QIF Quarterly Report Q4 2013

RNS Number : 2925Y

Qatar Investment Fund PLC

23 January 2014

 



QIF Quarterly Report Q4 2013

Highlights

Qatar Investment Fund plc's ("QIF" or "the Company") net asset value per share excluding dividends (NAV per share) increased by 25.5% to US$1.2576 as at 2 January 2014 compared to US$1.0022 as at 31 December 2012. The Qatar Exchange Index (QE) rose 26.2% over the same period.

In the fourth quarter of 2013, QIF's dividend adjusted NAV increased 6.5% to US$1.2576 (2 January 2014) from US$1.1813 (cum dividend) as at 26 September 2013 (QE: +10.1%).

Qatar's economy continues to grow, with real GDP rising 6.2% in the third quarter compared to Q3 2012. In 2014 GDP is estimated to grow 6.8%, largely due to expansion of the non-hydrocarbon economy.

Profits of Qatar Exchange listed companies increased 6.7% in the first nine months of 2013 compared to 9M 2012. However in Q3 2013, profits of Qatari companies declined 6.4% compared to Q3 2012.

Qatar National Bank expects banking sector activity to pick up in the coming months. For 2013, loan growth remained healthy at 13.3%.

In January 2014, Mesaieed Petrochemical Holding Company is seeking an IPO to raise QAR3.2 billion (US$880 million). In the coming 10 years, Qatar Petroleum, the state-owned energy firm, has announced plans to conduct IPOs for its subsidiaries, with an estimated total value of QAR50 billion.

According to the Middle East Economic Digest (MEED), major projects worth US$200 billion are expected to be awarded between 2014 and 2030. Strong activity is expected in Qatar's project market in 2014 with US$24 billion of contract awards in the infrastructure and transport sectors.

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.

In the fourth quarter of 2013 (ending 2 January 2014) QIF's dividend adjusted NAV rose 6.5% to US$1.2576 (26 September 2013: US$1.1813 - cum dividend). In 2013, QIF's dividend adjusted NAV increased 25.5% (31 December 2012: US$1.0022). As at 2 January 2014, the QIF share price was trading at an 8.2% discount to NAV per share.

Historic Performance against the QE Index

Performance	2007 5M	2008	2009	2010	2011	2012	2013*
QIF NAV	13.87%	-36.42%	10.40%	29.86%	1.29%	-4.68%	25.48%
QE Index	27.00%	-28.80%	1.10%	24.80%	1.10%	-4.79%	26.16%

* From 31 Dec 2012 to 2 January 2014

Source: Bloomberg, Qatar Insurance Company

Portfolio Structure

Top 10 Holdings

Name	Sector	% Share of NAV
Qatar National Bank	Banks & Financial Services	16.4%
Industries Qatar	Industry	10.6%
Masraf Al Rayan Bank	Banks & Financial Services	10.0%
Doha Bank	Banks & Financial Services	6.8%
Qatar Telecom	Telecoms	6.8%
Commercial Bank of Qatar	Banks & Financial Services	6.6%
Barwa Real Estate	Real Estate	6.3%
Qatar Electricity & Water Co	Industry	4.4%
Qatar Insurance Co	Insurance	4.4%
Qatar Navigation	Transportation	4.3%

Source: Bloomberg, Qatar Insurance Company

The top 10 holdings are unchanged from the end of the previous quarter.

Country Allocation

At quarter end QIF had 27 holdings: 17 in Qatar, 4 in UAE, 5 in Oman and one in Kuwait. Cash was 10.6% of NAV (Q3 2013: 2.8%). QIF has increased its overall cash position during the quarter, given the upcoming tender offer.

Qatar remains the main focus for the Investment Adviser, driven by a combination of healthy economic growth underpinned by infrastructure spending and a stable political environment. This view is supported by the dividend yield and attractive market valuations.

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 2 January 2014.

