Quarterly Report Q2 2014

RNS Number : 9075M

Qatar Investment Fund PLC

22 July 2014

 

QIF Quarterly Report - Q2 2014

Highlights

·      Qatar Investment Fund plc's ("QIF" or "the Company") net asset value per share (NAV) increased 13.6% from 31 December 2013 to 30 June 2014. The Qatar Exchange Index (QE) rose 10.7% over the same period.

·      Qatar's economy grew 6.2% in Q1 2014 compared to Q1 2013, driven by non-hydrocarbon sectors.

·      Qatari Ministry of Development Planning and Statistics expects GDP growth of 6.3% in 2014 and 7.8% in 2015.

·      Double digit growth expected for non-hydrocarbon sector; construction sector growth of over 14% per annum in 2014 and 2015.

·      Qatar's population rose to 2.17 million (6.3%) between December 2013 and May 2014.

·      Profits of Qatari listed companies in Q1 were 8.6% higher than Q1 2013.

·      Credit grew 4.2% between December 2013 and May 2014.

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.

QIF's NAV increased 13.6% to US$1.41 from US$1.24 at the end of 2013. The NAV fell 1.3% in Q2. On 30 June 2014, the QIF share price was trading at a 9.1% discount to NAV.

Historic performance against the QE Index

Performance	2007 5M	2008	2009	2010	2011	2012	2013	6M 2014
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	13.6%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	10.7%

*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	15.1%
Industries Qatar	Industry	10.8%
Commercial Bank of Qatar	Banks & Financial Services	8.6%
Barwa Real Estate	Real Estate	7.1%
Doha Bank	Banks & Financial Services	6.3%
Qatar Insurance	Insurance	6.3%
Masraf Al Rayan	Banks & Financial Services	6.0%
Ooredoo	Telecoms	5.9%
Qatar Electricity & Water Co	Industry	4.7%
Qatar Navigation	Transportation	4.5%

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

Country allocation

At 30 June 2014, QIF had 27 holdings: 17 in Qatar, two in UAE, five in Oman and three in Kuwait. QIF's holdings outside Qatar represented 7.1% of NAV (Q1 2014: 6.6%). Cash represented 7.7% of NAV (Q1 2014: 2.1%). The cash balance at the end of the quarter is higher than in the previous quarter as we realised some profits on stocks that reached or exceeded our valuation levels. We will be looking to redeploy the funds into stocks as valuations move more toward levels that we are comfortable with.

During the quarter, QIF added five new companies to the portfolio: Ezdan Holding Group, Widam Food Company, Al Batinah Power, Al Suwadi Power and National Industries Group. It sold Mazaya Real Estate Development, Mesaieed Petrochemical Co., Vodafone Qatar and Dhofar International Dev. and Inv. Holding Co. The Investment Adviser believes that valuations in these stocks were stretched.

QIF's holding in Masraf Al Rayan reduced from 11.3% at the start of the quarter to 6.0% at the end. The shares rose 14.6% in the quarter, to a 52 week high on 1 June 2014, and at the quarter end was trading on 19.7 times historic earnings.

Qatar remains the Investment Adviser's favourite market in the Gulf Cooperation Council (GCC) region because of the government's significant investment plans, relatively stable political environment, sizeable hydrocarbon reserves coupled with attractive valuations and strong yield.

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 30 June 2014.

The banking sector (including financial services) remains the Investment Adviser's most favoured sector with a weighting of 43.5% of NAV. Qatar National Bank is QIF's largest single holding (15.1% of NAV), followed by Commercial Bank of Qatar (8.6%). Qatar's banking sector growth continues.  Total assets grew 3.9% between December 2013 and May 2014, driven by a 4.2% expansion of the loan book. The outlook is good with further lending growth as a result of increased investment spending and rising population. Lower provisioning and efficient cost management should also improve profitability.

The industrials sector remains the fund's second largest weighting at 16.7% (Q1 2014: 17.8%). Real estate increased to 12.1% (Q1 2014: 11.3%) of the fund, with telecoms decreasing to 6.7% from 7.8%.  The insurance sector increased from 5.3% to 6.3% at the end of Q2 2014. Weighting in the transportation sector reduced marginally to 4.7%. Services and consumer goods sector weighting increased to 2.3% from 1.8%.

