Quarterly Report Q3 2014

RNS Number : 5319V

Qatar Investment Fund PLC

29 October 2014

 



29 October 2014

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

Interim Management Statement and Q3 2014 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 July 2014 to 28 October 2014.

The Company has also issued its Q3 2014 Investment Report for the period 1 July 2014 to 30 September 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 - Q3 2014

Highlights

Ø Qatar Investment Fund plc's ("QIF" or "the Company") net asset value per share ("NAV") increased 16.0% in the quarter ended 30 September, with the Qatar Exchange Index ("QE") rising 19.5% over the quarter.

Ø In the 9 months to 30 September 2014 QIF's NAV rose 31.8% (QE: 32.3%).

Ø Qatar's GDP rose 5.7% in Q2 2014 over Q2 2013 with the non-hydrocarbon sector (+11.3%) offsetting hydrocarbons (down 2.2%).

Ø Qatar's GDP expected to grow 6.8% in 2014, and 7.5% in 2015.

Ø Qatari population rose 6.9% so far in 2014.

Ø Qatari companies increased profits 2.2% in H1 2014.

Ø Credit growth increased 5.9% from December to August led by the private sector.

Performance

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 30 September 2014, the QIF share price was trading at a 16.5% discount to NAV.

Historic Performance against the QE Index

Performance	2007 5M	2008	2009	2010	2011	2012	2013	2014 9M
QIF NAV*	13.9%	-36.4%	10.4%	29.9%	1.3%	-4.7%	24.2%	31.8%
QE Index	27.0%	-28.8%	1.1%	24.8%	1.1%	-4.8%	24.2%	32.3%

*Net of dividends received and paid

Source: Bloomberg, Qatar Insurance Company 

Portfolio Structure

Top 10 Holdings

Company Name	Sector	% Share of NAV
Industries Qatar	Industry	13.7%
Qatar National Bank	Banks & Financial Services	13.4%
Commercial Bank of Qatar	Banks & Financial Services	9.1%
Barwa Real Estate	Real Estate	6.6%
Ooredoo	Telecoms	6.4%
Qatar Insurance	Insurance	6.1%
Doha Bank	Banks & Financial Services	4.8%
Qatar Islamic Bank	Banks & Financial Services	4.5%
Qatar Navigation	Transportation	4.3%
Qatar International Islamic Bank	Banks & Financial Services	4.3%

During the quarter, Qatar Islamic Bank and Qatar International Islamic Bank replaced Masraf Al Rayan and Qatar Electricity & Water Co. in the top 10 holdings.

Country Allocation

At 30 September 2014, of QIF's 26 holdings, 22 were in Qatar, three in the UAE and one in Oman (30 June 2014, 27 holdings: 17 in Qatar, two in UAE, five in Oman and three in Kuwait).  QIF's holdings outside Qatar represented 5.6% of NAV (Q2 2014: 7.1 %). Cash represented 2.6% of NAV (Q2 2014: 7.7%).  Cash at the end of Q2 2014 was higher than in the previous quarter as the Investment Adviser realised some profits. The Investment Adviser redeployed funds during the quarter, as valuations moved towards level that the Investment Adviser felt more comfortable with.

In the quarter, the Investment Adviser added six new companies to the portfolio: Doha Insurance, Gulf International Services, Mazaya Real Estate Development, Medicare Group, Qatar International Islamic Bank and Waha Capital. It sold seven portfolio companies: Al Batinah Power, Al Suwadi Power, Oman Telecom, Sembcorp Salalah, Mobile Telecommunications Company K.S.C., National Bank of Kuwait and National Industries Group. 

The decision to increase the allocation to the Qatari market is because of Investment Adviser's view that there is greater visibility of earnings in selected Qatari companies, momentum in infrastructure spending and non-hydrocarbon sector growth. Additionally, the sale of all the Kuwaiti listed companies and some Oman stocks is because the Investment Adviser believes there are better opportunities existed in other GCC markets, principally Qatar.

The Investment Adviser believes Qatar remains the most attractive market in the Gulf Cooperation Council (GCC).  It has a combination of low political risk, sizeable hydrocarbon reserves, strong economic growth, a huge infrastructure project pipeline and rising population. The market has moderate earnings growth and an attractive dividend yield.

