Investment Update Qatar Ticker: QEWC.QA (Reuters) QEWC QD (Bloomberg) Listing: Doha Securities Market Qatar Electricity & Water Company Rapid Value Generation! CMP: QR149.7 (As at June 22, 2008) June 2008 HOLD Investment Summary 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. 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. Omar M. El-Quqa, CFA Executive Vice President omar@global.com.kw Phone No:(965) 2400551 Ext.1270 Faisal Hasan, CFA Head of Research fhasan@global.com.kw Phone No:(965) 2951270 Chandresh Bhatt Assistant Vice President cbhatt@global.com.kw Phone No:(965) 2951282 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 Qatar Electricity & Water Company 1
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. 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. 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. 2 Qatar Electricity & Water Company
Table 1: QEWC at a Glance Price (as on June 22, 2008) Shares in issue Market Cap. (in QR bn) 52-week price range (QR) QR 149.70 100mn 14.97 149.7 / 73.0 Year Sales Net Profit EPS Book Value ROAE P/E P/BV (QR ' 000) (QR ' 000) (in QR) (in QR) (%) (x) (x) 2009 E 2,630,550 787,759 7.9 46.6 17.5% 19.0 3.2 2008 E 2,197,400 704,442 7.0 43.4 17.5% 21.3 3.4 2007 A 1,926,519 613,611 6.1 37.1 16.6% 17.4 2.9 2006 A 1,713,892 771,737 7.7 36.8 22.5% 9.3 2.0 * 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 June 22, 2008. Source: QEWC and Global Research Exhibit 1: Share Price Performance Chart Index 1200 1000 160 140 120 800 600 400 100 80 60 40 200 0 20 0 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Source : DSM & Global Research Global Qatari General Index Services Index QEWC Share Price (QR) Qatar Electricity & Water Company 3
Major Developments Projects under QEWC RAF-A1 Water Project QEWC is setting up 45 MIGD water desalination project at a cost of QR2.1bn (US$577mn). The project will be commissioned by mid-2009 and is likely to be funded in the proportion of 75% debt and 25% equity. RAF B2 Expansion 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. QEWC has awarded the execution work of the project to two international companies, namely, General Electric and Fisia Italimpianti. The project has been delayed and is now likely to start commercial operations in Summer of 2008. Both the utilities will be sold to Qatar General Electricity & Water Corporation (KAHRAMAA) for 25 years as per the Power and Water Purchase agreement entered into by the company. Joint Venture Projects Q Power Q.S.C. (Ras Laffan B) During March 2008, Qatar dedicated its second Independent Power and Water project, Ras Laffan - B, to the nation. 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 plant is built by Q Power a consortium of Qatar Electricity and Water Company (QEWC - 55% stake), International Power (40% stake), UK and Chubu Electric Power, Japan (5% stake). 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. The plant s entire power and water output will be sold to KAHRAMAA under a long-term power and water purchase agreement (PWPA). RAF-C Power and Water Project 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 of 2,600 MW of power generation and 55 MIGD of water. QEWC will have 45% equity stake in the project while Qatar Petroleum will own 15% and the remaining 40% will be offered to the successful international bidder. Bids have already been submitted by international power companies. The project financing structure has not been finalized been yet. The project will be commissioned in phases, 1,600 MW of power generating capacity will be commissioned by May 2010 and 20 MIGD of water desalination capacity will be implemented by August 2010. In the second and final phase, the rest 1,130 MW of power capacity will be commissioned in April 2011 and 43 MIGD of water desalination capacity will also be implemented in the same year. 4 Qatar Electricity & Water Company