Regional market overview

The performance of GCC markets was muted in Q2 after the strong gains of Q1. Qatar and UAE markets witnessed increased volatility on the back of profit taking. The Bloomberg GCC 200 index fell 1.8% in Q2 from March 2014. Dubai was the worst performer in Q2, with an 11.4% decline. Qatar reduced 1.3%.

During Q2 Qatar saw historic highs on the back of strong buying from Qatari investors and foreign institutions amid positive cues such as the MSCI upgrade and expansionary budget announcement. Valuations became expensive in some areas after strong gains in the Qatar and Dubai markets.

Dubai and Qatar markets retreated later in Q2 as profit-taking combined with the security crisis in Iraq and muted activity during the holy month of Ramadan impacting fresh buying. The start of Ramadan/summer traditionally triggers profit-taking by retail investors.   

The Dubai market dropped 11.4% in Q2, while Abu Dhabi market retreated 7%. All the sectors in Dubai, excluding the banking, consumer staples and industrials, recorded losses during the quarter. Construction major Arabtec declined 39% in Q2, after rising 108% in the first quarter.  Arabtec's CEO Hasan Ismaik resigned abruptly in June. Lack of clarity about the relationship between Arabtec and its major shareholder Aabar Investments and uncertainty over corporate strategy after the CEO's resignation led to investor concern. Arabtec later clarified it would continue with current projects and focus on its ongoing business. 

The Kuwait market fell 7.9% in Q2, with financial services emerging as the worst performer followed by the real estate and telecommunications sectors. The Saudi Arabian market reported a 0.4% rise during the quarter helped by gains in retail driven small and micro-cap sectors that offset modest losses in the institutional driven large‐cap sectors. The Oman market gained 2.2% during the quarter driven by gains in the banking & investment sector. The Bahrain market was the best performer, gaining 5.2% during the quarter, with rises across the board, excluding the industrial sector.

Going forward, the Investment Adviser believes that the Qatar market is fundamentally better poised than other GCC markets with large infrastructure investments in progress, healthy economic growth projections, and modest earnings growth.

2022 World Cup

News of allegations relating to corruption in Qatar's 2022 World Cup bid also coincided with the broader sell-off in the Qatar market. The Investment Adviser regards the 2022 World Cup as an important catalyst for growth rather than the sole driver of growth. Qatar's non-oil GDP has grown at around 10%-11% per year since 2011 and has been the impetus behind recent economic expansion. Infrastructure spend of US$182 billion (c90% of 2013 GDP) in the pipeline means that non-oil GDP can continue to grow at the mid-teens levels over the next few years. The Investment Adviser believes that while the 2022 World Cup remains important in providing a timing discipline on infrastructure plans, it's worth remembering that most of this infrastructure spend (e.g. road/rail transport infrastructure, expansion of air/sea ports, healthcare/education investments) was already planned prior to the 2022 World Cup hosting decision and is likely to go ahead even if the World Cup is moved elsewhere.

If the rights to host the 2022 World Cup were to be removed from Qatar, it is likely that some of the projects might be put on hold or cancelled altogether, the bulk of which would be stadia and related facilities. The Investment Adviser believes that with or without the World Cup, Qatar's economy will continue to prosper on the back of double digit non-hydrocarbon sector growth in coming years. The country would continue with its massive infrastructure development program.   

Qatar: corporate profits increased 8.6% in 3M 2014

The corporate profits of Qatari listed companies grew 8.6% during the first three months of 2014 compared to the same period last year. Strong growth was reported in the real estate sector, the services & consumer goods and insurance sectors. All the sectors, excluding industrials, reported a rise in net profits.

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

Sectors	Q1 2013	Q1 2014	% Change
Banking & Financial	1,169,493	1,277,105	9.2%
Insurance	104,631	119,290	14.0%
Industrial	890,385	825,254	-7.3%
Services & Consumer Goods	91,562	110,810	21.0%
Real Estate	171,065	302,121	76.6%
Telecoms*	222,096	243,583	9.7%
Transportation	148,965	160,656	7.8%
Total	2,798,196	3,038,820	8.6%

* Excluding Vodafone Qatar

Source: Qatar Exchange

Profits in the banking & financial sector increased 9.2% in Q1 2014 compared to Q1 2013. Growth was driven by a near 10% rise in net income reported by Qatari banks. Qatar National Bank (QNB) and Qatar Islamic Bank (QIB) recorded net profit growth of 13.7% and 15.2%, respectively. Lower profit growth was recorded by Commercial Bank of Qatar (+5.6%) and Doha Bank (+1.0%), while Al Khalij Commercial Bank reported a 16.9% decline. During the first quarter of 2014, overall credit growth remained good, with overall loans up 3.2%, helping the banks to increase their profitability. Loan growth is expected to remain healthy in 2014. The Investment Adviser believes that the expected uptick in project / contract awards in the coming months should be the main driver of loan growth in the public and corporate sectors.

