EUR 89.57 For Business Accounts Only

Attractive valuation, Qatar LNG expansion a cherry on top; Maintain Overweight

High levels of cash flow visibility and stability. Nakilat’s operations are highly stable, thanks to long-term time charter agreements that extend over 7-25 years, mostly with Qatar’s government, locking in c94% of the company’s FCFF. Nakilat does not bear fuel costs, hedging its operations against energy price movements. Nakilat’s valuation is attractive, trading on a 2019e P/E of 10.6x, c32% below global utility and energy peers with similar operational and risk profiles, unjustified, in our view.  

Poised to benefit from Qatar LNG market expansion. In April 2017, Qatar lifted its self-imposed moratorium on the mega North gas field, in tandem with plans to expand its LNG liquefaction capacity by c43% to 110mn tpa p.a by 2023. This bodes well for Nakilat, the exclusive LNG transporter for Qatar. We calculate every fleet unit addition to raise our TP by cQAR0.20/share for conventional and Q-Flex, and cQAR0.26/share for Q-Max fleet, assuming the new fleet is wholly-owned by Nakilat. With many uncertainties surrounding the expansion plans, including Nakilat’s share of the new project vs. JVs, we do not incorporate it into our TP, leaving it as an upside.

Attractive dividend yield, with high security. Management plans to maintain a dividend payout of >60% p.a., translating into a dividend yield of 5.6% and 6.2% in 2018e and 2019e, respectively, vs. 4.2% for the DSM index, and 4.1-4.6% for Qatar Electricity and Water Company, which operates using a close business model. This comes on: i) operational stability, permitting emphasis on dividends, despite high levels of debt (2018e net debt to EBITDA of 8.2x), and ii) solid cash flow generation (FCFE yield of 6.1% and 4.6% in 2018e and 2019e, respectively). Gradual deleveraging and rising JVs’ income should derive a 2018-28e EPS CAGR of 4.6%, reflecting positively on dividends. We expect future fleet additions to be mostly debt-funded, keeping dividend payments intact.

Risks skewed to the upside. Nakilat’s risk profile is favourable, in our view, thanks to operational stability and potential upside from Qatar’s LNG capacity expansion. Nakilat’s risk profile is similar to utility companies, with the main downside risks, we believe, being the possibility of amendments to Nakilat’s long-term agreements (low likelihood, in our view) or further deterioration in income from JVs. Every 5% of lower-than-expected income from JVs p.a. knocks 4.5% off our TP, all else constant.