Quarter 2 Investment Report

RNS Number : 0528J

Qatar Investment Fund PLC

11 July 2013

 



11 July 2013

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

Q2 2013 Investment Report

Qatar Investment Fund PLC (LSE: QIF), today issues its Q2 2013 Investment Report (covering the period 1 April 2013 to 30 June 2013 corresponding to the Company's financial fourth quarter), 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.

For further information:

Qatar Investment Fund plc [phone]

Nick Wilson

Panmure Gordon - [phone] 

Andrew Potts

Maitland - [phone]

William Clutterbuck/Robbie Hynes    

Highlights

·  Qatar Investment Fund plc's ("QIF" or "the Company") net asset value (NAV) increased by 16.5% to US$1.1672 (including dividends received) as at 27 June 2013 from US$1.0022 as at 31 December 2012. The Qatar Exchange Index rose by 11.2% during the same period, representing an outperformance of 5.3%.

·  On 25 June 2013, the Emir of Qatar, Sheikh Hamad bin Khalifa Al Thani, handed over power to his 33 year old son, Sheikh Tamim bin Hamad Al Thani.

·  Qatari listed companies reported Q1 2013 profit figures which showed an aggregate rise of 11.4% on Q1 2012.

·  Qatari banks continued to accelerate lending, with loans increasing 19.1% in the five months to the end of May 2013 compared to the same period in 2012.

·  Infrastructure project awards ticked up, including Qatar Railway Company awarding contracts worth more than QAR30 billion (US$8.2 billion) in June.

·  MSCI upgraded Qatar and UAE to 'Emerging Market' status from 'Frontier Market'. Market commentators have suggested that this may lead to additional investment inflows of up to US$430 million into the Qatar stock market.

Performance

In the second quarter of 2013 the QIF NAV rose 8.5% to US$1.1672 (28 March 2013: US$1.0758). As at 27 June 2013, the QIF share price was trading at a 12.6% discount to NAV.

QIF vs QE Index

	2007 (5M)	2008	2009	2010	2011	2012	6M 2013
QIF (NAV)	13.87%	-36.42%	10.40%	29.86%	1.29%	-4.64%	16.46%
QE Index	27.00%	-28.80%	1.10%	24.80%	1.10%	-5.33%	11.24%

Source: Bloomberg, Qatar Insurance Company

QIF Portfolio

Top 10 holdings

Company Name	Sector	% Share of NAV
Qatar National Bank	Banks & Financial Services	19.3%
Industries Qatar	Industrial	12.4%
Masraf Al Rayan	Banks & Financial Services	9.9%
Commercial Bank of Qatar	Banks & Financial Services	8.1%
Barwa Real Estate	Real Estate	6.7%
Qatar Electricity & Water Co	Industrial	5.6%
Qatar Telecom	Telecom	5.1%
Doha Bank	Banks & Financial Services	4.4%
Qatar Navigation	Transportation	4.1%
Qatar Insurance	Insurance	3.7%

Source: Bloomberg, Qatar Insurance Company

During the quarter, Qatar Insurance Company replaced Qatar Islamic Bank in the top 10 holdings.

Country allocation

At the end of the second quarter QIF had 29 holdings: 18 in Qatar, 7 in UAE, 3 in Oman and one in Kuwait. Cash was 3.2% of NAV (Q1 2013: 2.7%).

Qatar continues to be the Investment Adviser's favourite market in the GCC region because of the impetus for growth from the Qatar government's significant infrastructure development plan and Qatar's relatively stable political environment.

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 2013.

The banking sector (including financial services) remains the most attractive sector with a 57.0% weighting in the Company, up from 50.9% in Q1 2013. Qatar National Bank is the Company's largest holding (19.3% of NAV).

The second largest weighting in the Company, at 18.4%, is the industrial sector; particularly Industries Qatar (12.4% of NAV); followed by the telecoms sector which increased to 5.1% weighting at the end of Q2 2013 from 4.9% in Q1.

The real estate sector weighting has been reduced from 10.0% in Q1 to 3.0% at the end of Q2 2013. Similarly the transportation sector decreased to 4.5% at the end of Q2 2013.

The allocation to the insurance sector rose to 3.7%, while the Company added two more sectors: engineering & construction services (1.0% of NAV) and energy (0.1% of NAV) during the quarter.

Regional market overview

GCC markets rose in tandem with global markets, with the Bloomberg GCC200 Index gaining 5.9% in Q2. Dubai, Abu Dhabi and Kuwait markets performed strongly growing 21.5%, 17.4% and 15.6%, respectively, while Saudi Arabia and Oman markets performed below other GCC peers. Money inflows from MENA countries experiencing unrest have favoured the UAE due to its safe haven status in the GCC region.

Saudi Arabia's Tadawul Index continues to lag other GCC peers, gaining 5.2% in Q2. Concern that oil production may exceed demand in the world market put pressure on the world's largest oil exporter.

