Though largely influenced by the exploitation of Qatar’s abundant energy resources, Qatar, like its neighbors, is developing a diverse industrial infrastructure that embraces many commercial activities.
Beltone’s analysts track the companies that are changing the face of the region. Here they focus on three major players.
Almarai is one of the largest dairy companies in the world; operating seven dairy farms with a stock of over 100,000 cows. Almarai categorises its products into three branches: 1) Fresh dairy, which includes Laban, milk, zabadi, and yoghurt; 2) Food and beverages, including long-life dairy, fruit juice, and processed cheese and butter; 3) Fresh bakeries, including pastry, cake, bread, and biscuits. Over the past few years, Almarai has been transforming from a pure dairy company, into a regional, integrated food company; the company is currently producing bakery products through its subsidiary Modern Food Industries. Almarai’s subsidiary Hadco produces animal feed and poultry, in addition to the infant formula products which will debut in the Saudi Arabian market during 2H2011. Almarai has been growing in double digits since 2005, and we believe this trend will continue in the short to medium term, propelled by several factors, including: a) Continued growth in Saudi Arabia and GCC, in Almarai’s core businesses, b) Realising revenues from IDJ, especially from Egypt, as the company started operations in 3Q2010, c) The Infant formula to add weight to Almarai’s top line starting 2H2011, and d) Increasing the company’s market share in the packaged food category, especially through HADCO. We expect the dairy segment’s contribution to total sales to decrease going forward, as other, less mature, segments will grow at higher rates. We like Almarai’s solid fundamental story, and we believe that management has been highly efficient since listing (in 2005). Almarai’s impressive growth rates are a continuation of a five-year trend and are due, largely, to the company’s horizontal expansion, in addition to the y-o-y sales growth in the company’s different segments.
Qatar Electricity and Water (QEWC)
Qatar Electricity and Water (QEWC) is the country’s main provider of power and desalinated water; it is currently in control of over 70% of Qatar’s generation and desalination capacity. QEWC is a low-risk utility company as all of its operations are based on long-term off-take agreements with Kahramaa (minimum 65%) and Qatar Petroleum (QP). Thus, the company is solely a capacity provider and is not exposed to the volatility in demand for electricity and water in Qatar. Qatar’s total electricity capacity is set to quadruple from c.2,100 MW in 2007 to around 8,300 MW by 2012. Water desalination capacity, a product of cogeneration via excess heat from the power generation process, should grow similarly. Based on equity interest, QEWC’s proportionate capacity is set to grow by 63% to 5,278 MWh and 43% to 241 MIGD by 2012. The expansion is to be debt-financed primarily, and is subject to bids from international power producers. With the Qatari government encouraging investment in independent water and power projects (IWPPs), the future of QEWC will lie in its shift from being a recipient of assets to a co-investor in these new power generation projects. Currently, the largest of these projects in the medium term are the 2,000 MW Mesaieed plant and the 2,700 MW Ras Laffan C plant. Moreover, QEWC is looking to expand beyond the Qatari market in the GCC and other regions. As part of this strategy, QEWC announced, in April 2010, that it will build two 450 MW gas-fired power plants in Syria, at an estimated cost of US$1 billion, in collaboration with Syria Qatari Holding (SQH). Construction of the two plants should begin before April 2011. We like the QEWC story, and we believe in the company’s strong fundamentals. QEWC is an attractive dividend play (with a payout ratio of more than 54% in 2009) and an expected dividend yield of more than 5% in FY2010e. Furthermore, we believe that Qatar hosting
the FIFA World Cup 2022 will trigger an abnormal surge in the country’s electricity and water demand in the medium to long-term, which will be to QEWC’s benefit.
Sixth Of October Development Company (SODIC)
Sixth of October for Development and Investment Company (SODIC) is one of the largest real estate developers in Egypt, with a total land bank of 7.5 million sqm, distributed across Egypt, mainly in Cairo, and Syria, and is well diversified, in terms of segment types, with 40% of the BUA used up by residential developments, and the remaining 60% of the BUA is allocated to retail and office developments. In 2010, SODIC managed to increase its contracted sales to E£1.8 billion as of November 2010 versus E£800 million at the end of 2009. SODIC plans to launch five more projects in East Cairo over the next six months. In East Cairo, one is Esplanade, a residential apartment development, comprising 160,000 sqm of BUA, Eastown Square, a commercial development, comprising 80,000 sqm of BUA of offices and retail, and the Mansoura Shopping Mall in the Delta of Egypt, which should be operational in 1H2012.