The banking sector (including financial services) continues to be the largest single sector exposure within the portfolio, with a 45.8% weighting. The Investment Adviser believes that Qatari banks are well positioned for growth driven by loan growth and an uptick in project starts. Qatar National Bank is the Company's largest holding (16.4% of NAV) followed by Industries Qatar (10.6% of NAV).

The second largest sector exposure was industrials at 15.8% of NAV (Q3 2013: 16.2% of NAV). Weighting in the real estate sector declined marginally from 9.7% in the previous quarter to 9.5%. The telecom sector decreased from 8.4% in Q3 2013 to 7.5% in Q4 2013. Transport decreased from 4.8% in the previous quarter to 4.4% in Q4 2013. The allocation to the insurance sector rose to 4.4%, while weighting in the services and consumer goods sector reduced to 2.0% in Q4 2013.

Regional Market

Over the year, all GCC markets reported strong gains. Dubai rose 107.7% driven by recovery in the property sector coupled with an improved macro outlook; supported by winning the rights to host the 2020 World Expo and MSCI's decision to upgrade UAE to its emerging market index. Abu Dhabi also made progress (+63.1%) on the back of the UAE's macro recovery.

In the fourth quarter 2013, all GCC markets except Kuwait continued their good run. The Bloomberg GCC index rose 8.6% in the quarter, bringing full year gains to over 26%. During Q4 the Dubai market was the best performer gaining 22.0%.

The Qatari market grew 8.0% during the quarter with all sectors reporting gains. The industrial sector led with a 14.7% increase, followed by real estate growing 11.8%. The banking & financial services, insurance and transportation sectors reported over 4% gains during the quarter. In 2013, the Qatari market grew 24.2% (from 31 December 2012 to 31 December 2013), helped by MSCI's upgrade of Qatar to the emerging market index which market commentators expect to attract US$430 million of additional funds when implemented in May 2014. In 2013, the transport sector reported gains of 38.6%. This was followed by the telecommunications (+36.5%) and industrial (+33.2%) sectors.

Saudi Arabia's market gained 7.2% in Q4 2013 compared to the previous quarter. The Omani market grew by 2.8% during the same period. The Bahrain index was up 4.6%, while the Kuwait market was down by 2.8% in Q4 2013. Kuwait's consumer services sector index declined by 5% while the banking sector decreased by 3%.

Market commentators expect that the beginning of the year dividend payout by Qatari companies should attract investors, however, some selling pressure is expected as local investors realize funds to participate in the QAR3.2 billion (US$880 million) IPO of Mesaieed Petrochemical Holding Company, Qatar Exchange's first initial public offering since 2010, in January 2014. In the coming 10 years, Qatar Petroleum, the state-owned energy firm, has announced plans to conduct IPOs for its subsidiaries, with a total value of QAR50 billion.

The Investment Adviser believes that the GCC markets can be expected to continue their bullish run in 2014, but gains are expected to be lower as valuations increase. Market experts believe that the GCC region is becoming a mainstream investment destination for international funds. This belief is further supported by the recent upgrade of Qatar and UAE to emerging market status by MSCI and S&P Dow Jones.

Qatar: corporate profitability increased 6.7% in 9M 2013

Net profits of Qatar Exchange listed companies rose 6.7% in 9M 2013 compared to 9M 2012, to QAR30.1 billion (US$8.3 billion). In Q3 2013, the performance of Qatar Exchange listed companies was subdued, with net profit declining 6.4% to QAR9.1 billion (US$2.5 billion) compared to Q3 2012. The slowing in Q3 2013 was mainly due to a substantial fall in profits of the telecom sector and muted performance by the industrial sector.

