Qatar Stock Market Poised for Growth: Markaz Research

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Qatar Stock Market Poised for Growth: Markaz Research 31 - Jan - 2008

Kuwait Financial Centre (Markaz), in its latest report expects Doha stock market to move up by 21% in 2008. The target index level for 2008 is 11662, from the year end value of 9639. “The top 5 companies in Qatar which form 61% of the total market capitalization are expected to witness robust earnings growth within a band of 30%-40%” notes M.R. Raghu, Head of Research and Amrith M, Research Analyst. Even though the P/E multiples have witnessed a decline from its peak in 2005, when the Qatar stock market traded at 39x 2004 earnings and 24x 2005 earnings, there has been a significant increase in valuation during 2007. The expansion in PE has been at 53% if the historic earnings are taken into consideration. This has again caused the valuations to move higher than their historical norm. Therefore, the research team expects a reduction in PE by 13% in 2008 to return to a fair value historic PE of 23x. Among the heavy weights, Qatar Telecom and Qatar Islamic Bank provide strong upside in terms of price appreciation. Acquisitions made during 2007 are expected to lift bottom line for Qatar Telecom during 2008, leading to an earnings upside of nearly 36%. The stock’s reasonable valuation also provides further upside in terms of P/E expansion. Table: 1 Expected Trends in Large Caps Price-End 2007 (QAR)    P/E    Expected Earnings Growth for 2008 Target p/E    Target Price (QAR)    Change Industries Qatar    155.00    22    30%    21    192.02    24% Qatar National Bank    218.20    18    29%    18    287.87    32% Commercial Bank of Qatar 179.00    27    40%    17    151.36    -15% Qatar Telecom 235.20    14 36%    16    373.14    59% Qatar Islamic Bank 150.10    18    40%    20    236.40    57% Source: Markaz Research    Stock Market Performance in 2007 The Qatar index performance in 2007 was a mirror image of its performance in 2006. In 2006, the index declined by 35% and in 2007, the index has increased by 36%, which is higher than the long term returns of 14%. Industrial index led the gains with 74% increase in 2007 as compared to a 22% long term performance. Insurance sector and the banking sector returns were lesser than the overall benchmark returns at 26% and 28% respectively. Activity The market performance in 2007 was backed by a robust growth in volume and value traded. This has been an improvement in a healthier trend as compared to 2006, where in the market witnessed volume growth but value traded dipped significantly. In 2007, the volume traded on the exchange increased by 81%, which is similar to the volume growth witnessed in 2006. Bulk of the volume (48%) in the market continues to be concentrated in the services segment closely followed by the banking sector (41%). However, the YoY growth in volume has been significant in the Insurance and banking sector. The volume in the insurance segment witnessed a four fold jump and the banking sector witnessed a 87% growth on an YoY basis. Blue Chips Industries Qatar: It has been a year of expansion for Industries Qatar – both organically and inorganically. The total assets of the company as of September 2007 witnessed an increase of 30% to USD 4.8 Bn as compared to USD 3.7 Bn in the previous corresponding period. All the divisions Ex-QAFC (which produces Fuel additives) witnessed an expansion in its net profit margins in 2007. The aggregate net profit margin of the company jumped to 50.2% in 2007 as compared to 45.1% in 2006. The revenue mix of the company, which mainly constitutes steel (40%), fertilizers (31%) and Petrochemicals (20%), was positively impacted by rise in realizations. In the steel division, HRC steel bars, which primarily constitute the bulk of the volumes, witnessed a price increase of 22% as compared to the previous year. Similarly, Granular ammonia which constitutes the bulk of the volume in the fertilizer segment witnessed a 33.8% increase in price. Going forward, the company intends to be one of the world’s largest producers of ammonia and urea and is planning to spend USD 14 Bn through 2009. We expect the company to end the year with earnings of USD 1.25 Bn indicating a rise of 25% on a YoY basis. The company posted a 9M increase in earnings of 32% to USD 934 Mn on a YoY basis. Going forward, we expect the earnings