EUR 93.50 For Business Accounts Only

Value, stability, and yield; Initiate with Overweight

Several reasons to own QEWC. These include: i) compelling valuation: QEWC trades on a 2018e P/E of 13.8x, c18% below global peers, despite its 2018-20e EPS CAGR of 12.2% vs. 8.8% for peers, and ii) low-risk: QEWC’s operations are fairly stable and marginally impacted by the Qatari blockade. QEWS enjoys a high degree of cash flow visibility thanks to offtake agreements with the Qatari government, securing natural gas, power, and water prices; iii) attractive dividend yield: QEWC yields 4.1% in 2018e and 4.6% in 2019e vs. the Qatari 1-year treasury yield of 2.8%, and close to the 2018e market yield of 4.5%, with prospects of higher yield beyond 2019e on rising income, deleveraging, and limited capex commitments, and iv) potential for growth opportunities: QEWC has been venturing into utility projects outside Qatar since 2013 through its 60% owned subsidiary, Nebras Power. Potential for value-accretive investments abroad through its subsidiary, or directly in Qatar, given the country’s dire water shortage, would be a plus.

Resilient industry. On the supply front, the Qatari utilities sector is a state monopoly, with full state control over supply and pricing, leaving no competition against QEWC. In terms of demand, solid utilities demand ensures healthy operations for QEWC, despite power demand CAGR falling to 1.8% over 2017-22e vs. 5.5% over 2012-17, due to lower population and economic growth. Meanwhile, Qatar’s limited natural freshwater resources support future growth and expansion for QEWC. Subsidy cuts, if any, would be targeted towards the end-consumer, leaving limited impact on QEWC, as has been the case historically, and given the price-inelastic nature of demand. Expansion plans entail raising operational efficiency, (Qatar plants’ thermal efficiency of c38% in 2018e up from 33% in 2017e), which should reflect positively on QEWC.

Negative sentiment over 2018e earnings drop could delay value realisation. QEWC shut down its RAF A plant in Dec-17, given its old age (41 years) and low thermal efficiency (c11%); accordingly, we forecast its top line and bottom line to drop by c16% and c3%, respectively, in 2018e. In our view, negative sentiment over 2018e performance could delay value realisation to early 2019. Over 2019-21, we expect double-digit EPS growth, thanks to the pickup in JV operations. We see a low likelihood of input/output price amendments, thanks to the company’s offtake agreements with the Qatari government securing prices. Otherwise, every 5% of lower-than-expected electricity demand would knock c7% off our TP, all else constant.