EUR 55.07 For Business Accounts Only

QEWS QD | Stability amid global turmoil; Maintain Overweight

A value and dividend play. QEWC trades on a 2022e P/E of 14x, a c12% discount to global utility peers. It offers an attractive dividend yield of 4.8% in 2022e, despite buying-out minority stake in Nebras Power, up to 5.6% in 2023e vs. 3.5% for global peers. This should be backed by: i) a strong balance sheet (2022e net debt/EBITDA of 2.5x, down to 1.5x by 2025e), ii) healthy FCFF generation (total of QAR5.3bn over 22-25e, yielding 6.1%, on average), and iii) earnings stability and visibility.

Limited exposure to global unrest. QEWC’s operations are rather steady amid global energy shortages and rising uncertainty around the global economic outlook. The company secures its input and sells its output through long-term offtake agreements with the Qatari government at fixed prices. c75% of revenue and 67% of costs pertains to operations in Qatar, with limited risk of disruptions, even if the global energy crunch continues to worsen.

Expansions value accretive. QEWC announced its decision to acquire the remaining 40% stake in Nebras, its global utility arm, in Jan-22 for USD530mn (implying 2022e P/E of 14.3x; 10.5% discount to global peers and 20% below our valuation for Nebras). We believe the deal is value accretive, adding QAR950mn. Locally, the company is venturing into new value accretive power and water projects in Qatar through JVs. We look for a 2023-29e CAGR of 6.5% in JV income.

Potential contracts downward revision, either after contract expiry or during contract life, key downside risk. We note that QEWC’s RAF B1 contract (3.6% of total production capacity) is due for renewal in Aug-22. We factor into our numbers 2.5% lower electricity selling prices and 5% higher gas prices p.a. in 2022e/2023e across the wholly owned plants upon RAF B1 contract renewal, noting that every 5% higher/lower-than-anticipated rise in gas price across the board lowers/raises our TP for QEWC by 7%, while each 5% higher/lower-than-expected electricity selling price lowers/raises our TP by 7.3%, all else constant.