qatar shipping industry sector note including the initiation of coverage on milaha "qnns"...

For more information on MubasherTrade, please visit our website at www.MubasherTrade.com or contact us at [email protected]. Please read the important disclosure and disclaimer at the end of this document.

Unpredictability is the new normal; muted growth inglobal trade is expected: The volatility the shippingindustry experienced in 2015 may have been severe, butit is becoming more evident that such unpredictability isthe new normal. The year 2016 is expected to witnessmuted growth in global trade as a result of deceleratingeconomic activity in emerging markets, particularlyChina, which will likely exacerbate overcapacity causingdeclining and volatile freight rates.

Performance will vary across the segments with dry-bulkand container shipping companies probably continuingto be pressured, while tanker and LNG shippingcompanies should perform better. Container shippingcapacity is expected to rise 6% in 2016 on top of a 9%increase in 2015, outpacing demand growth of 3-4.5% in2016. Tanker shipping companies will likely outperformtheir peers in other segments due to a more moderatefleet growth and healthy demand resulting from oilstockpiling and high refinery throughput due to low oilprices. Implementation of more cost defensive measuresfrom smaller companies is expected in an effort topartially offset expected losses. Meanwhile, largershipping companies should remain profitable in 2016.

A China slowdown means slowdown in the shippingindustry: In view of the recent deceleration in China'seconomic growth and its lower demand for commodities,the shipping industry is expected to be negatively

affected by slowdown from one of the key drivers ofshipping demand growth, constituting 35% of worldcontainership demand, 70% of world seaborne iron oreimports, and 20% of world coal imports.

Qatar’s maritime transport sector has taken advantageof the country’s economic diversification plans andinfrastructure boom despite slowdown in globalshipping: The container trade and maritime sector inQatar is expected to continue to rise, fueled by animpressive GDP growth, rising consumer demand, andincreasing trade between Qatar, the UAE, and India. Themaritime infrastructure required to support futuregrowth is going through continuous improvement.

We initiate on Milaha with a Buy rating and a PriceTarget of QAR99.19 (ETR: +16%): We believe thecompany will leverage on Qatar's overall economicgrowth and on its position as a market share leader inthe container shipping traffic. However, we remaincautious in the short term due to uncertainty andvolatility in the global energy markets.

We initiate on Nakilat with a Buy rating and a PriceTarget of QAR27.62 (ETR: +19%): We believe the long-term nature of contracts on Nakilat vessels will ensurethe company’s financial performance is not vulnerable tofluctuations in oil price over the coming years. However,we remain cautious in the short term due to uncertaintyon the LNG vessel rates.

Navigating through rough waters

• 2016: A stumbling year for most shipping industry segments; muted growth expected in global trade.

• Tanker shipping companies will outperform their peers.

• Industry players expected to adopt more cost defensive measures.

• A China slowdown means slowdown in the shipping industry.

• Qatar’s container shipping expected to shine over increasing economic growth expectations.

• Qatar maintains its stronghold as the world largest LNG exporter in 2015.

• We initiate coverage on Milaha (PT QAR99.19) and Nakilat (PT QAR27.62); both with Buy ratings.

The Clarksea index is a strong indicator for the global maritime transport sector’shealth. It measures average weekly freight rates of all commercial vessel types in thisindustry. From the above graph, it is clear that there is a strong correlation between thestock performance of Nakilat (QGTS), Milaha (QNNS) and the Clarksea index. Thisproves that the Clarksea index can be used as a general proxy on how companiesoperating in the maritime industry might be performing.

Milaha and Nakilat price performance vs. Clarksea index performance

Source: Clarksons, MubasherTrade Research analysis * Weekly stock price performance

Qatar Shipping IndustryInitiation of Coverage

Equities | Energy & Utilities

Thursday, 23 June 2016

Amr ElDalySenior Equity AnalystMubasher International

[email protected]

Mohamed Bassuny Analyst

Mubasher [email protected]

Source: MubasherTrade Research estimates

Companies analyzed in this report Milaha Nakilat

Stock Price (QAR) 85.70 23.30

Mubasher 1-year Price Target (QAR) 99.19 27.62

Rating Buy/Low Risk Buy/Low Risk

EPS 6.54 1.97

DPS 3.65 1.49

BVPS 121.02 8.75

PER 13.1x 11.8x

PBV 0.7x 2.7x

EV/Sales 4.6x 10.4x

EV/EBITDA 15.0x 13.9x

Dividend Yield 4% 6%

Price as at 22 June, 2016 - Ratios are calculated based on 2016 estimates

http://www.MubasherTrade.com

mailto:[email protected]


MARITIME INDUSTRY OVERVIEW

I. Background of maritime transport 3

II. Developments in international seaborne trade 5

III. General market indicators overview 5

IV. Maritime transport segments

A. Dry bulk shipping 6

B. Liquid bulk shipping 7

C. Container shipping 11

D. Off-shore support market 12

V. Qatar overview 13

QATAR NAVIGATION (MILAHA)

Investment summary 15

Valuation & recommendation 16

Financial summary 18

Business model 19

QATAR GAS TRANSPORT (NAKILAT)

Investment summary 27

Valuation & recommendation 28

Financial summary 30

Business model 31

Qatar Shipping Industry | Sector Note | Qatar


Table of Contents




Maritime Industry Overview



I. Background of Maritime Transport

Maritime (seaborne) business is the backbone of world trade asit represents around 80% of trade volumes globally. Over the lastfour decades, total seaborne trade have grown by more than 6xfrom just over 8,000bn ton-miles in 1968 to over 53,165bn ton-miles in 2015, thanks to increasing industrialization and theliberalization of national economies that have fuelled free trade.Growing demand for consumer products and advances intechnology were the results of healthier free trade, makingshipping an increasingly efficient and swift method oftransportation.

The shipping business is done through charters. The “chartering”of a ship, in its simplest terms, is an agreement in which a cargoowner (charterer) agrees to lease a vessel from its owner.

Types of Charters

1) Voyage Charter refers to a single journey with the hiring ofboth vessel and crew. The charterer/cargo owner pays thevessel owner on a per-ton or lump-sum basis. Ship owner isresponsible for the port, fuel and crew costs. Voyage charterrates are determined based on spot market rates, which areupdated on a daily basis and affected by supply and demand.

2) Time Charter refers to the hiring of a vessel for a specificamount of time. The charterer pays for all expenses except forcrew costs. Time charter rates can be on monthly or yearlybasis at a negotiated rate.

3) Bareboat Charter is when the charterer takes completecontrol of the vessel including crew management. The shipowner is not responsible for any costs. This type of charteringis not commonly used because of its characterized high costson cargo owners.

The Maritime Transport Industry Key Indicators

The maritime transport market is analyzed according to:

1) Freight rates: Earnings indicators for all charter types. Thedetermining factors of freight rate are weight, size, distance,and points of pick-up and delivery of goods being shipped.

2) Indices: Famous indicators that measure spot freight rate.Liquid and dry bulks rates are measured by three indices: (1)Baltic index which measures the daily spot earnings of crude,

product and dry bulk vessels; (2) Clarksea index whichmeasures the weekly earnings of all the main commercialvessel types and is considered a good proxy for the sector’shealth and (3) China Containerized Freight Rate index whichmeasures container shipping rates.

3) Order-book: The order-book contains the number of newships ordered. It provides an insight on long-term demand forvessels and how their supply is likely to change as it takes 2-3years to build a ship.

4) Average age of fleet: The age of a ship ranges between 25 –30 years, at that age the ship will most probably be scrapped.In the shipping market, there is an indirect relation betweenaverage age of a fleet, and scrapping activity. If a fleet is as oldas 20 years then scrapping activity is very low due to higherdemand for ships and vice versa.

5) Second-hand ship values: Price movements in older vesselsoften reflect the nearer-term fundamental outlook and theytend to lead new build prices. Value of second hand vessels isaffected by the age, fuel prices and freight rates at time ofevaluation. If an available-for-sale vessel is young and fuelprices are low, freight rates are likely to be high and in turnsecond-hand ship should create more profits, making it moreattractive to buy than ordering a new-build.

6) Distance-Adjusted Demand: Distance-adjusted demand(expressed in ton-miles) offers a more accurate measure ofdemand for shipping services and tonnage. It mainly expressesthe distance travelled by a ship to reach its final destination.The supply of vessels can be limited if demand for long-haultrade routes is increasing, while fleet size remains constant,which eventually causes a shortage in capacities, resulting inan undersupply situation, and freight rates hike.

7) Ports: Ports play a vital role in sustaining growth in a country’strade and commerce, if handled capacity and port expansioncapacity is sufficient to meet trade demand. Both cargotonnage and container traffic are the commonly-usedmeasures for ports activity.

Maritime Transport Segments

There are three main categories of merchandise dominating theworld market: a) liquid bulk, b) dry bulk, and c) general cargo(containerized goods) shipping:

1) Liquid bulk shipping (30% of global seaborne trade in 2015)consists of crude oil, petroleum products, liquefied gases(Liquefied Natural Gas “LNG” and Liquefied Petroleum Gas“LPG”) and chemicals. Oil is usually carried by tankers andmeasured in deadweight tons (DWT), while liquefied gases arecarried by gas carriers and measured in cubic meters (CBM orCU.M).

2) Dry bulk shipping (54% of global seaborne trade in 2015)consists of solid raw materials mainly of iron ore, coal, grain,or minor bulks, which are all shipped in bulk, carried by bulkcarriers, and measured in DWT. Dry bulk shipping is a criticalcontributor to seaborne trade growth.

3) General cargo/container (16% of global seaborne trade in2015) consists mainly of manufactured goods measured bytwenty-foot equivalent units (TEU) and carried by containerships. An intermodal container is a twenty-foot or forty-foot inlength. Container shipping is considered to be one of the keyelements in transportation, offering minimum cost ascompared to air and land transportation.

International seaborne trade in 2014 – Market share of each segment

*Total Liquid bulk 32%**Total Dry bulk 52%

Source: UNCTAD secretariat, based on Clarksons Research, Seaborne Trade Monitor, May 2015.




Maritime Industry Overview (Cont.’d)

Shipping/Maritime Transport

General Cargo (Container)

Container Ships

Off-Shore Support

Driving Support

Construction Support

Anchor Handling Tug

Platform Supply

Safety Standby

Liquid Bulk(Oil & Gas)

Crude Oil Tankers

Product Oil Tankers

LNG Tankers

LPG Tankers

m3 or cf

m3 or cf

DWT

DWT

Small Gas Carrier (<20,000 m3)

Medium Gas Carrier(20,000-40,000 m3)

Large Gas Carrier(40,000-60,000 m3)

Very Large Gas Carrier

(>60,000 m3)

Handy size Tanker/(Medium

Range-MR) (10,000-50,000)

Panamax/(Long range1-LR1)

(60,000-80,000)

Aframax/(Long range1-LR2)

(80,000-120,000)

Suezmax (120,000-200,000)

Very Large Crude Carrier(VLCC)

(200,000-315,000)

Ultra Large Crude Carrier(ULCC)

(320,000-550,000)

Feeders (<1,000 TEU)

Handysize (1,000 -1999 TEU)

Panamax(3,001-5,100 TEU)

Post/New Panamax(5,101-14,500 TEU)

Ultra Large Container Vessels

(15,000+TEU)

TEU

Dry Bulk

Bulk Carriers

Handysize(10,000-40,000)

Handy max(40,000-65,000)

Panamax(65,000-100,000)

Capesize(100,000+)

DWT

The fleet analysis is composed of various sub-types having their own momentum in the market

Feeder vessels are ships of various sizes, but mostly understood tobe seagoing vessels. Feeders collect shipping containers fromdifferent ports and transport them to container terminals.

Handysize vessels refer to container, dry bulk or oil vessels. Due totheir small dimensions, handysize ships can serve ports andterminals of all sizes. As a result, handysize vessels make up themajority of bulk carriers.

Handy-max/Supramax vessels: These bulkers are well suited forsmall ports and are primarily used for carrying dry cargo, such asiron ore, coal, cement, finished steel, fertilizers, and grains.Sometimes this category is also used to define small-sized oiltankers.