Mesaieed A Project QEWC, along with the consortium partners, is implementing power generation project at 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$2bn) and will have power generation capacity of 2,000 MW. QEWC has 40% equity stake in the project while Qatar Petroleum owns 20% and the remaining 40% is owned by Marubeni Corporation of Japan. The project is likely to be funded by about 80% of debt and 20% of equity financing. The project will be commissioned in phases during April 2008 and April 2010. Table 2: Expansion and Joint Venture Projects Projects under QEWC Joint Venture Projects RAF-A1 RAF B2 Q Power RAF-C Power and Water Mesaieed A Water Project Expansion Q.S.C. Project Project Power (MW) - 567 1,025 2,730 2,000 Water (MIGD) 45 29.9 60 63 - Cost (US$ mn) 577 522 895 3,800 2,000 Implementation Schedule Source: QEWC mid-2009 2008- Summer Commissioned in 2008 2010 and 2011 2008 and 2010 Growing Capacity base 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. In 2007, electricity generation at QEWC s plants increased by 10% to 10mn MWh (megawatthour) while water production grew by 5% to 159.5mn Cum (cubic meter). Other Developments KAHRAMAA Shut Down Ras Abu Aboud Facility 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. Qatar Electricity & Water Company 5
Financial Performance Revenue Analysis 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 contribution from the sale of electricity in FY2007 declined to 59.7% from 61% in FY2006 while the share of water revenue declined from 37% in FY2006 to 35.7% in FY2007. The contribution from plant leases to Q Power was at 4.6% in FY2007. Table 3: Revenue Composition (in QR 000) Segment Revenue 2005 % of Agg. Y-o-Y Growth 2006 % of Agg. Y-o-Y Growth 2007 % of Agg. Y-o-Y Growth Electricity 901,699 61.0% 4.7% 1,050,004 61.0% 16.4% 1,149,904 59.7% 9.5% Water 579,921 39.0% -2.7% 627,694 37.0% 8.2% 687,566 35.7% 9.5% Lease income from plant leases - Q Power - - - 36,194 2.0% - 89,049 4.6% 146.0% Aggregate Revenue 1,481,620 1.7% 1,713,892 15.7% 1,926,519 12.4% Source: Company s Annual Reports & Global Research Costs Analysis Cost of Sales During FY2007, the company s cost of sales as a percentage of total revenue declined to 59.1% from 61.5% in FY2006. The cost of sales increased to QR1,139mn in FY2007 from QR1,054.8mn in FY2006. With this, the company s gross profit margin increased to 40.9% in FY2007 from 38.5% in FY2006. Table 4: Trend in Cost of Sales and Gross Profit (in QR 000) 2005 2006 2007 Total Revenue 1,481,620 1,713,892 1,926,519 Cost of Sales (917,433) (1,054,780) (1,138,990) as a % of total revenue 61.9% 61.5% 59.1% Gross Profit 564,187 659,112 787,529 Source: Company s Annual Reports & Global Research Cost of Gas In a gas-based power generation company, gas is the major feedstock and accounts for the largest share of the costs. The cost of gas as a percentage of total revenue declined marginally to 30.1% in FY2007 from 30.2% in FY2006. The cost of gas accounted for 48.5% of the total cost of sales in FY2007 which increased from 48% in FY2006. Finance Costs In FY2007, QEWC s finance costs increased by 41% to QR75.7mn. The company s total borrowings went up by 70.8% to QR4.53bn in FY2007 from QR2.65bn at the end of FY2006. 6 Qatar Electricity & Water Company
The company obtained these loans through banks to finance its expansion and joint venture projects. In 2007, the company repaid the government term loan of QR269.2mn in full, which was representing the purchase price of Ras Abu Fontas B (RAF B) plant. Other operating income QEWC s other operating income consists mainly of management fees which it was receiving from KAHRAMAA for the operation and maintenance of its Ras Abu Aboud (RAA) power and water plants. In FY2007, the management fees for the operation of RAA stations were at the same level as in FY2006 at QR10mn. However, from FY2008 onwards revenue from this source will discontinue as these plants had been shut down in December 2007. The share of liquidated damages received by Q Power was at QR1.2mn in FY2007 which was at QR31.9mn in FY2006. Profitability 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%. The company s net profit margin on reported profit declined to 31.9% for FY2007 from 45% for FY2006. The reported earnings per share for FY2006 were at QR6.1 as compared to QR7.7 in FY2006. QEWC s return on average assets and return on average equity declined from 12% and 22.5% in FY2006 to 7.5% and 16.6%, respectively, which was mainly because of faster growth in asset base due to expansion projects. Qatar Electricity & Water Company 7
