QEWC is setting up 45 MIGD water desalination project at a cost of US$577mn (QR2.1bn). The project will be commissioned in 2nd quarter of 2009 and is likely to be funded in the proportion of 75% debt and 25% equity.
QEWC, along with the consortium partners, is implementing the largest power generation and water desalination project in Qatar. The project is estimated to cost around US$3bn (QR10.92bn) and will have capacity of 2,600 MW of power generation and 55 MIGD of water. QEWC will have 45% equity stake in the project.
QEWC is undertaking expansion at RAF B stations, where it is setting up a 567 MW power plant and 29.9 MIGD water desalination plant. The project has been delayed and is now likely to start commercial operations from December 2007 for power project and water desalination project is likely to start operations from early 2008.
QEWC, along with the consortium partners, is implementing the power generation project at Mesaieed Industrial City in Qatar. The project is estimated to cost around US$2bn (QR7.28bn) and will have power generation capacity of 2,000 MW.
During 2004 Qatar General Electricity & Water Corporation (KAHRAMAA) had awarded the second Independent Power and Water (IPW) project, Ras Laffan - B, to QEWC and its consortium partners. The project is estimated to cost around US$895mn (QR3.26bn) and will have 1,025 MW of power generation capacity and 60 MIGD of water. The power project has been fully commissioned in May 2007 and water desalination project is likely to be commissioned fully by January 2008.
Financial Performance
Qatar Electricity & Water Company’s (QEWC) actual performance as compared to our projections for FY2006 showed variations (actual v/s projection) of -2.3% in total sales, -4.9% in gross profit and 12.7% in net profit (adjusted for non-recurring items reported by the company). The difference in net profit was mainly because of higher finance cost estimated by us while delay in project execution resulted in lower finance cost on the back of lower borrowing as compared to our estimates.
At the end of FY2006, the total revenue of the company stood at QR1,713.9mn which represented a growth of 15.7% over that reported for FY2005. In FY2006, the revenue from the sale of electricity grew by 16.4% to QR1,050mn while that from water segment registered a y-o-y growth of 8.2% to QR627.7mn. In FY2006, the company has reported revenue from plant leases to Q Power which amounted to QR36.2mn. During FY2006, the company’s cost of sales as a percentage of total revenue declined to 61.5% in FY2006 from 61.9% in FY2005. The cost of sales increased to QR1,054.8mn in FY2006 from QR917.4mn in FY2005. With this, the company’s gross profit margin increased to 38.5% in FY2006 from 38.1% in FY2005.
The company reported a net profit of QR771.7mn in FY2006 as compared to QR658.4mn reported in the previous year. The profit growth in FY2006 was mainly backed by one time revenue of QR221.3mn. Therefore, after making adjustment for this, the adjusted net profit for FY2006 comes to QR550.4mn. In FY2005 the company accounted three revenue items of non-recurring nature, QR39.4mn as liquidated damages and fair value of spare parts received from Alstom, QR117.9mn of reversal of provision for disputed revenue and QR20.8mn as share of income from joint venture. If we adjust the company’s FY2005 net profit for the above mentioned non-recurring items, its profit figure comes to QR481.2mn. On adjusted earnings for both the years, the net profit of FY2006 displays a growth of 14.4%.
During first nine months of 2007, the company’s total sales grew by 12.7% to reach at QR 1,461.6mn and its net profit increased by 4.5% to reach at QR514.2mn.
Outlook
Qatar is emerging as an important economic force in the Middle East region. The 2006 Asian Games saw Qatar as the flag bearer for the entire region. This new found confidence is based on strong economic and political foundations, and is supported by rapid industrialization all of which, in turn, requires adequate infrastructure support and a significant expansion of power and water supplies. Qatar's growing petrochemical, fertiliser and liquefied natural gas (LNG) enterprises all consume large amounts of electricity, so demand is set to rise rapidly over the next decade.
Demand for water in Qatar grew by 16% in 2006 and in the first quarter of 2007, and this pattern shows no sign of slowing. Demand for power in the same period grew by more than 17%. As per the industry sources, in Qatar, the power demand will increase by about 17% annually between 2007 and 2010.
To fulfill the likely growth in demand, Qatar has announced several projects in the power sector as discussed above, which are part of a future strategy to meet the country’s domestic needs for both the utilities, power and water. To meet the challenge, KAHRAMAA has also announced number of projects to expand its transmission and distribution infrastructure, for both electricity as well as water.
In Qatar, QEWC being the largest player in the sector has tremendous growth potential and has several large scale projects under its belt, such as Q Power, Mesaieed and RAF C. Therefore it will continue to maintain its leadership position in the sector. With regard to profitability, as in any other large scale projects, in the initial years there will not be substantial addition to the company’s bottomline, as the projects will have heavy depreciation provisions and large interest costs in the initial phase.
Based on Discounted Cash Flow Method and Peer Group Valuation Method, we value the company’s stock at an intrinsic value of QR96.4 per share. The stock currently trades at around QR104.7, which implies a premium of 8.6% over its intrinsic value. Hence, we revise our recommendation on the stock from “BUY” to “HOLD”.
QEWC at a Glance
Price (as on Oct11, 2007) Shares in issue Market Cap. (QR) 52-week price range (QR)
QR 104.70 100 mn 10.47 114.7 / 65.0
Year Sales Net Profit EPS Book Value ROAE P/E* P/BV*
(QR ' 000) (QR ' 000) (QR) (QR) (%) (x) (x)
2008 E 2,376,187 680,931 6.8 42.9 16.3% 15.4 2.4
2007 E 2,019,614 627,851 6.3 40.5 16.3% 16.7 2.6
2006 A 1,713,893 771,738 7.7 36.7 22.5% 9.3 2.0
2005 A 1,481,620 658,410 6.6 31.9 23.2% 11.8 2.4
* Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Doha Securities Market as on Oct 11, 2007.
Source: QEWC and Global Research estimates