Sector Allocation

QIF's allocation by sector as at 30 September 2014 is shown below:

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 September 2014.

The Investment Adviser remains positive on the Qatari banking sector, and is marginally overweight compared to the QE Index, with a sector weighting (including financial services) of 41.0% (down from 43.5% at the end of June 2014) in the portfolio vs. 40.1% for the QE Index. Qatar National Bank is QIF's largest banking sector holding (13.4% of NAV), followed by Commercial Bank of Qatar (9.1%). According to Qatar Central Bank data published at the end of August, overall banking sector assets in Qatar grew 4.2% so far in 2014, mainly driven by loan growth of 5.9%. The Investment Adviser believes that the Qatari banking sector outlook remains robust, driven by the infrastructure spending and population growth.

QIF's second largest allocation, at 22.0% (Q2 2014: 16.7%), is to the industrial sector, notably Industries Qatar (13.7% of NAV). During the quarter, the Investment Adviser increased the industrials weighting by adding Gulf International Services (4.2% of NAV) to the portfolio. Real estate increased to 14.6% (Q2 2014: 12.1%) of the fund, with telecoms decreasing to 6.4% from 6.7%. The allocation to the insurance sector stood at 6.5%, (Q2 2014: 6.3%) while the transportation sector eased to 4.5% (Q2 2014: 4.7%). The services and consumer goods sector increased to a weighting of 2.6% from 2.3%.

Regional Market Overview

All GCC markets rebounded in Q3 2014 after muted gains in Q2.  Dubai led the way (+27.9%) followed by Qatar (+19.5%).  The Bloomberg GCC 200 Index rose 12.9% in Q3 2014.

Gains in the UAE market were supported by clarifications from Arabtec Holding Co, which helped improve investor sentiment. The Abu Dhabi market rose 12.2% during the period. Qatar witnessed a boost in investor sentiment following a series of events, including greater visibility on project awards; addition of Qatar to the S&P Dow Jones Emerging Markets Index; and a revision in weightings of Qatari companies in the MSCI Emerging Markets Index following changes in the calculation methodology of foreign ownership.

The Saudi market gained 14.1% during the quarter, helped by news of the opening of the Saudi market to foreign investors in 2015.  All sectors in the Saudi market reported gains in the quarter with the insurance sector (+25.3%) emerging as best performer, followed by hotel & tourism (+17.8%) and banks & financial services (+17.5%).

The Kuwait market rose 9.3% during the quarter led by financial services (+13.8%) followed by oil & gas (+9.4%) and real estate (+9.3%). The Oman market gained 6.8% in the quarter mainly driven by gains in the banking & investment (+8.9%). The Bahrain market overall was up 3.4% with all sectors closing down except the banking (+5.3%) and industrial (+20.2%) sectors.

Qatar: corporate profits increased 2.2% in H1 2014

The net profit of the Qatar's 43 listed companies grew 2.2% in H1 2014 over H1 2013. However in Q2 2014, the profit of Qatari listed companies declined 3.8% compared to Q2 2013. Poor performance by the insurance, industrial and telecom sectors impacted the overall net profit growth.

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

Sectors	H1 2013	H1 2014	% Change	Q2 2013	Q2 2014	% Change
Banking & Financial	2,461,105	2,631,555	6.9%	1,291,612	1,354,449	4.9%
Insurance	345,488	230,572	-33.3%	240,857	111,283	-53.8%
Industrial	1,718,297	1,601,477	-6.8%	827,912	776,223	-6.2%
Services & Consumer Goods	196,109	247,781	26.3%	104,548	136,971	31.0%
Real Estate	278,470	410,460	47.4%	107,405	108,339	0.9%
Telecoms*	475,657	468,140	-1.6%	253,561	224,557	-11.4%
Transportation	270,602	283,187	4.7%	121,638	122,531	0.7%
Total	5,745,728	5,873,173	2.2%	2,947,532	2,834,353	-3.8%

* Excluding Vodafone Qatar because of 31 March year end

Source: Qatar Exchange

Banking and financial services sectorprofits increased 6.9% in H1 2014 compared to H1 2013. The growth largely came from increased lending, particularly to the private sector. According to Qatar Central Bank (QCB) data, Qatar's credit growth remained healthy with total loans increasing by 6.1% between December 2013 and June 2014. Banking profits improved 6.6% in H1 2014 compared to H1 2013, with Qatar National Bank reporting a profit increase of 7.0%. Qatar Islamic Bank's profit grew the most among its peers, by 15.1% in H1 2014 compared to H1 2013. Net profit of Commercial Bank of Qatar remained flat during the same period, while Al Khaliji reported a 10.9% decline in its profit. An uptick in project / contract awards in the coming months should mean loan growth remains strong. Profit in financial services increased 49.8% in H1 2014 compared to H1 2013, mainly due to strong growth reported by Dlala Brokerage.

