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  1. 1. QATAR electricity and water companyStability March 24, 2011key data Highlights Fair Value: QAR 144Fair Value per share (QAR) 144.00Closing Price (QAR) * 129.70 Recommendation: Accumulate – Risk Level**: 252-week High / Low (QAR) 136.30/101.00 Reason for Report: FY2010 UpdateYTD / 12-month return 1.6%/25.7%P/E (TTM) 11.2Market Cap (QAR Millions) 12,970 • Qatar Electricity and Water Company (QEWC) reportedShares Outstanding (Millions) 100Free Float 36% strong financial results for 2010 as the company receivedReuters / Bloomberg QEWC.QA / QEWS QD a boost from new capacity additions and the consolidation*As of March 24, 2011. Sources: Bloomberg and NBK Capital of Ras Laffan Power Company (RLPC) in 4Q2010. Total revenue reached QAR 3.4 billion in FY2010, 29% abovekey metrics FY2009 and 9.5% above our forecasts. EBITDA increased by 33% in FY2010 to QAR 1.9 billion, a result that is ahead 2010A 2011F 2012F 2013F of our forecast by 13.8%. Moreover, net income stood atEPS (QAR) 11.6 12.2 13.0 13.9 QAR 1.2 billion in FY2010, 23% above FY2009 and 2.9%EPS Growth 26% 5% 7% 7% below our forecast.P/E 11.2 10.7 10.0 9.4Dividend Yield 5% 5% 5% 6% • QEWC is a leading utility company in the Gulf CooperationEV/EBITDA 13.2 11.5 10.9 10.8 Council (GCC) with long-term purchase agreements withRevenue (QAR Millions) 3,430 4,320 4,543 4,606Revenue Growth 29% 26% 5% 1% Kharamaa, the sole distributor of electricity and water inEBITDA (QAR Millions) 1,883 2,175 2,286 2,312 Qatar. Accordingly, QEWC has a stable revenue stream, asEBITDA Growth 36% 15% 5% 1% the company is not exposed to fluctuations in demand forEBITDA Margin 55% 50% 50% 50% electricity and water. QEWC is a capacity provider and doesSources: Company financial statements and NBK Capital not engage with the end-user, which makes the company a low-risk business. Moreover, QEWC has been shielded fromQUARTERLY forecasts regional unrest, and operations remain normal. • In 2010, QEWC saw major operational developments: a) theQAR Millions 1Q2010A 4Q2010A 1Q2011F 2Q2011F Mesaieed Power Plant (power-generating capacity of 2,007Revenue 593 1,086 978 1,050EBITDA 317 547 460 525 MWh) became fully operational in 4Q2010, b) the first phase of Ras Gitras (which will be the largest power plant inSource: NBK Capital Qatar upon completion) was completed, and c) ownership in RLPC increased from 25% to 80%.Rebased Performance • We are forecasting a 26% increase in revenue to QAR 4.3 140 billion for QEWC in 2011, mainly driven by new capacity 135 additions and the full consolidation of RLPC. On an 130 operational level, we are forecasting EBITDA to grow by 125 15.5% to QAR 2.2 billion in 2011, while we are expecting a 120 drop in the EBITDA margin from 54.9% in 2010 to 50.3% 115 in 2011 (mostly due to the accounting treatment of the new 110 plants as finance leases). 105 • QEWC remains a good dividend play. In 2010, the company 100 announced a higher-than-expected dividend payment of 95 QAR 6 per share, 9% above our forecast of QAR 5.5 per 90 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 share, and 20% ahead of last year’s payment. This translates MSCI Qatar Qatar Electricity into a dividend payout of 52% and a dividend yield ofSources: MSCI, Bloomberg, and NBK Capital 4.6%. For 2011, we are expecting a dividend payment of QAR 6.5 per share, which has an implied yield of 5%. Our new fair value of QAR 144 per share for QEWC representsAnalysts an 11% upside potential from the last closing price (March 24, 2011); hence, our new recommendation for the stockSamir Murad, CFA Wadie Khoury is “Accumulate.”T. +965 2259 5145 T. +965 2259 5118E. samir.murad@nbkcapital.com E. wadie.khoury@nbkcapital.com **Please refer to page 6 for recommendations and risk ratings. nbkcapital.com