Panamax vessels are mid-sized cargo ships that are capable ofpassing through the lock chambers of the Panama Canal. They arebuilt strictly in accordance with the dimensions of the lockchambers and the height of the Bridge of the Americas.

Suezmax vessels: Named after the Suez Canal. Suezmax aremedium- to large-sized ships. They are the largest marine vesselsthat meet the restrictions of the Suez Canal.

Aframax vessels are medium-sized crude oil tankers, smaller insize relative to Very Large Crude Carriers (VLCC) and Ultra LargeCrude Carriers (ULCC). They are just ideal for short- to medium-haul oil trades and are primarily used in regions of lower crudeproduction or the areas that lack large ports to accommodate giantoil carriers.

Capesize vessels are large-sized bulk carriers/tankers, typicallyabove 150,000 DWT. They are categorized under VLCC, ULCCcarriers. Nowadays, capesize vessels can reach up to 400,000 DWT.Capesize vessels are too large in size to pass through the PanamaCanal. As a result, they must transit via Cape Horn to travelbetween the Atlantic and Pacific oceans, hence comes their name.

Very Large Crude Carriers (VLCC) are the largest operating crudeoil vessels in the world with a capacity in excess of 250,000 DWT.Known also as Supertankers, these vessels are primarily used forlong-haul crude transportation from the Arabian Gulf to Europe,Asia and North America.

Driving Support Vessels (DSV): Vessels that are used as a floatingbase for professional diving projects often performed aroundoil platforms and related installations in open water.

Construction Support Vessels (CSV): Vessels that are used tosupport complex offshore construction, installation, maintenanceand other sophisticated operations. CSVs are significantly largerand more specialized than other offshore vessels.

Anchor Handling Tug Supply Vessels (AHTS): Vessels that aremainly built to handle anchors for oil rigs, tow them to location,anchor them up, and in a few cases serve as an EmergencyResponse & Rescue Vessel (ERRV). They are also used to transportsupplies to and from offshore drilling rigs.

Platform Supply Vessels (PSV): Vessels that are used to carry crewand supplies to the oil platform deep inside oceans and bringcargo and personnel back to shore. Their size varies from small 20meter long ships to 100 meter large ships.

Safety Standby Vessels: Vessels that are used to “protect”offshore installations from wandering vessels. They are also usedto provide standby, rescue and emergency duties, and to aidclosely in the installation and preparation of rescue operations,such as helicopter landing and take-offs, and helping personnelworking over side and near or in the water.






Source: World Bank, WTO Secretariat Source: Clarksons, Danish Ship FinanceSource: IMF, UNCTAD Statistics Source: Clarksons, Danish Ship Finance


Merchandise trade & real GDP growth Clarksea indexRelation between industrial production,

GDP & seaborne tradeClarksea tanker and dry bulk indices

II.Developments in International Seaborne Trade

World Economic Situation

Since 2012, the global economy has continued to experienceslow growth on the back of weak economic activities in keyemerging and developing countries, especially from the BRICScountries (Brazil, Russian Federation, India, China, and SouthAfrica).

According to World Bank’s data, BRICS account for 40% of globalprimary energy and food commodity consumption and morethan 50% of global metal consumption.

The rebalance in China's economy from commodity-intensive toservice-intensive, besides lower GDP contribution frominvestment and over-capacity in the industrial and constructionsectors, has led to the shrinking of the country’s imports.

The rise in financial market volatility, currencies depreciation,sharp fall in capital inflows and declines in commodity prices arealso contributing factors to the fall in global trade activities.

As a result, 2015 global trade witnessed a slowdown in growth,increasing only by 0.3% versus 2014. Despite the above adversefactors, the World Trade Organization’s (WTO) Secretariat forTrade remains positive about the sector’s growth and forecastsworld merchandise trade to pick up and increase by 3.9% in2016, 4.3% and 4.5% for 2017 and 2018, respectively.

World Seaborne Trade

Seaborne trade general trends: Demand for maritime transportservices and seaborne trade volumes continue to be shaped byglobal economic growth and the need to carry on merchandise

trade.

There is a close correlation between industrial production,seaborne trade, and world GDP growth. As industrial activitiesand commodities production rise, demand improves onseaborne trade, directly leading GDPs to grow, since trade is amain component of GDP.

According to the latest available data, the industrial productionin 2014 increased by 2.4% on average, which reflected a 3.4%increase in seaborne trade, adding 2.6% to the world GDP.

Going forward in terms of ton-miles: World seaborne trade inton-miles should increase by a CAGR of 2.4% through 2018, anassumption based on IHS Global insight data and forecasts.

Going forward in terms of volumes: World seaborne tradevolume should witness steady growth in the coming three years(as a percentage of total merchandise trade growth) by 3.1% in2016, 3.4% in 2017, and 3.6% in 2018 as per WTO’s data. Theseslow growth expectations are mainly triggered by the previously-mentioned adverse factors for the world economic situation.

III. General Market Indicators Overview

Over the 2009-2014 period, average freight rates fell by roughly50%, compared to the 2000-2008 period, as the world fleet wasunderutilized due to sluggish demand following the worldeconomic downturn and vessel oversupply. In 2015, theperformance of the Clarksea Index improved by 24% YoY, led bya spike in tanker vessel demand, increasing freight rates abovethe pre-financial crisis levels on the back of low oil prices which

led to an unprecedented surge in oil demand for stock build-upsand refinery in-take. Meanwhile, the dry bulk and off-shoresegments experienced a huge vessel supply glut and facedfluctuating demand for both lines of business. However, in Q12016, the index kept falling to reach USD10,000/day, reflecting a30% YoY decline compared to 2015. This fall indicates animbalance in the market across the major segments.

Second-hand ship values were up 4% YoY for the same scenariothat boosted the Clarksea index, as second-hand vessels becamea more lucrative option for buyers (as the lead time to order anew vessel is around two years from order date to delivery).

Age of the fleet and order-book indicates that at end ofNovember 2015, only 9% of the world fleet (162.3mn DWT) isaged 20 years or older, while the order-book/current fleet ratiostands at 17%. This may intensify pre-mature scrapping of vesselsas demand is not enough to bring the huge inflow of vesselsentering the market into use. According to Clarksons, more than70% of the order-book (215mn DWT) is scheduled to bedelivered in 2016. If demand remains at the current levels, thereis high probability that most vessels older than 15 years wouldneed to be scrapped within the next two to three years. Theexception will be the tanker segment, as it is less likely toexperience high scrapping activity, given their profitability.

4.1%

2.8%

2.4% 2.6%

2.4% 2.

9% 3.1%

3.1%

5.3%

2.2

%

2.5%

2.5% 2.

8%

3.9% 4.

3% 4.5

%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2011 2012 2013 2014 2015E 2016F 2017F 2018F

World GDP World Merchandise trade







IV. Maritime Transport Segments

A. Dry Bulk Shipping

Dry bulk shipping has been struggling becauseof weak demand (mainly from China) for coal,iron ore, and minor bulks, leading to a 0.3% fallof dry bulk distance-adjusted demand in 2015.In addition, vessel supply was 29% higher thandemand. This, coupled with the decline indistance-adjusted demand, led dry bulkshipping earnings to fall by 29% in 2015.

The slowdown in global seaborne coalshipments (23% of total dry bulk shipments) in2015 was led mainly by the 5.7% fall of coaldemand in China (which accounts for c.50% oftotal global consumption) caused by theChinese electricity-sector transformation tousing natural gas instead. This was translatedinto a YoY drop of 30% in Chinese coal importsin Q4 2015. Additionally, the 15% decline in USimports in 2015 further curbed seabornethermal coal imports.

Global iron ore (25% of dry bulk shipments)trade grew by only 2% in 2015 as compared to15% in 2014 according to a report by ClarksonsResearch in January 2016. This was mainlyascribed to the slowdown in industrial activitiesof China, depressing steel production growth by2.6%.

China’s iron ore imports increased by 2.2% YoYin 2015 despite a 2.6% contraction in Chinesesteel production and weak domestic demand.This rise in iron ore imports was due tosubstituting the majority of domestic iron oreportion, which has low iron (Fe) content, withimported iron ore from Australia and Brazil. Tocompensate for shrinking demand at home,steelmakers in China exported excess supply atrecord levels, causing global prices to fallsharply to USD40/ton (more than 50% declinecompared to 2014).

Minor bulks trades (28.8% of dry bulkshipments) are dominated by various inputs

going into either the manufacturing or theconstruction sector. Growth in minor bulk tradeis estimated to have increased by only 1.5% in2015, aided by lower Chinese demand forimports of forest products, steel products,nickel ore, and various other smaller cargoes.

A 3-4% growth in other minor bulks (fertilizersand agricultural) in 2015 failed to keep growthin minor bulks from slowing.

Dry bulk carriers spot rates: Weak dry bulkdemand has heavily affected spot rates. TheBaltic Dry Index, an indicator of bulk-carrier spotrates, declined to its second lowest annualaverage of 718 points in 2015, or USD7,000/day,the lowest annual average bulk carrier earnings.On 17 June 2016, the Baltic dry index decreasedan average 587 points to reach an average spotrate of USD5,566. (The average is calculatedbased on all sizes of dry bulk ships.)

The Outlook

China is expected to be the main consumeraffecting dry bulk demand as it accounted for38% of global seaborne dry bulk demand in2015 as per IHS Global Insight and Danish ShipFinance. This means that any changes in theChinese seaborne dry bulk trade will have asignificant impact globally.

In the medium-term outlook, Seaborne Dry Bulkdemand is expected to grow by only 3.0%annually from 2015 to 2018 compared to 5.1%annually from 2010 to 2015 (IHS Global Insight -November 2015).

Slower growth in demand is forecasted basedon the following factors:

Global coal import demand is forecasted todecline at a 5.3% CAGR until 2021, accordingto the Institute of Energy Economics &Financial Analysis (IEEFA) and EnergyInformation Administration (EIA).

The Chinese Metallurgical Industry Planning& Research Institute forecasts the country'siron ore demand would be 1.073bn tons in

2016 (4.2% lower than in 2015), 920mn tonsin 2020, and 710mn tons in 2030. This willincrease pressure on seaborne iron ore trade.

Grain exporters and trade may face a falloutif China (which accounts for 25% of seabornegrain demand) manages to rebalance itseconomy, modernize its agricultural sectorand increase its domestic grain output.

In the long term, it is expected that graindemand will continue to grow, especially inAfrica and Asia, as the urbanization processpulls more people out of poverty andincreases demand for both food and feed.

Minor bulk demand and trade are alsoexpected to take their share of the falloutfrom the current slowdown in China’seconomy. Given the global slowdown in themanufacturing and construction sectors,growth in minor bulk trade is expected toslow to only 1% annually until 2018,according to Danish Ship Finance.

Dry bulk carriers Fleet is expected to grow 4% in2016 after delivering vessels that werepostponed in addition to new orders, butthereafter the order-book would shrinkconsiderably, and if contracting continues to below, fleet growth could fall to around 2% in2017 as per Danish Ship Finance.

The Chinese steel exports in 2015 rose 20% YoY.But this trend is not expected to continue as theUS, UK and other steel-producing countries areimplementing protection strategies to mitigatethe risk of losing domestic steel producers.Signs emerged in January 2016 as Chinese steelproducts exports fell by 5.3% YoY and 8.6%MoM, compared to December 2015. This was inline with recent warnings by China Iron & SteelAssociation (CISA) that sustained increases wereunlikely, given a rise in foreign anti-dumpingmeasures against Chinese producers.Developing countries are currently benefitingfrom the current oversupply in iron ore andsteel products, especially countries with high

construction activities.

Accounting for 23% of seaborne dry bulk tradein 2015, coal is expected to weigh heavily onthat trade. Iron ore trade is expected to be weakbecause of expectations of lower demand inChina. The supply surplus is expected to belarger in the coming three years as demand isseen failing to absorb the world dry bulk fleet.

