Qatar Stock Exchange Earnings Preview - 4Q2016

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1. 4Q2016 Earnings : Expect Weak Sequential Performance Due to a Challenging Operating Environment We expect 4Q2016 earnings for Qatari stocks under coverage to decrease by 1.2% QoQ but grow by 9.5%YoY. DHBK, QIIK and QNNS are estimated to contribute negatively QoQ to the aggregate bottom-line of stocks under coverage. On the other hand, IQCD, GISS and QGTS are also expected to skew positively YoY results. We do not anticipate 4th quarter earnings to be a significant catalyst for the market. However, the second tranche (March 2017) of the FTSE EM Index (estimated inflow of ~$450mn) in conjunction with 2016 dividends remain the next major catalysts for the Qatari market. Near-term outlook for most of our stocks under coverage remains muted but we continue to be positive longer term. Longer-term, attractive fundamental drivers and a significant spending program should provide tailwinds for growth. For the time being, valuations are in-line with the region’s price-to-earnings multiples along with its dividend yields. On an overall basis, the Qatar Exchange General Index trades at a 2017 P/E of 12.9x complemented by a dividend yield of 4.0%, while the Bloomberg GCC 200 Index trades at a 13.3x P/E along with a dividend yield of 4.3%. We await a drop in multiples complemented with improving fundamentals for better long opportunities. Highlights     Net provisions to adversely impact 4Q2016 bottom-line, which is a normal occurrence in the 4th quarter. As such, we estimate banks under coverage (ex-QNBK) to experience a QoQ drop while the YoY drop is affected by a subdued operating environment. Doha Bank (DHBK) and Qatar International Islamic Bank (QIIK) is expected to contribute negatively to the QoQ profitability performance based on our figures. We expect DHBK to follow historical trends. We estimate DHBK to report a net income of QR211.74mn in 4Q2016 vs. QR310.62mn in 3Q2016 (QR231.40mn in 4Q2015). We expect the QoQ decline in net profit to emanate from a surge in provisions and impairments, which is in-line with historical trends. Our estimated YoY performance (-8.5%) is also due to a gain in provisions and impairments as we believe the majority of the provisions will be booked in the 4 th quarter. Concerning QIIK, we expect a surge in net provisions to dent profitability on a QoQ basis. QIIK is estimated to post a net profit of QR126.19mn in 4Q2016 vs. QR223.30mn in 3Q2016 and QR127.63mn in 4Q2015. We expect the bank to book high provisions in 4Q2016 vs. muted provisions in 9M2016 . On the other hand, we expect Commercial Bank of Qatar (CBQK) and Masraf Al Rayan (MARK) to contribute positively to the aggregate profitability of banks. We estimate CBQK to report a modest profit in 4Q2016 after generating a loss in 3Q2016. We estimate a net profit of QR44.71mn in 4Q2016 vs. a loss of QR1.04mn in 3Q2016. The bank posted a net loss in 3Q2016 driven by provisioning as management started cleaning their books. We are of the view that provisions will remain high in 4Q2016 but lower than that of 3Q2016 so that CBQK ends 2016 on a positive note. Regarding MARK, we expect the bank to post QoQ growth; in-line with historical trends. The bottom-line is expected to grow as a result of net reversals since the bank does not usually book provisions because it is mainly exposed to the public sector. It should be noted that higher provisions vs. our estimates could further hinder the bottom-line. We estimate diversified non-banks under coverage to generate a bottom-line growth of 2.5% and 31.2% QoQ and YoY, respectively. Based on our assumptions, Industries Qatar (IQCD) and Gulf International Services (GISS) are modeled to positively impact aggregate bottom-line of non-banks under coverage. Regarding IQCD, We expect a QoQ increase in profitability on the back of improved sequential price realizations. Price realizations should improve for the steel segment