  2. 2. March 24, 2011 Utilities – Qatar Electricity and Water Company Valuation Our 12-month fair value estimate for QEWC’s share price increased by 10% and currently stands at QAR 144 per share. The fair value derived from the discounted cash flow (DCF) valuation increased by 13% while the value generated from the peer comparison method saw a decline of 2%. Given that our fair value estimate is 11% above the latest market price, our recommendation for QEWC is “Accumulate.” Figure 1 Fair Value per Share Old New Valuation Method Change Weight Value Weight Value Our new 12-month fair value Discounted cash flow 80% QAR 129 80% QAR 146 13% for QEWC is QAR 144 Peer comparison 20% QAR 136 20% QAR 133 -2% Weighted average fair value 100% QAR 131 100% QAR 144 10% Source: NBK Capital Strong financial performance in 2010 comes in higher than expected Qatar Electricity and Water Company (QEWC) reported stronger-than-expected financial results for FY2010. Total revenue reached QAR 3.4 billion in FY2010, 29% above FY2009 and 9.5% above our forecasts, primarily due to new capacity that came online in 4Q2010 and the consolidation of the Ras Laffan Power Company (RLPC). The power generation and water desalination operations continued to show strong growth in revenue for FY2010; each grew by 19%. However, the highest growth came from lease income, which more than doubled due to the accounting treatment of the new plants as finance leases. As a result, lease income’s contribution to revenue increased from 7.7% in 2009 to 15.1% in 2010. At the operating level, the company reported 33% year-on-year growth in EBITDA to QAR 1.9 billion in FY2010, a result that is ahead of our forecast of QAR 1.6 billion by 13.8%. Moreover, net income stood at QAR 1.2 billion in FY2010, 23% above FY2009 and 2.9% below our forecast. QEWC continues to demonstrate its ability to generate strong cash flow from operations. Cash flow from operations remained positive at QAR 1.2 billion in 2010, slightly lower than QAR 1.3 billion in 2009. Figure 2 Income Statement Full Year Common Size QAR 000 2009 2010 YoY FY2009 FY2010 Electricity 1,515,516 1,801,027 19% 57% 53% Water 931,294 1,110,739 19% 35% 32% Lease Income from Plants 204,058 518,468 154% 8% 15% Sales 2,650,868 3,430,234 29% 100% 100% Power generation and water Cost of Goods Sold (1,535,409) (1,891,517) 23% -58% -55% desalination operations Gross Profit 1,115,459 1,538,717 38% 42% 45% continued to show strong General and Admin. Expenses (162,504) (166,652) 3% -6% -5% growth in revenue; however, Share of Profits from Associates 46,619 31,946 -31% 2% 1% the highest growth came from EBITDA 1,408,230 1,866,817 33% 53% 54% lease income Depreciation 408,656 462,806 13% 15% 13% EBIT 999,574 1,404,011 40% 38% 41% Finance Cost (194,466) (465,618) 139% -7% -14% Other 139,766 228,472 63% Net Income 944,874 1,166,865 23% 36% 34% Source: QEWC nbkcapital.com | 2
  3. 3. March 24, 2011 Utilities – Qatar Electricity and Water Company QEWC has been shielded from regional unrest, and operations remain normal Qatar has not been affected by the unrest that has swept the Middle East and North Africa (MENA) region. Thus, QEWC, which operates solely in Qatar, has been shielded from the geopolitical events that have been taking place since the onset of 2011. QEWC is responsible for generating power and desalinizing water in Qatar, with long-term purchase agreements with Kahramaa (the government entity responsible for distributing electricity and water within Qatar). As a result, QEWC has a secure revenue stream and cash flow from operations that are not exposed to the fluctuations in demand for electricity and water. Moreover, 54% of the company is owned by the Government of Qatar (direct and indirect stake), which further strengthens the company’s position