Dry bulk order-book expectations to 2017

Dry bulk demand/supply balance to 2018

Source: Clarksons, IHS Global Insight, Danish Ship Finance

Source: Clarksons, Danish Ship Finance







B. Liquid Bulk Shipping

Crude Oil (Dirty Oil)

Starting 2012, global crude oil production has been leaping, liftedby sharp a rise in US crude oil production after the US startedutilizing its shale oil and increasing its oil production by 55% to9.3mnbpd in 2015, making it the highest since May 1972.Meanwhile, other crude producers, such as Brazil, Iraq and SaudiArabia, also increased their production by 600,000bpd in 2015.

According to IHS Global Insight data, overall crude oil productionin 2015 increased by 2mnbpd. That said, demand for crude oildid not increase as much, translating into a sharp fall in prices.Demand has been declining in some regions, including the USwhich used to be one of highest importers and cut its imports byc.19% from its peak in 2010. Again, the slowdown in China’seconomy reduced the country’s share of global crude oil demandto only 24% in 2015 compared to 30% in 2014 and 60% in 2011 asper EIA data.

Crude oil prices fell from over USD100 per barrel in 2014 toaround USD31 per barrel by end of January 2016, which marksthe lowest level since 2008. Low oil prices drove seaborne crudeoil demand to increase by 4.8%, reaching 2.93bn tons in 2015compared to 2.79bn tons in 2014, according to ClarksonsResearch 2016.

The fall in oil prices encouraged countries to increase their crudeoil reserve build-ups. The IEA estimated global oil consumptionrising by an average of 1.7mnbpd or 1.8% in 2015, while globaloil inventories increased by 1.9mnbpd in 2015, marking thesecond consecutive year of inventory builds.

Floating storage build-ups forced cargoes to stay longer offshorewhich in turn benefited the crude tankers. Asia, China inparticular, continued to be the main driver of growth in seabornecrude oil trade in 2015.

The Crude Oil Tanker Market

Freight rates: Lower crude oil prices boosted crude oil tankerdemand which translated into higher freight rates. According toLloyd’s List Intelligence, spot rates in the Baltic Dirty Tanker Index(BDTI) rose 6% YoY throughout 2015 as compared to 2014average.

Time charter rates responded stronger to the low oil prices asone-year charter rates spiked to the highest level since 2010,reaching an average of USD49,500 in 2015, up 50% YoY fromUSD33,000 for 2014.

Overall, average tanker earnings (spot and time-charter) rose73% YoY with the VLCCs in the lead as their average earnings hitover USD60,000/day in 2015, a 120% increase from 2014 rates.

Fleet growth: The inflow of new vessels continued to be low (uponly 2% YoY), while crude oil demand remained high, up by 4.8%YoY. Slower growth in supply resulted from owners postponingscrapping to take advantage of high freight rates.

Demand/supply balance: Despite the 4.8% rise in seabornecrude oil trade, distance-adjusted demand increased by only 1%while vessel supply rose by 2%, increasing vessel supply surplusto 29% (above demand) in 2015. This was due to temporaryfactors supporting demand in 2015, such as floating storage,inventory build-ups and refinery intake which did not affect theend-user consumption (demand).

The Outlook

Storage builds (both commercial and strategic petroleumreserves) are expected to support growth in demand forseaborne crude oil volumes, driven by low oil prices, a trend thatis expected to continue in 2016.

Overall, global seaborne crude oil imports are expected toincrease at a CAGR of 1.7% through 2020, driven by Asiandemand and global refinery additions, which are expected togrow by close to 5.5mnbpd in the coming five years, according toIHS Global Insight and EIA estimates.

Meanwhile, new crude oil tankers are expected to increase by4% in 2016 and 2017 with expectations of unchanged supplysurplus.

Major oil exporters like Saudi Arabia increased output in 2015 toretain market share which increased oil oversupply. Moreover,the meeting of top oil exporters in Doha, Qatar to cut productionback in April 2016 had failed. This implies that the global marketwill likely remain flooded, increasing depression in oil prices,while overall end-user demand growth will not offset theoversupply.

Crude tanker fleet order-book to 2017

Crude tankers one-year time charter rates

Crude oil prices forecasts

Source: World Bank oil forecasts



104.196.2

50.837.0

48.0 51.4 54.9 58.8 62.9

-10

10

30

50

70

90

110

130

150

2013 2014 2015 2016 2017 2018 2019 2020 2021

USD

/bar

rel

Crude oil prices (World Bank), average, spot USD/bbl







Product Oil (Clean Oil)

Product oil (petroleum products) is (are) refinedfrom crude oil, unlike petrochemicals which area collection of well-defined, usually purechemical compounds. Petroleum products arecomplex mixtures. The majority of crude oil isconverted to petroleum products which includeseveral classes of fuels, such as gasoline, jetfuel, diesel fuel, and heating oil.

Developments in refinery capacities cansignificantly shape crude and product tradepatterns as mentioned in the crude oil tankersection.

The fall in oil prices stimulated demand whichled refineries to operate at near maximumcapacities, achieving their highest margins inyears. This happened because refined productsprices lagged behind crude oil prices.

Also, high US and China gasoline demand hasincreased by more than 8% and 15%,respectively, boosting demand for petroleumproducts in 2015. This high demand encouragedSaudi Arabia and the United Arab Emirates toincrease their refinery capacities in 2015 by400,000bpd, adding significant volumes to themarkets, topped by Asia, and benefiting the LR2market in particular as the Middle East mainlyuses LR2 product tankers for oil shipping,according to Clarksons and Danish Ship Finance.

That said, distance-adjusted demand forproduct tankers increased by only 1% becausethe majority of seaborne petroleum productstrade routes are characterized as being short-haul, which negatively affects distance-adjusteddemand.

Supply surplus widened in the product tankermarket in 2015, reaching 33% as product tankerfleet grew by 7%, while distance-adjusteddemand remained almost flat (+1% YoY).

Product Tanker Market Overview

Freight rates: After a few years with a growingimbalance between supply and demand, the

product tanker market has improvedsignificantly in 2015. Average tanker earningsjumped 73% YoY in 2015. The recovery startedfrom the end of 2014, when higher refinerythroughputs and lower oil prices boostedproduct tanker demand. This development hasreflected in average Baltic Clean Tanker Index(BCTI) (spot rates index) which reached 676 inthe first three quarters of 2015, compared with566 in the same period in 2014.

Time charter rates have benefited from thesurge in spot rates, especially the LR1 and LR2time charter rates, which doubled to USD30,000in 2015 from an average of USD15,000 in 2014.MR time charter rates have reacted slower, dueto weak demand for MR vessels.

The spike in freight rates dragged the scrappingactivity to a new record low and supported fleetgrowth expectations in 2015. Consequently,secondhand prices rose sharply by 10% at thestart of 2015 and remained fairly stable since.

The Outlook

Seaborne petroleum products’ demand isexpected to increase slightly by 1.3% annuallyover the coming five years, mainly driven byAsia, according to IHS Global Insight forecasts.

The Middle East in particular is expected tosupply much of Asia’s additional importvolumes. Even though the Middle East refineriesmay be operating at near-maximum capacities,they are set to grow by 1.3mnbpd over thecoming five years. This will boost demand forLR2 tankers in particular, given that loadingfacilities in the Middle East are built to handlethese types of vessels.

Asia, mainly China, will continue demandinghigher-quality petroleum products whichcontain less sulphur content and could result ina surplus of low-quality petroleum productbarrels in the market. But these barrels may beexported to Africa because their standards offuel are lower, and in turn Africa will increase its

imported volumes of petroleum products by 5%per annum, overtaking Europe as the world’sthird-largest import region. In addition, Asia,Europe and the Middle East are expected tobecome larger suppliers, especially the MiddleEast given its closer location to Africancountries.

This situation may generate large volumes andstimulate inter-regional trading while theAfrican port infrastructure is hardly able tohandle LR tankers. MR tankers are expected tobenefit the most from increasing African importvolumes.

Product tanker fleet is expected to grow at aslower rate than 2015 due to the largeoversupply that occurred in 2015. Moreover,the new tanker orders during the intensecontracting activity in 2013 amplified the supplysurplus in 2015 as per Danish Ship Finance.

Seaborne petroleum products imports to

2020 by region

Source: IHS Global Insight, Danish Ship Finance

Product tanker order-book


Demand/supply balance for product

tankers in 2015


1-year product tanker time charter rates








Liquefied Natural Gas (LNG) Shipping

LNG is natural gas (mostly methane, CH4) thathas been converted to liquid form for ease ofstorage or transportation. LNG trade increasedby more than 50% between 2006 and 2014. TopLNG importing countries are the Japan, SouthKorea and China, while the top LNG exportersare Qatar, Australia and Malaysia.

LNG Supply: Supply has grown in 2015 as LNGtrades and production increased by 1.6%compared to 2.5% in 2014. Meanwhile,Australia’s LNG export increased by 8.8bn CUMto reach 42bn CUM, thanks to a new plantcoming online. North America made a FinalInvestment Decision (FID) to increase itsproduction capacity by 25.1bn CUM per annum.This means that North America has completedthe financing and defined its strategy for theyear to come.

LNG Demand in 2015

Demand in key Asian markets declined in 2015as China, which has one of the biggest LNGmarkets, saw a surprise drop by over 1% (26.5bnCUM) in consumption in 2015 after years ofgrowth of 10%+. Moreover, LNG demand inJapan, the world's biggest importer, dropped4%, while South Korean demand was 11% downdue to weaker energy demand and strongernuclear and coal energy output, according toWood Mackenzie.

Weak Asian demand was partially offset bynew emerging buyers and Europe, such asEgypt, Jordan and Pakistan as they startedheavily importing LNG in H1 2015 throughfloating storage and regasification units (FSRUs)totaling 7.86bn CUM of LNG imports, accountingfor 20% of global LNG imports in 2015 (2.7bnCUM were sourced from Qatar). The threecountries contracted more than 27bn CUM tobe delivered through 2020.

Europe’s imports for 2015 were estimated at50bn CUM (+14% YoY), offsetting the fall in

Atlantic to Pacific LNG trade flows (-16% YoY).Overall, world LNG trade rose by 2% in 2015.

Natural gas prices in 2015: The natural gas priceindex fell by 15% in Q4 2015 only, as all threemain importing markets (the US, Europe andJapan) remained in surplus according to WorldBank data. US gas prices plunged 23% reachingUSD2.1 per million British thermal units(mmBtu) while European gas prices fell 9 % toUSD6.26/mmBtu, as stocks touched recordhighs, and consumption was weakened by mildweather.

Natural gas spot price in 2015 for deliveries toJapan fell by roughly 2% to USD9.06/mmBtu,while spot cargoes of LNG flowing into Asiatraded at USD7/mmBtu and to Europe at underUSD6/mmBtu.

LNG Shipping Market Overview

Freight rates: Spot/term-charter rates (T/C) atthe beginning of 2015 averaged USD70,000/day,but at year-end, rates fell below USD40,000/dayon average (-43%). Spot charter rates for a160,000 cubic meter dual fuel diesel electric(DFDE) LNG carrier are currently aroundUSD32,000 per day, down 57% from 2014,according to data from RS Platou.

The Outlook

In the short-term outlook, the global LNG carrierfleet growth is forecasted to sharply rise in 2016by 12% compared to 8% in 2015. Meanwhile, 19new LNG vessel orders are expected to bedelivered and operational in 2016 (12 of whichto be dedicated to US export projects and threeto FSRUs), as per Drewry Research 2016.

There are no signs of owners willing to scrapolder vessels, suggesting LNG shipping will likelygo through a prolonged period of overcapacity.New sources of LNG supply from projectscoming online in Australia are expected toreduce demand for spot cargoes from theMiddle East, and in turn lowering the overallton-mile demand for LNG shipping.

Natural gas prices are projected by the WorldBank to fall in 2016. Delivery price to Japandropped 19% to USD7.90/mmBtu, and price inEurope also lost 19% to reach USD5.57/mmBtu,on continued supply surplus and mountingcompetitive pressures on oil-linked importcontracts. Moreover, natural gas prices in theUS are expected to fall by 6% to an average ofUSD2.32/mmBtu.

Long-term LNG demand through 2025 isforecasted to increase by 2% annually,according to British Petroleum (BP) energyoutlook for 2015, as natural gas demand will bedominated by the power and industrial sectors.

Moreover, the World Bank expects prices to risedue to continuing strong growth in futuredemand, rising pipeline and LNG exports,prompting a surge in petrochemicals demand.

