Q4 2014 Investment Report

RNS Number : 2615D

Qatar Investment Fund PLC

27 January 2015

 



27 January 2015

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

Q4 2014 Investment Report

Qatar Investment Fund plc (LSE: QIF), today issues its Q4 2014 Investment Report for the period 1 October 2014 to 31 December 2014, 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 Quarterly Report - Q4 2014

Highlights

Ø Qatar Investment Fund plc's ("QIF" or "the Company") net asset value (NAV) per share net of dividends increased 20.6% in the year ended 31 December 2014, outperforming an 18.4% rise by the Qatar Exchange Index (QE).

Ø In Q4 2014, QIF's NAV per share before dividends was down 6.4% (QE: down 10.5%).

Ø Qatar's real GDP rose by 6.0% in Q3 2014 compared to Q3 2013, helped by the non-hydrocarbon sector which grew by 12%.

Ø Non-hydrocarbon GDP is expected to show double digit growth over the next few years.

Ø US$30 billion of new projects lined up in 2015.

Ø The Qatari population rose 9.3% in 2014.

Ø For 2014, Qatar was in the top 10 best performing indices in the world.

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.

On 31 December 2014, the QIF share price was at a 12.1% discount to NAV.

Historic Performance against the QE Index

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

* NAV is net of dividends

Source: Bloomberg, Qatar Insurance Company

Portfolio Structure

Top 10 Holdings

Company Name	Sector	% share of NAV
Qatar National Bank	Banks & Financial Services	17.7%
Commercial Bank of Qatar	Banks & Financial Services	9.4%
Qatar Islamic Bank	Banks & Financial Services	6.9%
Industries Qatar	Industry	6.6%
Ooredoo	Telecoms	6.3%
Barwa Real Estate	Real Estate	6.2%
Doha Bank	Banks & Financial Services	6.0%
Qatar Insurance	Insurance	5.9%
Masraf Al Rayan	Banks & Financial Services	5.6%
Gulf International Services	Industry	5.3%

During Q4 2014, Masraf Al Rayan and Gulf International Services replaced Qatar Navigation and Qatar International Islamic Bank in QIF's top 10 holdings. The Investment Adviser expects markets to remain volatile in the near to medium term and the portfolio is positioned to take advantage of the companies with high dividend yields and which are directly linked to non-hydrocarbon economic growth.

Country Allocation

As at the end of December 2014, QIF had 25 holdings: 21 in Qatar, 3 in UAE and 1 in Oman. (Q3 2014: 26 holdings: 22 were in Qatar, 3 in the UAE and 1 in Oman). Cash was 1.2% of NAV (Q3 2014: 2.6%).

The Investment Adviser remains focused on Qatar because of encouraging economic growth coupled with infrastructure spending. Robust earnings potential and attractive dividend yields of selected Qatari companies remain key drivers behind the heavy Qatar exposure.

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 December 2014.

The Investment Adviser remains positive on Qatari banking because the infrastructure development plans announced by the government are expected to support lending activity, from which domestic banks will benefit. The Company's banking and financial sector weighting rose from 41.0% in Q3 2014 to 52.0% in Q4 2014. Qatar National Bank remains QIF's largest holding at 17.7% of NAV, followed by Commercial Bank of Qatar at 9.4%.

Industrials remain the second largest exposure at 16.8% of NAV. The allocation to industrials decreased from 22% in Q3 2014 to 16.8% in Q4 2014. Industries Qatar remained the largest holding in the industrial sector at 6.6% of NAV.

The Investment Adviser decreased the Company's real estate exposure in Q4 2014, reducing exposure in United Development Company (from 2.9% of NAV in Q3 2014 to 0.9% at the end of Q4 2014) and Ezdan Holding Group (from 1.4% in Q3 2014 to 0.4% in Q4 2014). The Investment Adviser reallocated the cash into other sectors, mainly in the banking sector. This move has yielded positive results for the portfolio, as these two stocks corrected significantly by 18.7% and 30.1%, respectively, during the quarter. The Company's weighting in telecom, transportation and insurance was broadly unchanged.  

