9% over the quarter. The chart below shows the NAV compared to the share price. At the end of Q1 2012 the QIF share price was trading at a -17.3% discount to NAV, this level having slightly increased towards the end of the quarter.
Embedded image removed - please refer to the quarterly report on 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 quarterly report on 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 quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting historic performance against local and international indices.
Top 10 Holdings
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the top 10 holdings.
As of 29 March 2012, the top five investments of the Company constituted 62.1% of NAV, down from 63.7% as at 29 December 2011. The top 10 holdings represent 88.3% of the Company's NAV. During the quarter Industries Qatar replaced Commercial Bank of Qatar as the second largest position in the portfolio due to the stock rising by 5.6% over the period and the fund increasing its position through selective buying.
Qatar continues to be the Investment Adviser's favouritemarket within the GCC due to a combination of relatively low political risk and high growth prospects. In addition the Investment Adviser believes that the Qatari market is trading at an attractive valuation of 10.3x based on 2012 estimates, relative to its earnings growth potential of 13% based on 2012 estimates.
The overall portfolio allocation by country as at 29th March 2012 is shown below:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the country allocation.
At the end of Q1 2012, 21 positions were held in Qatar (4 more than in Q4 2011) and one in Oman (no change from Q4 2011), while the cash position has increased from 1.0% to 1.9%.
The overall portfolio allocation by sector as at 29 March 2012 is shown below:
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the sector allocation.
Banks continue to represent the largest single sector exposure within the portfolio, with a weighting of 57.7% of NAV at the end of March 2012, down from 59.1% at the end of December 2011. The weighting of the banks is around 0.9% above the QE Index with the largest holding, QNB, around 0.5% underweight. This is offset by overweight positions of 3.5% in both Commercial Bank and Doha Bank. The Investment Adviser maintains a positive outlook on the Qatari banking sector and remains overweight compared to the QE Index. Qatari banks reported a 22.2% growth in 2011 net profits. The Investment Adviser expects this positive trend to continue into 2012 and beyond; this conviction is underpinned by Qatar's strong macro environment and high public spending levels that the Investment Adviser believes should continue to sustain growth and bank lending activity over the coming years.
The services sector, which is very broadly defined, and includes telecommunications, utilities and real-estate, accounted for 23.8% of the Company's portfolio at the end of Q1 2012 compared to 24.4% at the end of Q4 2011. The underweight position of 3.4% compared to the QE Index is due to large underweight positions in Nakilat, Qatar Telecom and Vodafone Qatar.
Exposure to the Industrial sector stood at 13.0% of NAV at the end of first quarter 2012 compared to 12.1% at the end of Q4 2011. The industrial exposure is in line with the QE Index with the 1.3% overweight position in Industries Qatar (IQ), offset by no holding in Al-Khalij Holding and an underweight position in United Development. The Company's second largest exposure, IQ, constitutes most of the sector exposure as the Investment Adviser believes it remains an attractive investment with robust profitability.
Qatar Insurance Company (QIC), the sole insurance company in the portfolio and the QE Index stood at 3.6% at the end of Q1 2012 compared to 3.4% at the end of 2011 and around 0.9% overweight compared to the QE Index.
Going forward the Investment Adviser expects to increase the overweight position in the banking sector although the overall banking exposure is expected to drop in the light of recent QE index methodology changes. With effect from 1 April 2012, the Qatar Exchange implemented a methodology change for QE Indices, whereby the maximum weighting a single stock can hold within the QE Index as of the rebalance date is 15%. The new rule will bring down the banking sector weighting in the QE Index to 52%, from 57% at the end of March 2012, as QNB's weighting is reduced to 15%.
Regional Equity Market Overview
Most of the GCC markets performed positively during the first quarter of 2012. Only one market performed negatively during Q1 12 with Oman declining 0.1%. Saudi was the best performer during Q1 12, surging 22.1% and was up 19.4% over the last 12 months as local and regional investors preemptively took positions in the local market in anticipation of an opening of the market to foreign investors and consequent inflow of international capital. The Dubai market was the second best performer, up 21.8%, and is continuing the momentum gained over the last 6 months, while Abu Dhabi recovered by 6.3% during the quarter. A number of markets were helped by the continued strengthening of oil prices, which averaged $114 in the first quarter of 2012.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the GCC quarterly equity market performance.
After Qatar's solid performance in 2011, institutional investors re-allocated funds to some of the more distressed regional markets in early 2012, leading to significant divergence of intraregional performance. Furthermore, the level of cash dividends declared by the Qatari banks during Q1 2012 disappointed some domestic investors, resulting in volatile price movements and some negative short-term performance. However, although the Qatari market has underperformed its GCC peer group in the last few months, the long term performance remains strong and the outlook positive, driven by peak LNG export volumes, ongoing mega-investment plans, and an expansionary fiscal stance.