growth to drive the stock price. The company had witnessed a significant run-up in 2007 thereby providing a return of 83%, also resulting in a spike in valuations. We expect a 30% growth in earnings for 2008E and a 5% contraction in valuation resulting in a fair value target of QAR 193, signifying a 24% upside potential. Qatar National Bank: Qatar national bank had increased its presence geographically in 2007. The bank opened new branches in Kuwait, Oman, Mauritania and Yemen. The bank also raised its stake in Jordan’s housing bank for trade and finance from 20.6% to 30%. The purchase consideration paid was at USD 195 Mn for the approximately 10% stake. The bank had earlier paid USD 442 Mn paid for the 20.6% stake. The earnings growth was also robust in 2007. The bank reported a 16% increase in net profits for the 9M period ending September 2007 on a YoY basis. We expect the bank to close the year with earnings of USD 679 Mn as compared to USD 550 Mn on a YoY basis representing a growth of 23%. Going forward, we expect the bank to generate earnings of USD 874 Mn in 2008, representing a growth of 29% as compared to 2007A earnings. We also expect the bank to continue with its geographic expansion in 2008. As far as valuations are concerned, the stock provided a return of 15% in 2007 as compared to a negative return of 19% in 2006. We believe that the stock is expected to benefit from both earnings growth and PE expansion. The closing prices of year 2007 discounts the 2006 and 2007A earnings by 18x and 14x respectively, leaving a 3% room for PE expansion. We believe that the stock has the potential to provide a return of 32% in 2008. Commercial Bank of Qatar: Commercial bank of Qatar witnessed a robust run up of 82% in its stock price. The increase in the stock price was supported by both earnings surprises and also a flow of M&A related news from the company. For the 9M ending September 2007, the company posted an increase in earnings to an extent of 14% to USD 282 Mn as compared to USD 247 Mn on a YoY basis. The company also won initial approval to buy a 40% stake in Sharjah based United Arab Bank for USD 601 Mn. Post this, the company completed acquisition of 34.7% stake in UAB in December. These events and the managements disclosure that it is looking at growth opportunities across the GCC region sent the stock price soaring. We expect the growth momentum in earnings to continue in 2008 too. The bank is expected to post earnings of USD 530 Mn as compared to USD 377 Mn on a YoY basis. The stock price at the end of 2007, discounts the 2006 earnings by 27x and 2007A earnings by 18x. We believe that the run – up in 2007 has led to the stock trading at stretched valuations as compared to its six year average multiples. We expect a PE contraction to an extent of 40% in 2008 resulting in a down side potential of 15% to a 2008 end year target of QAR 151. Qatar Telecom: It has been a year of acquisition for Qatar Telecom. The company bought stakes aggregating to USD 5.1 Bn (Excluding the Asia Cell stake acquisition in Iraq). Due to these acquisitions, the subscriber base reached 10.2 Million as at the end of Q307 representing a growth of 600% as compared on a YoY basis. (Excluding Iraq contribution) This had a beneficial impact on the top line of the company too, wherein the revenues of the company more than doubled in 9M07 to USD 1.89 Bn from USD 846 Mn on a YoY basis. However, the increasing competition in its major geographic region in terms of revenue concentration and the higher capes led to a muted growth in bottom line of 1% for 9M07 on a YoY basis. We expect the company to close the year 2007 with a bottom line of USD 479 Mn. This will mean a 3% growth on a YoY basis. The low bottom line growth can be attributed to erosion in margins. However, going forward, the consensus estimates point out to a 36% growth in earnings in 2008. The stock price in 2007 remained flat and provided a return of 4% as compared to a decline of 4% in 2006. We expect both earnings growth and valuation expansion to drive the stock prices in 2008. At the end of 2007, the stock prices discount the 2006 earnings by 14x and 2007A earnings by 13.7 x. We expect a 16% expansion in valuations leading to a potential upside in the stock price of 59%. Qatar Islamic Bank: The increase in loan volumes resulted in robust growth in earnings of the Islamic Bank. The volume of Islamic loans increased