In H1 2014, the insurance sector's profit declined 33.3% compared to H1 2013, mainly due to a 92.8% drop in profit for Qatar General Insurance and Reinsurance Company (QGRI). This fall in QGRI's net profit was largely due to fair value gains of QAR690.8 million reported by the company in H1 2013 as against a fair value loss of QAR3.9 million in H1 2014. All the other companies in the sector reported strong double digit profit growth. The sector major, Qatar Insurance Company (QIC) reported a 53% rise in the period.

Industrials sector profits declined 6.8% in H1 2014 compared to H1 2013. The fall was largely attributed to a substantial profit drop from sector heavyweight, Industries Qatar (IQ). These contracted 37.9% in H1 2014 compared to H1 2013, on account of delayed and planned production shutdowns.

Profits in the services & consumer goods sector increased 26.3% in H1 2014 compared to the same period last year. The largest contributor was Qatar Fuel Company, which reported a 12.5% profit increase.

The real estate sector reported the strongest growth of all the sectors in the period, with profits growing 47.4%. All the sector companies reported strong double digit growth. United Development Company and Ezdan Real Estate contributed significantly with a 50%+ rise in profits during the period.

The telecom sector comprises Vodafone Qatar and Ooredoo. Vodafone Qatar was excluded from this profit comparison, since its fiscal year ends on 31 March. Ooredoo reported a 1.6% fall in profit for H1 2014.

The transportation sector profit for H1 2014 improved 4.7%, with two companies in the sector reporting higher profits and one reporting a decline. The largest company by profit, Qatar Navigation, reported a 9.7% drop in H1 2014 compared to H1 2013.

Recent Developments

Changes to QE Index constituents and weightings

Following the semi-annual review of the QE indices, from 1 October 2014, Al Khaliji Commercial Bank and Al Meera Consumer Goods were replaced by Ezdan Holding and Mazaya Qatar in the QE Index. In additional, Ezdan Holding, Mannai Corp. and Mesaieed Petrochemical Holding Co. will join the QE All Share Index from 1 October 2014. Following these additions, the QE All Share Index will comprise all 43 stocks.

S&P Dow Jones moves Qatar to its Emerging Market Index

Recently, Standard & Poor's (S&P) Dow Jones announced an upgrade of the Qatari market from Frontier Market Index to Emerging Market Index. The Qatari market will have a 0.9% weight in Standard & Poor's Broad Market Index (BMI) for emerging markets.

MSCI increases weightings of some Qatari stocks following foreign ownership increase

In August 2014, MSCI increased the weightings of three Qatari companies in the MSCI Emerging Markets Index following changes in the way foreign ownership limit is calculated by the Qatari authorities (from free float to a proportion of the total market capital).

Following a change in calculation method, the foreign inclusion factor for Qatar National Bank (QNB) has been raised to 0.13 from 0.06, Industries Qatar (IQ) to 0.13 from 0.06 and Qatar Islamic Bank (QIB) to 0.25 from 0.21. A foreign inclusion factor for a company reflects the percentage of outstanding shares available for foreign investors which are freely floated.

As a result, Qatar's total weighting in the MSCI Emerging Markets Index increased to an estimated 0.59% from 0.47%. Additionally, MSCI is expected to increase the currently applied adjustment factor of 0.5 to 1, mainly for QNB and IQ, in the upcoming November review. The adjustment factor is used to reflect the actual level of foreign room in constituent securities. Foreign room represents the percentage of shares available for foreign investors to purchase.

The MSCI had applied the adjustment factor to four Qatari securities during the May 2014 Semi-Annual Index Review. Following the increased adjustment factor for QNB and IQ, Qatar's weight in the MSCI Emerging Markets Index is expected to rise to 0.8%.