Natural gas prices to 2021

Source: IMF and World Bank average forecasts

LNG imports by country in 2015

Source: Wood Mackenzie, Bloomberg

LNG vessels time charter rates

Source: RS Plateau Research report



11.810.1

7.3 6.0 6.2 6.4 6.6 6.8 7.0

3.74.4

2.6 2.5 3.0 3.5 3.7 3.9 4.1

16.0 16.0

10.48.5 8.8 9.0 9.3 9.5

9.8

0

5

10

15

20

2013 2014 2015 2016 2017 2018 2019 2020 2021

USD

Natural Gas prices USD/MMBTU - Europe

Natural Gas prices USD/MMBTU - US

Natural Gas prices USD/MMBTU - Japan

USD

000’s

/day

Years





Liquefied Petroleum Gas (LPG) Shipping

LPG is a portable fuel that can be used forcooking, heating, and powering vehicles. It alsohas a range of commercial applications acrossthe manufacturing and agriculture industries.LPG is a classification of hydrocarbon fuel,including propane, butane and otherhydrocarbons.

LPG is produced during oil refining (using oilderivative naphtha as a base that is derivedfrom crude oil) or is extracted during the naturalgas production process (using ethane as a basegas). Instead of destroying or burning off thisbyproduct, the LPG is captured and used as fuelsource on its own.

Demand in 2015: Global imports of LPG grew by5% in 2015, as Asia continued to fuel demandfor seaborne LPG volumes. This demand wassupported by:

The feedstock demand for propylene (usingpropane as feedstock) which has benefiteddistance-adjusted demand and VLGC vesselsin particular.

Sharp rises in prices of ethylene (usingethane as feedstock) boosted its margins andled steam crackers to operate near maximumcapacity, increasing the use of LPG as afeedstock, as LPG has a higher ethyleneproduction yield than naphtha (a byproductfrom refined crude oil).

Supply in 2015: The Middle East remains theleading supplier of LPG to the Asian market(48% market share as of November 2015), butthe US is increasingly strengthening its position.The US increased its Asian market share to 7%,thanks to its competitive prices and highpropane content and the desire of Asiancountries to diversify their supply.

Demand/supply balance in 2015: Supplysurplus has widened to 11% as the fleet grewsharply on back of higher distance-adjusteddemand growing by 5%, while supply surged by

16% in 2015.

Overview of the LPG Tanker Market

Growing LPG demand pushed freight ratesduring 2015, as the average spot rate reachedUSD97 per ton. However, during Q1 2016 VLGCspot rates have dropped 75% compared to theirhighs in July 2015.

This is similar to what was seen in the Dry Bulkmarket in 2008 due to a massive inflow of newLPG tankers in the market while demand hasn’tbeen enough to keep up with the rapidlyexpanding LPG fleet.

Time charter rates have fairly risen throughoutmost of the past two years, up from aroundUSD1mn per month at the beginning of 2014 toclose to USD2.2mn per month in July 2015(+120%).

LPG carrier fleet has grown by 16% in 2015according to Clarksons data and Danish ShipFinance estimates, as during the first ninemonths of 2015, 2.4mn cubic meters or 87% ofscheduled orders were delivered on time.

High freight rates have also led owners,particularly of larger vessel types, to postponescrapping, which left a bigger LPG carrier fleetand made second-hand ships more valuable.

The Outlook

Demand for seaborne LPG volumes is expectedto keep growing strongly in the coming years (a5-year CAGR of 5.7%), fueled by rising demandfrom both the residential and the petrochemicalsectors around the world, especially Asia, as thecountry is by far the world’s largest importer ofseaborne LPG volumes (IHS Global Insight,November 2015) .

Over the coming five years, Asian LPG importsare estimated to grow even further, expandingat a rate of 5% per annum to reach 52mn tons in2020. Propane dehydrogenation plants areexpected to expand their capacity by more than8mn tons during the next five years. The

expansion forecasts also assume the US willcontinue expanding its export facilities byroughly 25mn tons (equivalent to almost 45mncubic meters) over the coming five years, whichwill improve LPG trade growth.

LPG demand in Asia does not only stem fromdemand from the petrochemical sector, but aswell from the residential sector, as the majorityof LPG is used for heating appliances andvehicles. In rural areas in Asia, millions ofhouseholds are currently switching fromkerosene and solid biofuels to LPG, which iseasier to handle and more environmentally-friendly.

Fleet Growth Expectations

The majority of the order-book is scheduled tobe delivered in 2016, consistent with the highlevel of contracting activity that took place in2014, according to data from Clarksons andDanish Ship Finance in November 2015. Whilepostponements are likely to increase, fleetgrowth is still expected to reach a massive 19%in 2016 as an order-book equivalent to 42% ofthe fleet is scheduled to be delivered by 2018.This will be the highest level ever recorded.Scrapping is expected to counterbalance someof this but only slightly, as only 16% of the fleetis older than 20 years.

LPG carrier order-book to 2017


Seaborne LPG forecasted imports by region

till 2020


Demand/supply balance in 2015


LPG carrier 1-year time charter rates in

2015








C. Container Shipping

The container shipping sector is driven bydemand from the market user. As a result, it ismore linked to global GDP growth than dry bulkor tankers. Container shipping was developedafter World War II and was a major element inglobalization. As of 2015, containerized traderepresented 15% of total seaborne trade. Chinaaccounted for 26.5% of the containerized trade,while North America, along with CentralAmerica and the Middle East, were the largestcontributors to seaborne container tradegrowth in 2015.

Containerized trade consists mainly ofmanufactured goods. According to data byClarksons Research in January 2016, seabornecontainer trade grew by only 2.5% in 2015compared to 5.3% in 2014. Containerized tradein 2015 was affected by global merchandisetrade which slowed on the back of the followingfactors:

Economic slowdown of BRICS.

Contractions in China’s manufacturing sectorsince 2014.

Sluggish demand in the container shippingfrom Europe (which contracted by 1%)compared to a 6% growth in 2014.

As an overall result, ‘Mainlane’ container traderoutes witnessed their slowest growth of only0.4%, especially the Far East-Europe trade routewhich contracted by around 4% in 2015 YoY.Moreover, the North/South container traderoute only grew by 1.8%.

Container shipping market in 2015

Freight spot rates: Fleet grew by 8% in 2015,outpacing demand growth, which was up byonly 2.5%, resulting in a wider supply surplus,and lower fleet utilization rates at 78%compared to 81% in 2014. During H1 2015, spotrates soared on the back of temporary factors:

Port congestion in the US West Cost (led tolimited supply) and the new Intra-Asianservices that were introduced at the start of2015, raising demand sharply, especially forsmall- and medium-sized containerships(feeders and handy-sized fleets).

Limited capacity growth in the small- andmedium-sized containership fleets due toincreased scrapping activity.

This trend was bucked by Q3 2015, as thefactors that supported demand diminishedcausing spot rates to decline sharply. The ChinaContainerized Freight Index (CCFI CompositeIndex) in 2015 showed that the averagecontainer box spot rate fell by 15% comparedwith the 2014 average. While in the ShanghaiContainer Freight Index (SCFI Composite index),spot rates were pushed down by 32% reachingUSD724/TEU compared to USD1,072/TEU in2014, according to Clarksons data in January2016.

Time charter rates: Ship owners exploited thesharp rise in spot rates in H1 2015 andsucceeded in securing charters at attractiverates, resulting in an overall average growth of12.6% in 2015.

Small- and medium-sized vessels benefited themost, reaching USD8,842/TEU on average in2015 for a 1,700TEU vessel, while large sizevessels (Post-Panamax) declined by 7.8% YoY.Starting Q3 2015, time charter rates declinedsimultaneously with spot rates, as supply was30% higher than demand in 2015.

Moving into the first two months of 2016,freight market remained under severe pressure;however supply-side fundamentals still lookpotentially solid. It appears unlikely in 2016 thatthere will be any significant upside for timecharter rates until demand steps up, which willtake time.

The Outlook

IHS Global Insight expects containerized trade toincrease at a 3-year CAGR of 5.2% through 2018.However, there are downside risks, as thecurrent market is oversupplied with super-largevessels. This is a trend that is expected tocontinue since most of the vessel order-book isestimated to be delivered in the coming threeyears.

Three demand growth scenarios described byDanish Ship Finance, 3-year CAGR of 5.2%, 4%and 2% scenarios, respectively, showed thateven if demand reaches 4%, the oversupply willremain at the current levels. The containerindustry will continue to be idled by low fleetutilization in the coming years, despite marketfundamentals indicating that current and futuredemand will fail to employ the capacity. Shipowners' priorities now are to retain marketshares and lower marginal costs, but the resultis a deflationary market.

Seaborne container trade volumes in 2015

China Containerized Freight Index (CCF)


Container fleet, order-book vs.

Utilization rates




Demand/supply balance for different

demand scenarios till 2018







D. Off-Shore Support Market

Offshore support vessels (OSVs) are ocean-going vessels used fortransporting cargo, goods, supplies, crew, as well as carrying outoff-shore exploration and production across oil platforms. OSVssupport marine off-shore drilling activities throughtransportation of off-shore energy resources. They also facilitateinstallation of oil rigs. They are mostly used by oil and gascompanies for providing services for exploration and productionactivities. The OSVs are either operated by ship owners or shiplessees. In addition, OSVs facilitate maritime logistic operationsfor different industries such as subsea and deep water mining.

Off-Shore Market in 2015

The off-shore market is fundamentally linked to oil prices, andthe activity of oil exploration and production. In January 2015,Brent price recovered to stand at USD49/barrel after fallingsharply from Q4 2014. Brent prices were rising in the beginningof 2015 and reached USD65/barrel but were knocked down inDecember 2015 to below USD37/barrel due to oil oversupply.The year 2015 ended with an increase 2.9% in oil supply, whiledemand rose by only 1.8%.

During 2015, a lot of factors led to the oil supply glut and fallingprices, including OPEC policies, persisting US shale oil segmentand the weakening global economic outlook. Oil producingcompanies reacted to the falling oil prices by severely cuttingexploration and production spending by around 19% and layingoff jobs as final investment decisions knocked the off-shoredevelopment projects 49% down, as operators were reluctant tocommit capital to long lead-time projects.

Off-shore discoveries in 2015 were the lowest in over a decadeafter declining globally by 19% compared to 2014 and 41%compared to the 2005-2014 average. Only 68 off-shore fieldsstarted up in 2015.

Off-shore support vessels (OSVs) index fell by 21% in 2015 as oilactivity weakened. OSVs order-book fell by 32% and the fleetgrew by 3.5% compared to 5.3% on average in the 2005-2014period. Also, off-shore new-build vessel contracting suffered a68% drop compared to 2014.

Off-shore term rates in 2015: The North Sea Term Index was54%, down YoY compared to 2014, as the rate for a large AnchorHandling Tug Supply vessel (AHTS) was only USD16,000/day onaverage compared to USD35,000/day in 2014. Also, the rate for a

large Platform Supply Vessel (PSV) declined at the same ratereaching USD6,000/day, compared to USD13,000/day in 2014.

Global oil rig fleet utilization stood at 73% at year-end 2015,compared to 87% in 2014 and 96% in 2013.

The Outlook

For 2016, expectations of steady recovery were disappointedwith exploration and production cuts and oil prices still falling.Off-shore seems to be facing a downturn that is expected tocontinue in 2016.

During the next five years, oil prices are forecasted toexperience a slow recovery but remain low compared to 2014and 2013 levels, reaching only USD58.8/barrel in 2020. Thisforecast is based on a gradual pick-up in oil demand along withbetter management of the oversupplied market by 2020. Theslow price recovery will tighten the lid on E&P activity, chokingdown oil producing companies.

Source: Clarksons Research 2016

Field discoveries and start-ups






Qatar containerized imports trade


V.Qatar Overview

Qatar is a high-income economy backed by itsposition as the world's third largest owner ofnatural gas reserves after Russia and Iran.Qatar has enjoyed significant economic growthwith real GDP increasing by 10.7% per annumon average since 2008. It is now one of therichest nations in the world with GDP percapita exceeding USD100,000 at PPP(Purchasing Power Parity) exchange rates.Qatar is currently the largest LNG exporter inthe world.