Qatar remains one of the strongest growth stories in the region, combining domestic political stability and a relative lack of exposure to the troubled European economies with extremely robust fiscal and external positions.
The recent underperformance of the index compared to its peers has meant that the fundamentals of the market remain attractive with an estimated P/E of 10.3x and a forecast dividend yield of 5.1% for 2012.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the GCC valuations.
Due to the continued low risk appetite prevailing among investors, the Investment Adviser believes that the Qatari market continues to represent an attractive combination of reasonable valuations, high yields, good prospects for profit growth, and a low level of political risk compared to other countries within the GCC. The preferred sectors are banking, industrials, energy and utilities.
2011: Corporate profitability increased by 27% y-o-y
Qatari companies continued to deliver substantial profit growth during 2011. The 41 companies listed on the Qatar Exchange reported an aggregate net profit of US$10.6bn for 2011 compared to a net profit of US$8.3bn achieved in 2010, representing a growth of 27% and reflecting the strength and rigidity of the country's economy. During 2011, 32 companies recorded higher earnings, against 9 companies that reported a decline in profits. (Please note that Vodafone Qatar is excluded from this comparison as the company's fiscal year ends on 31March).
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a table depicting the Qatar corporate profitability.
Banking & Financial Sector
Qatari banks reported 22.2% growth in 2011 net profits, reaching US$4.12bn, compared to US$3.37bn recorded a year earlier. The banking sector still accounts for 39% of the total profit of the market. All eight banks reported growth in their FY2011 results with growth ranging from 7.3% for Al-Ahli Bank to 31.5% for QNB.
The banking sector remains profitable and robust with high teen capital adequacy ratios. The Investment Adviser remains bullish on the sector as the macroeconomic story remains intact and underpinned by massive domestic infrastructure spending. A supportive Government and the additional growth potential of the World Cup in 2022 is expected to translate into some of the strongest loan growth numbers in the GCC region.
QNB, the largest position in the Company, delivered a robust financial performance for the financial year. With the NPL ratio at 1.1% of gross loans it remained one of the lowest in the industry while provisioning stood at a comfortable 119%. The Investment Adviser continues to believe that QNB's business model remains robust and asset quality is strong. Given its size (it is the largest listed bank by assets in the GCC) and strong ties with the state, the bank will continue to capture Qatar's public sector credit growth which is expected to remain high in the near term.
The services sector reported a decline in profits of 2.2% during the FY2011, down from US$2.82bn in 2010 to US$2.76bn in 2011. Of the 22 companies comprising the sector 16 reported profit increases, while 6 recorded declines. The main factor behind the aggregate decline in profitability was the base effect created in 2010 by the reporting of exceptional items relating to the merger of Qatar Navigation with Qatar Shipping. Adjusting for these the sector would have shown a modest 3% increase in overall profits.
The Insurance sector reported an aggregate net profit of US$0.26bn in 2011, a 5.2% increase compared to an aggregate net profit of US$0.25bn in 2010. Two of the five listed insurance companies recorded lower earnings while three companies reported profit growth. The only insurance company currently held within the portfolio is QIC, Qatar's leading property casualty insurer, which accounts for 63% of the sector's profit.
With an increase of 81.6% y-o-y, the industrial sector saw the fastest profit growth of any quoted sector with an aggregate total profit of US$3.43bn in 2011, up from US$1.89bn in 2010, now accounting for 32% of the total market profits. Several factors supported this performance, in particular higher crude oil prices and an increase in the price of downstream petrochemical products in general. IQ, the Gulf's second-largest chemical producer by market value, reported a 44.8% y-o-y jump in 2011 net profits to US$2.18bn.
IQ is Qatar's largest conglomerate by market capitalisationand offers investors an indirect exposure to Qatar's hydrocarbon industry through its diverse operations in petrochemicals, fertilizers and steel. IQ has emerged as a key player in Qatar's strategy of diversifying into industries that leverage its competitive advantages of inexpensive gas feedstock and cheap energy inputs, and is planning to bring on-stream new plants equal to ~32% of existing capacity by 2013. These low-cost projects are expected to lift earnings which are already benefiting from strong oil prices and recovering product spreads. With capex declining after a period of heavy investment, strong cash generation is expected to underpin an already strong balance sheet and dividend payments. IQ trades on a 2012E PE of 8.8x and the Investment Adviser believes that IQ will continue to deliver superior profit growth going forward, supported by the attractive long-term contract prices achieved in 2011 and further capacity additions going forward.