Balance Sheet Structure Assets During FY2007, the company s asset base increased by 29.5% as compared to the growth rate of 22.9% in FY2006. The total asset base was at QR9.2bn at the year end 2007. QEWC s business being capital intensive in nature, its fixed assets accounted for the largest share of the company s asset base. Its share in the total assets remained almost constant in FY2007 at 66.5%. The capital work in progress of RAF B2 project continued to augment the gross block of the company. The share of current assets in the total asset base declined to 15.2% in FY2007 from to 17.3% in FY2006. The company has investments in two associate companies, which comprised 2.5% of total assets and available for sale investment accounted for 3.3% of total asset base at the end of FY2007. Exhibit 2: Composition of Total Assets (FY2007) Available for sale investment 3.35% Lease Receivable 12.49% Net fixed assets 66.48% Total current assets 15.18% Investment in associates 2.51% Source: Company s Annual Reports & Global Research Funding Structure The company s reliance on debt financing increased in FY2007. The share of long term debt in the company s funding structure increased to 49% in FY2006 from 37.3% in the previous year. During 2007, the non current portion of bank borrowings increased to QR3.9bn from QR1.98bn in FY2006, which was mainly because of the funds raised to finance companies expansion as well as joint venture projects. The contribution of owner s equity to the company s total funding structure declined to 40.4% in FY2007 from 51.9% in FY2006. The owners equity remained almost constant at QR3.71bn in FY2007 as compared to QR3.68n in the previous year. Exhibit 3: Composition of Total Liabilities (FY2007) Other liabilities 0.97% Total current liabilities 9.66% Long term debt 49.00% Source: Company s Annual Reports & Global Research 8 Qatar Electricity & Water Company
Results for Q1-2008 During Q1-2008, the company s total sales grew by 10.9% and its net profit increased by 3.2%. During the first Quarter of 2008, the company reported a total revenue of QR413.5mn as compared to QR372.9mn reported during the corresponding period of the previous year. The sales from electricity segment increased by 14.2% to QR220.4mn, while that from the water segment grew by 0.8% to QR163.2mn. The lease income from plant leases to Q Power amounted to QR29.8mn which was at QR17.9mn in Q1-2007. The cost of sales increased by 8.9% to QR261.5mn. Therefore, with lower growth in cost of sales as compared to total sales led to a growth of 14.4% in gross profit to QR152mn, with this gross profit margin increased to 36.8% in Q1-2008 from 35.6% in Q1-2007. During the period under review, its finance cost grew by 27.8% to QR17.9mn. QEWC s net profit grew by 3.2% to QR131.9mn over QR127.8mn reported in the corresponding period of the previous year. The growth in the company s net profit was mainly aided by 46.2% increase in interest income, 420% increase in share of interest income from joint ventures and 422% increase in miscellaneous income. Table 5: Financial Results for Q1-2008 March March Change (Amount in QR 000) 2007 2008 (3 months) Sales 372,896 413,514 10.9% Cost of sales (240,002) (261,466) 8.9% Gross Profit 132,894 152,048 14.4% Deferred income 6,605 6,605 0.0% Dividend income 8,175 8,012-2.0% General & administration expenses (26,489) (41,298) 55.9% Finance costs (14,008) (17,907) 27.8% Liquidated damages to KAHRAMAA - (242) - Interest income 3,660 5,352 46.2% Share of interest income from joint venture 978 5,086 420.0% Share profits of associate companies 14,420 9,629-33.2% Miscellaneous income 891 4,651 422.0% Profit / (Loss) on sale of property, plant & equipment (1,789) 12 - Management fees from KAHRAMAA 2,500 - -100.0% Net Profit for the period 127,837 131,948 3.2% Source: Company Reports & Global Research Future Earnings Growth Since all the projects are coming on stream by 2011 we extended our financial projections till FY2012. 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 Qatar Electricity & Water Company 9