by 66% to USD 2.97 Bn in 9M07 period ending September 2007.The total assets of the bank also witnessed a robust growth of 52% to USD 5.33 Bn as of September 07 on a YoY basis. The Islamic bank engaged in organic growth in 2007 by opening new branches in a bid to reach its target of owning 35 branches within a five year period. The earnings of the bank increased by 18% in the 9M07 period ending September 2007 as compared on a YoY basis to USD 235 Mn. We expect the bank to end the year with a bottom line of USD 314 Mn representing a growth of 13% as compared to 2006. Going forward we expect the earnings to grow at a rate of 40% in 2008. Thus, we believe that both earnings growth and expansion in valuations to provide the necessary trigger for an upside potential in the stock price to an extent of 57%. Regulatory Developments The Qatar stock market was abuzz with consolidation activity during 2007. Q-Tel made six acquisitions in 2007, the largest among them being the USD 3.8 Bn acquisition of a 51% stake in Kuwait’s Wataniya. This deal was also the largest deal in 2007. The total deal activity in Qatar totaled up to USD 6.12 Bn in 2007 and most of the deals were to enhance growth rather than being backed by private equity. Among the major developments in Qatar this year, the government had announced the slashing of tax rates from the current 35% to 12% and also the opening up of the telecommunications segment to other players. This is expected to increase competition for the incumbent telecom operator Q-tel. However, Q-tel has proactively ventured into other markets by way of acquisitions. Apart from the Wataniya acquisition, Q-tel also acquired Singapore Technologies Telemedia in Singapore and Burraq telecom in Pakistan. Economy Growth: Qatar is expected to post a 13.2% and 12% growth in Real GDP and Nominal GDP respectively. The hydrocarbon GDP growth is fuelled by increasing sales of LNG. Even though, the crude oil production is expected to post a stable growth rate of 3% to 0.89 Mn Bbls per day from 0.86 Mn Bbls per day, the growth is expected to be high on the gas production. Gas production is expected to touch 1.3 Bn oil equivalent Bbls per day as compared to 0.97 Mn Bbls per day in 2007, representing a 34% growth in production of gas. Fiscal Situation: Year 2008 may herald as the year in which Qatari economy may register its highest surplus in recent history of $7.8 billion. Total revenues are expected to register a growth of nearly 22% to $ 29.3 billion, thanks to hydrocarbon revenue growth of nearly 28%. Hydrocarbon revenues constitute nearly 75% of total revenues. Expenditure at $21 billion is expected to increase by 8%. Current Account: Qatar has been averaging a more than 20% current account surplus to GDP since 2000. However, 2006 and 2007 witnessed a dip to 18% and 16.8% respectively. This has been mainly due to increase in imports. CY06 and CY07 witnessed the imports increase by 59% and 15% respectively. However, current account surplus as a percentage of GDP is expected to widen again to 24% on the back of enhanced exports as well as receipts from investment income. Inflation: The high growth in the economy has increased the inflation rates in Qatar to historic highs. The official data for the 1Q07 shows that the inflation rates breached the 15% mark for the first time. The fall in Qatari Riyal (which is pegged against the USD) resulted in the imports becoming costlier. Coupled with this, excess demand as compared to low supply in housing had also impacted the rental rates negatively. Exchange Rates: Even though inflation rates have been spiking to new highs, the central bank witnessed increased amount of pressure in 2007 to abandon the USD peg. We expect the central bank to continue with its USD peg in 2008 too with some probability of re-valuation. Interest Rates: Due to the Qatar riyal peg to the USD, short – term interest rates closely follow interest rates prevailing in the US, with a slight differential. Even though, not many instruments are available as a benchmark in Qatar (there have been recent additions of treasury instruments), the 3M deposit rate comparison continues to show a negative spread in interest rates. ### About Markaz Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD1.21 billion as of March 31, 2007, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and was awarded a BBB+ corporate rating by Capital Intelligence Ltd.