Qatar managed to sustain growth as crude oilprices continued falling: Qatar has madeconsiderable efforts and managed to reducethe dependency of its economic growth onrevenues generated from the hydrocarbonssector, as the government encouragedinvesting in sectors such as financial services,construction, health, transportation, andmanufacturing. Qatar’s economy managed togrow by 3.7% in 2015 driven by the non-hydrocarbon sector which climbed 10.1%,while the hydrocarbon sector has witnessed a2.2% decline in growth, according to Ministryof Development Planning & Statistics(MDP&S).

Annual inflation, as measured by the changein the consumer price index, is estimated tohave averaged 1.5% in 2015 as inflation ofresidential properties decelerated sharply in2015. Moreover, falling prices of food andother commodity are estimated to keepforeign inflation low.

Gas production: Since the end of the ramp-upphase in LNG production in 2011, LNG exportshave flattened to account for 58.3% of totalproduction in 2015. Qatar exports 11.3% of itsgas production via pipelines. Due to the pricefluctuations and postponements of further gasdevelopment in the North Field, no furtherincreases in gas exports are expected.

Qatar Economic Outlook

Qatar’s economy is expected to grow by 4.3%in 2016, followed by a slowdown to 3.9% in2017, as non-hydrocarbon should grow by9.9% in 2016 and 10% in 2017, according toMDP&S forecasts.

Hydrocarbons are expected to grow by 0.4% in2016 as output will get a boost from Barzan, anew pipeline gas production facility scheduledto come on stream in 2016. Barzan will reachfull capacity in 2017. In 2017 the hydrocarbonsector is predicted to contract by 0.3%,affected by oil prices which are expected to fallfurther reaching an average of USD37/barrel in2016 and USD58.8/barrel by 2020.

The combination of shutdowns andmaintenance of production facilities, as well asdeclining output from maturing oil fields isexpected to continue.

Qatar Transport Sector Outlook

The Qatari shipping sector continues to bedominated by the export of the country's keycommodities, which are mostly transported bythe national carrier Nakilat.

However, Qatar also aims to increase itscontainer and dry bulk shipping presencethrough the new Hamad Port, which is beingdeveloped to focus on capturing some highlyprofitable transshipment trades. In addition,Qatar is opening new container trade lines,such as the one recently opened with Indiausing Milaha as the shipping base that wouldboost Qatar’s future container shipping sector.

The development of the local transport andlogistics sector is a strategic priority for Qatar.There are more than USD35.8bn transportcontracts scheduled to be awarded in 2015-2017, as the country installs the infrastructureit needs to deliver the 2022 FIFA World Cup.

The future of LNG & LPG shipping in Qatar remains robust …

LNG and LPG shipping in Qatar is expected togrow strongly on the back of the Brazanproject which will boost natural gas output.Qatar is also working aggressively on securingits global market share as it recently securedlong-term LNG contracts with Pakistan andrevised the LNG prices on some of its existingcontracts with key importers.

Global demand for LPG is expected to increaseby 5.7% per annum till 2020, which will highlybenefit LPG in Qatar. Qatar’s LPG shipping isforecast to grow by the same rate.

Dry bulk & container shipping

While global dry bulk and container shippinghas plummeted in 2015 due to oversupply ofvessels, demand for dry bulks and containersare expected to recover in the coming threeyears at an average of 3% per annum.

The dry bulk and container shipping in Qatar isexpected to be boosted by the demand frominfrastructure and construction projects ascontainerized trade in Qatar has been growingby 11.5% per annum since 2013.

Off-shore support services

The off-shore support segment is directlyaffected by oil exploration and productionactivity. Production and budget cuts arealready occurring and expected to continue inboth 2016 and 2017 and slightly inch up by2020 as oil producers manage theoversupplied market.

Petroleum products shipping

The export volumes from Qatar of petroleumproducts’ shipping is expected to grow slowlyby 1.3% annually until 2020 on the back of lowoil prices, oversupply and weaker demand.

Qatar real GDP growth % year on year

Source: MDP&S

-

2,000

4,000

6,000

8,000

10,000

12,000

Jan-13 Jan-14 Jan-15 Jan-16

QA

R m

n28

.5%

15.0

%

1.2%0.1%

-1.5% -2.2%

0.4%

-0.3%

8.9%

11.1

%

10.2

%

10.6

%

10.6

%

10.1

%

9.9%

10.0

%

19.6%

13.4%

4.9% 4.6% 4.1% 3.7% 4.3% 3.9%

2010 2011 2012 2013 2014 2015f 2016f 2017f

Hydrocarbons Non-hydrocarbons

Real GDP Growth



Source: MDP&S





We initiate coverage in this report on Qatar Navigation “Milaha” and Qatar Gas Transport “Nakilat” with a Buy/Low Risk rating for each. Of the two stocks, we favor Nakilat as we believe it is moredefensive given:

• Its long-term agreements that ensure a stable revenue stream and margins,

• Growing demand for LNG as the best alternative to meet increasing environmental standards, and

• Minimal earnings fluctuation exposure to oil prices due the nature of its long-term contracts.




Total Revenues (QARmn) 2015a 2016e 2017e 2018e 2019e 2020e 2021e CAGR - 6 years

Milaha 2,998 2,767 2,448 2,456 2,590 2,672 2,701 -1.7%

Nakilat 3,140 3,167 3,195 3,222 3,251 3,279 3,308 0.9%

EBITDA (QARmn)

Milaha 1,177 843 776 774 810 831 832 -5.6%

Nakilat 2,329 2,367 2,388 2,408 2,429 2,451 2,472 1.0%

EBITDA margin

Milaha 39.3% 30.5% 31.7% 31.5% 31.3% 31.1% 30.8%

Nakilat 74.2% 74.7% 74.7% 74.7% 74.7% 74.7% 74.7%

Net Income (QARmn)

Milaha 1,095 749 617 628 678 720 781 -5.5%

Nakilat 982 1,094 1,185 1,255 1,328 1,388 1,458 6.8%

Total Revenues - YoY growth

Milaha 13.8% -7.7% -11.6% 0.3% 5.5% 3.2% 1.1%

Nakilat 0.8% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%

EBITDA - YoY growth

Milaha 23.1% -28.4% -7.9% -0.3% 4.7% 2.5% 0.1%

Nakilat 0.1% 1.6% 0.9% 0.9% 0.9% 0.9% 0.9%

Net Income - YoY growth

Milaha 4.3% -31.6% -17.6% 1.9% 7.9% 6.2% 8.5%

Nakilat 9.9% 11.3% 8.3% 6.0% 5.8% 4.6% 5.0%





[email protected]

Source: Company reports, MubasherTrade Research estimates

Qatar Navigation (Milaha)Qatar

Equities | Energy & Utilities | Initiation of Coverage


Deeply linked to Qatar’s economic growth story:Qatar Navigation’s (Milaha) diversified businessmodel makes it well positioned to benefit fromthe exceptional growth in all aspects of theQatari economy, aided by an increase in tradevolumes, substantial investments ininfrastructure and transportation projects, andthe boost in Qatar’s property market.

Strong position in the container shipping: Thecontainer feedering unit of Milaha is thedominant player in the container trade trafficbetween Doha and the UAE (main trade hub toQatar), with a 90% market share and over 66% ofthe overall import traffic between Qatar and theUAE. Milaha also secures several exclusivecontainerized export contracts, such as withMuntajat (gateway to Qatar’s exports of over10mn tons of chemicals and petrochemicalsproducts) and other main companies.

Nakilat—the catalyst to Milaha’s bottom line:The 30% stake in affiliate Qatar Gas TransportCompany (Nakilat), the world’s leading LNGtransporter, secures Milaha over QAR280mnannually in share of profits.

An investment arm managing promising realestate development projects and financialportfolio: With huge growth anticipated inQatar’s infrastructure development creatingopportunities for more warehousing anddistribution projects, Milaha Capital has arelatively large portfolio of real estate assets thatare spread across Qatar with exposure to theresidential, commercial, and showrooms/retailmarket. In addition, it also manages a largeportfolio of blue chip stocks listed on the QatarExchange, which generates attractive dividendyields.

Initiate with Buy/Low Risk; PT of QAR99.19(Expected Total Return “ETR” +15.7%): Weinitiate coverage on Milaha (QNNS.QE) with aBuy/Low Risk rating and a one-year Price Target(PT) of QAR99.19/share based on sum-of-the-parts (SOTP) methodology for the businessoperations of each segment using a 5-year DCFvaluation model and a DCF-based value forMilaha’s 30% stake in Nakilat. At our PT, QNNSwould be valued at 15.2x 2016e PER.

• One of the few companies in Qatar that strongly leverage on the country’s overall economic growth.

• Leading market share in the container shipping line between Qatar and the UAE.

• Largest shareholder in the world’s leading LNG transporter: Nakilat.

• Promising portfolio of both financial and real estate investments.

• Initiate with Buy/Low Risk; PT QAR99.19/share (ETR: +15.7%)

A diversified business model with growing demand and

consistent dividend stream — Initiate with a Buy/Low Risk

Buy

Low Risk

Price Target: QAR99.19

ETR: +15.7%

QARmn 2013a 2014a 2015a 2016f 2017f 2018f

Revenue 2,305 2,633 2,998 2,767 2,448 2,456

EBITDA 881 956 1,177 843 776 774

Net Income 950 1,049 1,095 749 617 628

Revenue Growth (%) 0.6% 14.3% 13.8% -7.7% -11.6% 0.3%

EBITDA Growth (%) 8.5% 8.5% 23.1% -28.4% -7.9% -0.3%

Net Income Growth (%) 13.7% 10.5% 4.3% -31.6% -17.6% 1.9%

EBITDA Margin (%) 38.2% 36.3% 39.3% 30.5% 31.7% 31.5%

Net Margin (%) 41.2% 39.8% 36.5% 27.1% 25.2% 25.6%

Net Debt (Cash) 1,044 1,645 2,844 2,778 2,475 2,141

EPS (QAR) 8.293 9.161 9.557 6.538 5.386 5.487

BVPS (QAR) 109.9 117.7 119.4 121.0 122.8 125.2

DPS (QAR) 5.0 5.5 5.0 3.6 3.0 3.1

PER (x) 9.0x 10.3x 9.9x 13.1x 15.9x 15.6x

PBV (x) 0.7x 0.8x 0.8x 0.7x 0.7x 0.7x

Dividend Yield (%) 6.7% 5.8% 5.2% 4.3% 3.5% 3.6%

Stock Performance & Details

QNNS (QAR) vs. DSM Rebased

Stock Details

Last price (QAR) 85.50

52-W High (QAR) 102.00

52-W Low (QAR) 83.40

6M-ADVT (QARmn) 2.88

% Chg: MoM -1.7

% Chg: YoY -12.13

% Chg: YTD -10.0

Mubasher Ticker QNNS.QE

Bloomberg Ticker QNNS QD

Capital Details

No. of Shares (mn) 114.5

Mkt Cap (QARmn) 9,791.9

Mkt. Cap (USDmn) 2,689.6

Free Float (%) 48.0%

-

2.00

4.00

6.00

8.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

Jun

-15

Jul-

15

Au

g-1

5

Se

p-1

5

Oct

-15

Nov

-15

Dec

-15

Jan

-16

Fe

b-1

6

Ma

r-1

6

Ap

r-1

6

Ma

y-1

6

Volume (RHS) QNNS DSM Rebased




Qatar Navigation “Milaha” | Qatar | Initiation of Coverage


DCF – One-year PT of QAR99.19/share: We used the DCF model to value Milaha. We have built a two-stage forecasting model: A high-growth period through 2021, followed by a stable-growth terminalperiod. We have discounted free cash flow to the firm (FCFF) at a weighted average cost of capital(WACC) of 6.52%, resulting from a cost of equity (COE) of 8.18% and an after-tax cost of debt of 2.38%.We derived COE as follows:

• 10-year US Treasury yield of 1.69%.

• Qatar’s equity risk premium (ERP) of 7.29%, derived from US ERP of 6.12% and a country riskpremium of 1.17% based on its Aa2 country rating.