to grow at a CAGR of 19.7%, 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 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. 10 Qatar Electricity & Water Company
Valuation and Recommendation Our valuation rating for the stock is supported by combination of DCF Method and Peer Group Valuation Method. a) DCF Valuation As per this method we have arrived at a fair value of QR170.5 for the stock as compared to the current market price of QR149.7 per share as on June 22, 2008. Key points to be noted for DCF valuations are: i. Risk free rate: We have assumed the risk free rate of 5.75% for Qatar. To arrive at risk free rate we have taken the discount rate of Kuwait, which is at 5.75%. Normally, we subtract the difference of country risk premiums from the discount rate of 5.75%. But Kuwait and Qatar have equal country risk premium of 0.9%. Therefore, we have taken a risk free rate of 5.75% for Qatar. The difference in country risk premiums have been taken from the study done by Prof. Damodaran and available on his web site www.pages.stern.nyu.edu.com. ii. We have assumed a market risk premium of 5.5%. iii. A beta of 1 is taken for QEWC. The actual beta for the company is low, but to more appropriately reflect the market risk we have taken it as 1. iv. The weighted cost of capital has been estimated to be at 7.6% for QEWC. The total capital commitment would consist of 68% debt financing and 32% of equity financing. The Weighted Average Cost of Capital (WACC) will be skewed more towards cost of debt financing, which we have assumed at around 5.9%, looking at the company s average cost of funds. v. Terminal growth rate of 3%. vi. We have assumed a 5-year forecast period (2008-12) for the consolidated entity. vii. We have valued QEWC s investments in associates at a discounted P/BV multiple (75% discount) of the peer group as these are the associate companies and QEWC does not have 100% stake in these companies. Qatar Electricity & Water Company 11
A summary sheet of the DCF valuation is shown below. Table 6: DCF Calculations QEWC (Amount in Qatari Riyal 000) Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 FCFF (3,803,400) (2,380,977) 470,137 1,257,444 1,526,617 Discounted Cash Flow (3,659,421) (2,128,800) 392,973 976,710 1,101,689 NPV of FCFF (3,316,849) NPV of Terminal Value 24,604,066 Total Enterprise Value 21,287,217 Less: Debt (5,316,861) Add: Investments & Cash 1,082,204 Total Equity Value 17,052,560 Number of shares outstanding (in '000) 100,000 DCF value per share (QR) 170.5 Current Share Price (QR) 149.7 Upside/(Downside) Potential (%) 13.9% Source: Global Research Sensitivity Analysis A sensitivity analysis for different estimated long-run future growth rates and weighted cost of capital is provided. The table provides estimated fair values for QEWC s stock based on a range of varying inputs. The shaded area at the center shows the most probable range of alternatives. Table 7: Sensitivity Analysis Terminal Growth Rate 170.5 1.0% 2.0% 3.0% 4.0% 5.0% 5.6% 108.2 143.0 192.7 270.1 406.7 6.6% 100.3 133.6 181.3 255.5 386.5 Cost of Capital 7.6% 92.8 124.7 170.5 241.7 367.4 8.6% 85.6 116.3 160.2 228.5 349.1 9.6% 78.8 108.3 150.5 216.1 331.8 Source: Global Research b) Valuation based on multiples For peer group valuation we have used the valuation of regional listed companies from the sectors. We believe that the comparative valuation would be more appropriately reflected through the book value multiple i.e. P/BV as the book value multiples of a stock are a reflection of various factors such as the expected profitability, growth potential as perceived by the market, predictability and the sustainability of revenues, quality of earnings and the quality of management among others. The weighted average P/BV for the regional listed power & water companies based on their closing prices as on June 22, 2008 was estimated at 1.925x. Therefore on the basis of that, QEWC s stock valuation comes to QR83.54 based on its forecasted book value for FY2008. As the book value multiples vary with time and are dependent on several factors such as market sentiment and other qualitative factors, we have provided 20% weightage to the book value multiple and 80% to the DCF value calculation. 12 Qatar Electricity & Water Company