but margins could lag given uptick in iron ore prices. For petrochemicals, given moderate-to-healthy improvement in PE pricing, we expect sequential increase in revenue and profitability. For fertilizers, urea rebounded from its lows in 4Q2016, which bodes well for segment top-line although feedstock pricing remains elevated. For dividends, we expect IQCD to reduce DPS to QR4.50. However, we cannot rule out a range of QR4-QR5 a share in dividends; the company paid QR5 in DPS for 2015. Moreover, for GISS we project an increase in net income on a sequential basis after the dip seen in 3Q2016. There is virtually no clarity on the segment performance as segment details were last disclosed in end-2015. We do believe the worst is behind us in terms of the drilling segment and expect the insurance segment to show its usual fourth quarter uptick. For dividends, we hold GISS’ 2016 DPS flat at QR1.00. We expect dividends on average to decline due to a soft operating environment; overall yields remain decent and could provide a catalyst for the market in 1Q2017. Among banks under coverage, DHBK and KCBK offer strong yields. We expect KCBK to distribute DPS of QR1.00/share (unchanged over the past years), implying a yield of 5.9%. Moreover, DHBK is yielding 5.7% based on our DPS estimate of QR2.00/share (QR3.00/share in 2015). However, there is always the possibility that they maintain a flat DPS in-light of the impending rights issue. Among non-banks, QGTS offers a yield of 5.5% based on our DPS estimate of QR1.30/share. Risks: Estimates can be impacted by one-offs, greater or lower provisions for banks and investment income/capital gains(losses). Volatility in oil prices remain a substantial risk to regional equity prices and have a direct impact on stocks under coverage. 4QCY2016 Estimates EPS (QR) Revenue (QR m n) QoQ YoY 4Q2016e QoQ Ahli Bank (ABQK) -9.8% 8.4% 240.1 -1.0% Al Khalij Commercial Bank (KCBK) 27.5% -15.8% 284.9 0.9% Commercial Bank of Qatar (CBQK) N/M -64.2% 919.6 -2.9% Doha Bank (DHBK) -31.8% -8.5% 724.8 6.6% Gulf International Services (GISS) 62.8% -321.4% 740.7 4.0% Industries Qatar (IQCD) 19.5% 47.8% 1,049.3 4.3% Masraf Al Rayan (MARK) 8.0% -1.8% 669.0 12.1% Qatar Electricity & Water (QEWS) -12.2% 7.8% 793.8 -2.0% Qatar Gas & Transport (QGTS)* -2.4% 6.8% 927.6 0.4% Qatar International Islamic Bank (QIIK) -43.5% -1.1% 332.5 6.8% Qatar Islamic Bank (QIBK) 2.0% 3.1% 945.2 2.4% Qatar Navigation (QNNS) -30.9% 4.7% 595.3 -1.3% Total -1.2% 9.5% 8,222.8 2.3% Source: QNBFS Research; Note: EPS based on current number shares, *EPS based on weighted average shares outstanding 4Q2016e 0.81 0.37 0.14 0.82 0.25 1.50 0.73 3.53 0.44 0.83 2.37 1.24 YoY -1.0% -3.6% 8.4% 0.8% -17.3% -6.3% 5.2% 2.7% -0.8% -5.3% 4.0% -14.1% -2.3% DPS (QR) 2015 1.43 1.00 3.00 3.00 1.00 5.00 1.75 7.50 1.25 4.00 4.25 5.00 Yield 2016e 1.20 1.00 1.00 2.00 1.00 4.50 1.75 7.75 1.30 3.75 4.25 4.00 3.1% 5.9% 3.1% 5.7% 3.1% 3.8% 4.5% 3.3% 5.5% 5.8% 4.0% 4.3% 4.1%
2. Net Income (QR mn) of Key Qatari Stocks Under Coverage (Diversified) Stock GISS IQCD QEWS QGTS QNNS 4Q2015 (20.84) 614.45 359.95 226.05 135.93 QNBFS Research, company data 3Q2016 28.35 759.77 442.31 247.46 206.03 4Q2016e 46.14 908.08 388.15 241.42 142.39 % Change QoQ Key Themes 62.8% We project an increase in net income on a sequential basis after the dip seen in 3Q2016. There is virtually no clarity on the segment performance as segment details were last disclosed in end-2015. We do believe the worst is behind us in terms of the drilling segment and expect the insurance segment to show its usual fourth quarter uptick. For dividends, we hold GISS’ 2016 DPS flat at QR1.00. 