Satyendra Pathak
Doha
Industries Qatar (IQ) agreeing to buy the remaining 25 percent stake in Qatar Fertilizer Company (QAFCO) from Qatar Petroleum (QP) for $1 billion and a favourable blended gas price for a new gas sale and purchase agreement (GSPA) for QAFCO 1-6 will have a positive financial impact on IQ in 2020, QNB Financial Services (QNBFS) has said in its latest report.
"We see the modest upside to our existing QR1.4 billion earnings estimate for IQ in 2020. The 100 percent consolidation of QAFCO would add QR93 million or 19 percent to IQ’s reported H1, 2020 net income of QR485 million, bringing it up to QR578 million. Looking at it on a segment level, QAFCO at 100 percent added QR371 million in H1, 2020 net income, which is around 45 percent of our 2020 net income estimate for QAFCO.
"Given our expectation of an H2 recovery and IQ’s comments of favourable new gas pricing, we could end up with a modest upside to our overall 2020 net income forecast for IQ of QR1.4 billion. We await more details from management and could change our estimates going forward,” QNBFS said in the report.
As part of the deal, QAFCO and QP have also entered into a new GSPA covering gas requirements for QAFCO 1-6 and QMC from August 1 until December 31, 2035. Under the agreement, the 25 percent stake in QAFCO will revert back to QP when the above-mentioned GSPA expires in end-2035. IQ will finance this transaction with internal cash given the company held QR11.3 billion in cash and bank balances as of the first half of 2020.
"We remind investors that the prior GSPA, which set the feedstock price for trains 1-4, expired in December 2019 and was replaced on an interim basis by a gas processing agreement. We believe this new GSPA will lower the overall blended gas price for QAFCO 1-6 against the previous blended gas cost,” the report said.
If the acquisitions of the remaining stakes of 20 percent in Qatar Petrochemical Company (QAPCO) and 50 percent in Qatar Fuel Additives Company (QAFAC) respectively provide further catalysts for stock price upside, QNBFS said, "We could witness similar deals concerning these JVs, especially in light of QP’s strong deal-making ability and bargaining power relative to minority partners and IQ’s robust cash position and cash-generating ability. Indeed an agenda item in the upcoming EGA, which authorises IQ’s board controlled by special shareholder QP to negotiate transactions with JV partners, could pave the way for similar deals in the future.”
"We upgrade IQ from market perform to accumulate with a QR11.50 price target. Our previous price target was QR10. Although recent strong stock price activity suggests that this deal could be somewhat baked into the current price, valuing QAFCO at 100 percent in our DCF model allows us to up our price target. We will fine-tune our model when more details become available,” QNBFS said.
Doha
Industries Qatar (IQ) agreeing to buy the remaining 25 percent stake in Qatar Fertilizer Company (QAFCO) from Qatar Petroleum (QP) for $1 billion and a favourable blended gas price for a new gas sale and purchase agreement (GSPA) for QAFCO 1-6 will have a positive financial impact on IQ in 2020, QNB Financial Services (QNBFS) has said in its latest report.
"We see the modest upside to our existing QR1.4 billion earnings estimate for IQ in 2020. The 100 percent consolidation of QAFCO would add QR93 million or 19 percent to IQ’s reported H1, 2020 net income of QR485 million, bringing it up to QR578 million. Looking at it on a segment level, QAFCO at 100 percent added QR371 million in H1, 2020 net income, which is around 45 percent of our 2020 net income estimate for QAFCO.
"Given our expectation of an H2 recovery and IQ’s comments of favourable new gas pricing, we could end up with a modest upside to our overall 2020 net income forecast for IQ of QR1.4 billion. We await more details from management and could change our estimates going forward,” QNBFS said in the report.
As part of the deal, QAFCO and QP have also entered into a new GSPA covering gas requirements for QAFCO 1-6 and QMC from August 1 until December 31, 2035. Under the agreement, the 25 percent stake in QAFCO will revert back to QP when the above-mentioned GSPA expires in end-2035. IQ will finance this transaction with internal cash given the company held QR11.3 billion in cash and bank balances as of the first half of 2020.
"We remind investors that the prior GSPA, which set the feedstock price for trains 1-4, expired in December 2019 and was replaced on an interim basis by a gas processing agreement. We believe this new GSPA will lower the overall blended gas price for QAFCO 1-6 against the previous blended gas cost,” the report said.
If the acquisitions of the remaining stakes of 20 percent in Qatar Petrochemical Company (QAPCO) and 50 percent in Qatar Fuel Additives Company (QAFAC) respectively provide further catalysts for stock price upside, QNBFS said, "We could witness similar deals concerning these JVs, especially in light of QP’s strong deal-making ability and bargaining power relative to minority partners and IQ’s robust cash position and cash-generating ability. Indeed an agenda item in the upcoming EGA, which authorises IQ’s board controlled by special shareholder QP to negotiate transactions with JV partners, could pave the way for similar deals in the future.”
"We upgrade IQ from market perform to accumulate with a QR11.50 price target. Our previous price target was QR10. Although recent strong stock price activity suggests that this deal could be somewhat baked into the current price, valuing QAFCO at 100 percent in our DCF model allows us to up our price target. We will fine-tune our model when more details become available,” QNBFS said.