Table 8: Weighted Price Valuation Approach Fair Value/ Share (QR) Weightage Weighted Price (QR) DCF Method 170.5 80% 136.4 Peer Group Valuation Method 83.5 20% 16.7 Estimated Fair Value/Share 153.1 Prem./Disc. to Composite Value 2.3% Source: Global Research Therefore, based on the weighted average valuation approach we have reached a fair 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. Qatar Electricity & Water Company 13
Consolidated Balance Sheet Qatar Electricity & Water Company (Amount in QR '000) 2005 (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) 2012 (E) Assets: Bank & cash equivalents 398,720 499,351 654,294 1,046,348 879,149 642,226 1,086,423 1,159,534 Accounts receivable 197,118 259,061 230,824 427,302 548,553 780,406 931,268 1,044,291 Spares Receivable from KAHRAMAA 173,323 - - - - - - - Spares Receivable from Alstom Power 51,865 - - - - - - - Management fee & amounts reimbursable from KAHRAMAA 2,371 1,666 1,662 2,203 2,534 2,914 3,351 3,854 Inventories 274,776 329,034 417,629 469,481 585,585 794,837 914,142 1,016,992 Derivatives 19,277 11,370 - - - - - - Prepayments and other receivables 22,025 128,444 90,185 127,982 169,309 267,408 317,089 356,992 Amounts due from related parties - - - - - - - - Total Current Assets 1,139,475 1,228,926 1,394,594 2,073,316 2,185,130 2,487,792 3,252,272 3,581,663 Finance lease receivable - 719,615 1,147,933 1,406,553 1,441,717 1,477,760 1,514,704 1,552,572 Investment in associates 202,163 226,257 230,400 253,440 283,853 317,915 356,065 398,793 Available-for-sale investments 309,021 192,508 307,522 488,585 415,298 498,357 647,864 842,223 Net fixed assets 4,122,046 4,729,503 6,108,652 10,472,066 13,790,548 14,280,745 14,372,708 14,403,559 Total Assets 5,772,705 7,096,809 9,189,101 14,693,961 18,116,545 19,062,568 20,143,613 20,778,810 Liabilities: Accounts payable 70,824 176,392 231,618 267,813 331,588 410,594 470,217 520,824 Current portion of Government term loan 229,446 245,517 - - - - - - Current portion of Bank borrowings 190,463-18,056-313,470 313,470 313,470 426,465 Current portion of other term loans 5,973 5,973 5,973 5,973 5,973 5,973 5,973 5,965 Derivatives - - 321,920 418,496 481,270 529,397 582,337 640,571 Deferred income 26,422 26,422 26,422 29,248 31,150 32,127 32,179 32,179 Other current liabilities 198,948 201,242 283,915 348,949 420,991 499,155 551,415 588,879 Total Current Liabilities 722,076 655,546 887,904 1,070,480 1,584,443 1,790,717 1,955,591 2,214,884 Non-current portion of government term loan 269,304 23,655 - - - - - - Non-current portion of bank borrowings 644,988 1,985,079 3,872,551 8,587,550 11,194,434 11,417,096 11,637,353 11,181,771 Non-current portion of other term loan 641,800 635,829 629,857 623,884 617,911 611,938 605,965 600,000 Deferred income 280,502 80,757 54,335 27,913 1,491 - - - Employees' end of service benefits 22,986 28,135 35,198 43,998 54,997 68,746 85,933 107,416 Employees insurance fund 2,320 2,873 - - - - - - Owner's Equity: Share capital 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Legal reserve 323,893 401,067 462,428 500,000 500,000 500,000 500,000 500,000 General reserve 1,526,546 1,864,849 2,017,099 2,157,987 2,315,539 2,521,356 2,772,866 3,061,773 Cumulative change in fair value 172,850 57,319 (170,271) 170,792 170,792 170,792 170,792 170,792 Retained earnings 165,440 361,700 400,000 511,357 676,939 981,924 1,415,114 1,942,175 Total Shareholder's Equity 3,188,729 3,684,935 3,709,256 4,340,136 4,663,270 5,174,071 5,858,772 6,674,740 Total Liabilities & Shareholder's Equity 5,772,705 7,096,809 9,189,101 14,693,961 18,116,545 19,062,568 20,143,613 20,778,810 14 Qatar Electricity & Water Company