in the local market. Major developments in QEWC’s portfolio in 2010 In 2010, QEWC saw major developments in its operations: a) the Mesaieed Power Plant (power- generating capacity of 2,007 MWh) became fully operational in 4Q2010, b) the first phase of Ras Gitras (which will be the largest power plant in Qatar upon completion) was completed, and c) the ownership stake in the Ras Laffan Power Company (RLPC) increased from 25% to 80%. On a proportional basis, these power plants added 2,040 MWh of electricity, bringing QEWC’s total power-generating capacity (on a proportional basis) to 5,471 MWh. Ras Gitras, the final plant in the company’s pipeline, is expected to be inaugurated in 2Q2011 and raise the company’s proportionate power-generating capacity to 5,875 MWh. Market Update – Power Surplus in Qatar According to MEED’s Arabian Power and Water Market Report for 2011, Qatar is the fastest- growing power market in the region with 7,900 MWh of capacity and a reserve margin of 36% (the reserve margin is measured against peak demand for electricity). MEED data shows that peak power demand in Qatar increased by 12% in 2010 to 5,095 MWh. However, Kharamaa forecasts that Qatar’s existing power capacity is sufficient to meet future demand until 2015. MEED expects that a new facility with 2,000 MWh capacity may be tendered in 2011, for which construction will begin in 2013. We expect that QEWC will be part of a consortium that is awarded the contract for the new facility, as is the case for all previous power projects in Qatar. All of our revenue forecasts are based on existing projects. We did not include any greenfield projects that QEWC has expressed interest in, such as expanding into countries outside Qatar. We will begin to incorporate new capacity into our forecast once the projects are formally announced. 2011 Forecasts We are forecasting a 26% increase in revenue to QAR 4.3 billion for QEWC in 2011, mainly driven by new capacity additions and the full consolidation of RLPC. However, in 2011, we expect lease income from plants to show the largest growth in revenue due to the full impact of the Mesaieed Power Plant and RLPC. Moreover, the completion of Ras Gitras in 2Q2011 provides a further boost to lease income in 2011. As a result, we are forecasting 80% growth in lease income in 2011, which increases the segment’s contribution to revenue from 15.1% in 2010 to 22% in 2011. On an operational level, we are forecasting EBITDA to grow by 15.5% to QAR 2.2 billion in 2011, while we are expecting a drop in the EBITDA margin from 54.9% in 2010 to 50.3% in 2011. The 450-basis point drop in the EBITDA margin stems mostly from the accounting treatment of the new plants as finance leases. nbkcapital.com | 3
  4. 4. March 24, 2011 Utilities – Qatar Electricity and Water Company All of QEWC’s plants are built by using project financing; whereby, interest is capitalized during the construction phase. As a result of the completion of QEWC projects, we are expecting interest expense to jump 38% in 2011. In our opinion, this increase will limit net income growth to 4.6% in 2011, with the net income margin dropping to 28% in 2011 from 33.9% in 2010. A higher-than-expected dividend payment for 2010 The long-term take-or-pay agreements with Kahramaa have enabled QEWC to consistently produce positive cash flow from operations and increase dividend payments on a yearly basis. QEWC has repeatedly increased dividend payments by QAR 0.5 per share between 2006 and 2009 to reach QAR 5 per share in 2009. In 2010, the company announced a higher-than-expected dividend payment of QAR 6 per share, 9% above our forecast of QAR 5.5 per share, and 20% ahead of last year’s payment. This translates into a dividend payout of 52% and a dividend yield of 4.6%. We believe that the