Industrial sector profits decreased 7.3% in Q1 2014 compared to Q1 2013, mainly due to a drop in net profit reported by Industries Qatar. The sector now contributes 27.2% of the Qatar market's profits, lower than the 31.8% in Q1 2013. Industries Qatar's net profit fell 37.8% in Q1 2014 compared to Q1 2013, mainly due to extended planned shut-downs, product price deflation, and increasing costs.

In Q1 2014 insurance sector profits increased 14.0%compared to the same period in 2013. Strong growth in net profit was reported by Al Khaleej Takaful (+47.0%) and Islamic Insurance (+32.1%). Growth was also supported by the sector's largest company, the Qatar Insurance Company which reported a 12.4% rise in profit.

Net profits in the services & consumer goods sector grew 21.0% in Q1 2014 compared to Q1 2013. The largest profit contributor was Qatar Fuel Company, which reported a 12.3% rise in net profit. Al Meera Consumer Goods and Medicare reported 52.1% and 40% profit growth, respectively.

Real estate sector profits grew 76.6% in Q1 2014 compared to Q1 2013, helped by higher earnings from all sector companies. Ezdan Holding Group posted an 82.3% growth in profits to become the largest profit contributor in the sector. Profits at Barwa Real Estate increased by 67.3%.

In the telecoms sector Qatar Telecom (Ooredoo) reported a 9.7% rise in profit for Q1 2014.

In the transportation sector profits rose 7.8%, with all three companies in the sector reporting higher profits. The largest company by net profit, Qatar Navigation, grew 1.4% year-on-year. Gulf Warehousing Company recorded the strongest growth of 40%.

Recent developments

Qatar's construction sector to expand

Qatar's construction sector is poised for growth driven by heavy investments by the government in infrastructure, particularly local roads, expressways, the Doha metro and rail, and drains and sanitation. The construction sector in Qatar is estimated to grow by 14.1% in 2014 (13.6% growth reported in 2013) and accelerate in 2015 to 14.5%. The building of new healthcare centres and education facilities should entail heavy spending. Further impetus is expected from private construction activity in residential and commercial real estate development, including new malls, hotels and labour accommodation.

Tax exemption for foreign investors

Recently, the government's Advisory Council has approved a draft law to exempt foreign investors trading in the local market from paying tax on capital gains, dividend income and interest on bonds, including Sukuk bonds. The law covers foreign investment, mutual and portfolio funds. Once the law is implemented foreign companies or individuals participating in such mutual and portfolio funds are entitled for tax exemption on earnings.

Loan growth

According to Qatar Central Bank (QCB) data, Qatar's credit growth remained healthy with total loans increasing by 4.2% between December 2013 and May 2014. Public sector loan growth was relatively flat, while private sector reported strong growth of 6.3%. Total deposits grew 6.8% between December 2013 and May 2014. The banking sector's loans-to-deposit ratio (LDR) stood at 103% at end of May 2014 compared to 105% at the end of December 2013.

An uptick in project / contract awards in the coming months should mean loan growth remains strong. Public sector and corporate sector are expected to be the drivers of loan book growth in 2014, with support from SMEs and consumer lending.   

10 Qatari stocks in MSCI EM Index

Recently MSCI reclassified Qatar and the UAE as emerging markets from frontier-markets. Qatar will have 0.48% weighting in the MSCI EM Index with 10 companies qualifying for inclusion: QNB Group (QNBK), Industries Qatar (IQCD), Masraf Al Rayan (MARK), Ooredoo (ORDS), Vodafone Qatar (VFQS), Qatar Electricity & Water (QEWS), Qatar Islamic Bank (QIBK), Barwa Real Estate (BRES), Commercial Bank of Qatar (CBQK) and Doha Bank (DHBK).The UAE will have 0.58% weighting in the MSCI EM Index with 9 stocks qualifying for inclusion. At the end of Q2 2014, QIF held nine out of ten Qatari companies qualifying for inclusion, representing a weighting of 67.2% in QIF. Of the nine UAE stocks that have been qualified for the MSCI EM Index inclusion, the QIF holds one - Emaar Properties (1.7% of NAV).  