Orascom Construction Industries (OCI)
Orascom Construction Industries (OCI) is a leading construction contractor, active mainly in emerging markets. The construction group includes 50%-owned BESIX and 100%-owned Contrack. As at 9M2010, OCI had a construction backlog of US$6 billion with exposure to emerging markets in the Middle East and North Africa including Egypt and Algeria. OCI is becoming increasingly active in natural gas-based industries, with investments in existing and greenfield fertiliser projects in North Africa and Europe. OCI ranks in the top ten largest nitrogen based fertiliser producers in the world by capacity. By the end of 2011, OCI’s total urea and ammonia capacity will stand at 2.8 and 1.9 million tonnes per annum (tpa) respectively.
Qatar National Bank (QNB)
QNB is one of the strongest and most fundamentally sound banks in the region. The bank continues to show high profitability (ROAE FY11f of 26.6%); high efficiency (cost-to-income FY11f of 18.4%); high asset quality (NPLs to gross loans FY11f of 0.8%), and strong capitalisation (CAR FY11f of 14.1%. Being the largest bank in Qatar, with strong government and public sector ties, enjoying a very strong brand name in Qatar, with a total asset market share of 37.2% in September 2010, QNB is the
key candidate to capture Qatar’s future growth. The bank relies on its brand equity, ownership, rating, and on its relatively larger local and international presence, to attract and maintain clients. QNB’s geographical dispersion and branch network provide it with access to the existing and potential clients domestically and internationally. QNB has a strong alliance with the government and the public sector, where most of the bank’s deposits and loans (around 45- 50% of each) are sourced from and channeled to these entities. QNB is the primary beneficiary of the infrastructure spending planned until World Cup 2022, where the government and public sector lending comprise 47% of its total portfolio.
National Bank of Abu Dhabi (NBAD)
NBAD is the largest bank in Abu Dhabi and the second largest in the UAE, with a loan and deposit market share of 13.4% and 11.9%, respectively, as of September 2010. NBAD is the prime bank for the Abu Dhabi government, providing it with a very large and secured business, at a lower risk profile compared to its peers. NBAD’s aim is to be one of largest Arab banks and, therefore, continues to look for opportunities in large Arab economies, as well as other international markets. NBAD is expanding regionally and internationally, with a focus on specific segments within certain countries. For example, the bank has 28 branches in Egypt focusing on trade flow businesses, large Egyptian corporations, government institutions and high net worth individuals. Management intends to bring the total branches in Egypt to a total of 50. In line with its strategy, NBAD’s branches in London, Paris, Washington, Kuwait, Oman, Bahrain, Sudan, Libya (representative office) and Switzerland focus on corporate, government and high net worth clients, rather than mass retail banking. NBAD opened a branch in Hong Kong in December 2009 and in Jordan in February 2010. The bank is also working on increasing its branch network in Egypt and Oman and transforming its representative office in Libya into a full branch. Also under consideration is the expansion into countries with strong business growth potential including Malaysia, Lebanon, Morocco, Singapore, Shanghai, India, Indonesia and Turkey.
Al-Rajhi controls the largest branch network in Saudi Arabia, operating through 443 branches and is well-positioned to take advantage of any growth opportunities in all business segments. Al-Rajhi is a full service bank in terms of its lending strategy, as it has been focusing, equally, on all major lending sectors. The bank’s advances composition as of December 2009 stood at: Corporate (28%), retail (38%) and government (16%). Currently, Al-Rajhi is more focused on lending to the retail and government segments, given its risk aversion to lending to the corporate sector and the opportunity arising from the government’s US$385 billion development plan. The bank is expected to be a major beneficiary of the Saudi Arabian government’s spending plan, as it supplied 73.2% of total lending to the government from the banking sector as of December 2009. In addition, Al-Rajhi has highest proportion of retail assets amongst Saudi Arabian banks, which stood at 44.2% as of December 2009, indicating its relative superiority in creating retail assets. With regard to international presence, Al-Rajhi has been operating in the Malaysian market since 2006, after being the first foreign bank to be awarded a full-banking licence there. Currently, Al-Rajhi is operating 20 branches, and is offering its services to 130,000 clients in Malaysia. Al-Rajhi has obtained approval to open branches in Kuwait and Jordan, and will become the first Saudi Arabian bank to operate in these markets. Once operations start in Jordan and Kuwait, Al-Rajhi is expected to explore opportunities in other countries. Al-Rajhi has the highest capital adequacy ratio amongst Saudi Arabian banks, which stood at 19.69% as of June 2010.