EUR 49.26 For Business Accounts Only

QGTS QD | Stable operations amid turmoil; Maintain OW

Current market valuation ignores stability of operations; Raise TP by 22% to QAR2.94/share. Nakilat’s share price shed 9.4% y-t-d (vs. 33% for spot LNG shipping rates), on concerns over the global energy market slump since the COVID-19 outbreak. Nakilat’s operations are intact in the short-term, rendering the share price drop unjustified, in our view. We raise our TP by 22%, to reflect Nakilat’s acquisition of the remaining 49.9% stake in its subsidiary OSG at USD250mn in 2019, bringing total ownership to 100% (this alone derives an 11% top line increase in 2020e), roll over our DCF, and reduce our WACC estimates by 50bps, amid the global monetary easing dynamics. Nakilat trades on a 2020e P/E of 10.5x, 24.8% below global utility peers, and yields 5.3% in 2020e vs. global peers’ 3.6%.

Limited exposure to global energy market turbulence; Expansion could face delays. Nakilat’s LNG operations are hedged, thanks to long-term offtake agreements, mostly with the Qatari government. This protects the company from fluctuations in global energy prices, and ensures a high degree of cash flow visibility, and security, at least in the short-term. However, we believe Qatar’s expansion of its mega North Gas field could face delays beyond its announced completion date of 2023, amid global energy market uncertainties. The expansions could eventually be a source of upside for Nakilat, Qatar’s sole LNG transporter, but we do not factor new fleet additions into our TP until there is more visibility.

Extension of LNG market slump beyond 2020 a possible strain to Nakilat’s clients, putting secure contracts at risk. If the global energy market’s weakness extend beyond 2020, it could lead to adverse outcomes for Nakilat’s clients, which could trickle down to Nakilat, in case of force majeure. Other risks include: i) potential amendments to Nakilat’s long-term agreements with its clients, and ii) lower-than-expected income from JVs (2.0% reduction in TP for each 5% lower-than-expected JV income p.a., all else constant).