• Adjusted 5-year monthly historical beta of 0.611.

• Terminal growth rate (TGR): 3.0%.

We reached a one-year fair value (FV) of QAR95.54/share.

PT of QAR99.19/share (ETR: +15.7%), initiate with Buy/Low Risk: We reached a one-year PT ofQAR99.19/share (including 2016e DPS), implying an upside potential of 15.7%. At our PT, QNNS wouldbe valued at 2016e PER of 15.2x and 2016e EV/EBITDA of 16.9x. We see 2016e dividend yield at 4.3%.

• In reaching our PT of QNNS, we added:

Our estimated market value of 370,000 sqm raw land at a 50% discount to fair value. Weapplied this conservative discount factor according to our estimates or the utilization period.

Our estimated book value of long-term loans extended to LNG and LPG companies as of 31December 2016.

Book value of Investments in subsidiaries and other long-term investments, excluding Nakilatas of 31 December 2015.

The fair value balance of financial assets of Milaha group as of 31 December 2015.

• In addition to the above, we added our estimated excess cash, deducted our estimated value of debtand accumulated minority interest as of December 2016 to reach the fair value of Milaha’s equity.We also considered deducting our estimated 2016 projected balance of employees’ end of servicebenefits.

• Rather than using the market value of Nakilat, we separately valued Milaha’s 30% stake in Nakilat,which is treated as an investment in an associate using DCF valuation to arrive at a fair value ofQAR26.13/share discounted by a WACC of 6.96% based on a US risk free rate of 1.69%, Qatar equityrisk premium of 7.29%, a beta of 0.829, and a TGR of 3.0%.

• We did not take into account revenues from new Hamad Port which will replace the existing DohaPort as the main commercial port in the country. We believe that in case Milaha wins the operationtender, this can potentially increase our PT of QNNS by 15% or QAR15.34/share toQAR114.52/share, (ETR: +33.6%).

Investment Rationale

• Capitalizing on the Qatari growth story.

• Dominant player in Qatar, enjoying government support.

• Business diversification that plays a major role in decreasing overall operational risks.

• Expanding fleet, state-of-the art equipment and world-class partners.

• A strong investment and development properties portfolio that secure recurring income.

• Growing dividends is one of QNNS’s key positives with a solid dividend payout ratio averaging 57% over 2013-2015 with an average yield of 5.9%.

Key Risks

• In current market conditions, profits/dividends yields are threatened by the volatility in charter rates from crude oil price fluctuations.

• Concentration risk, as the majority of the container shipping business (c.35% of MM&L revenues and c.14% of group revenue as of 2015) is with the UAE only.

• Possibility of lack of focus in business strategy due to the large number of business lines.

• Rising competition from key transportation and port management players.

• Uncertainty of wining the management contract of the new Hamad Port.

Company Profile

Incorporated in 1957, Milaha is headquartered in Doha. Milaha along with its subsidiaries areengaged in (a) maritime and logistics services, including marine transport, acting as an agenton behalf of foreign shipping lines, (b) offshore support vessels services, serving the offshoreoil and gas sector, (c) gas and petrochem services, operating LNG and LPG carriers, inaddition to, harbor marine services, (d) investment, encompassing investment in real estate,a portfolio of investments in listed and unlisted securities, and (e) trading activities, includingbuilding materials, heavy vehicles, lubricants and the operation of a travel agency. Thecompany has a branch in Dubai, UAE that operates the NVOCC service.

Board of directors structure

Sheikh Ali bin Jassim Al-Than Chariman

Sheikh Khalid bin Khalifa Al-ThaniVice Chairman

SulaimanHaidar

SulaimanMember

Ali Hussain Al-Sada

Member

HamadMohammad

Al-ManaMember

Dr. MazenJassim Jaidah

Member

Salman Abdullah

AbdulghaniMember

Adil AliBin Ali

Member

Ali Ahmad Al-Kuwari

Member

Sheikh Jassimbin Hamad

AlThaniMember

SaadMohammad Al-Romaihi

Member

Source: Company reports

Valuation & Recommendation




Economic Profit Analysis 2017f 2018f 2019f 2020f 2021f TV

ROIC (excluding goodwill & intangibles) 5.4% 5.6% 6.4% 7.1% 8.3% 7.3%

WACC 6.7% 7.0% 7.3% 7.4% 7.5% 7.7%

Terminal growth rate 3.0%

QARmn, except per-share figures 2017f 2018f 2019f 2020f 2021f TV

EBIT (1 - t) 322 327 370 401 442

Non-Cash Items (D&A) 454 447 441 430 390

Gross Cash Flow 776 774 810 831 832

Change in Operating Working Capital 128 2 (56) (32) (7)

Capital Expenditures (382) (291) (55) (19) (19)

Gross Investment (254) (289) (110) (51) (25)

Free Cash Flow to the Firm (FCFF) 522 486 700 780 806 6,240

Present Value of FCFF 505 438 586 607 580 4,489

DCF Enterprise Value 7,205

Net Debt (2,778)

Minority Interest (82)

Long Term Investments 6,683

Value of land 4

Employees end of service benefits (91)

DCF Equity Value 10,942

Number of Shares Outstanding 115

DCF Price Target (QAR) 95.54

2016 DPS 3.65

1-year Price Target (QAR) 99.19

DCF valuation PER and PBV

EV/Sales and EV/EBITDA

Dividend payout and dividend yield

Sensitivity analysis of our PT


Sum-of-the-parts (SOTP) valuation summary



Enterprise Value (QAR7,205mn)

Valuation & Recommendation (Cont.’d)



99.19 2.0% 2.5% 3.00% 3.5% 4.5%

6.18% 124.36 126.93 130.40 135.35 156.25

7.18% 109.78 110.35 111.08 112.02 115.17

8.18% 99.82 99.53 99.19 98.76 97.50

9.18% 92.55 91.88 91.09 90.14 87.56

10.18% 86.99 86.16 85.19 84.06 81.13

Terminal Growth Rate (TGR)

Co

st o

f E

qu

ity

(CO

E)




Financial Summary



Balance Sheet (QARmn) Per-Share Data

FY End: December 2013a 2014a 2015a 2016f 2017f 2018f 2013a 2014a 2015a 2016f 2017f 2018f

Current Assets Price 74.5 94.3 95.0 85.7 85.7 85.7

Cash & Cash Equivalent 1,458 3,129 5,586 1,935 1,447 1,086 # Shares (WA,in mn) 115 115 115 115 115 115

Marketable securities 4,119 4,822 4,329 4,417 4,508 4,601 EPS 8.29 9.16 9.56 6.54 5.39 5.49

Trade & other receivables 590 711 788 737 652 654 DPS 4.96 5.46 4.96 3.65 3.00 3.10

Other Current Assets 160 205 212 248 216 221 BVPS 109.90 117.74 119.44 121.02 122.76 125.24

Total Current Assets 6,327 8,867 10,915 7,338 6,824 6,562

Fixed Assets (net) 2,510 3,356 4,385 4,665 4,592 4,526 Valuation Indicators

Other Non-Current Assets 6,813 6,464 6,833 6,777 6,805 6,755 2013a 2014a 2015a 2016f 2017f 2018f

Total Assets 15,650 18,687 22,132 18,780 18,221 17,844

Liabilities & Equity PER (x) 9.0x 10.3x 9.9x 13.1x 15.9x 15.6x

Short-Term Debt 91 0 - - - - PBV (x) 0.7x 0.8x 0.8x 0.7x 0.7x 0.7x

Current Portion of LT Debt 767 1,437 4,885 700 699 695 EV/Sales (x) 4.2x 4.7x 4.6x 4.6x 5.1x 4.9x

Accounts Payable 469 415 553 629 549 560 EV/EBITDA (x) 10.9x 13.1x 11.7x 15.0x 15.9x 15.6x

Other Current Liabilities 0 - - - - - Dividend Payout Ratio 59.8% 59.6% 51.9% 55.8% 55.7% 56.6%

Total Current Liabilities 1,328 1,852 5,438 1,328 1,247 1,255 Dividend Yield 6.7% 5.8% 5.2% 4.3% 3.5% 3.6%

Long-Term Debt 1,408 3,028 2,693 3,226 2,527 1,833

Other Non-Current Liabilities 271 265 250 284 297 313 Profitability & Growth Ratios

Total Liabilities 3,008 5,144 8,381 4,838 4,072 3,401 2013a 2014a 2015a 2016f 2017f 2018f

Minority Interest 56 58 72 82 91 99

Total Equity 12,586 13,485 13,679 13,860 14,059 14,344 Revenue Growth 0.6% 14.3% 13.8% -7.7% -11.6% 0.3%

Total Liabilities & Equity 15,650 18,687 22,132 18,780 18,221 17,844 EBITDA Growth 8.5% 8.5% 23.1% -28.4% -7.9% -0.3%

EPS Growth 13.7% 10.5% 4.3% -31.6% -17.6% 1.9%

Income Statement (QARmn) EBITDA Margin 38.2% 36.3% 39.3% 30.5% 31.7% 31.5%

2013a 2014a 2015a 2016f 2017f 2018f Net Margin 41.2% 39.8% 36.5% 27.1% 25.2% 25.6%

Total Revenue 2,305 2,633 2,998 2,767 2,448 2,456 ROAE 8.1% 8.0% 8.1% 5.4% 4.4% 4.4%

COGS (808) (1,043) (1,139) (1,295) (1,130) (1,154) ROAA 6.4% 6.1% 5.4% 3.7% 3.3% 3.5%

GP 1,496 1,590 1,859 1,472 1,317 1,302

Other operating (exp.)/ Inc. (615) (634) (682) (629) (541) (528) Liquidity & Solvency Multiples

EBITDA 881 956 1,177 843 776 774 2013a 2014a 2015a 2016f 2017f 2018f

Depreciation & Amortization (229) (264) (308) (427) (454) (447)

Other income 82 61 116 109 27 18 Net Debt (Cash) 1,044 1,645 2,844 2,778 2,475 2,141

Investment Income 250 342 342 336 341 347 Net Debt/Equity 8.3% 12.2% 20.8% 20.0% 17.6% 14.9%

Net finance exp., taxes (42) (42) (106) (102) (66) (56) Net debt to EBITDA 1.2x 1.7x 2.4x 3.3x 3.2x 2.8x

NP Before XO & MI 942 1,052 1,221 759 625 637 Debt to Assets 0.14x 0.24x 0.34x 0.21x 0.18x 0.14x

XO & Minority Interest 8 (2) (127) (10) (8) (8) Current ratio 4.8x 4.8x 2.0x 5.5x 5.5x 5.2x

Net Income 950 1,049 1,095 749 617 628

Consensus Estimates

Cash Flow Statement (QARmn) 2016f 2017f 2018f

2013a 2014a 2015a 2016f 2017f 2018f Revenues 3,209 3,247 3,455

Cash from Operating 714 664 690 1,000 905 778 MubasherTrade Research vs. Consensus -13.8% -24.6% -28.9%

Cash from Investing (1,611) (1,132) (997) (371) (146) (61) Net Income 1,290 1,261 1,380

Cash from Financing 635 2,065 2,221 (4,214) (1,157) (1,080) MubasherTrade Research vs. Consensus -42.0% -51.1% -54.5%

Net Change in Cash (262) 1,597 1,914 (3,585) (397) (364) Fwd PER (x), Last Price 13.1x 15.9x 15.6x

Fwd PER (x), Price Target 15.2x 18.4x 18.1x

Capex (417) (955) (1,374) (569) (382) (291) Fwd DY (%), Last price 4.3% 3.5% 3.6%

Source: Company data, MubasherTrade Research estimates a = Actual; f = Forecasted Share price at 22-Jun-16




Business Model

Milaha which means “navigation” in Arabic is a Qatar-based public shareholding company originallyincorporated in 1957 under the name of Qatar NationalNavigation Transport Company (QNNTC), the firstshipping agent in the country. Milaha is a holdingcompany with a number of interests ranging across themaritime and logistics spectrum.