GCC and MENA companies may list their stocks on QE

According to reports, the Qatar Exchange (QE) is likely to see companies from the GCC and MENA region listing on the QE, driven by QE's three phase development program to make Qatar an attractive investment destination for global fund managers.  Dual listing of companies and products are under discussion. QE is expected to introduce securities lending and borrowing, margin trading, omnibus accounts and a central counterparty in order to attract foreign investors and improve operational efficiency.

Credit Growth

Qatar's credit growth remained healthy with loans growing by 5.9% between December 2013 and August 2014. Public sector credit declined 2.8%, while private sector credit rose 11.1%. The slower public sector rate could be due to recent government directives that state-owned entities must gain approval from the Ministry of Finance before taking on loans.

Private sector credit growth is mainly driven by a strong demand for funds from the construction, real estate and services sectors.  The private sector now contributes 58.6% of total credit as compared to 55.9% at the end of 2013.

Total deposits grew 6.3% between December 2013 and August 2014. The banking sector's loans-to-deposit ratio (LDR) stood at 105% at the end of August 2014, in line with the ratio at the end of December 2013.

Credit growth in Qatar is expected to remain strong, underpinned by infrastructure development and growth in the non-hydrocarbon sectors.

Macroeconomic Update

Qatar's economy continues to grow, with GDP increasing 5.7% in Q2 2014 compared to Q2 2013, according to Qatar Statistics Authority (QSA). In Q2 2014, GDP accelerated from a downwardly revised 5.4% in the previous quarter. Q2 growth was mainly driven by double-digit expansion in the non-hydrocarbon sector. Non-hydrocarbon sector GDP grew 11.3% in Q2 2014 over Q2 2013 due to demand in electricity, construction, trading, hospitality and financial sectors, and the growing population.

The hydrocarbon sector GDP contracted 2.2% during the same period, because of lower oil production, some major maintenance shutdowns in Natural Gas Liquids (NGL) and Liquefied Natural Gases (LNG) plants and the lower oil price.

Looking ahead Qatar's GDP will be driven by expansion of the non-hydrocarbon sector as demand for domestic goods and services is expected to remain strong. According to the QNB Group, Qatar's GDP growth in 2014 is expected to be 6.8% accelerating to 7.5% in 2015 and 7.8% in 2016. The non-hydrocarbon sector is estimated to grow by over 11% each year, while the hydrocarbon sector growth is expected to be around 1% between 2014 and 2016. 

Population growth in Qatar remained healthy, rising 6.9% at the end of September 2014 compared to December 2013. The population is estimated to rise by over 10% in 2014 and by 7% in 2015, encouraging for the domestic consumer and services sectors.

Valuations

Market	Market Cap.	P/E (x)		P/B (x)	Dividend Yield (%)
	US$ Mn	2014E	2015E	2014E	2014E
Saudi Arabia	563,999	16.4x	14.6x	2.9x	3.6%
UAE	209,922	15.4x	13.5x	2.0x	3.7%
Qatar	165,818	15.9x	13.4x	2.8x	3.8%
Kuwait	113,510	16.4x	12.3x	1.7x	3.5%
Oman	19,932	11.5x	10.7x	1.7x	7.4%
Bahrain	22,364	12.0x	10.5x	0.8x	5.1%
Egypt	32,417	17.3x	12.6x	2.0x	3.6%
Jordan	22,959	13.9x	11.8x	1.5x	4.1%
Overall MENA	1,150,921	16.0x	13.7x	2.5x	3.7%

Source: Bloomberg, Deutsche Bank reports, Prices as of 14th October 2014

Outlook

The long term prospects for the Qatari economy remain compelling because of massive infrastructure spending (US$182 billion over 2014-2018) and favourable demographics. GDP growth from an expanding non-hydrocarbon sector and rising population should drive consumption spending, creating opportunities in financial services, transport, communications, and real estate.

The banking sector should benefit from demand for project financing and consumer lending. Hence, the Investment Adviser favours selected domestic banks, real estate and consumer driven companies.

In the near term, growth prospects for the Qatari economy and the Qatari market are expected to remain good because of the near term infrastructure project pipeline, expansionary budget announcements, moderate corporate earnings growth and an attractive dividend yield.

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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