The Qatar Index rose 8.14% in Q2, led by the real estate sector which gained 20.88%. The transportation and insurance sectors rose 14.87% and 12.56%, respectively.

Despite simmering political issues and lack of liquidity, the Bahrain Index rose 8.81%. Oman's growth of 5.82% was led by the industrials sector which grew 11.87%.

Qatar: corporate profitability increased 11.4%

Qatari-listed companies' net profits rose 11.4% in Q1 2013 compared to Q1 2012, to QAR10.2 billion (US$2.8 billion).

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

Sector	Q1 2012	Q1 2013	% Change
Banking & Financial	1,126,518	1,169,493	3.8%
Insurance	83,376	104,665	25.5%
Industrial	720,079	890,385	23.7%
Services & Consumer Goods	104,127	101,673	-2.4%
Real Estate	160,728	171,065	6.4%
Telecoms	195,448	222,096	13.6%
Transportation	131,485	148,965	13.3%
Total	2,521,761	2,808,342	11.4%

Source: Qatar Exchange

Profits in the banking & financial sector increased 3.8% in Q1 2013 compared to Q1 2012. This growth was largely driven by increased lending, particularly to the public sector, which has increased 6.8% so far in 2013. However, the 4% growth in bank profits was slower than in 2012 as a result of slower project/contract awards in Q1 2013. Lending to the public sector is expected to increase going forward as project/ contract awards gather pace. Sector heavyweight Qatar National Bank, QIF's largest holding, reported slower growth in net profits at 6.7%. Commercial Bank of Qatar and Masraf Al Rayan Bank reported 7.3% and 13.2% rises in profits, respectively. Qatar Islamic Bank's profits fell 24.9% in Q1. Going forward, loan growth in the Qatari banking sector is expected to remain strong, underpinned by rising infrastructure spending and a pick-up in contract awards, leading to increased lending to the corporate sector.

Industrials sector profits grew 23.7% in Q1 2013 compared to Q1 2012. The industrial sector now contributes 31.7% of the total Qatar market's profits. Growth accelerated during Q1, and this was mainly driven by increased profits from heavyweights such as Industries Qatar, one of the largest chemical producers in the GCC region, which reported a 33.6% jump in Q1 2013 profits.

In Q1 2013 insurance sector profits increased faster than any other sector, by 25.5%, compared to the same period in 2012. Again, growth was led by the sector's largest company, the Qatar Insurance Company which reported a 35.6% rise in profit.

Net profits in the services & consumer goods sector declined 2.4%. The largest profit contributor was Qatar Fuel Company, which reported flat profits of QAR0.24 billion (US$0.07 billion).

After a poor performance in 2012 the real estate sector profits rose 6.4% in Q1 2013 compared to Q1 2012, mainly helped by profit growth from United Development Company and Ezdan Holding Group. After reporting losses for 2012, United Development Company (UDC) posted a 51.4% growth in profits in Q1 compared to the same quarter in 2012.

The telecoms sector comprises two companies, Vodafone Qatar and Qatar Telecom. Vodafone Qatar was excluded from this profits comparison, since its fiscal year ends on March 31. Qatar Telecom reported a 13.6% rise in profit for Q1.

In the transportation sector profits rose 13.3%, with all three companies in the sector reporting higher profits. The largest company, Qatar Navigation, led with 21.4% year-on-year growth.

Recent Developments

Inclusion of the Qatar market in the MSCI Emerging Market index

MSCI has promoted UAE and Qatar from 'Frontier Market' to 'Emerging Market' status, effective from May 2014.  This is the result of Qatar's powerful economic, regulatory and financial progress in recent years, and continuing efforts to address the low foreign ownership limits on many Qatari companies. Regulators in Qatar have encouraged companies to increase their limits.

The move to emerging market status is expected to increase the shares available to foreign investors, as companies are changing their foreign ownership limits. In Qatar, Doha Bank recently raised its foreign ownership limits to 25%, while The Commercial Bank of Qatar and Qatar Islamic Bank have applied for an increase. This should encourage inward capital flows (HSBC expect additional investment inflows of US$430 million) and mean these markets are accessible to more funds across the world. The change is effective from May 2014, when the UAE and Qatar markets are expected to represent 0.40% and 0.45%, respectively, of the MSCI Emerging Markets Index.

This change should attract a broad mix of international investors to the wider GCC region, from long-term foreign investors to hedge funds, and is expected to improve liquidity.

Foreign fund inflows in the MENA region

In May the MENA region experienced inflows of QAR2.4 billion (US$655 million) from foreign funds, according to a report by Deutsche Bank. Of this, Qatar attracted fund inflows of QAR477 million (US$131 million). For Qatar, this encouraging trend is the opposite of the approximately US$1.3 billion of foreign fund outflows in 2011-2012.

