Qatar Fuel Company (Woqod) CMP: QR 196 Target price : QR 216 Rating: HOLD Shantanu Sarkari 971-42222267 (Ext: 206) Shantanu@bankmuscat.com Qatar Research October 24, 2010
Contents Investment Summary Business Profile Growing consumption of petroleum products Air traffic growth aiding jet fuel demand Population growth driving demand for LPG Bunkering Investing for future growth Revenue growth appears to be back on track Financial Summary Financial position healthy Vl Valuation Risks to Valuation Financials Economy rich with hydrocarbon reserves 2
Summary Revenue momentum is improving, margins to remain stable. We believe the stock is currently undervalued and is a good dividend play. Qatar fuel enjoys exclusive marketing and distribution rights for petroleum products in Qatar. Back in 2002, the Government divested the fuel storage and distribution arm from Qatar Petroleum, the company is listed on the local bourse since. Qatar Petroleum holds 40% stake in the company and rest is held by public. Foreign ownership is capped at 25%, with single investor ownership restricted to 10,000 shares. Woqod has a 60% stake in Qatar Jet Fuel Company and owns 1% of Nakilat. Key data Market Cap: 6.8bn Enterprise Value 3.7bn Number of shares (mn) 34.7 Forward P/E (2010) 6.2 Price/Book 1.7 Enterprise Value/EBITDA 4.3 We believe with stability in global environment and growth in domestic market, Qatar fuel could exhibit a revenue CAGR of c15% over the next three years. Jet fuel business contributed c35% (2009) to the overall revenue and had reached a peak of c43% in 2008. We believe eve that construction o of new Doha International a Airport, growth in air traffic and fleet expansion of Qatar Airways would bring in growth for this business segment. Acquisition and successful integration of Qatar Technical Inspection would help Woqod leverage growth. Fixed prices for distribution of petroleum products and fixed procurement costs from Qatar petroleum would keep the margin within a stable range. We believe EBITDA margins for the company will remain in a range of c14% to 16% over the next three years. We initiate coverage with a Hold rating and target price of cqr 216 which provides a potential upside of c13% from current levels and has a dividend yield of c5%. 3
Business Profile 4
Growing consumption of petroleum products Qatar Petroleum (QP) controls all aspects of Qatar s Oil and Gas sector, including exploration, production, refining, transportation, and storage within Qatari territories. Under an agreement with the government which is valid for 15 years, Woqod has been given sole rights to supply all kinds of fuel in the country. Consumption of petroleum products has been increasing on account of economic growth and development in Qatar. According to BP Statistical Review, domestic consumption of petroleum products stood at c209,000 barrels/day in 2009 up 6% yoy. With substantial revenues from the Oil and Gas Sector, Qatar has been going through massive infrastructure developments. According to MEED, Qatar has estimated project pipeline of cusd 221 billion that is currently planned or underway. Source: BP World Statistical Handbook, and Bank Muscat Research With population reaching c1.2 million there has been a simultaneous increase in demand for basic infrastructure as well as in consumption of refined products. There has been a huge increase in the number of vehicles, as the registrations for new vehicles have shown a significant increase over last few years. The number of registered vehicles in Qatar have exhibited a growth CAGR of c16% from 2002-2008. The total number of vehicles in 2008 was c641786 an increase of c19% on Y-o-Y basis. The increased investment in road infrastructure along with increase in number of vehicles has also led to increased consumption of petroleum products in Qatar. Source: Qatar Ministry of interior and Bank Muscat Research 5
Air traffic growth aiding jet fuel demand Jet fuel business has been growing steadily and remains the key for growth. Jet Fuel volumes has exhibited a growth trend of c30% over the last five years. Jet fuel contributed c35% (2009 end) to the overall revenue and had reached a peak of c43% in 2008. The company supplies jet fuel to more than 35 airlines at the moment. Qatar Airways is the largest customer and margin realization from sale of jet fuel to Qatar Airways is capped based on a formula that takes into account the volatility in international prices. According to International Air Transport Association, global air traffic (passenger) is expected to grow by c7.7% and c5% in 2010 and 2011 respectively after having declined by c2% in 2009. Air traffic in Qatar has also seen a significant increase. Qatar airways is reported to have made investments to