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

Sectors	9M 2012	9M 2013	% Change	Q3 2012	Q3 2013	% Change
Banking & Financial	3,450,028	3,622,974	5.0%	1,161,014	1,161,870	0.1%
Insurance	175,534	389,676	122.0%	36,624	44,189	20.7%
Industrial	2,465,812	2,481,800	0.6%	941,297	763,502	-18.9%
Services & Consumer Goods	331,978	365,272	10.0%	115,824	146,461	26.5%
Real Estate	401,611	466,643	16.2%	100,198	188,173	87.8%
Telecoms*	592,227	568,312	-4.0%	220,766	92,655	-58.0%
Transportation	346,067	386,070	11.6%	109,240	115,467	5.7%
Total	7,763,257	8,280,746	6.7%	2,684,964	2,512,316	-6.4%

* excluding Vodafone Qatar

Source: Qatar Exchange

Banking and financial services sector net profit grew 5.0% in 9M 2013 compared to 9M 2012. Banking was the main contributor, with profits improving 6.1% in 9M 2013 compared to 9M 2012. Banking sector growth in Qatar can largely be attributed to growth in lending, particularly to the private sector. Loan growth was strong, principally helped by the industrial, consumption and others segments. Lending to the government segment also remained strong. Going forward, public sector loan growth is expected to remain healthy, as project/contract awards gather pace. The sector heavyweight Qatar National Bank reported profit growth of 14.1%. Masraf Al Rayan Bank reported a 15.4% profit rise, the fastest growth among the eight Qatari listed banks. Commercial Bank of Qatar and Qatar Islamic Bank reported a decline of 16.6% and 13.8% in net profits respectively.

The net profit of the financial services sector declined 56.1% in 9M 2013 compared to 9M 2012, mainly due to losses reported by Dlala Brokerage and a fall in net profit reported by National Leasing Company and Qatar Oman Investment Company.

Industrials sector profits increased marginally by 0.6% in 9M 2013 compared to 9M 2012. This sector now contributes 30% to the total profits of all the Qatari listed companies. During the same period, sector heavyweight and one of the largest chemical producers in the GCC region, Industries Qatar, reported a 4.8% fall in net profit.

Net profit in the insurance sector surged 122.0% in 9M 2013 compared to 9M 2012 largely driven by strong growth reported by Qatar General Insurance & Reinsurance Company (QGRI) and Qatar Insurance Company. During the period, QGRI became the largest company in the sector by net profit with 955% growth. This extraordinary growth was mainly driven by a one-off fair value gain of QAR690 million realized during 9M 2013 as against fair value losses of QAR6.7 million reported during 9M 2012. Net profit of Qatar Insurance Company grew 28.7% during the same period.

In 9M 2013, the net profit of the services & consumer goods sectors increased by 10.0% compared to 9M 2012. The largest profit contributor was Qatar Fuel Company, which reported a growth of 5.4% in net profit.

After reporting a 7.6% decline in H1 2013, the real estate sector reported a strong 16.2% growth in net profit in 9M 2013 compared to same period previous year. This growth was mainly driven by strong profitability of companies such as Ezdan Holding Group and Mazaya Qatar Real Estate. On the other hand, Barwa Real Estate net profit declined 40.0% during the period.

The telecom sector comprises of two companies, Vodafone Qatar and Qatar Telecom. Vodafone Qatar was excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo (formerly Qatar Telecom), reported a 4.0% fall in net profit in 9M 2013 compared to 9M 2012.

The transportation sector net profit rose 11.6%, with the two companies in the sector reporting higher profits and the remaining one reporting a decline in net profit. The largest company by net profit, Qatar Navigation, reported a 22.1% rise in net profit in 9M 2013 compared to 9M 2012.

Recent Developments

Strong forex reserves with 6 months of import cover

According to the Ministry of Development Planning and Statistics (MDP&S) Qatar reported a trade surplus of QAR200.3 billion in the first half of 2013 or equivalent to 54.7% of nominal GDP. During the period export revenue grew by 4.4% driven by oil and gas, as non-hydrocarbon exports are still very small. In the first half of 2013, a large trade surplus helped creating a substantial current account surplus. MDP&S expects the country's external current account surplus to remain sizeable at 26.6% (as a % of GDP) in 2013 and 22.7% in 2014. The reduction of the surplus can largely be attributed to an expected decline in hydrocarbon export revenues and higher imports on the back of stronger domestic demand. The overall balance of payments surplus is expected to decline to US$5.5 billion in 2013 and to US$1.5 billion in 2014, as the substantial portion of current account surpluses are expected to be recycled outside Qatar in the form of overseas investments funded by export earnings.

