x Abu Dhabi, UAEThursday 18 January 2018

Qatari utility looking as safe as houses

Electricity and water company reports top-end results.

Qatar Electricity and Water (QEWC) offers the stability and income of a bond with potential gains on the equity side as well. The state-controlled utility reported second-quarter earnings this week that were in the higher end of analyst expectations. After the company reported a net profit of 315 million Qatari rials, the stock fell 1.8 per cent yesterday to 103.10 rials. However, the Nomura analyst Scott Darling has a "buy" rating on the stock with a price target of 135 rials, suggesting a potential upside of 30 per cent.

But the stock is arguably more attractive for its generous dividends, which have consistently been above 5 per cent of late - a return that compares favourably with Qatari sovereign bonds. The company's business model is simple: it buys natural gas from the Qatari government at a set rate, produces water and electricity that it then sells to the government-run distributor, also at a fixed rate. As such, the profit margins are essentially guaranteed.

The company is 42 per cent owned by the Qatari government. The company continues to generate buckets of cash with revenues rising to 808 million rials, outperforming Mr Darling's forecast by 3 per cent. The expectation is this trend will continue into the third quarter, as the summer heat builds and the usage of power and water increases correspondingly. The question is whether they will use the cash for acquisitions either inside or outside the country or even increase dividends to shareholders.

The company in the past has expanded mainly through joint ventures with foreign companies. In April, QEWC purchased the equity stake of the power company AES in the Ras Laffan gas plant and desalination facility. The acquisition, which should support QEWC's capacity exposure in Qatar, is expected to close in the second half of the year. The terms were not disclosed. halsayegh@thenational.ae