Long-term valuation of companies key to Qatar’s stock market investors

June 17, 2014 - 1:25:12 pm

By Satish Kanady

DOHA: An accurate assessment of long-term prospects of companies is a must for Qatar’s stock market investors for steady investment returns.

This is a challenging task in a market like Qatar which is a relatively young economy and has a very large investment budget for the next several years in the run up to 2022. The fact that the prospects for Qatar’s non-energy economy after 2022 are relatively unknown, exacerbate the situation, a top investment advisor told The Peninsula.

“While many investors believe short term earnings are more important to stock valuation, our extensive back-testing guides us to focus on long term earnings as the key driver of stock returns in the long term” says Afa Boran (pictured), Head of Asset Management, Amwal.

Boran, who noted that valuing a company using P/E (the price-to-earnings) would be a misleading act, classified Qatar’s stocks into four groups in terms of their profitability outlook.

The companies like Industries Qatar and Mesaieed Petrochemical Holding Company (MPHC) which export the bulk of their output are in a way immune from what happens to the local economy after 2022, assuming the feedstock subsidies do not change.

Second are businesses like building materials producers, whose business model is mainly focused on catering to the infrastructure investments being made in the country. These companies should make good profits between now until completion of the infrastructure build out.

“If we assume investments will be completed a year before 2022, we have about eight potential years of strong profitability. However, as demand for building materials tapers off after that, it will be difficult to redeploy the assets to some other use, and hence the value of assets could be worth much less, unless their export-competitiveness is strong. For some building materials such as cement, exporting is not economically feasible and subject to strict regulations.”

The third group of stocks is industries such as real estate, consumer and telecom, whose prospects largely depend on domestic population. They, therefore, also get a boost from the infrastructure build out from the additional population in Qatar working for these projects. The future profitability of these industries are dependent on the population size after the build out phase.

Boran noted that Amwal’s recent conversations with management teams of certain companies in these sectors corroborate its view that the strategic thinking of such businesses should factor in potentially two very different phases of growth. For these companies the key determining factor will be whether or not they will be diversifying their businesses, he said.

Finally, is the banking sector which according to Amwal, needs to be treated differently. A bank can redeploy its assets into other markets, make acquisitions or pay it back to investors. So while banks’ profitability may be also affected after 2022, they will likely be the least affected. It is important to note, however, that not all banks will do equally well, as the management decisions in the use of the capital accumulated will have an important bearing on long term value.

The Peninsula

comments powered by Disqus