higher-than-expected dividend payout was a result of the nearing of the completion QEWC’s planned capacity expansions (Ras Gitras is the last confirmed project in QEWC’s pipeline). For our forecasts, we have assumed that QEWC will revert to its previous dividend policy of increasing dividends in increments of QAR 0.50 per year. Figure 3 Dividend Payout 9.0 70% 65% 8.0 59% 60% 7.0 53% 52% 50% 45% 6.0 The company announced a 40% 5.0higher-than-expected dividend QAR payment of QAR 6 per share 4.0 30% in 2010 3.0 6.0 5.0 20% 4.5 2.0 4.0 3.5 10% 1.0 0.0 0% 2006 2007 2008 2009 2010 Dividend Per Share [LHS] Payout Ratio Ratio [RHS] Source: QEWC and NBK Capital nbkcapital.com | 4
  5. 5. March 24, 2011 Utilities – Qatar Electricity and Water CompanyFINANCIAL STATEMENTSBalance Sheet ( Q A R M i l l i o n s ) Historical ForecastFiscal Year Ends December 2009 2010 2011 2012 2013 2014 2015ASSETSCash 2,307 2,074 1,218 1,430 1,478 1,834 1,651Receivables 432 1,454 691 727 737 747 757Total Inventory 274 295 331 348 354 360 366Finance Lease Receivable 3,848 11,836 13,105 12,890 12,658 12,408 12,138Property/Plant/Equipment, Total - Net 10,664 5,974 7,308 6,988 6,688 8,261 9,750Long Term Investments 275 358 358 358 358 358 358Goodwill and Intangilbes - 133 133 133 133 133 133Other Long-Term Assets, Total 247 - - - - - -TOTAL ASSETS 18,048 22,123 23,143 22,874 22,406 24,100 25,152LIABILITIES & EQUITYAccounts Payable 1,667 2,315 2,313 1,932 1,691 1,457 1,441Short-Term Debt 668 1,513 1,147 1,103 1,028 1,131 1,178Other Current Liabilities 1,209 1,813 1,813 1,813 1,813 1,813 1,813Long-Term Debt 10,823 12,446 13,190 12,680 11,824 13,009 13,551Minority Interest - 176 186 190 194 197 201Other Liabilities 92 98 114 130 144 161 180Total Liabilities 14,458 18,361 18,764 17,848 16,695 17,769 18,365Total Equity 3,590 3,763 4,380 5,026 5,711 6,331 6,787TOTAL LIABILITIES AND EQUITY 18,048 22,123 23,143 22,874 22,406 24,100 25,152Income Statement ( Q A R M i l l i o n s ) Historical ForecastFiscal Year Ends December 2009 2010 2011 2012 2013 2014 2015Total Revenue 2,651 3,430 4,320 4,543 4,606 4,669 4,733Operating expenses (1,265) (1,547) (2,145) (2,257) (2,294) (2,329) (2,366)Depreciation/Amortization (409) (463) (466) (470) (450) (527) (611)Operating Income 977 1,421 1,708 1,816 1,862 1,812 1,756Interest (Expense) Income (54) (331) (552) (579) (536) (501) (558)Other (1) 77 82 82 82 82 82Minority Interest - (4) (22) (23) (23) (23) (24)Net Income 922 1,163 1,217 1,296 1,385 1,370 1,256Cash Flow Statement ( Q A R M i l l i o n s ) Historical ForecastFiscal Year Ends December 2009 2010 2011 2012 2013 2014 2015Cash from Operating Activities 1,525 1,674 1,630 2,067 2,288 2,339 2,604Cash from Investing Activities (3,954) (1,996) (1,656) (16) (14) (1,955) (1,950)Cash from Financing Activities 3,120 90 (831) (1,839) (2,226) (29) (837)Sources: Company’s financial statements and NBK Capital nbkcapital.com | 5
  6. 6. March 24, 2011 Utilities – Qatar Electricity and Water CompanyRISK AND RECOMMENDATION GUIDE RECOMMENDATION UPSIDE (DOWNSIDE) POTENTIAL BUY MORE THAN 20% ACCUMULATE BETWEEN 5% AND 20% HOLD BETWEEN -10% AND 5% REDUCE BETWEEN -25% AND -10% SELL LESS THAN -25% RISK LEVEL LOW RISK HIGH RISK 1 2 3 4 5DisclaimerThe information, opinions, tools, and materials contained in this report (the “Content”) are not addressed to, or intended for publication, distribution to, or use by,any individual or legal entity who is a citizen or resident of or domiciled in any jurisdiction where such distribution, publication, availability, or use would constitute abreach of the laws or regulations of such jurisdiction or that would require Watani Investment Company KSCC (“NBK Capital”) or its subsidiaries or its affiliates to obtainlicenses, approvals, or permissions from the regulatory bodies or authorities of such jurisdiction. 