EUR 45.77 For Business Accounts Only

Cut TP 10%, on downward revision of government contracts; Maintain Overweight

RAF B and RAF B2 plants contracts revised downwards. QEWC’s contracts with Kahramaa for the operations and output supply of RAF B and RAF B2 plants were revised downwards in 2018 (42% of QEWC’s wholly-owned capacity and 23% of its water desalination capacity). We cut our average pricing and EBITDA forecasts by 8% and 14.8%, respectively, over our 10-year forecast horizon to reflect the development (QEWC does not disclose its terms with the government) based on the recent drop in financial performance. 

Maintain Overweight on valuation; Value realisation a long-term story. We cut our TP by 10% to QAR221/share. QEWC remains cheap, despite the negative development, trading on a 2019 and 2020 P/E of 12.3x and 11.4x, respectively, on our figures, 22.4% and 11.7% below global peers. However, we expect the lack of catalysts (we look for 2019e EBITDA and net profit to drop 9.7% and 6.6%, respectively) and market concerns about further revisions to deter value realisation in the short-term.

QEWC remains an attractive yield play. QEWC’s 2019e DPS of QAR7.75 is equivalent to a yield of 4.8% vs. global utility peers’ 3.9% and the Qatari market’s 4.2%. Beyond 2019, we look for modest bottom line growth, driven by rising JV income (41% of 2019e net income) and deleveraging (average debt repayment of QAR500mn p.a. beyond 2019), to reflect positively on QEWC’s dividend potential. This comes given the limited capital spending plans beyond 2019. Accordingly, yield would rise to 5% in 2020e and 5.6% in 2021e.  

Further contract revisions the key downside risk. QEWC’s contracts with the Qatari government typically extend for 25 years means an average remaining contract life of 3-21 years for the rest of QEWC’s plants. The risk of further downward contract revision, either after contract expiry or during the life of the contract, is the main downside risk to our numbers. Alone, 5% lower/higher-than-expected electricity price and desalinated water price p.a. knocks/adds 8% and 5.4% off our TP, all else constant. Otherwise, every 5% higher/lower-than-anticipated gas price changes our TP by 2.3%, all else constant.