Foreign ownership limit increased to 49%

In May 2014, HE the Emir Sheikh Tamim bin Hamad al-Thani, President of the Supreme Council for Economic Affairs and Investment, issued a directive to increase foreign ownership limits in the Qatar Exchange listed companies to 49% of the capital from the traditional 25%.  Investors outside the six-nation Gulf Cooperation Council (GCC) are now eligible to hold 49% in companies listed on the Qatar Exchange. Under this new directive, the share of foreign ownership would be calculated based on total share capital of each company and not on the available free float. An increase in foreign ownership limit should have a positive impact on Qatar's overall weight in the MSCI EM Index. This rise in foreign ownership limits is expected to take Qatar's MSCI EM Index weight from 0.48% to 0.62%, higher than 0.58% weight of UAE. That increased weight should attract around US$440 million of passive inflows to Qatar.

Qatar Exchange (QE) to launch margin trading, short selling

QE is working toward launching margin trading and covered short selling in the near future. The objective behind this initiative is to enhance investment opportunities, diversify the market and increase liquidity. The QE is in talks with the regulator to formulate rules and regulations to oversee these transactions.

QE to launch two ETFs

QE is planning to launch two exchange-traded funds (ETFs) over the next six months. One ETF is expected to be based on government fixed income securities, while the second would be based on the Qatar Exchange.

Macroeconomic update

Qatar's economic growth continued to remain healthy in Q1 2014, with real GDP rising 6.2% compared to Q1 2013, according to Qatar Statistics Authority (QSA). As compared to the previous quarter (Q4 2013), real GDP growth stood at 2.3%. The growth was mainly driven by the non-hydrocarbon sector, which expanded 11.5% in Q1 2014 compared to Q1 2013. Double digit growth was reported in the construction, trading, hospitality and financial sectors.

The hydrocarbon sector contracted 1.2% in Q1 2014 compared to Q1 2013, mainly due to lower crude oil production and flat gas production, and also impacted by lower crude oil prices.

Going forward, Qatar's economic growth is expected to be largely driven by non-hydrocarbon sector growth, as domestic demand is expected to remain strong. A continuing rise in investment spending, the government's expansionary fiscal stance together with population growth should fuel growth momentum. According to the Ministry of Development Planning and Statistics (MDP&S), the country's economic growth is estimated at 6.3% in 2014, hitting 7.8% in 2015 on account of strong investment activity in the non-hydrocarbon sector and partially helped by the commissioning of the Barzan gas project.  

Population growth is expected to remain healthy as large infrastructure projects require large number of workers. Steady growth in population and rise in spending is encouraging for the domestic consumer sector and services sector companies.

Valuations

Market	Market Cap.	P/E (x)		P/B (x)	Dividend Yield (%)
	US$ Mn	2014E	2015E	2014E	2014E
Saudi Arabia	517,973	14.7x	12.2x	2.7x	3.9%
UAE	193,202	14.6x	12.9x	1.9x	4.0%
Qatar	132,536	13.4x	11.5x	2.4x	4.6%
Kuwait	111,749	15.9x	12.0x	1.6x	4.0%
Oman	18,687	11.1x	10.4x	1.6x	5.1%
Bahrain	21,581	11.5x	10.0x	1.3x	4.8%
Egypt	28,342	15.4x	11.3x	7.2x	4.3%
Jordan	23,835	15.6x	12.8x	1.5x	3.4%
Overall MENA	1,047,906	14.6x	12.1x	2.4x	4.1%

Source: Bloomberg Finance LP, Deutsche Bank, Prices as of 30th June 2014

Outlook

The Qatari economy is growing well with diversification of the economy set to continue. Double digit growth is expected in the non-hydrocarbon sector over the medium term as the Qatari government recently earmarked US$182 billion for various infrastructure projects over the next five years.

The banking sector in Qatar is expected to benefit from government spending and growth in the non-hydrocarbon sectors, hence, the Investment Adviser favours selected banks. Population growth and infrastructure investment should drive growth in demand for finance, hotels and restaurants, trade and transport. Hence, the Investment Adviser favours selected consumer and services driven companies.

The Investment Adviser believes that Qatar and the Qatari exchange are well positioned for future growth underpinned by the infrastructure program, corporate earnings growth, robust government spending, compelling valuations and a healthy dividend yield.

 

END

 

 

MSCRBMATMBITBFI