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  7. 7. March 24, 2011 Utilities – Qatar Electricity and Water CompanyNBK CAPITALKuwaitHead Office MENA Research Brokerage38th Floor, Arraya II 35th Floor, Arraya II 37th Floor, Arraya IIAl Shuhada Street, Block 6, Sharq Al Shuhada Street, Block 6, Sharq Al Shuhada Street, Block 6, SharqP.O.Box 4950, Safat 13050 P.O.Box 4950, Safat 13050, Kuwait P.O.Box 4950, Safat 13050, KuwaitKuwait T. +965 2224 6663 T. +965 2224 6964T. +965 2224 6900 F. +965 2224 6905 F. +965 2224 6978F. +965 2224 6905 E. menaresearch@nbkcapital.com.kw E. brokerage@nbkcapital.comUnited Arab Emirates TurkeyNBK Capital Limited NBK CapitalPrecinct Building 3, Office 404 Arastima ve Musavirlik AS,Dubai International Financial Center Sun Plaza, 30th Floor,P.O.Box 506506 Dereboyu Sk. No.24Dubai, UAE Maslak 34398, Istanbul, TurkeyT. +971 4 365 2800 T. +90 212 276 5400F. +971 4 365 2805 F. +90 212 276 5401National Bank of KuwaitKuwait Jordan United States of America VietnamNational Bank of Kuwait SAK National Bank of Kuwait SAK National Bank of Kuwait SAK National Bank of Kuwait SAKAbdullah Al-Ahmed Street Head Office New York Branch Vietnam Representative OfficeP.O. Box 95, Safat 13001 Al Hajj Mohd Abdul Rahim Street 299 Park Avenue, 17th Floor Room 2006, Sun Wah TowerKuwait City, Kuwait Hijazi Plaza, Building # 70 New York, NY 10171, USA 115 Nguyen Hue Blvd, District 1T. +965 2242 2011 P.O.Box 941297, T. +1 212 303 9800 Ho Chi Minh City, VietnamF. +965 2243 1888 Amman -11194, Jordan F. +1 212 319 8269 T. +84 8 3827 8008Telex: 22043-22451 NATBANK T. +962 6 580 0400 F. +84 8 3827 8009 United Kingdom F. +962 6 580 0441INTERNATIONAL NETWORK National Bank of Kuwait (Intl.) Plc China Lebanon Head Office National Bank of Kuwait SAKBahrain National Bank of Kuwait 13 George Street, Shanghai Representative OfficeNational Bank of Kuwait SAK (Lebanon) SAL London W1U 3QJ, UK Suite 1003, 10th Floor,Bahrain Branch Sanayeh Head Office T. +44 20 7224 2277 Azia Center, 1233 Lujiazui Ring Rd.Seef Tower, Al-Seef District BAC Building, Justinian Street F. +44 20 7224 2101 Shanghai 200120, ChinaP.O. Box 5290, Manama, Bahrain P.O. Box 11-5727, Riyad El Solh T. +86 21 6888 1092T. +973 17 583 333 1107 2200 Beirut, Lebanon NBK Investment F. +86 21 5047 1011F. +973 17 587 111 T. +961 1 759 700 Management Limited F. +961 1 747 866 13 George Street ASSOCIATESSaudi Arabia London W1U 3QJ, UKNational Bank of Kuwait SAK Iraq T. +44 20 7224 2288 QatarJeddah Branch Credit Bank of Iraq F. +44 20 7224 2102 International Bank of Qatar (QSC)Al-Andalus Street, Red Sea Plaza Street 9, Building 187 Suhaim bin Hamad StreetP.O. Box 15385 France Sadoon Street, District 102 P.O.Box 2001Jeddah 21444, Saudi Arabia P.O.Box 3420, Baghdad, Iraq National Bank of Kuwait (Intl.) Plc Doha, QatarT. +966 2 653 8600 T. +964 1 7182198/7191944 Paris Branch T. +974 447 3700F. +966 2 653 8653 +964 1 7188406/7171673 90 Avenue des Champs-Elysees F. +974 447 3710 F. +964 1 7170156 75008 Paris, FranceUnited Arab Emirates T. +33 1 5659 8600 Turkey Egypt F. +33 1 5659 8623National Bank of Kuwait SAK Turkish Bank Al Watany Bank of Egypt Head OfficeDubai Branch Singapore 13 Al Themar Street Valikonagl Avenue No. 1Sheikh Rashed Road, Port Saeed Gameat Al Dowal AlArabia National Bank of Kuwait SAK P.O.Box 34371 Nisantasi,Area, ACICO Business Park Fouad Mohie El Din Square Singapore Branch Istanbul, TurkeyP.O. Box 88867, Dubai Mohandessin, Giza, Egypt 9 Raffles Place #51-01/02 T. +90 212 373 6373United Arab Emirates T. +202 333 888 16/17 Republic Plaza, Singapore 048619 F. +90 212 225 0353T. +971 4 2929 222 F. +202 333 79302 T. +65 6222 5348F. +971 4 2943 337 F. +65 6224 5438 nbkcapital.com | 7
  8. 8. KUWAIT DUBAI ISTANBUL CAIRO

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