Along with its subsidiaries, Milaha is a diversifiedmaritime transport and logistics group of companiesprimarily engaged in (1) Maritime and logistics servicesoffering services in the form of container feedershipping, port management, bulk shipping, shipyard andsteel fabrication services, shipping agency & ship repairservices; (2) Offshore support vessels services includingvessels chartering, diving and construction andmaintenance services; (3) Gas and petrochem shippingthrough the transport of LPG, LNG and clean/dirtypetroleum products; (4) Trading activities through thesale of international brands for trucks and heavyequipment, such as Hino (Japan), Fassi (Italy),Sennebogen (Germany), Doosan (Korea), and Sany(China); (5) Investments through the construction of realestate projects (commercial and residential) and themanagement of a large portfolio of financial investments(quoted and unquoted) on the Qatar Exchange. Milahaalso provides other non-core businesses, such as travel

and tourism services including travel packages, airlineticketing and reservations, car rentals andaccommodation.

The merger of Qatar’s top three maritime serviceproviders – into Milaha: The year 2010 was a significantyear for Milaha after its merger to become QatarNavigation with the legacy Qatar Shipping Company andHalul Offshore Services. The acquisition changedMilaha's operations fundamentally and gave it significantexposure to other business segments within the shippingindustry, such as LNG, LPG, and petrochems. In July 2015,through Qatar Shipping, Milaha acquired the residual60% holding percentage in its associates, Milaha RasLaffan Gmbh Company ("KG 1") and Milaha Qatar Gmbh& Company ("KG 2"). KG 1 owns and operates oil and gastankers, while KG 2 operates one liquefied natural gas(LNG) vessel. Both companies are based in Hamburg,Germany.

Milaha’s journey from individual services to a group of complete solutions

Source: Company reportsSource: Company reports

Individuals, 48%

Companies, 30%

Governments, 14%

Institutions, 8%

Milaha’s shareholder structure


Milaha’s business segments

MilahaCapital

Milaha Gas &

Petrochem

Milaha Maritime

& Logistics

MilahaTrading

MilahaOffshore






Business Model (Cont.’d)

MM&L focuses primarily on Qatar and the Arabian Gulf region. The business offers a diverse set ofactivities from logistics and marine transport to port management, ship repairs and completeshipping agency services. This business includes seven sub-segments as follows:

Milaha’s Container Shipping unit (35% of MM&L revenues in 2015) operates in the GCC regionwith a fleet of seven fully-owned containerized vessels and two pairs of tugs and barges. Milaha’sContainer Shipping unit primarily consists of two operations: Container Feeder and Non-VesselOperating Common Carrier (NVOCC). According to company data, the feeder service captures over90% of the feeder market between the UAE and Qatar and over 65% of the overall traffic betweenQatar and the UAE. In terms of volumes, the unit handled a total of 568,166 TEUs (Twenty-footEquivalent Units) in 2015, an increase of 21% YoY from 2014. In March 2015, to facilitate andenhance this unit, Milaha announced the launch of the first direct container service betweenQatar and India.

Milaha’s Port Services unit (44% of MM&L revenues in 2015) manages Doha Port, the maincommercial port in Qatar, on behalf of Qatar Ports Management Company (Mwani). In addition, itmanages Container Terminal 7 at Mesaieed Port on behalf of Qatar Petroleum, and provides cargohandling and stevedoring services for the general cargo berth.

MGP fully owns and operates a fleet of five tankers (four Handy / LR product tankers and oneAframax crude carrier), two gas carriers and LNG carriers. In addition, the segment also ownspartial stakes ranging from 15% to 30% in seven LNG carriers and is the largest shareholder inNakilat with a 30% stake. MGP also owns a 50% stake in Gulf LPG, a JV company with Nakilat,which owns and operates four Very Large Gas Carriers (VLGCs) transporting petroleum products.The segment also owns and operates harbor and marine service vessels at Mesaieed Port onbehalf of Qatar Petroleum.

Milaha Capital is considered the investment arm of Milaha group. It manages a portfolio offinancial and real estate investments. This is in addition to a 50% investment in Qatar Quarries& Building Materials Company WLL (the company involved in aggregate import trade).

Listed Equity Portfolio includes QAR3.8bn available for sale (AFS) and QAR499mn held fortrading (HFT) portfolio as of 31 December 2015, all actively managed and traded in-house.

Milaha Trading focuses on commercial agency activities and is comprised of four separatebusinesses: Navigation Trading Agencies, Navigation Marine Service Center, and Bunker Sales.This is in addition to owning one of the country’s oldest travel agencies “Navigation Travel &Tourism” operating since 1958.

Milaha Offshore is the offshore services arm of the group and currently owns and operates a diverse fleet of 40 offshore support vessels in Qatar and Saudi Arabia, servicing the offshore oil and gas sector.

• Diving Operations operates a fleet of three diving vessels and provides offshore subseamaintenance and repair services.

• Development and Commercial operates a diverse fleet of 31 Offshore Support Vessels (OSV),ranging from Anchor Handling Tugs (AHTs) and Plat Form Support Vessels (PSVs) to crewboats.

• Construction and Services operates a fleet of 6 construction service vessels and provideoffshore topside maintenance and repair services.

During 2011, Milaha rebranded itself under its current name and reorganized its operations into five business segments:

PORT SERVICESCONTAINERFEEDER

LOGISTICS SHIP YARD

QNL (NVOCC) SHIPPINGAGENCIES

BULK SHIPPING

45.7%* 24.8%* 6.7%* 5.2%*

Milaha Maritime and Logistics “MM&L” (35% of revenues in 2015)

Milaha Gas and Petrochem “MGP" (14% of revenues in 2015)

Milaha Capital (16% of revenues in 2015)

Milaha Trading (12% of revenues in 2015)

Milaha Offshore (24% of revenues in 2015)

* % of Available for Sale listed equity portfolio

Real Estate Investment Portfolio – Developed

Flagship 52-Story Tower Ain Khaled Commercial Building Other Diversified Commercial & Residential Properties

Real Estate Investment Portfolio – In Progress

Ain Khaled Residential Compound Al Thammama Logistics Warehouses Ras Laffan Technical Workshop






Q1 2016 financial highlights

Milaha financials for Q1 2016 recorded negativeresults across all business units, except forMilaha Gas and Petrochem which witnessed agrowth of 63% YoY driven by additional revenuefrom 2 LNG vessels that were fully acquired in Q32015. Q1 2016 earnings dropped 3% YoY toQAR352mn compared to QAR352mn in the year-ago period, mainly as a result of a hike in financecosts by 132% YoY and increase in depreciationexpense by 9% YoY. On the other hand, thedecline in Q1 2016 operating revenues (-2% YoY)compared to QAR786mn in Q1 2016 came mainlyon the back of lower heavy equipment and lowerBunker sales due to oil price drop from Trading(-22% YoY) supported by a decline by 12% YoYfrom Capital mainly due to lower dividendsincome (a declined of QAR41m).

2015 full-year financial highlights

Operating revenues for 2015 increased by 14%YoY to QAR2.9bn compared to QAR2.6bn in 2014,while earnings of QAR1.094bn represented a 4%upturn when set against QAR1.049mn in 2014.The rise in 2015 operating revenues was mainlyattributed to a set of strong positive results fromMilaha Maritime & Logistics, especially in thecontainer shipping unit (+21% YoY) and the PortServices unit (+15% YoY), largely driven bypopulation growth, healthy constructionactivities and first direct container liner serviceseffect between India and Qatar.

Meanwhile, Milaha Gas & Petrochem showed anexceptional performance leveraging on tankermarket freight rates. Offshore revenues jumpedby 21% YoY, mostly driven by the increases in thediving operations, namely Shaddad vessel andthe full-year effect of new vessels additions fromthe development and commercial segmentduring 2014.

Despite the above, net margin declined by 3% to

37% relative to 2014, mainly due to increase inone-off expenses related to vessel/equipmentimpairments (+65% YoY) to align book valueswith market values. Milaha incurred a total ofQAR58mn higher vessels impairment charges inaddition to QAR4mn in AFS investmentsimpairment. The company also accounted forQAR27mn in relation to disposal of investment inKG1 & KG2 LNG vessel.

Excluding these one-offs, clean earningsincreased by 13% YoY to QAR1.2bn in 2015 withnet margin remaining flat at 41%.

Q1 2015 vs. Q1 2016 profitability

Historical income statement

Source: Company data, MubasherTrade Research


Profitability margins TEUs handled

Source: Company data

Revenue mix by segment


2015

Avg. 3 years,

2013-2015


12m FY13 12m FY14 12m FY15 Q1 2015 Q1 2016

In QAR 000s (Audited) (Audited) (Audited) (Reviewed) (Reviewed)

Milaha Capital 610,848 630,757 491,064 217,603 190,786

Milaha Maritime and Logistics 834,038 925,031 1,165,751 256,863 251,286

Milaha Offshore 595,084 587,258 710,972 161,855 145,030

Milaha Trading 281,202 396,289 420,909 126,808 99,515

Milaha Gas and Petrochem 179,348 275,210 415,324 76,574 124,625

Gross Sales 2,500,520 2,814,545 3,204,020 839,703 811,242

Eliminations (195,776) (181,313) (206,214) (54,048) (40,284)

Net Sales 2,304,744 2,633,232 2,997,806 785,655 770,958

Cost of sales (808,458) (1,042,936) (1,138,741) (266,764) (272,889)

Gross profit 1,496,286 1,590,296 1,859,065 518,891 498,069

GP Margin 65% 60% 62% 66% 65%

G&A (615,064) (634,091) (682,210) (166,829) (159,286)

EBITDA 881,222 956,205 1,176,855 352,062 338,783

EBITDA Margin (RHS) 38% 36% 39% 45% 44%

Depreciation (229,259) (264,444) (307,776) (72,902) (79,600)

EBIT 651,963 691,761 869,079 279,160 259,183

EBIT Margin 28% 26% 29% 36% 34%

Finance Cost (41,576) (42,474) (106,363) (16,156) (37,511)

Other Income 82,595 93,365 131,277 21,020 40,212

Investment Income 250,237 341,724 342,277 79,566 89,495

Gain (loss) on disposal of property, vessels & equipment 13,886 181 1,716 (8) (3)

Impairments (7,900) (36,214) (100,545) - -

Net gain (loss) on foreign exchange (1,148) 2,744 726 1,297 2,791

Loss on deemed disposals - - (28,955) - -

Minority (1,736) (1,894) (14,679) (369) (2,379)

Profit for the period (LHS) 946,321 1,049,193 1,094,533 364,510 351,788

Net Income Margin 41% 40% 37% 46% 46%

Clean Profit of the period 954,221 1,085,407 1,224,033 364,510 351,788

Clean Net Income Margin 41% 41% 41% 46% 46%







Forecast Assumptions

RevenuesMilaha MM&L

• We assumed average revenues of container shipping to growat a CAGR of 6.7% over 2016-2021 for this business unit.

• We assumed the strong expansion in the non-hydrocarbonsectors in Qatar will continue to drive up the growth in GDP,which we relate to the growth in handled TEU’s of MM&L’scontainer shipping unit.

• We assumed revenue per TEU to grow at an average of 2.5%,accounting for inflation.

• We assumed a conservative assumption that the Doha Portmanagement sharing agreement with Mwani that will expireend of 2016 will not be renewed and that Milaha will not beawarded the management contact of the new Hamad Port forwhich it is currently bidding. As such, we forecast MilahaMM&L will mainly depend on container feedering as its mainsource of revenues.

• In case of not winning new Hamad Port managementagreement, we expect port services to lose 90% of its currentrevenues.

Milaha Offshore

• We expect the diving fleet to operate at an average utilizationrate of 56% throughout the projected years apart fromShaddad vessel that we assumed will have a utilization rate of100% based on its 5-year contract with Qatar Petroleumending 2020. In the case of not winning new contracts, weassumed Shaddad utilization rate to drop to 50%.

• We expect a weak performance from commercial andconstruction units, driven by the steep decline in oil prices andthe cutbacks on capital spending by E&P companies.

Milaha Gas and Petrochem

• We assumed the product tankers fleet will operate at anoverall average utilization rate of 83% industry forecasts, withdifferent charter rates depending on tanker type.

• We assumed the 19 Harbour Marine unit vessels to contributesteady revenues on the back of the long-term contract withQatar Petroleum that rewards QAR95mn annually.

