Recent Developments

ØQEWC is undertaking expansion at RAF B stations, where it is setting up a 567 Mega Watt (MW) power plant and 29.9 Million-Gallons-a-Day (MIGD) water desalination plant. The project has capital outlay of about US$522mn (QR1.9bn), which is likely to be funded by about 75% of debt and 25% of the company’s own funds. The project is likely to go on stream from mid-2007.

ØQEWC, along with the consortium partners, is implementing the largest power generation and water desalination project at Mesaieed Industrial City in Qatar. The project is estimated to cost around US$1bn (QR3.64bn) and will have capacity of 2,000 MW power generation and 40 MIGD potable water.

ØThe project execution work has already started at Q Power Q.S.C. (Ras Laffan – B). During 2004, the Government awarded this Independent Power and Water (IPW) project to QEWC and its consortium partners. The project is estimated to cost around US$895mn (QR3.26bn) and will have 1,025 MW of power generation capacity and 60 MIGD of water.

Financial Performance

During FY2005, Qatar Electricity &Water Company (QEWC) performed more or less in line with our estimates with variations (actual v/s projection) of 2.37% in total sales, -0.33% in grossprofit and -5.08% in net profit (adjusted for non-recurring items reported by the company).

At the end of FY2005, the total sales of the company stood at QR1,482mn which represented a marginal growth of 1.7% over that reported for FY2004. In FY2005, the revenue from the sale of electricity grew by 4.75% to QR901.7mn while that from water segment registered a y-o-y decline of 2.73% to QR579.9mn. During FY2005, the cost of sales of the company grew at a faster rate of 5.7% as compared to the growth of 1.7% in revenue, which resulted in decline of 4.26% in gross profit. Its cost of sales as a percentage of total revenue was increased to 61.9% in FY2005 from 59.6% in FY2004. The cost of sales increased to QR917.4mn in FY2005 from QR867.8mn in FY2004. With this the company’s Gross Profit Margin declined to 38% in FY2005 from 40% in FY2004.

The company reported a lower net profit of QR651.7mn in FY2005 as compared toQR751.2mn reported in the previous year. This resulted into a lower earnings per shareof QR6.52 as compared to QR7.51 in FY2004. In FY2004, the company accounted a prior period income of QR310.6mn while in FY2005, it accounted three items of non-recurring nature, QR39.4mn as liquidated damages and fair value of spare parts received from Alstom, QR117.9mn of reversal of provision for disputed revenue and QR20.8mn as share of income from joint venture. If we adjust the company’s net profits of both these years for the above mentioned non-recurring items, its FY2005 net profit shows a growth of 7.5% to QR473.6mn.The projected net profit of FY2006 shows decline of 25.1% to QR488.3mn, however, onadjusted earnings of FY2005, the net profit of FY2006 displays a growth of 3.1%.

Outlook

In Qatar, several projects are coming up in different sectors valued at billions of dollars and the power and water sectors are the backbone of any industrial or infrastructure project. Qatar's growing petrochemical, fertiliser and liquefied natural gas (LNG) enterprises all consume large amounts of electricity, so demand is set to rise rapidly over the next decade. As estimated by KAHRAMAA, demand for electricity in Qatar is expected to increase by 10% a year over the next five years while that for water would grow by 9% during the same period. To fulfill the likely growth in demand, Qatar has announced several projects in the power sector as discussed above, which are part of a future strategy to meet the country’s domestic power needs until 2015.

Besides growing domestic demand for power, the major development in the Qatari power sector is the development of the Gulf Cooperation Council (GCC) power grid. The first phase of the grid development is scheduled to connect Qatar with Saudi Arabia, Kuwait and Bahrain by 2008. The objective of forming the regional grid is to harness the surplus power generating capacity in each Gulf state and to create an adequate and reliable power supply system for the fast developing regions. All the six countries are committed to put the required regulatory changes in place in order to create a genuine power pool.

In Qatar, QEWC being the largest player in the sector has tremendous growth potentialand as several large scale projects are coming under its belt, it willcontinue to maintain its leadership position in the sector. We believe that the company’s own project, RAF B2, will commence its operations from FY2007 and Q Power will start contributing to the company’s revenues from FY2006 onwards. With regard to profitability, as in any other large scale projects, in the initial years there will not besubstantial addition to the company’s bottomline. Therefore, profitability of QEWC is likely to improve gradually.

We believe that the earnings momentum from QEWC’s existing operations and commencement of expansions at RAF-B as also at Q Power Q.S.C. and Mesaieed would provide re-rating triggers to the stock over the medium term. Hence, we maintain our earlier BUY recommendation on the stock for a medium to long term perspective. We revalue the company’s stock at a higher intrinsic value of QR109.2, as compared to earlier estimated price of QR91.3, based on the Discounted Cash Flow Method and Peer Group Valuation Method. Increased valuation factors in capacity expansions which are likely to take place during 2006-2009.

* Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Doha Securities Market as on May 08, 2006.

Source: QEWC and Global Research estimates