increase its fleet of aircrafts and to cater to other destinations. With increase in the number of international passengers traveling to Middle East region, Qatar Civil Aviation Authority has announced the construction of the New Doha International Airport. Qatar will have a world class aviation hub catering to 24 million passengers per year when a new airport opens in 2011. Qatar Airways has been expanding its fleet over last few years and the air traffic activity in Qatar has also been growing. We believe that construction of new Doha International Airport and expansion of Qatar airways would fuel growth for the company. Million Lit tres Jet fuel Sales trend 1,400 1,200 CAGR of c30% 1,000 800 600 400 200-2004 2005 2006 2007 2008 2009 3.5 Jet Fuel realisation per litre (QAR) 3.0 2.5 2.0 1.5 1.0 0.5-2005 2006 2007 2008 2009 6
Population growth driving demand for LPG Domestic demand for LPG is increasing rapidly The building and construction sector has exhibited a growth of c41% over the last five years. With increase in the number of houses, restaurants, hotels and residential complexes there has been an increase in demand for LPG. According to Qatar Statistical Authority, the population in Qatar has reached c1.2 million at end of 2009. This has led to significant increase in demand of LPG in Qatar. According to EIA, LPG sales in Qatar is projected to grow at an average annual rate of about 5% over the next 15 years. With growing demand and exclusive rights of LPG distribution in Qatar, we believe Wooqod is well poised to benefit from this trend. Source: Qatar Statistical authority, IMF and Bank Muscat Research Source: IMF and, Bank Muscat Research 7
Bunkering Construction of Bunkering facilities at Ras Laffan is currently underway. Recent investments and increasing maritime activities would help in future growth. Qatar Fuel is planning to install 6 berths in cooperation with Qatar Petroleum for supply and storage of bunker fuel in Ras Laffan. Construction of Berth 1 is complete and is currently in procedural negotiations with Qatar Gas before the facility becomes fully operational. Ship to ship (bunkering) business has been growing at a rapid pace till 2008 after exhibiting a decline in 2009. The volume sales from ships supplying operations has increased c8x to reach 131 K ton in 2009 from 16.7K ton in 2006. We believe, development of shipping activities supporting LNG exports will bring increasing opportunities for Woqod. The company has been positioning itself to leverage this opportunity. Making investments to bring Bitumen sales back on track The company exhibited a volume growth of c16% during 2009. It has been making investments for bitumen storage, loading and processing facility Bitumen distribution is a low profitability business and companies realize benefit through volume sales. The increased construction activity in Qatar is expected to continue for few years. We expect bitumen sales to grow at CAGR of c10% over the next three years USD billion 120 100 80 60 40 Trade Data exhibintg the trend in increased maritime activity Expected to Dip in 2009 retrace growth 35 30 25 20 15 10 Economic and construction activity 1.4 1.2 1.0 0.8 0.6 0.4 20 5 0.2 - - - 2004 2005 2006 2007 2008 Exports 2009E 2010E Imports 2011E 2012E 2013E 2014E 0 2000 1 2001 2 2002 3 2003 4 2004 5 2005 6 2006 7 2007 8 2008 Building and Construction (QR billion) (LHS) Trade,Restaurants & Hotels (QR billion) (LHS) Population (Million) (RHS) 9 2009 Source: Qatar Statistical authority, IMF and Bank Muscat Research 8
Investing for future growth Bitumen Storage and Loading and Processing Facilities The company plans to install new 20,000 ton storage capacity for bitumen. The Government s investment plans for upgrading the road networks and other infrastructure within Qatar has led to a increased demand for bitumen in the local market. Hence it has led to increased investment requirements by Woqod to upgrade and resolve delays in supply of bitumen btu on account of logistics problems. pobe Qatar Fuel remains committed to national interest with investments in the bitumen business despite the high cost and low profitability of the business. However, we believe that the Company is well positioned to gain from volume sales in this segment. Projects underway for New Doha international airport: Installation of pipeline pp from Mesaieed refinery to New Doha international airport is expected to be completed by end of 2010.This would facilitate the storage and distribution of aviation fuel and other petroleum products. Construction of 6 new tanks with storage capacity of 337K barrels of jet fuel at the New Doha international airport is also on track. Woqod has fuel off-take agreement with Qatar Airways and margin