Regional Market Overview

During Q4 2014, all GCC markets touched multi-year low levels, as global energy prices tumbled by almost 50% from their 52-week high, after the OPEC nations refrained from cutting production. The Bloomberg GCC 200 index fell 17.6% during the quarter. A sell-off in the GCC region was triggered by concerns that the Gulf nations might be forced to make spending cuts as fiscal revenues might be impacted by lower energy prices. The sell-off also reversed much of the earlier gains of many GCC bourses.

Among other factors, the rapid sell-off in the GCC markets was also triggered by year-end profit booking - post the strong performance by the GCC markets in the past year and a half, driven by MSCI inclusion news followed by acceleration of capital market reforms in Saudi Arabia resulting in the CMA announcing a plan to open up its market for direct foreign participation.

In Q4 2014, the Qatari market dropped by 10.5%. This affected all sectors particularly the industrial and real estate sectors, which fell by 11.2% and 21.5%, respectively. The Dubai market led the drop among GCC markets, falling by almost 25%. Almost all sectors reported negative returns, with greatest impact on investment & financial and real estate & construction. Abu Dhabi declined 11.3% following significant losses in the energy and real estate sectors.

The Qatari and Dubai markets have, however, managed to post double-digit annual returns, helped by a further upgrade to emerging market status, this time from S&P Dow Jones. Separately, MSCI's move to increase the weighting of the two countries in its Emerging Market Index also helped encouraged demand from foreign investors.

Saudi Arabia, the largest oil producer in OPEC, posted a loss of 23.2% during Q4 as Saudi's petrochemical sector dropped over 30%. The sell-off reversed gains for 2014. In 2015 investors look forward to developments in the Saudi market, as it plans to open its exchange to foreign investors by April 2015. Meanwhile, the Saudi government maintained its spending plans for the 2015 budget despite a fall in oil prices.

The Omani market fell nearly 15% in Q4 2014, led by the banking & investment and industrial sectors. Omani companies will see their input costs rising as the government has decided to raise the prices of natural gas in order to make up for the fall in the energy prices.

Kuwait and Bahrain declined by 14.2% and 3.4%, respectively, driven by poor returns in their banking sectors. In 2014 as a whole, Kuwait was the worst performer among the GCC markets, with the market down by 13.4%.

Despite the oil price fall, Saudi Arabia and Oman confirmed that they continue with their 2015 spending plans. According to Standard Chartered estimates, the GCC region has seen successive surpluses recorded over the last decade in budgets which have helped build up a net asset position of US$2.2 trillion. As a result, the Investment Advisor expects governments to adopt a counter-cyclical approach to spending, which means that lower oil prices will not impact capital expenditure and infrastructure projects in the short to medium term, keeping real GDP growth healthy.

Fundamental story of Qatar remains intact

In 2014, the Qatar market reported a gain of 18.4%, outperforming its GCC peers and securing a place among the top 10 best performing indices in the world. The outperformance of the Qatari market can largely be attributed to a robust infrastructure pipeline, coupled with lesser reliance on crude oil prices, as the country's major revenues arise from non-hydrocarbon activities and LNG exports.

Qatar has been one of the largest producers and exporters of LNG and enjoys a combination of secure long-term contracts and flexible supply arrangements. This means steady revenue streams from the export of LNG, reducing volatility in oil and gas prices.

Additionally, Qatar's state budget has been assuming conservative oil price estimates, helping the country build substantial surpluses over the past decade. For 2014-15, the budget was drafted on an estimated oil price of US$65 per barrel when Brent crude was hovering around US$100 per barrel. The nation's budget surplus for 2004/2005 stood at QAR19.0 billion (16.4% of GDP at current prices) which has increased to QAR115.0 billion (15.6% of GDP at current prices) during 2013/2014. Strong budget surpluses have also helped the country to diversify its economy from the traditional hydrocarbon sector to non-hydrocarbon sectors. Recent falls in oil prices might have a temporary impact on the country's budget surpluses. However, in the coming years, the non-hydrocarbon sector is expected to play an important role as infrastructure remains a priority. Latest data from MEED Projects states that Qatar's infrastructure projects pipeline is set to soar, with ~US$30 billion worth of new projects lined up in 2015.