Consolidated Operating Statement Qatar Electricity & Water Company (Amount in QR '000) 2005 (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) 2012 (E) Sales 1,481,620 1,713,892 1,926,519 2,197,400 2,630,550 3,353,723 3,847,238 4,206,152 Cost of Sales (917,433) (1,054,780) (1,138,990) (1,286,537) (1,563,668) (1,979,771) (2,245,323) (2,451,393) Gross Profit 564,187 659,112 787,529 910,862 1,066,882 1,373,952 1,601,915 1,754,759 Staff Costs (45,706) (46,010) (52,427) (63,725) (76,286) (98,935) (121,188) (132,494) General & Administration Expenses (72,394) (58,619) (67,844) (82,402) (105,222) (134,149) (153,890) (168,246) Other Operating Income 10,000 41,887 11,243 - - - - - Retirement of assets (64,480) (1,892) - - - - - Liquidated damages & fair value of spare parts 39,408 - - - - - - - received from Alstom Reversal of provision for disputed revenue 117,866 - - - - - - - Liquidated Damages paid to KAHRAMAA - (18,349) (109,758) - - - - - Deferred income 26,422 247,727 26,422 26,422 26,422 26,422 26,422 26,422 Prior Period Income - - - - - - - - Interest Income 16,677 14,131 20,393 26,889 27,181 26,079 29,380 34,629 Misc. Income 3,651 1,028 15,918 18,306 21,601 25,489 30,077 35,491 Dividend Income 6,770 7,820 9,965 13,838 19,543 22,841 24,918 32,393 Share of income from joint venture 20,830 3,199 14,058 19,681 27,554 38,575 48,219 60,274 Share of Result of Associates 43,986 37,987 35,716 40,550 45,416 54,046 60,531 67,795 EBIT 731,697 825,433 689,323 910,422 1,053,091 1,334,320 1,546,384 1,711,022 Finance Costs (73,287) (53,696) (75,712) (205,980) (265,332) (305,238) (288,832) (266,490) Net Profit 658,410 771,737 613,611 704,442 787,759 1,029,082 1,257,552 1,444,532 P&L Appropriation Account: Op Balance of Retained Earnings 100,000 165,440 361,700 400,000 511,357 676,939 981,924 1,415,114 Adjustments Adjustments arising from restatement of Ras Laffan 74,159 - - - - - - - Power Co. Net Profit for the year 658,410 771,737 613,611 704,442 787,759 1,029,082 1,257,552 1,444,532 Trfr to Legal Reserve (67,713) (77,174) (61,361) (37,572) - - - - Directors Remuneration (4,700) - (11,700) (14,625) (14,625) (18,281) (22,852) (28,564) Dividends paid for the previous year (120,000) (160,000) - - - - - - Interim Dividends paid (110,000) - - - - - - - Dividend for the year - - (350,000) (400,000) (450,000) (500,000) (550,000) (600,000) Trfr to General Reserve (364,716) (338,303) (152,250) (140,888) (157,552) (205,816) (251,510) (288,906) Cl Balance of Retained Earnings 165,440 361,700 400,000 511,357 676,939 981,924 1,415,114 1,942,175 Qatar Electricity & Water Company 15
Cash Flow Statement Qatar Electricity & Water Company (Amount in QR '000) 2005 (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) 2012 (E) Operating Operating Activities (a) 996,074 997,791 994,599 1,293,788 1,718,956 2,165,689 2,422,838 2,625,693 Net Profit 658,410 771,737 613,611 704,442 787,759 1,029,082 1,257,552 1,444,532 Share of results from associates (43,986) (37,987) (35,716) (40,550) (45,416) (54,046) (60,531) (67,795) Depreciation 356,700 388,373 366,366 482,267 773,428 947,007 1,000,518 1,054,426 Provision for employees' end of services benefits 532 6,684 10,301 8,800 10,999 13,749 17,187 21,483 Provision for slow moving stocks - 19,486 21,797 Interest income (16,677) (14,131) (20,392) (26,889) (27,181) (26,079) (29,380) (34,629) Interest expense 73,287 53,696 75,712 205,980 265,332 305,238 288,832 266,490 Dividend income (6,770) (7,820) (9,965) (13,838) (19,543) (22,841) (24,918) (32,393) Deferred income recognised (26,422) (247,727) (26,422) (26,422) (26,422) (26,422) (26,422) (26,422) Profit on sale of property, plant & equipment - - - - - - - - Provision for employees insurance fund 1,000 1,000 (2,585) - - - - - Retirement of assets - 64,480 1,892 - - - - - Working Capital (b) 99,966 (796,590) (331,322) (350,408) (115,585) (373,986) (196,976) (153,554) Dec/(inc.) in receivables 95,765 (61,943) 28,237 (196,478) (121,251) (231,853) (150,861) (113,023) Dec/(inc.) in spares receivable from KAHRAMAA (38,211) - - - - - - - Dec/(inc.) in spares receivable from Alstom Power (47,003) 51,865 - - - - - - Amounts due from related parties 39,756 - - - - - - - Dec/(inc.) in mgmt. fees reim. from KAHRAMAA 276 705 4 (541) (330) (380) (437) (503) Dec/ (inc) in other current assets 25,305 (106,419) 38,259 (37,797) (41,326) (98,099) (49,681) (39,904) Dec / (inc) in inventories 38,693 (73,744) (110,392) (51,852) (116,105) (209,252) (119,305) (102,850) Dec / (inc) in derivatives 96,576 62,774 48,127 52,940 58,234 Increase in lease receivable (719,615) (428,318) (258,620) (35,164) (36,043) (36,944) (37,868) Inc/(dec) in accounts payable (49,157) 105,567 55,226 36,195 63,775 79,006 59,623 50,607 Inc/(dec) other current liabilities 34,542 6,994 85,662 62,109 72,042 74,508 47,689 31,752 Total Operating (a+b) 1,096,040 201,201 663,277 943,380 1,603,370 1,791,702 2,225,862 2,472,139 Finance Cost (73,287) (53,696) (75,712) (205,980) (265,332) (305,238) (288,832) (266,490) Employees' end of service benefits paid (7,392) (1,535) (3,238) - - - - - Payment for strategic spare parts received 221,305 - Payment of Directors fees (4,700) (4,700) (11,700) (11,700) (14,625) (14,625) (18,281) (22,852) Insurance fund payments (136) (447) (288) - - - - - Net Cash from Operating 1,010,525 362,128 572,339 725,700 1,323,413 1,471,840 1,918,749 2,182,798 Investing Purchase of property, plant & equipment (1,224,073) (1,060,310) (1,747,409) (4,845,680) (4,091,911) (1,437,204) (1,092,481) (1,085,278) Interest income 16,677 14,131 20,392 26,889 27,181 26,079 29,380 34,629 Dividend income 6,770 7,820 9,965 13,838 19,543 22,841 24,918 32,393 Investment in associates - - - 318,023 (30,413) (34,062) (38,150) (42,728) Dividend received from associate 35,994 22,781 24,603 - - - - - Share of Result of Associates - - - 40,550 45,416 54,046 60,531 67,795 Purchase of available for sale investments (1,797) - (2,343) (181,063) 73,288 (83,060) (149,507) (194,359) Proceeds from sale of property, plant & equipment - - - - - - - - Total Investing (1,166,429) (1,015,578) (1,694,792) (4,627,443) (3,956,895) (1,451,360) (1,165,310) (1,187,548) Financing Dividends paid (230,000) (160,000) (352,987) (400,000) (450,000) (500,000) (550,000) (600,000) Inc./(Dec.) in govt. term loans (1,464,226) (671,573) (275,144) - - - - - Inc./(Dec.) in bank borrowings 1,278,375 1,585,654 1,905,527 4,696,944 2,920,354 222,662 220,256 (342,587) Inc./(Dec.) in other terms loans - - - (5,973) (5,973) (5,973) (5,) (5,973) Movement in deferred income 38,211 - - 2,826 1,902 25,908 26,474 26,422 Total Financing (377,640) 754,081 1,277,396 4,293,797 2,466,282 (257,403) (309,243) (922,138) Net change in cash (533,544) 100,631 154,943 392,055 (167,200) (236,922) 444,196 73,112 Net cash at beginning 932,264 398,720 499,351 654,294 1,046,348 879,149 642,226 1,086,423 Net cash at end 398,720 499,351 654,294 1,046,348 879,149 642,226 1,086,423 1,159,534 16 Qatar Electricity & Water Company
Ratios Qatar Electricity & Water Company 2005 (A) 2006 (A) 2007 (A) 2008 (E) 2009 (E) 2010 (E) 2011 (E) 2012 (E) LIQUIDITY RATIOS - Current Ratio 1.6 1.9 1.6 1.9 1.4 1.4 1.7 1.6 - Quick Ratio 1.2 1.2 1.0 1.4 0.9 0.8 1.0 1.0 - Inventory Stock (days) 117 104 120 126 123 127 139 144 - Receivales Outstanding (days) 60 49 46 55 68 72 81 86 - Payables outstanding (days) 38 43 65 71 70 68 72 74 PROFITABILITY - Gross Profit Margin (%) 38.1% 38.5% 40.9% 41.5% 40.6% 41.0% 41.6% 41.7% - Operating Profit Margin (%) 32.6% 48.2% 30.9% 36.0% 34.7% 34.8% 35.2% 35.2% - EBIT Margin (%) 49.1% 47.0% 35.6% 41.4% 40.0% 39.8% 40.2% 40.7% - Net Profit Margin (%) 44.4% 45.0% 31.9% 32.1% 29.9% 30.7% 32.7% 34.3% - Return on Average Assets (%) 11.9% 12.0% 7.5% 5.9% 4.8% 5.5% 6.4% 7.1% - Return on Average Equity (%) 23.2% 22.5% 16.6% 17.50% 17.50% 20.9% 22.8% 23.1% TURNOVER RATIOS - Inventory Turnover 3.12 3.49 3.05 2.90 2.96 2.87 2.63 2.54 - Debtors Turnover 6.05 7.51 7.87 6.68 5.39 5.05 4.50 4.26 - Creditors Turnover 9.62 8.53 5.58 5.15 5.22 5.33 5.10 4.95 LEVERAGE RATIOS - Current Liability/ Equity 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.3 - Capital