realizations from sale of jet fuel is capped at under 5%. We believe that the basic infrastructure for supplying jet fuel is a strategic initiative that would ensure the increase in volume offtake. The increase in air traffic within Qatar, would result in direct and immediate benefits to Woqod. Remains committed to business diversification with recent acquisition As part of the overall diversification strategy Qatar Fuel acquired and successfully integrated Qatar Technical Inspection (swap ratio between Woqod and QTIC was at 1:5.3 per share) in 2009. Qatar Technical Inspection (QTIC) is in a high margin business, the acquisition would enable Woqod to render other value added services along with the distribution of fuel products. QTIC is involved in technical inspection of vehicles and also offers registration and insurance renewal services. The acquired entity exhibited a revenue growth of c21% during year ended 2009. We believe the revenue contribution from the entity to be c1% over the next three years. 9
Investment plans of QR 1 bn along with QP over next two years Petroleum Products (Distribution and Growth) Product type (Million litres) 2008 2009 % growth Diesel 2,202 2,254 2.4% 24% Premium 564 576 2.2% Super 760 857 12.8% JetFuel 1,081 1,148 6.1% Total 4,607 4,835 4.9% LPG (tonnes) 60 90 50.0% Bitumen (tonnes) 34 39 16.4% 18% 12% Distribution of petroleum products 46% Diesel Premium Super JetFuel Petrol Station network expansion Three new petrol stations are expected to be completed and commissioned by the end of current financial year. The Govt. of Qatar has given exclusive rights to Woqod for setting up service stations in Qatar, which implies a moratorium placed on other operators. Woqod plans to add 50 to 75 petrol stations over the next 5 years. This would help the company in expanding its revenue base from offering services (i.e. food court, car wash, auto repair etc.) at the stations. With exclusive rights for setting up petrol stations Woqod is well poised to benefit from the consumption growth in Qatar. Bunkering Facilities at Ras Laffan As far as the ship to ship bunkering activity is concerned, Woqod has completed the first phase of the project which relates to completion and operation of berth 1atRasLaffan. Work is underway for the construction of 5 more berths at Ras Laffan. The project is being executed in stages along with Qatar Petroleum. We believe that investments are expected to reap benefits on account of increase in maritime activity. The project is being worked upon along with Qatar Petroleum and is less vulnerable to execution risks. Construction of bunkering facility would help the company to cater to both onshore and offshore requirements at Ras Laffan. 10
Revenue growth appears to be back on track After a dip in 2009, growth is creeping back. Revenue for H1 2010 increased by c20% yoy Woqod has grown at a CAGR of c33% over the last 5 years. Revenue has almost increased 4x from cqr 1.5 billion in 2004 to cqr 6.1 billion in 2009. Sales volume exhibited a muted growth of c5% in 2009. Whereas the severe decline in fuel prices resulted in overall revenue decline of c18% during 2009 to QR 6.1bn. The growth in 2009 has been lower on account of regional slowdown but is expected to retrace the higher growth rates. Revenue for Q2 2010 stood at cqr 1.85bn exhibiting an increase of c26% compared to the Q2 2009. With stability in economic situation the company has started exhibiting growth in the current year. According to British Petroleum World Statistical Review, domestic consumption of petroleum products in Qatar stood at c209,000 barrels/day (2009) exhibiting a Y-o-Y Y growth of c6% during the year. QR Million 8000 7000 6000 5000 4000 3000 2000 1000 0 Revenue growth trend CAGR c33% Revenue decline of c18% due to decline in prices and muted voulme growth. 2004 2005 2006 2007 2008 2009 Refined Products Jet Fuel Other Revenue 250 200 150 100 50 0 Consumption of petroleum products in Qatar 25% 20% 15% 10% 5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Consumption (000 barrels/day) (LHS) % growth (RHS) Source: BP World Statistical Handbook, and Bank Muscat Research 11