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

The Investment Adviser believes that Qatar's long term growth story remains intact, driven by double digit growth of the non-hydrocarbon sector on the back of a strong infrastructure development pipeline, ahead of the FIFA World Cup 2022 and in line with Qatar National Vision 2030. Additionally, most of this infrastructure spend is related to road and rail transport projects, expansion of air and sea ports, healthcare and education investments, with a lesser allocation to the conventional real estate sector. Furthermore, investors see more visibility of projects being completed on time, as these are expected to be ready for the FIFA World Cup in 2022.

Qatar: corporate profits increased 8.8% in the first 9 months of 2014

Net profits of Qatari listed companies rose 8.8% during the first 9 months of 2014 compared to 2013, to QAR32.7 billion (US$9.0 billion). The rise in profitability was driven by robust earnings growth achieved by the real estate and transportation sectors during the period. In Q3 2014, earnings increased by 23.9%, with net profits reaching QAR11.3 billion (US$3.1 billion), helped by a strong rise in net income from the insurance and transportation sectors.

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

Sectors	9M 2013	9M 2014	% Change	Q3 2013	Q3 2014	% Change
Banks & Financial	3,622,974	4,072,410	12.4%	1,161,870	1,440,855	24.0%
Insurance	389,676	309,366	-20.6%	44,189	78,793	78.3%
Industrial	2,481,799	2,569,129	3.5%	763,502	967,652	26.7%
Services & Consumer Goods	340,490	374,770	10.1%	144,381	126,990	-12.0%
Real Estate	466,643	641,591	37.5%	188,173	231,130	22.8%
Telecoms*	568,312	571,151	0.5%	92,655	103,010	11.2%
Transportation	386,069	443,748	14.9%	115,467	160,560	39.1%
Total	8,255,964	8,982,165	8.8%	2,510,236	3,108,991	23.9%

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange

Net income of the Qatari banking & financial sector rose 12.4% in the first 9 months of 2014, compared with the first 9 months of 2013. The banking sector continued to remain the major profit contributor of the sector, as its profitability increased by 12.2%, with most of the listed banks posting double-digit rate of growth. The rise in the profitability can be mainly attributed to the healthy credit growth rate achieved by the banking sector, especially in the private sector. This trend is expected to continue, as infrastructure spending could keep supporting the lending growth. Sector heavyweight, Qatar National Bank posted a 12.6% rise in its net profits during the first 9 months of 2014, whereas, Qatar Islamic Bank posted the highest growth rate of 15.9% during that period.

Earnings of the Qatari financial services sector advanced 39.5% in the first 9 months of 2014, compared with the first 9 months of 2013, as net profits of Dlala Brokerage rebounded strongly during the period. Meanwhile, Qatar Oman Investment Company and Islamic Holding Company also posted robust earnings growth during the similar period. However, the net income of National Leasing Company experienced a sharp decline in the first 9 months of 2014.

The industrial sector's profitability improved by 3.5% during the first 9 months of 2014, compared with a similar period past year. The sector continues to remain the second largest contributor of total profits amongst all the Qatari listed companies. The modest rise in the sector's profitability was mainly a result of the robust earnings growth rates achieved by Qatar Electricity & Water and Gulf International Services. Net income of Gulf International Services increased sharply, this was partially on account of buy-out of the remaining 30% stake by the company in its drilling segment JV in April 2014. Sector heavyweight Industries Qatar reported a decline in net profit, as shutdown programs in H1 2014 continued to weigh on the company's profitability.

