A webinar organised by Industries Qatar focused on IQ’s $1bn purchase of the remaining 25% stake in Qafco from Qatar Petroleum.
In an update on Sunday, QNB Financial Services (QNBFS) said it expects favourable financial impact on Industries Qatar (IQCD) from two sources – one extra 25% contribution from Qafco and two favourable blended gas price for new Gas Sales and Purchase Agreement (GSPA) for Qafco 1-6.
Independent valuation of the purchase and the new GSPA adds nearly QR1/share to IQCD’s fair value, consistent with QNBFS’ recent increase in price target from QR10 to QR11.50.
Net Present Value (NPV) of the 25% stake ranges between QR0.9-1.7bn and enhancement to equity value (under the new GSPA) of the existing 75% stake is worth around QR4.63bn (at the lower-end of the valuation range).
The deal values 100% of Qafco at QR15.22bn gross equity value or QR11.58bn net equity value or NPV (deducting the $1bn purchase price).
Based on DCF-based valuation provided by external QFMA-approved evaluators, the previously existing 75% stake in Qafco (at the old gas price) is worth QR6.01bn but the new lower blended gas price adds another QR4.63bn or 77% to this stake. The purchase of the extra 25% adds an almost equivalent amount, or another QR4.58bn to bring the overall gross equity value of 100% of Qafco to QR15.22bn.
Of this QR15.22bn, 39% accrues from the existing 75% stake at the old gas price and 30% each come from the impact of the new gas price on the existing 75% stake and the purchase of the 25% stake.
The weighted average cost of capital (WACC) used in this valuation exercise was 10% and the range of IRRs for the new 25% stake was nearly 14-17%.
Blended base gas cost for Qafco under the new GSPA should decline by nearly 18% to $3.30/MMBtu vs $4/MMBtu in 2019. As disclosed by management during the webinar, at $250/MT (or below) urea price, the base price kicks in, which is adjusted depending on the CPI. However, if urea prices increase, the base price also increases driven by a proprietary formula.
The management signals that dividends could remain stable going forward. During the webinar, management pointed out that significant changes in dividends on a year-to-year basis could cause volatility in IQCD’s stock price, especially given the dividend-sensitive nature of local individual investors. The management seemed to signal consistent dividends could become the norm going forward. Despite a substantial decline in earnings expected in 2020, this could imply that dividends per share (DPS) could remain flat YoY in QR0.40/share, which could be construed positively by investors.
According to QNBFS, the management has confirmed that IQCD will look to do similar deals, especially when it comes to Total’s 20% stake in Qapco.
“As we have pointed out before, we could witness similar deals concerning other JVs, especially in light of QP’s strong deal-making ability and bargaining power relative to minority partners and IQCD’s robust cash position/cash generating ability,” QNBFS noted.
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