Financial Summary Margins to remain stable at current levels Woqod procures products from Qatar petroleum and sells it at a fixed price regulated by the government. The concession agreement stipulates fixed retail prices, though Woqod has some price discretion in the commercial segment. The company is able to realize higher margins from the bulk sales and provides some room from margin improvement. The gross profit margins have increased by c700bps over the last five years to reach c21% during 2009. This expansion in margins is basically on account of increase in blk bulk sales and diversificationifi initiativesiti into other business activities. iti Refined products contribute c63% to overall revenue and jet fuel contributes c35% of the overall share. The jet fuel contribution declined in 2009 mainly on account of decline in prices. We believe revenue contribution from Jet fuel would increase again with stability in the energy price but will remain skewed towards refined products. 8-9% growth in revenue and profits over 2010-2012 2012 We envisage a profit CAGR (2009-2012) of 18% in profits and expect the revenues to grow at CAGR of c15% over the same period taking into account successful completion of the slated projects. We expect the revenue for the current year (December 2010) to reach cqr 7.5 billion (+c21 %, compared to FY 2009) and EPS to reach cqr 31.37 per share for the full year. Revenue growth trend 24% % margin trend 10000 8000 Refined Products Jet Fuel 22% 20% 18% 16% QR Million 6000 4000 2000 0 2006 2007 2008 2009 2010E 2011E 2012E 14% 12% 10% 8% 6% 4% 2% 0% Gross Profit EBITDA Net profit 2006 2007 2008 2009 2010E 2011E 2012E 12
Financial Summary Figures in QR Million Revenue % YoY growth Revenue % YoY growth 2008 2009 2008 2009 H1 2010 H1 2009 H1 2009 H1 2010 Refined Products 4,111 3,869 54% -6% Jet Fuel 3,259 2,145 67% -34% Other Revenue 139 163 39% 17% Total 7,509 6,176 59% -18% 2,909 3,509-13% 21% 25% 20% 15% Expansion in Gross profit margins Margin of c21% (+c700 bps over 5 years) Figures in QR Million Margin % YoY growth Margin % YoY growth 2008 2009 2008 2009 H1 2009 H1 2010 H1 2009 H1 2010 Gross Profit 1,539 1,277 95% -17.0% 626 747 19.4% % margin 20% 21% 22% 21% Net profit 1,206 870 96% -27.8% 408 549 34.6% % margin 16% 14% 14% 16% 10% 5% 2005 2006 2007 2008 2009 13
Financial position healthy Cost control and growing share of commercial sales has helped the company improve its EBITDA margins over the past few years. We expect EBITDA margins to move in a narrow range of c14% to 16% over next 3 years. Asset Mix (2009) 3% Woqod has negligible ibl debt to equity ratio and has benefit of availing interest free loans from Qatar petroleum. With investment plans underway we believe that the ratio would remain around the current levels. 38% 26% With stable cash generation capability and no interest bearing liabilities on balance sheet the company has been in profitable range since inception. Divided payout ratio for 2009 stood at c36%, we believe that company would be able to sustain dividend payments and estimate a payout ratio of c40% through 2012. Woqod has negligible debt to equity ratio and has benefit of availing interest free loans from Qatar petroleum. With investment plans underway we believe that the ratio would remain around the current levels. Working in awell regulated ltdand protected t Government regime. Lower turnover cycle and QP as financial backup helps the company manage its working capital requirements effectively. The average RoE for the company has been c44% over the last five years. Woqods RoE has been as low as c30% (in 2009) and as high as c60% (in 2008). We believe that the ROE for the company would remain at sustainable levels in the future. 26% Available-for-Sale Investments PPE AR Cash Profitability trend 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2004 2005 2006 2007 2008 2009 EBIT Margin (LHS) EBITDA Margin (LHS) ROE (RHS) 70% 60% 50% 40% 30% 20% 10% 0% 14
Valuation We initiate coverage on Qatar Fuel with a HOLD rating and target price of cqr 216. This gives a potential upside of c10% from the current levels. Based on the DCF analysis we expect upsides from current levels. Our implicit assumptions for DCF valuation are as follows: o Risk free rate of 5.5% 5% o Terminal growth rate of 2% o Beta of c1.2 for the stock o WACC of c12.7% We expect the revenues to grow at CAGR of c15% through 2012 taking into account successful completion of the slated projects. We expect the revenue for the current year (December 2010) to reach cqr 7.5 billion (+c21 %, compared to FY 2009) and EPS to reach cqr 31.37 per share for the full year. The company is currently trading at QR 196 at a PE (TTM) of c6.7x and is retracing the higher end of the trading band 5-10. It has been trading within this bandfor most of the time over last2 years. Based on our EPS estimate of 2010 and 2011 the company is currently trading at discount to peers at a forward PE of c6.2 x and c5.7x respectively. Source: Bloomberg, Company report, Bank Muscat Research 15 Source: Bloomberg, Company reports, Bank Muscat Research