In the first 9 months of 2014, the net profit of the insurance sector was down by almost 20%, as earnings of Qatar General Insurance & Reinsurance Company declined by 77.4%. The sharp decline in the company's net income is mainly due to a one-off fair value gain for the company during the first 9 months of 2013. Net income of Qatar Insurance Company was QAR779.8 million for the period, rising by 45.9% compared with the first 9 months of 2013.

Net profit in services & consumer goods sector rose 10.1% in the first 9 months of 2014, compared to the same period last year. The sector's largest profit contributor, Qatar Fuel, reported a 2.8% rise in its net income during the period.

The real estate sector continued to post healthy earnings growth, as its net profit increased by 37.5% during the first 9 months of 2014. The largest contributor of profits, Ezdan Holdings, posted a 41.4% rise in its earnings growth during the period, mainly on the back of a strong rise achieved by the company's rental income. Other major players in the sector, United Development Company and Barwa Real Estate Company, also posted double-digit earnings growth.

The Qatari telecom sector includes two companies, Ooredoo and Vodafone Qatar. Vodafone Qatar was excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo's net income grew marginally to QAR2.1 billion during the nine month period.

The transportation sector profitability increased 14.9% in the first 9 months of 2014, compared with the same period past year, with Gulf Warehousing Company and Qatar Gas Transport Company posting an earnings growth of more than 25% for the period. Meanwhile, Qatar Navigation, the largest profit contributor of the sector, reported a 5.5% rise in the first 9 months of 2014 net profits.

Recent Developments

MSCI lifts weighting of Qatar and UAE in its EM index

In its semi-annual review, the global index provider, MSCI, lifted the weighting of a few Qatari and UAE companies in its emerging market index. The index provider also removed the adjustment factor of 0.5 for selected companies from the countries, citing the relaxation of their foreign ownership requirements. These companies include Emaar Properties, Dubai Islamic Bank, Qatar National Bank, Industries Qatar, Commercial Bank of Qatar and Doha Bank. Meanwhile, the index provider also announced the inclusion of Gulf International Services to its emerging market index.  

QFMA sets guidelines for margin trading on Qatar Exchange

The Qatar Exchange's regulator, Qatar Financial Markets Authority, has set the guidelines for investors looking to undertake margin trading on the exchange. The guidelines prohibit margin traders from investing in IPOs and allow them to trade only in listed securities on the exchange that are approved by the QFMA. The brokerage firm would not be allowed to lend more than 50% of the purchase value of a stock to a margin trader. The regulator also guided the brokerage firms to keep a maintenance margin of 30% of the market value of the securities bought and issue a margin call whenever the share price of a stock falls, requiring the trader to add more cash to the account in order to maintain the required percentage. Moreover, the licensed company would be reporting the margin trading funding activities to the QFMA once every week.

S&P affirms AA/A-1+ for Qatar with a stable outlook

The global rating service provider, Standard & Poor's, has affirmed its 'AA' long-term and 'A-1+' short-term foreign and local currency sovereign credit ratings for Qatar. The agency has also maintained its 'Stable' outlook for Qatar, citing economic wealth and surplus.

Strong credit growth

The Qatari credit growth rate continued at an encouraging pace, as the loan book grew by 7.8% in November 2014 on an YTD basis. Public sector lending declined 5.9% between December 2013 and November 2014, while private sector lending increased by 16.6% during the same period. The double-digit growth in the private sector loan book mainly resulted from healthy lending in the trading and contractor sectors. The private sector now contributes almost 60.4% of total credit, as compared to 55.9% at the end of 2013. 

Islamic loans grew at a quicker pace during the period, when compared with traditional loans. Islamic loans grew by 21.5%, whereas traditional loans increased by 3.0% during the period. Total deposits in the nation grew by 9.3% between December 2013 and November 2014. Islamic deposits also grew at a quicker pace as compared to commercial deposits. The overall loan to deposit ratio in the Qatari banking sector stood at 104%, compared to 105% recorded as at the end of December 2013.