Expenditure Ratio 0.8 0.9 0.6 0.3 0.4 1.5 2.2 2.4 - Long term Debt/Equity 0.5 0.7 1.2 2.1 2.5 2.3 2.1 1.8 - Interest Coverage 10.0 15.4 9.1 4.4 4.0 4.4 5.4 6.4 RATIOS USED FOR VALUATION - Number of Shares Outstanding 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 - DPS (QR) 2.7 3.5 4.0 4.5 5.0 5.5 6.0 6.0 - EPS (QR) 6.58 7.72 6.14 7.04 7.88 10.29 12.58 14.45 - Book Value Per Share (QR) 31.9 36.8 37.1 43.4 46.6 51.7 58.6 66.7 - Market Price Year End (QR) 77.4 72.0 106.7 149.7 149.7 149.7 149.7 149.7 - P/E (x) 11.8 9.3 17.4 21.3 19.0 14.5 11.9 10.4 - P/BV (x) 2.4 2.0 2.9 3.4 3.2 2.9 2.6 2.2 * Market price for 2008 and subsequent years are as per closing prices on DSM on June 22, 2008. Qatar Electricity & Water Company 17
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The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure. Disclosure Checklist Company Recommendation Ticker Price Disclosure Qatar Electricity & Water Company HOLD QEWC.QA (Reuters) QEWC QD (Bloomberg) QR149.7 1,10 1. did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in. 3. makes a market in securities issued by this company. 4. acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of serves on the board of directors of this company. 7. Within the past year, has managed or co-managed a public offering for this company, for which it received fees. 8. has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures. Global Research: Equity Ratings Definitions Global Rating Definition Buy Fair value of the stock is >10% from the current market price Hold Reduce Sell Fair value of the stock is between +10% and -10% from the current market price Fair value of the stock is between -10% and -20% from the current market price Fair value of the stock is < -20% from the current market price This material was produced by KSCC ( Global ),a firm regulated by the Central Bank of Kuwait. This document is not to be used or considered as an offer to sell or a solicitation of an offer to buy any securities. Global may, from time to time,to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities ( securities ), perform services for or solicit business from such issuer, and/or have a position or effect transactions in the securities or options thereof. Global may, to the extent permitted by applicable Kuwaiti law or other applicable laws or regulations, effect transactions in the securities before this material is published to recipients. Information and opinions contained herein have been compiled or arrived by Global from sources believed to be reliable, but Global has not independently verified the contents of this document. Accordingly, no representation or warranty, express or implied, is made as to and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. Global accepts no liability for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. This document is not to be relied upon or used in substitution for the exercise of independent judgement. Global shall have no responsibility or liability whatsoever in respect of any inaccuracy in or ommission from this or any other document prepared by Global for, or sent by Global to any person and any such person shall be responsible for conducting his own investigation and analysis of the information contained or referred to in this document and of evaluating the merits and risks involved in the securities forming the subject matter of this or other such document. Opinions and estimates constitute our judgment and are subject to change without prior notice.past performance is not indicative of future results. This document does not constitute an offer or invitation to subscribe for or purchase any securities, and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. Neither this report nor any copy hereof may be distributed in any jurisdiction outside Kuwait where its distribution may be restricted by law. Persons who receive this report should make themselves aware of and adhere to any such restrictions. By accepting this report you agree to be bound by the foregoing limitations. 20 Qatar Electricity & Water Company