Global Investment House – Kuwait – Masraf Al Rayan – Initial Research Report: Masraf Al Rayan (Masraf) was incorporated as Qatari Shareholding Company in January 2006. Masraf operates through its head office located on Grand Hamad Street in Doha and two local branches, all operating in the State of Qatar. The bank commenced its activities in October 2006, through its first branch in Al Sadd Street. Masraf is engaged in banking, financing and investing activities in accordance with its Articles of Incorporation, Islamic Shari’a principles and regulations of the Qatar Central Bank. The bank came out with its IPO in January 2006. It floated 412.5mn shares through the IPO at a nominal value of QR10 per share. The authorized share capital of the bank is QR7.5bn divided into 750mn shares. At the end of 2007, the issued and paid up capital of the bank is QR3.75bn divided into 749.9mn shares with a paid-up value of QR5 per share.
Recent Developments
In April 2007, the banks launched Al Rayan Investment, the first Islamic financial institution issued a license to operate within the Qatar Financial Centre. The Masraf owns 100% of the issued share capital of Al Rayan Investment Co. It has an authorized and paid-up share capital of US$100mn and it will commence operations during the current year.
In May 2007, the bank entered into QR1.93bn Mudharaba contract with Barwa Real Estate. The deal is to finance Barwa’s acquisition of the the Convention Hall in Paris. Previously also Masraf entered into number of financing deals with Barwa Real Estate.
In second quarter of 2007, Masraf established a 75% owned ‘Lusail Waterfront Company’ through in kind capital contribution of a land. This land is located in Lusail project and was purchased from a founder shareholder, Qatari Diar Real Estate investment Company for an amount of QR129.2mn. Subsequently, Masraf sold its entire holding in Lusail Waterfront Company for an amount of QR965.6mn which resulted in a profit of QR836.4mn.
In October 2007, Masraf announced that it obtained a license to operate SR1.2bn consumer finance company in the Kingdom of Saudi Arabia. The company is named as Kirnaf Instalment Company will offer services such as home, car and goods financing to consumers. Masraf Al Rayan is the majority shareholder with a 20% stake and it also has a seat on the board.
As part of its associate companies the bank has 20% holding in Pak Qatar Takaful General Co. and Pak Qatar Takaful Family Co. These companies were incorporated in August 2007 to conduct Sharia compliant Takaful business.
The bank has paid dividend of 20% for the year 2007, out this 10% was cash dividend and the remaining 10% credited to the share capital towards the uncalled share capital, therefore, with the this the bank’s equity capital increased to QR4.12bn from QR3.75bn.
Financial Performance
At the end of 2007, the total assets of the bank was QR10.2bn. Among the major asset components, due from financing activities (gross) was at QR6.9bn and funds with banks & FIs was at QR2.3bn. Net financing activities accounted for 66.1% of the total assets.
During 2007, income from financing activities was at QR573.3mn. Among the major components of this, Murabaha was at QR50.2mn, Istesna was at QR2.3mn, Mudaraba was at QR123.1mn and income from Ijara financing was at QR80.4mn and income from investments with banks & FIs was at QR317.3mn. The depositors’ profit sharing was at QR169.5mn in 2007 and the net profit sharing reached to QR403.8mn. Masraf reported a net profit of QR1,192.4mn. In 2007 the bank accounted for QR836.4mn of profit from selling of its stake in Lusail Waterfront.
During Q1-2008, income from financing activities grew by 8.7 times to QR96mn whereas income from investing activities registered a y-o-y growth of 180% to QR144.2mn. Total income from financing & investing activities grew by 284.2% on y-o-y basis to QR240.1mn and total operating income grew by 381.3% to QR314mn. The bank reported a net profit of QR217.8mn in Q1-2008 as compared to QR43.5mn reported in Q1-2007. On the balance sheet side, on a y-t-d basis, total assets registered a growth of 45.8% to QR15.4bn and customer deposits increased by 80.9% to QR9.6bn. Due from financing activities (net) was at QR6.6bn as compared to QR6.7bn reported at the end of 2007.
Outlook and Valuation
The bank is expanding its operations gradually. It has opened two branches so far and for the year 2008 it has plans to add three more branches. Apart from focusing on its regular banking operations, the opening of an Islamic financial institution, Al Rayan Investment, will definitely help in further leveraging its business operations. Apart from expanding its operations in domestic market, the bank’s move to foray in consumer financing in Saudi Arabia and holding equity stake in Pak Qatar Takaful General Co. and Pak Qatar Takaful Family Co. will is in further leverage its business operations. The bank is well capitalized to further expand its operations and leverage its balance sheet.
At the current market price of QR22.3 (April 27, 2008), the bank trades at 15.4x and 11.3x of its earnings and 3.2x and 2.9x of its book value for FY2008E and FY2009E respectively. The estimated fair value for Masraf Al Rayan works out to QR25 based on the DDM and peer group valuation methods, which is 12.2% above the market price on April 27, 2008. Hence we initiate our coverage on the stock with a “BUY” recommendation.