At the end of September 2013, Qatar Central Bank's (QCB) foreign currency reserves stood at QAR143 billion, growing by QAR7 billion reported at the end of September 2012. Going forward, foreign exchange cover is expected to remain strong, equivalent to about six months of total imports of goods and services.

Strong infrastructure growth to stay

In the past few years, Qatar's economic growth was largely driven by ambitious infrastructure development plans, including the infrastructure for the 2022 FIFA World Cup. According to MEED, major projects valued at US$200 billion are expected to be awarded between 2014 and 2030. MEED expects strong activity in Qatar's project market in 2014 with contract awards in the infrastructure and transport expected at US$24 billion. In Doha alone, a substantial backlog of project work is expected to be completed between 2014 and 2019, with an estimate of associated contractor and third party contracts/tenders worth US$90 billion. These include roads, ports and rail work of about US$40 billion and construction projects valued at around US$19 billion. Qatar Rail Company (QRC) is expecting additional contract awards for the upcoming stages of its mega-rail project in 2014 and 2015. These contracts are in addition to recent deals worth US$8.8 billion awarded for the Doha metro and a passenger and freight rail network in Lusail. New contracts are expected to be awarded at the start and the end of 2014, as well as in 2015, and should cover both metro and cargo trains, as well as the related systems.

According to MEED, Qatar's petrochemicals industry also offers substantial opportunities to international EPC contractors, as contracts worth US$14.63 billion are in the design and tender phases. About US$14 billion would be accounted by two massive schemes which are being planned for the Ras Laffan industrial city in northern Qatar.

Banking sector credit growth remains healthy in 2013

According to a QNB report, the banking sector activity in Qatar is expected to pick up in the coming months. For 2013, loan growth remained healthy at around 13.3%. Public sector credit (including credit outside Qatar) was 10.1% higher in 2013. Total domestic public sector credit grew 9.7% in 2013, mainly driven by 9.3% credit growth witnessed by the government institutions' segment (that represents 63.6% of public sector loans) and 12.7% credit growth reported by the semi-government institutions segment. The government segment loan book expanded 9.3% in 2013.

During the same period, the private sector loan book (including credit outside Qatar) grew higher by 16.8%. Total credit extended to the domestic private sector increased 13.9% in 2013, helped by strong growth reported in the loans extended to the services sector (up 44.3%). The consumption & others sector loan book witnessed an increase of 10.7% in 2013.

Total deposits (including deposits outside Qatar) also grew at a healthy level, by 19.7% in December 2013 compared to December 2012. The banking sector's loan-to-deposit ratio (LDR) stood at 105% at end of December 2013 compared to 111% at the end of December 2012.

Going forward, public sector loan growth should largely drive the overall credit growth in 2014, helped by an estimated uptick in project mobilizations in the coming months.

Qatar Exchange to launch further financial products

After the upgrade by MSCI granting the Qatar Exchange Emerging Market status, Qatar Exchange has submitted proposals to the government for higher limits on foreign ownership of Qatari listed stocks. In the recent past, the Qatar Exchange has also undertaken various steps to enhance the liquidity of the market.

Going forward, the Qatar Exchange is likely to introduce margin trading and covered short selling regulations. Additionally, the Qatar Exchange is expected to shorten the settlement cycle for bonds traded on the exchange to T+1. There are also plans to launch the first Exchange Traded Fund (ETFs) on the exchange soon. In 2014, it is expected that the first SME company will list on the dedicated SME market, the QE Venture market (QEVM). Going ahead, the Qatar Exchange is expected to introduce derivatives, with an initial focus on offering futures on the local index as well as several individual stock options.