19.5% We expect a QoQ increase in profitability on the back of improved sequential price realizations. Price realizations should improve for the steel segment but margins could lag given uptick in iron ore prices. For petrochemicals, given moderate-to-healthy improvement in PE pricing, we expect sequential increase in revenue and profitability. For fertilizers, urea rebounded from its lows in 4Q2016, which bodes well for segment top-line although feedstock pricing remains elevated. For dividends, we expect IQCD to reduce DPS to QR4.50. However, we cannot rule out a range of QR4-QR5 a share in dividends; the company paid QR5 in DPS for 2015. (12.2%) 4Q2016 EPS and revenue to dip sequentially on seasonality. We forecast net income of QR388mn for 4Q2016 (-12% QoQ, +8% YoY) and revenue of QR794mn (-2% QoQ, +3% YoY). Yearly growth should be driven by the RAF A3 plant and tariff growth. QEWS paid a dividend of QR7.50 a share for 2015 and we forecast the company to increase this to QR7.75 a share. However, flat dividends are also possible. (2.4%) -30.9% We project flattish revenue and moderate decline in earnings, on a sequential basis, in 4Q2016. Wholly-owned ship revenue should be marginally up QoQ while we expect JV profits to be slightly lower QoQ. For 2016, we expect Nakilat to recommend QR1.30 in DPS versus QR1.25 in 2015; however, the company could choose to hold dividends flat at QR1.25 a share. QNNS is expected to generate a QoQ decrease, in-line with historical/seasonality trends and factors. We expect net profit to drop by 30.9% QoQ (+4.7% YoY) led by a decrease in revenue due to a soft operating environment. We expect QNNS to pay a DPS of QR4.00/share vs. QR5.00/share in 2015 as the company has experienced weak year.
3. Net Income (QR mn) of Key Qatari Stocks Under Coverage (Financials) Stock 4Q2015 3Q2016 4Q2016e % Change QoQ ABQK 142.04 170.73 153.95 -9.8% KCBK 158.75 104.78 133.60 +27.5% CBQK 124.81 (1.04) 44.71 N/M Key Themes We expect a QoQ drop based on higher opex and higher provisions and impairments. We estimate ABQK to report a net profit of QR153.95mn in 4Q2016 vs. QR170.73mn in 3Q2016 (QR142.04mn in 4Q2015). We expect weak performance QoQ mainly due to higher opex and provisions. We expect a NIM of 2.33% vs. 2.34% in 3Q2016 (2.55% in 4Q2015). On the other hand, we expect the bottom-line to grow by 8.4% YoY based on lower provisions and impairments. We expect KCBK’s 4Q2016 bottom-line to experience strong growth QoQ driven by a sharp drop in net provisions; DPS to remain at QR1.00/share. We estimate KCBK to post a net income of QR133.60mn in 4Q2016 vs. QR104.78mn in 3Q2016 (QR158.75mn in 4Q2015). The growth is based on flattish total revenue coupled by a 47.8% drop in net provisions. We estimate lower provisions after a spike in the 3rd quarter as we expect the bank to end the year on a positive note. On a YoY basis, we expect a 15.8% decrease in net income on the basis of higher provisions. We expect CBQK to report a modest profit in 4Q2016 after generating a loss in 3Q2016; DPS to substantially drop. We estimate a net profit of QR44.71mn in 4Q2016 vs. a loss of QR1.04mn in 3Q2016. The bank posted a net loss in 3Q2016 driven by provisioning as management started cleaning their books. We are of the view that provisions will remain high in 4Q2016 but lower than that of 3Q2016 so that CBQK ends 2016 on a positive note. We believe CBQK would pay a DPS of QR1.00/share vs. QR3.00/share in 2015 as the bank shores up capital for Tier-1 capital purposes as well turnaround it’s going through. DHBK 231.40 310.62 211.74 -31.8% We expect DHBK to follow historical trends; DPS to drop. We estimate DHBK to report a net income of QR211.74mn in 4Q2016 vs. QR310.62mn in 3Q2016 (QR231.40mn in 4Q2015). We expect the QoQ decline in net profit to emanate from a surge in provisions and impairments, which is in-line with historical trends. Our estimated YoY performance (-8.5%) is also due to a gain in provisions and impairments as we believe the majority of the provisions will be booked in the 4 th quarter. We are of the view that DHBK would cut DPS to QR2.00/share vs. QR3.00/share in 2015 to preserve capital. However, there is always the possibility that they maintain a flat DPS in-light of the impending rights issue. MARK QIIK QIBK 559.48 127.63 544.01 Source: QNBFS