Project activity gathering momentum

Construction and infrastructure contract awards are increasing in the GCC. Contracts worth US$15.9 billion were awarded between April and June 2013 compared to US$13.4 billion worth awarded in the first quarter of 2013.

The most recent months have seen an uptick in infrastructure project awards in Qatar. In June Qatar Railways Company awarded four contracts worth in total more than QAR30 billion (US$8.2 billion) as part of phase 1 of the Doha Metro. Phase 1 includes construction of four rail lines and an underground railway in the centre of Doha. Qatar Rail also recently released further tenders for additional elevated sections of rail line.

Furthermore, Qatar's Public Works Authority (Ashghal) recently awarded new contracts worth QAR7.2 billion (US$2 billion) for the construction of 24 roads across Doha.

Credit growth accelerates

Credit growth in Qatar and adjacent markets remains strong. Total credit extended by Qatari banks continued to accelerate, rising 19.1% in May 2013 compared to May 2012. Total credit extended by Qatari banks has grown 5.5% year to date. Public sector credit jumped by 6.8% year to date (May 2013). The private sector reported growth of 5.3% during the same period.

Banks in Qatar have been experiencing a strong growth environment underpinned by the ongoing infrastructure plan and non-oil sector growth.

Political changes in Qatar

On 25 June 2013, the Emir of Qatar, Sheikh Hamad bin Khalifa Al Thani, handed over power to his 33 year old son, Sheikh Tamim bin Hamad Al Thani. Sheikh Hamad introduced political and economic liberalization and is credited with Qatar's emergence as a major player in regional diplomacy.

In his first speech to the nation as the new Emir, Sheikh Tamim underscored the importance of continuity, raising expectations that the progressive policies laid out by his father would continue.

Macroeconomic update

As forecast, economic growth in Qatar is continuing at lower levels than that witnessed during the rapid economic growth of the last decade which occurred principally from investment in oil and gas production. Growth in the years ahead should largely come from the non-oil sectors: construction, consumer durables and banking as the government continues its significant infrastructure development program ahead of the FIFA 2022 World Cup. According to the IMF, Qatar's real GDP is estimated to grow 5.2% in CY2013 and 5.0% in CY2014.

The government plans to spend over US$150 billion on infrastructure and related projects as they seek to diversify the economy. The expansionary budget announced by the Qatari government shows a strong commitment to speed up and complete its planned infrastructure projects before 2022.

Qatar nominal GDP grew 6.1% in the first quarter of 2013 compared to Q1 2012; when compared to Q4 2012 growth was 2.4%. Non-hydrocarbon sectors continued to drive the growth with a 13.1% increase in Q1 2013, while the hydrocarbon sector reported only a 1.5% increase.

Qatar's population continues to grow at a healthy pace, with the overall level expanding 9.3% to 1.96 million at the end of May 2013. Steady growth in population coupled with rising income levels is encouraging for the domestic consumer sector and services sector companies.

GCC Market valuations

	Market Cap.	P/E (x)		P/B (x)	Dividend Yield (%)
	US$ Mn	2013E	2014E	2013E	2013E
Saudi Arabia	399,127	12.3x	10.2x	1.6x	4.1%
UAE	136,508	10.8x	8.5x	1.0x	3.8%
Qatar	109,381	11.3x	10.5x	1.4x	5.7%
Kuwait	105,490	13.2x	11.7x	1.5x	3.3%
Oman	16,734	9.9x	9.5x	1.2x	5.1%
Bahrain	17,414	10.5x	9.1x	0.9x	5.7%
Egypt	22,588	9.9x	6.5x	1.2x	4.5%
Jordan	23,811	7.7x	6.9x	0.8x	4.7%
Overall MENA	831,053	11.3x	9.7x	1.4x	4.5%

Source: Bloomberg Finance LP, Deutsche Bank, Prices as at 1 July 2013

Despite recent strong performance the Investment Adviser believes that the Qatar market still offers an attractive combination of appealing valuations, high dividend yields, and strong prospects for profit growth.

Outlook

Qatar listed companies reported reasonable profit growth in the first quarter of 2013 after a marginal decline for 2012 as a whole. This earnings momentum is expected to continue in the coming quarters, driven by increasing infrastructure development activity leading to strong credit growth.

Qatar's economy is growing satisfactorily, with future growth expected to be driven by the non-hydrocarbon sector. The banking sector is expected to benefit from government infrastructure spending and the growth in the non-hydrocarbon sectors, and the Investment Adviser favours selected banks.

Steady growth in population coupled with rising income levels leading to higher disposable income and increased government spending should bode well for domestic banks and consumer, real estate, utilities, manufacturing and transport sector companies.

The recent upgrade of the Qatar market to the 'Emerging Market' status should provide a significant impetus to the financial market and should encourage additional foreign fund inflows, as more global investors can now consider investing in the Qatari market.

The Investment Adviser believes Qatar and the Qatari exchange are well positioned for future growth.

 

END

 

 

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