Macroeconomic Update

Qatar's economy continues to grow with Q3 2013 real GDP rising by 6.2% compared to Q3 of 2012. Growth was marginally higher than the 6.1% recorded in Q1 2013 and 6.0% recorded in Q2 2013. The hydrocarbon sector, which includes Qatar's oil and gas production, rose 1.8% in Q3 2013 compared to Q3 2012, driven by higher production of natural gas during the quarter. The non-hydrocarbon sector real GDP increased by 9.5% over the same period. The combined finance, insurance, real estate and business services sectors grew by 10.5%, while the construction sector expanded 13.0% driven by government spending on infrastructure projects. When compared to the previous quarter, the real GDP growth stood at 4.3%. On a quarter-on-quarter basis, the non-hydrocarbon sector grew 4.8%, while the hydrocarbon sector expanded by 3.5%.

The QNB Group expects Qatar's economy to grow 6.5% in 2013. Growth is estimated to pick up further to 6.8% in 2014, largely due to the expansion of the non-hydrocarbon economy. This growth is likely to be boosted by the implementation of large infrastructure projects and a healthy growth in the population boosting domestic demand. Large infrastructure projects include the Lusail real estate development, the new Doha Port, and the Doha Metro Rail project. The QNB Group expects the contribution of the non-hydrocarbon sector to the nominal GDP to increase from 42% in 2012 to over 50% by 2015.

Population growth in Qatar has been strong in recent years. At the end of December 2013, Qatar's population reached 2.05 million, growth of 11.4% compared to December 2012. Looking ahead, Qatar's population growth in 2014 is expected to remain strong, mainly driven by the new employment opportunities created by the country's substantial pipeline of projects. Steady growth in population bodes well for the overall economy as it will increase demand for local services, and should stimulate services activity.

Robust growth in the construction sector should also provide an impetus to the manufacturing, basic fabrication activity and cement production. Additionally, banks are also expected to benefit as contractors' needs for working capital and ancillary services increase. Hence, the Investment Adviser favors selected banks, real estate and consumer driven companies.

Valuations

Market	Market Cap.	P/E (x)		P/B (x)	Dividend Yield (%)
	US$ Mn	2013E	2014E	2013E	2013E
Saudi Arabia	472,423	16.1x	14.0x	2.7x	3.9%
UAE	173,756	17.5x	14.5x	2.0x	3.8%
Qatar	121,822	11.9x	11.3x	2.8x	4.2%
Kuwait	109,674	19.7x	16.0x	1.8x	3.3%
Oman	18,146	11.5x	11.0x	1.9x	5.0%
Bahrain	18,591	8.4x	12.3x	1.3x	4.6%
Egypt	25,359	12.5x	11.6x	1.9x	4.6%
Jordan	23,161	14.4x	11.2x	1.6x	4.0%
Overall MENA	962,932	15.9x	13.8x	2.4x	3.9%

Source: Bloomberg Finance LP, Deutsche Bank, Prices as at 2nd Jan 2014

Outlook

Economic growth in Qatar is expected to remain modest in the coming years, after growing at around 6% in the last three quarters. The QNB Group expects Qatar's real GDP to grow 6.5% in 2013 and growth is estimated to pick up further to 6.8% in 2014, driven by non-hydrocarbon sector. Implementation of large infrastructure projects and fast growth in population, boosting domestic demand, should drive the non-hydrocarbon sector growth. Healthy growth in population should create opportunities in areas such as financial services, transport and communications, and tourism. The Investment Adviser believes strong domestic demand will continue helped by strong investment spending, an expansionary fiscal stance and a continuing inflow of workers. The banking sector activity should remain strong in the coming months driven by public sector loan growth. The Banking sector is expected to benefit from the business generated by real estate development and infrastructure projects. Hence, the Investment Adviser favors selected banks.

Qatar's near to long term growth prospects should remain healthy driven by a strong infrastructure pipeline, expansionary fiscal spending, and supportive demographics. The Investment Adviser believes that the near term catalysts for the Qatari market include the recent upgrade to the MSCI Emerging Market index, upcoming IPO activity, and healthy dividend payouts against a background of attractive valuations.  

 

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