Nominal GDP grew 36.3% in 2011
Expansion in the production levels of gas-related products, LNG and condensates, coupled with increases in hydrocarbon prices have been the main factors in the nominal GDP rising by 36.3% in 2011. The oil and gas sector contributed 58.3% of Qatar's total nominal GDP in 2011.
According to QNB Capital, nominal GDP is forecast to surge by 19.8% in 2012 and rise by a further 5.4% in 2013 to QAR798bn (US$219bn) as the non-hydrocarbons sector takes over from the hydrocarbons sector as the main driver of growth. The baseline forecasts assume that oil prices will average US$120 per barrel in both 2012 and 2013. Qatari crude oil prices have averaged US$119/barrel for the first quarter of 2012, with an average of US$125/barrel in March 2012.
Qatar's real GDP growth was 18.8% in 2011 and the IMF is forecasting further growth of 6.0% in 2012 and 4.6% in 2013, which the Investment Adviser believes to be very conservative.
Population grew 4% from 2011
Qatar's population continues to grow at a healthy pace, with the overall level expanding by a further 3.9% to 1.77 million in Q1 2012, according to the Qatar Statistics Authority. This positive trend is encouraging and should bode well for the profitability of local companies.
QE Index - Semi Annual Review
The semiannual review of the QE Index constituents took place at the end of March. The changes to the index involved removing Salam International and Al Khalij Holding from the index and replacing them with Al Meera Consumer Goods and Qatar Meat and Livestock. The review also led to the change in the QE Index methodology, with the announcement that the maximum weight a single stock represents within the QE Index of 15% as of the rebalance date. If, during the index review, any stock is found to exceed this weight, then for index calculation purposes the stock's market value is capped, and any excess weight is distributed proportionately among the remaining index constituents. This rule also applies to the new QE Total Return index, whose constituents are identical to the QE Index.
As a result of the change in the index calculation methodology QNB's weight in the index has been reduced to 15% from around 22% at the end of March 2012. The Company's exposure to QNB has subsequently been reduced to comply with investment guidelines.
Qatar Exchange launched two new Indices
The Qatar Exchange launched a number of new equity indices to complement the existing QE Index, including a total return version of the QE Index and an All-Share index. The new indices went live on 1 April 2012. Based on global industry standards, and accepted best practice, the Qatar Exchange also announced the reclassification of the sectors within the index. This has led to the addition of four new sectors including transport, real estate, telecom and consumer goods & services. Thus, from April 1 the QE will reflect seven primary sectors: Banks & Financial Services, Consumer Goods & Services, Industrials, Insurance, Real Estate, Telecom and Transportation. Using the new classification the breakdown of the Company as of 29 March 2012 can be seen below.
Embedded image removed - please refer to the quarterly report on the Company's website www.qatarinvestmentfund.com for a chart depicting the Qatar sector breakdown under the new classification.
The changes to the index methodology and launch of the new indices are seen as the first step towards further product development in the Qatari market. The QE introduced the new index methodology in May 2010 and has embarked on a number of initiatives since then to enhance the visibility of the market performance and provide investors tools to increase liquidity in the market. Introduction of new products such as ETFs and Real Estate Investment Trusts (REITs) are also part of the overall development strategy of the Qatari market.
The Investment Adviser believes that the outlook for the Qatari market is particularly compelling with no significant negative earnings surprises expected in Q1 2012 and with most companies expecting to improve on their previous quarterly figures.
Qatar is expected to continue to have robust economic growth in 2012 and 2013 on the back of output increases combined with high oil prices. In the hydrocarbons sector, 2012 will represent the first full year of maximum production of Liquefied Natural Gas (LNG) at 77m tonnes. This represents a 16% increase in production over 2011. A major new gas-to-liquids (GTL) facility (Pearl GTL Project) will also have its first full year at new capacity in 2012 at an average of 139,000 barrels/day, leading to a 126% increase in output, followed by a further 25% increase in 2013.
With the oil price hovering around $115, Qatar is expected to report a much higher budget surplus than initially estimated as $55 per barrel was used as an assumption for the FY2011/12. Furthermore, Qatar has weathered the global crisis with high growth and continues to run large external current account and fiscal surpluses.
The Investment Adviser believes that Qatari companies will deliver sustained growth in profitability as domestic fiscal policy remains expansionary, and that this combination of highly visible GDP growth and dynamic earnings outlook makes Qatar one of the most attractive investment destinations amongst the emerging and frontier markets.
For further information, please contact:
Ian Dungate/Suzanne Jones +44 (0) 1624 692600
Galileo Fund Services Limited
Andrew Potts +44 (0) 20 7459 3600
Joe Winkley/Neil Winward +44 (0) 20 7710 7600
William Clutterbuck/Sam Turvey +44 (0) 20 7379 5151