• Global values QEWC’s stock at an intrinsic value of QR153.1 per share, which is 2.3% higher than the current market price of QR149.7 (as of June 22, 2008). Hence, we recommend a “HOLD” on the stock
Global Investment House – Kuwait – Qatar Electricity & Water Company – Investment Update Report-
Major Developments
• QEWC is expanding its own capacity base apart from other joint venture projects. With regard to its own expansion projects, it is setting up 45 MIGD water desalination project at a cost of US$577mn (QR2.1bn). The project will be commissioned by mid-2009 and is likely to be funded in the proportion of 75% debt and 25% equity. Secondly, 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 will have capital outlay of about QR1.9bn (US$522mn), which is likely to be funded by about 75% of debt and 25% of the company’s own funds. The project has been delayed and is now likely to start commercial operations in Summer of 2008.
• With regard to joint venture projects, Q Power has been implemented during March 2008. The project is estimated to have cost around QR3.26bn (US$895mn) and has 1,025 MW of power generation capacity and 60 MIGD of water. The project has been implemented in phases, after completion of its first phase the plant has been generating 600 MW of electricity since 2006. The final phase been implemented during the current year.
• Apart from the project discussed above, QEWC along with the consortium partners is implementing the largest power generation and water desalination project in Qatar. The facility will be owned and operated by Ras Girtas Power Company (RGPC). The project is estimated to cost around QR14bn (US$3.8bn) and will have capacity of 2,730 MW of power generation and 63 MIGD of water. The project’s capacity base has been increased from the earlier envisaged 2,600 MW of power generation and 55 MIGD of water.
• The other joint venture project is a power project in Mesaieed Industrial City in Qatar. A jointly controlled entity named Mesaieed Power Company Limited was incorporated in January 2007 for executing this project. The project is estimated to cost around QR7.28bn (US$2bn) and will have power generation capacity of 2,000 MW.
• In December 2007, KAHRAMAA shut down Ras Abu Aboud Facility. QEWC was undertaking operations and maintenance of KAHRAMAA’s Ras Abu Aboud power and water desalination plants, which was having capacity of 210 MW of power and 11 MIGD of water.
• With the implementation of all these projects, Qatar’s power capacity will increase to 9,179 MW and water desalination capacity will increase to 343 MIGD by 2011. QEWC’s own capacity base will be increased to 2,674 MW of power and 180 MIGD of water desalination.
Financial Performance
Qatar Electricity & Water Company’s (QEWC) actual performance as compared to our projections for FY2007 showed variations (actual v/s projection) of -4.6% in total sales, 1.4% in gross profit, -2.3% in net profit and 1.3% in total assets.
At the end of FY2007, the total revenue of the company stood at QR1,926.5mn which represented a growth of 12.4% over that reported for FY2006. In FY2007, the revenue from the sale of electricity and water both grew by 9.5% each to QR1,149.9mn and QR687.6mn, respectively. In FY2007, the company reported revenue from plant leases to Q Power amounted to QR89mn which was at QR36.2mn in FY2006.
The company reported a net profit of QR613.6mn in FY2007 as compared to QR771.7mn reported in the previous year. The decline in profit in FY2007 was mainly due to a onetime revenue of QR221.3mn in FY2006. Therefore, after making adjustment for this, the adjusted net profit for FY2006 comes to QR550.4mn. In FY2007, the company’s net profit mainly hit by payment of QR109.8mn to KAHRAMAA towards liquidated damages for failing to commence the RAF B2 project on scheduled commencement date, which resulted in delaying the supply of electricity and water. If we adjust the company’s FY2007 net profit for the above mentioned non-recurring item, its profit figure comes to QR723.4mn. On adjusted earnings for both the years, FY2006 and FY2007, the net profit of FY2007 displays a growth of 31.4%. During Q1-2008, the company’s total sales grew by 10.9% to QR413.5mn and its net profit increased by 3.2% QR131.9mn.
Depending on successful and timely implementation of all the projects, we estimate that during FY2008-12 the company’s revenue from the sale of electricity will grow at a CAGR of 21.6% while that from desalinated water will grow by 11.8% CAGR. The total revenue is likely to grow at a CAGR of 17.6%, during 2008-12, to reach QR4.21bn in FY2012. Going forward, its finance cost will increase significantly due to increase in borrowings for expansion as well as joint venture projects. Its consolidated net profit is likely to grow at a CAGR of 19.6%, during FY2008-12, to reach QR1.44bn in FY2012. During the forecast period the company’s balance sheet size is likely to grow at a CAGR of 9%. We estimate that QEWC will spend about QR7.7bn during FY2008-12 on own expansion as well as joint venture projects.
Outlook
Qatar is one of the fastest growing economies in the world for past many years and to further boost the growth it is committed to spend huge amount on infrastructure and hydrocarbon projects over the coming years. These projects present significant opportunities to almost all the economic sectors such as power, telecom, banking, financial services, real estate, construction and service sectors related to these industries. The power and water sectors are the backbone of any industrial or infrastructure project.
As per the industry sources annual growth rate of 17% is foreseeable in the demand for electricity and 11% growth in the demand for water during the next five years in Qatar. Also, the market served by Kahramaa is fast changing with very strong growth in the industrial and commercial sectors. To meet the likely growth in demand, Qatar has announced number of projects in the power as well as water 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.
Therefore, in Qatar the major factors which will drive the demand for the power as well as water utilities are the scale of projects coming up in the country. In a nutshell, with all these factors acting in favor of the company, the outlook for QEWC seems to be bright.
Based on Discounted Cash Flow Method and Peer Group Valuation Method, we value the company’s stock at an intrinsic value of QR153.1 per share, which is 2.3% higher than the current market price of QR149.7 (as of June 22, 2008). Hence, we recommend a “HOLD” on the stock. At the current market, QEWC trades at 21.3x and 19.0x of its earnings and 3.4x and 3.2x of its book value for FY2008E and FY2009E, respectively.