Risks to valuation On back of strong domestic consumption environment, Qatar Fuel (Woqod) has been showing robust growth performance but there are risks attached to the financial performance. Any of the following factors might prompt us to review our earnings scenario: Slow growth rate in the country might restrain inflow of expatriates to Qatar; recent downturn has resulted in some expatriates outflow. We consider the geo political situation as the major concern for the business of Qatar Fuel. Any changes in the geo political situation or changes leading to slowdown of economic growth, would bring a shift in the current consumption pattern of petroleum products. Any delay in completion of projects would impact the sales and margins for Qatar Fuel and would alter our long term valuation. Petroleum products are supplied on a fixed price agreement signed with QP. The selling price of these products is fixed and limits the margin realization for Qatar Fuel (Woqod). Changes in the terms of the agreement could bring changes in our long term valuation. Qatar fuel at the moment has a monopoly within Qatar. Any changes in the current agreement with the government might intensify the competition and bring changes in the sales and margin pattern of Qatar Fuel. At the moment there are no taxes levied on Qatar Fuel, any changes in the corporate tax payment regime for Qatar Fuel (which is very unlikely) would result in a decline in overall margins. 16
Financials Income statement summary (QR mn.) 2009 2010E 2011E 2012E Refined Products 3,869 4,672 5,088 5,926 Jet Fuel 2,145 2,595 2,855 3,222 Other revenue 139 153 168 185 Overall revenue 6,176 7,450 8,148 9,379 EBITDA 800 1,045 1,171171 1,415 EBIT 737 962 1,071 1,298 Pre-Tax Profit 949 1,186 1,306 1,544 Net Profit after minority 870 1,087 1,197 1,415 EPS 25.1 31.4 34.5 40.8 Balance Sheet summary (QR mn) 2009 2010E 2011E 2012E Fixed Assets Goodwill 60 60 60 60 Available-for-Sale Investments 149 126 133 139 PPE 1,269 1,587 1,887 2,170 Total Fixed Assets 1,478 1,773 2,079 2,369 Current Assets Accounts Receivables & Prepaym. 1,336 1,531 1,674 1,927 Other Assets 3 6 7 7 Inventories 188 250 300 380 Bank Balances & Cash 1,864 2,210 2,551 2,965 Total Assets 4,869 5,769 6,611 7,649 Long term Liabilities Long term debt 0 0 0 0 Minority Interest est 172 181 190 199 Other Liabilities 23 30 40 52 Current Liabilities Accounts Payable & Accruals 272 295 291 301 Short term debt 0 0 0 0 Due to Qatar Petroleum 1,205 1,326 1,392 1,462 Total Liabilities 1,673 1,833 1,913 2,014 Total Equity 3,196 3,936 4,699 5635 5,635 Total Liabilities and shareholders equity 4,869 5,769 6,611 7,649 YoY Growth (%) 2009 2010E 2011E 2012E Refined Products -6% 21% 9% 16% Jet Fuel -34% 21% 10% 13% Overall revenue -18% 21% 9% 15% EBIDTA -35% 31% 12% 21% EBIT -38% 31% 11% 21% Net Profit -28% 25% 10% 18% Ratio Analysis 2009 2010E 2011E 2012E Profitability Gross profit margin 21% 21% 21% 22% EBIT Margin 12% 13% 13% 14% Net Income Margin 15% 16% 16% 16% Return on Assets 19% 20% 19% 20% Return on Equity 31% 30% 28% 27% Leverage and Efficiency Debt to Equity 0.0% 0.0% 0.0% 0.0% Assets turnover 138% 140% 132% 132% Days of Sales Outstanding 79.0 75.0 75.0 75.0 Valuation Price to Earnings 7.8 6.2 5.7 4.8 Price to Book 2.1 1.7 1.4 1.2 Enterprise Value to EBITDA 6.0 4.3 3.5 2.6 Cash Flow Summary (QR mn) 2009 2010E 2011E 2012E Cash from Operating Activities 986 1,054 1,164 1,278 Capital Expenditures -280-400 -400-400 Cash from Investing Activities -240-362 -388-385 Cash from Financing Activities -166-347 -435-479 Net Cash-Beginning Balance 1,284 1,864 2,210 2,551 NtC Net Cash-Ending hedi Balance Bl 1864 1,864 2210 2,210 2551 2,551 2965 2,965 17
Economy rich with hydrocarbon reserves According to BP Statistical Review, Qatar has oil reserve base of c26.8 billion barrels and natural gas reserve base of 25.4 TCF. Asper IMF, Qatar's real GDP is expected to grow at average rate of c14% from 2010-2012. (2004-09 average c13.4% ) Source: IMF and, Bank Muscat Research Oil and Gas sector share of Qatari GDP has been averaging at c50-60%, underlining the importance of the sector. Qatar has been investing the petroleum revenues for diversification into other non hydrocarbon business and infrastructure development. According to Qatar Statistical Authority, Oil and Gas sector declined by c23% in 2009 (c46% of the GDP), down from high growth rate regime of c40% CAGR between 2002-2008. We expect the sector contribution to retrace c50-60% share of GDP in 2010. However, the government has remained committed to its investment in the sector and aims to deliver 77 million tonnes per year of LNG to the world (LNG production: c25 mn tons 2009, c42 mn tons 2010. Source: Qatar Statistical authority, IMF and Bank Muscat Research Source: IMF, World Economic Outlook Database, Bank Muscat Research Source: BP World Statistical Handbook, and Bank Muscat Research 18 Source: BP World Statistical Handbook, and Bank Muscat Research
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