Research, company data 508.72 223.30 550.08 549.67 126.19 560.99 +8.0% We expect MARK’s 4Q2016 net profit to grow QoQ; in-line with historical trends. We expect MARK to report a net profit of QR549.67mn in 4Q2016 vs. QR508.72mn in 3Q2016 and QR559.48mn in 4Q2015. We expect growth to be driven by net interest and investment income coupled with net reversals. MARK does not usually book provisions as the bank is mainly exposed to the public sector. -43.5% We expect a surge in net provisions to dent profitability on a QoQ basis. QIIK is estimated to post a net profit of QR126.19mn in 4Q2016 vs. QR223.30mn in 3Q2016 and QR127.63mn in 4Q2015. We expect the bank to book high provisions in 4Q2016 vs. muted provisions in 9M2016. +2.0% We expect QIBK’s profitability to climb up by 2.0% QoQ (+3.1% YoY) in 4Q2016 mainly due to lower net provisions and impairments. We estimate lower provisions after a surge in the 3rd quarter as we expect the bank to end the year with strong results. QIBK experienced a strong 9M2016 where its net profit grew by 13.8% YoY.
4. Recommendations Risk Ratings Based on the range for the upside / downside offered by the 12month target price of a stock versus the current market price Reflecting historic and expected price volatility versus the local market average and qualitative risk analysis of fundamentals OUTPERFORM Greater than +20% R-1 Significantly lower than average ACCUMULATE Between +10% to +20% R-2 Lower than average MARKET PERFORM Between -10% to +10% R-3 Medium / In-line with the average REDUCE Between -10% to -20% R-4 Above average UNDERPERFORM Lower than -20% R-5 Significantly above average Contacts Saugata Sarkar Shahan Keushgerian Zaid Al Nafoosi, CMT/CFTE Head of Research Senior Research Analyst Senior Analyst Tel: (+974) 4476 6534 Tel: (+974) 4476 6509 Tel: (+974) 4476 6535 saugata.sarkar@qnbfs.com.qa shahan.keushgerian@qnbfs.com.qa zaid.alnafoosi@qnbfs.com.qa QNB Financial Services Co. WLL Contact Center: (+974) 4476 6666 PO Box 24025 Doha, Qatar Disclaimer and Copyright Notice: This publication has been prepared by QNB Financial Services Co. WLL (“QNBFS”) a wholly-owned subsidiary of QNB SAQ (“QNB”). QNBFS is regulated by the Qatar Financial Markets Authority and the Qatar Exchange QNB SAQ is regulated by the Qatar Central Bank. This publication expresses the views and opinions of QNBFS at a given time only. It is not an offer, promotion or recommendation to buy or sell securities or other investments, nor is it intended to constitute legal, tax, accounting, or financial advice. QNBFS accepts no liability whatsoever for any direct or indirect losses arising from use of this report. Any investment decision should depend on the individual circumstances of the investor and be based on specifically engaged investment advice. We therefore strongly advise potential investors to seek independent professional advice before making any investment decision. Although the information in this report has been obtained from sources that QNBFS believes to be reliable, we have not independently verified such information and it may not be accurate or complete. QNBFS does not make any representations or warranties as to the accuracy and completeness of the information it may contain, and declines any liability in that respect. For reports dealing with Technical Analysis, expressed opinions and/or recommendations may be different or contrary to the opinions/recommendations of QNBFS Fundamental Research as a result of depending solely on the historical technical data (price and volume). QNBFS reserves the right to amend the views and opinions expressed in this publication at any time. It may also express viewpoints or make investment decisions that differ significantly from, or even contradict, the views and opinions included in this report. This report may not be reproduced in whole or in part without permission from QNBFS COPYRIGHT: No part of this document may be reproduced without the explicit written permission of QNBFS . 4