Qatar utility upgraded after strong showing

What's Up: Qews was upgraded to "buy" from "hold" at Naeem Holding after showing strong profits in the second quarter.

Doha's skyline at night. Reuters

Qatar Electricity and Water (Qews) was upgraded to "buy", from "hold", after the company's strong performance in the second quarter, Naeem Holding said yesterday.

The Middle East's second-biggest utility by market capitalisation recorded a 41 per cent increase in net profit for the quarter to 444 million Qatari rials from a year earlier.

Revenues increased to 1.2 billion riyals, up 49 per cent on the second quarter last year and 30 per cent compared with the first quarter, beating analyst estimates.

Revenue from electricity reached 579m rials, up 32 per cent on last year, while water desalination revenue rose 28 per cent to 364m rials.

Gas costs to total sales decreased to 25 per cent from 29 per cent, widening the gross margin. Qews has substantial borrowings compared with its global peers. "The company is likely to follow a de-leveraging strategy in the medium term as it has no need to fund new investments or construct new plants given the excess capacity in both electricity, at 35 per cent, and water, at 23 per cent," said Essam Abd Elalim, the analyst at Naeem Holding. "Therefore capital expenditures would decline, resulting in both free cash flow and dividends increase."

Following the upgrade, Mr Elalim increased the price target on the stock to 158 rials from 120 rials. The stock traded flat at 129.9 rials yesterday.

One of Qew's strategic goals is to expand overseas. The company has just won a new project in Oman in partnership with Marubeni, Chubu and Multitech. The Sur project includes operation of a 2,000-megawatt gas-fired power plant. Oman Power and Water Procurement Company is to purchase power from the project under a 15-year power purchase agreement, "which guarantees secured, long-term income for Qews," Mr Elalim said.

The 6.5bn rial project is expected to generate revenues of 227m rials in 2013 after the 433MW phase 1 starts and is fully operational by mid-2014.

"We upgraded to reflect the company's strong second-quarter performance, the improvement in margins owing to lower costs, as well as value added from the Sur power project in Oman."