Going forward, credit growth is expected to remain buoyant on the back of infrastructure spending and growth in the non-hydrocarbon sector.

Macroeconomic Update

During Q3 2014, the Qatari economy remained resilient, and the nation's real GDP grew by 6.0%, on an annual basis, according to a report released by the Ministry of Development Planning and Statistics (MDP&S). The non-hydrocarbon sector again remained the key driver behind the nation's growth. During the period, the non-hydrocarbon sector grew by 12.0%, when compared to the similar period in 2013. This growth helped in making up for the slowdown in the oil sector, which contracted by 2.8% in Q3 2014.

Sectors including electricity, construction, trading, transport & communication, financial and domestic services were the top performers among the non-hydrocarbon sectors, as they experienced double-digit growth rates. The slowdown in the hydrocarbon sector was mainly attributed to muted crude oil production and maintenance shutdowns in gas plants coupled with a reduction in international price levels of crude oil and gases, which weighed up on the growth of the sector.

The Investment Adviser believes that the growth prospects for the Qatari economy remain compelling, backed by significant infrastructure spending ahead of the 2022 FIFA World Cup and in line with Qatar National Vision 2030. Recently, the Minister of MDP&S, HE Dr. Saleh Al Nabit indicated that the nation's non-hydrocarbon sector remains resilient and that its contribution to the overall economy would surpass that of the hydrocarbon sector.   

According to QNB's estimates, Qatar's non-hydrocarbon economy is expected to witness double digit growth in coming years, mainly on the back of continued infrastructure spending. Furthermore, rapid population growth would also result in increased consumer spending. As at the end of December 2014, Qatar's population stood at 2.24 million, increasing by 9.3% compared to the end of December 2013.

Valuations

Market	Market Cap	P/E(x)		P/B(x)	Dividend yield (%)
	US$ Mn	2015E	2016E	2015E	2015E
Saudi Arabia	487,108	14.2	12.4	2.7	4.6
UAE	193,895	12.2	10.3	1.8	4.7
Qatar	154,069	13.4	12.7	2.6	4.5
Kuwait	101,087	11.1	9.4	1.5	4.9
Oman	17,689	10.4	9.5	1.9	8.8
Bahrain	21,861	9.3	8.7	0.8	5.2
Egypt	31,347	11.8	9.5	2.0	4.5
Jordan	22,709	11.5	9.6	1.3	4.9
Overall MENA	1,029,765	13.1	11.5	2.3	4.7

Source: Bloomberg Finance LP, Deutsche Bank, Prices as at 2 Jan 2015

Outlook

The Qatari economy is expected to grow healthily in the near-term, as the fast growing non-hydrocarbon sector helps offset the slowdown in the hydrocarbon sector. A sustained oil price downturn would likely result in capex downsizing and prioritizing of ongoing / strategic projects in the GCC. However, Qatar's capex pipeline is relatively resilient given sizeable investments by central government and greater public sector involvement. While a large chunk of government spending is allocated to urban, utilities and transport projects, a significant amount is committed to the FIFA 2022 World Cup and ancillary projects. Widespread infrastructure spending remains the engine of Qatar's growth potential, as these contracts help economic activity in related industries.

The current slump in energy prices might not affect the nation too adversely as Qatar's long term strategic gas sale contracts should mean less price volatility. Compared to other GCC nations, Qatar is in a better position to withstand lower oil prices, as it enjoys one of the lowest per barrel budget costs.

The growing population, helped by an influx of expatriates, should help domestic demand, notably in sectors such as financial services, consumer, transport and communications, and tourism. Hence, the Investment Adviser favours selected banking and consumer-driven companies.  

The Investment Adviser believes that the recent correction in the Qatari market gives fresh entry points for long term investors seeking robust earnings growth potential and attractive dividend yields.

For further information:

Qatar Investment Fund plc - [phone]

Nick Wilson

Panmure Gordon - [phone]

Andrew Potts

Maitland - [phone]

William Clutterbuck

Robbie Hynes

 

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