• We assumed medium gas/ammonia carrier time charter ratesto rise in 2016 to reach USD40,000, falling 2017 onwards asowners ‘kill the market’ with vessels on a pre-contracted orderbook which are expected to be gradually delivered over2016/17, according to Drewry Research.

• We assumed that the incremental value to revenues from theacquisition of KG1 and KG2 vessels to be allocated underMilaha Gas and Petrochem will be around 39% based on theirlong-term contracts.

Milaha Trading

• We forecasted Milaha Trading revenues to be driven by thegrowth of GDP of Qatar, backed by the huge infrastructuredevelopment plan of the country which exceeds USD200bn,aligning with the country’s National Vision 2030.

Milaha Capital

• We highlight that revenues of Milaha capital are generatedfrom the following assets:

(1) Qatar Gas long-term rental contract with annual rentalincome of QAR110mn, for which we assumed no leaserate growth.

(2) Ain Khaled residential project (in progress) whichcomprises 180 villas. We expect this project to startcontributing to revenues from 2017 at an averagemonthly rental rate of QAR13,000 per villa.

(3) Ein Khaled Retail Project (in progress) which we expectto start contributing to revenues from 2016 with sixshowrooms and to increase gradually to reach fullcapacity of 18 showrooms in 2018. We expectc.QAR30,000/month in showroom rent from each unit.

(4) AlThamama Logistics Center (in progress) which is awarehouse project spread over 60,000 sqm land area.We assumed this project to start contributing torevenues from 2017 at an average monthly rentalincome of QAR30/sqm.

This is in addition to recurring rental income generated fromreal estate properties, investment income from a portfolio ofavailable-for-sale and held-for-trading investments in quotedand unquoted securities on the Qatar Exchange and incomegenerated from Qatar Quarries.

We estimate overall revenue to increase at a CAGR of 2.5%over 2017-2021. We did not factor any revenues from newdirect container service route between Qatar and India. Weestimate revenue mix of Milaha to change in the future withhigher contribution from Milaha Capital and Milaha Trading.

Projected net operating revenues by segment

Revenue mix by segment, 2015 vs. 2021



2015a

Source: Management guidance, MubasherTrade Research estimates

2021f







Profitability• We assumed overall profitability margins to be sustained within

historical trend (average gross margin of 53%, average EBITDAmargin of 31%) and assumed net profit margin to decreasegradually from an average of 39% over 2012-15 to an average 27%over 2017-21.

• We assumed Milaha Capital to contribute the most to overallgroup EBITDA with an average of 49% through the years ofprojections driven by the strong construction activities in Qatar.The weights on the right reflect the segmental contribution toEBITDA, net of allocations relating to Milaha corporate.

• We assumed a conservative estimate that accrued interestincome on loans to subsidiaries (LNG and LPG companies) 2015balance to be based on an annual interest rate of 0.4% with thedebt principals to retire in 2019.

• We assumed COGS to average at 47% and G&A at an average of22% of total sales of the group over 2017-21.

• We assumed allocated expenses related to Milaha corporatebased on each segment’s historical average as a percentage ofgroup revenues. Total allocated expenses depressed group pre-adjusted EBITDA over the forecast period (2016-2021) by 17%.

Dividends and Leverage• We assumed the dividend policy to be sustained (payout ratio of

56%), with the DPS growing at a CAGR of 6.1%, on the back of anaverage EPS growth of 27% over the period 2017-21; to reachQAR6.82 by 2021.

• Shipping is a high-capex industry and a brand new vessel canreach up to USD100mn. Any vessel purchased by Milaha is mostlikely going to be debt financed for a tenor of 7-10 years with anaverage effective interest rate of 2% p.a. Based on historicalrefinancing trends, we assumed Milaha will refinance part of itslong-term debt to avoid cash deficits.

Capex• In terms of expansion capex, we expect the development and

commercial segment of Milaha Offshore to introduce four newvessels during 2016 (two Anchor Handling Tugs and two Jack ups)with estimated purchase cost of QAR600-700mn.

• We further estimate QAR1bn remaining capex for completingboth residential and warehouses projects of Milaha Capital over2017-2018.

• We assumed (a) annual maintenance capex of QAR5mn forMM&L and QAR15mn for Gas and Petrochem and (b) major drydocking maintenance service for KG1 oil tanker in 2016 and KG2LNG vessel in 2019 at an average cost of USD10mn, each.

Projected segmental contribution to EBITDA

Projected capex as a percentage of sales, consolidated

Projected profitability margins, consolidated

DPS & dividend yield, consolidatedProjected net income & returns, consolidated




Projected net debt/EBITDA, consolidated





Milaha Maritime and Logistics

• Buoyed by population growth, the non-hydrocarbon sector is projected to remain thedrivetrain of the Qatari economy, with the number of handled TEUs annually,projected to grow by the growth of Qatar’s GDP.• We assumed 2015 rates/TEU as the base of our forecasts and assumed rates to grow

at an annual average of 2.5% based on IMF estimates to Qatar inflation, April 2016.• We related other revenues (logistics, shipping agencies, bulk shipping and shipyard

services) to the performance of the container shipping and port services. This is basedon the historical average percentage of total container and port services revenues.• We assumed a conservative assumption that Milaha will not win port management

tender of new Hamad Port; accordingly, revenues were cut by 90% from 2017.• We assumed eliminations of inter-segment revenues transactions of 14.7% of gross

revenues to be eliminated on consolidation.

Milaha Offshore


Milaha Trading

Comments

• We project this segment to grow by Qatar’s GDP growth rate. Despite recent signs ofslowdown in projects, the State of Qatar reaffirmed its commitment to continueinvesting in infrastructure projects, which will likely have a positive impact on thisunit. We assumed heavy equipment sales to continue supporting segment growth,backed by massive infrastructure projects in the country.

• We assumed eliminations of inter-segment revenues transactions of 15.1% of grossrevenues to be eliminated on consolidation.

• In an oversupplied Offshore Support Vessels (OSV) market, we forecast all vessels ofthe diving operations unit to operate at a conservative utilization rates apart fromShaddad vessel which is currently fully utilized on a service contract with QatarPetroleum that began September 2014 and expected to end in 2020.

• As a consequence of low oil prices, drilling rig utilization rates are expected tocontinue decreasing on the short-term (global rig utilization decreased to 73% in 2015,according to Clarkson research), we applied an average annual spot rate of USD50,000on all diving vessels based on industry-average forecasts.

• According to market research leaders, the last decade has seen high offshore vesseland building activity, driven by rising oil prices. In the current weak oil priceenvironment that is forecasted to continue for the medium term, we expect to seemore contractions in explorations and production activities. As such, we expectperformance of both development & commercial and construction & maintenanceunits to be affected during 2016-2021 and to start re-gaining momentum from 2022.

• The near-term demand generated by fixed platforms is likely to be mainly frommaintenance and repair services, according to Clarkson research.

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

GDP growth 4.3% 3.9% 3.9% 4.0% 4.0% 4.1%

No. of TEUs 592,597 615,708 640,006 665,548 692,396 720,617

Qatar inflation rate 2.4% 2.7% 2.8% 2.6% 2.4% 2.4%

Rate/TEU 722 739 759 780 801 820 839

Container Shipping revenues 437,872 467,064 499,298 532,797 567,533 604,775

Port Services revenues 546,806 56,962 57,087 56,984 56,883 56,906

Others revenues 259,519 165,663 175,893 186,451 197,400 209,181

Gross revenues 1,244,197 689,689 732,278 776,232 821,816 870,862

Eliminations 14.7% 182,999 101,441 107,705 114,170 120,874 128,088

Net revenues 1,061,198 588,248 624,573 662,063 700,941 742,774

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

Vessels utiliazation rates

Khattaf 50% 50% 50% 60% 60% 60%

Halul 41 50% 50% 50% 60% 60% 60%

Shaddad 100% 100% 100% 100% 100% 50%

Avg. daily rates (USD) $50,000

Total Diving Operations revenues 132,495 132,495 132,495 145,745 145,745 112,621

Development & Commercial revenues 117,453 209,202 172,683 206,689 207,259 207,005

Construction & Maintance revenues 36,964 65,838 54,345 65,047 65,226 65,146

Net revenues 286,912 407,535 359,522 417,480 418,230 384,772

Forecasted crude oil prices 2016f 2017f 2018f 2019f 2020f 2021f

Crude/barrel - average spot (USD) 37 48 51 55 59 63

Source: World bank commodity price forecast report, February 2016

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

GDP growth 4.3% 3.9% 3.9% 4.0% 4.0% 4.1%

Gross revenues 439,008 456,129 474,129 493,051 512,941 533,848

Eliminations 15.1% 66,204 68,786 71,500 74,354 77,354 80,506

Net revenues 372,804 387,343 402,629 418,697 435,588 453,342

Comments

Comments








Milaha Capital


• The recovery in product tanker shipping market started from the end of 2014, whenhigher refinery throughputs and lower oil prices boosted product tanker demand.

• The sharp rise of demand on Aframax vessels has created a squeeze in supply andpromoted the Handy/LR2 tankers to turn dirty to help offset the supply/demand gap.Accordingly, we assumed an 85% average utilization rate.

• According to Danish ship finance and Clarksons research, during 2015, the Middle Easthas been able to increase its exports to Asia as refinery additions in the region havebegun to be fully operational. In Saudi Arabia, the latest of its two new megarefineries, Yanbu, has boosted utilization to roughly 80%. and the expansion unit atRuwais in the UAE has ramped up utilization rates to between 80% and 90%.

• We assumed a 100% utilization rate for all 19 harbor and marine services vessels fromNakilat Damen Shipyards Qatar (NDSQ) which are all under a 20-year contract worthQAR1.9bn. The contract provides harbor marine services for Qatar Petroleum atMesaieed Port. According to management guidance, under contract each vesselgenerates an annual income of QAR5mn.

• According to leading industry information providers, average short-term daily ratesfor medium size gas carriers are expected to fall globally to around USD40,000 in2016, before easing to an average of USD15,000 in following years. This estimate wasbased on projected decrease in fleet utilization, largely driven by expected excesssupply of vessels.

• We project the recent acquisition of KG1 and KG2 vessels to fuel revenues of MilahaGas and Petrochem and add up QAR179mn annually backed up by long-term chartercontracts.

• We assumed eliminations of inter-segment revenues transactions of 0.1% of grossrevenues to be eliminated on consolidation.

Comments

• Long-term rental income from Qatar Gas is expected to secure an average of 15% oftotal revenues throughout years of projections.

• We assumed a conservative assumption that the investment portfolio will only growby 3% on an annual basis.

• Qatar’s non-oil and gas sector is estimated to have posted double-digit growth in2015, again spearheaded by construction activities, which is expected to expand by13.5% in 2015, according to MDPS update report.

• We retain a promising view on the future of the real estate market on account of thebooming domestic economy from increased demand in investment spending andpopulation growth. The residential segment is the largest contributor of the realestate sector in Qatar.

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

No. of Product tankers (Handy) 2 2 2 2 2 2

Average spot rate (USD) 9,000 9,500 9,750 10,000 10,250 10,500

Average utilzation rate 80%

No. of Product tankers (LR2) 2 2 2 2 2 2



No. of Aframax crude carriers 1 1 1 1 1 1



Product Tanker revenues 126,093 120,863 119,050 121,923 136,455 126,555

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

No. of Pilot boats under contract 12 12 12 12 12 12

No. of Mooring boats under contract 7 7 7 7 7 7

Util ization rate 100%

Annual revenue/boat 5,000

Marine Services revenues 95,000 95,000 95,000 95,000 95,000 95,000

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

No. of carriers 2 2 2 2 2 2

Daily rate (USD) 40,000 17,500 15,375 15,375 15,375 15,375

Utilization rate 56% 87% 50% 50% 50% 50%

Gas Carrier revenues 59,358 40,113 20,371 20,371 20,371 20,371

Wholly Owned LNG Vessels reveneus 179,148 179,148 179,148 179,148 179,148 179,148

Gross revenues 459,598 435,123 413,569 416,441 430,973 421,074

Eliminations 0.1% 598 566 538 542 560 548

Net revenues 459,000 434,557 413,031 415,900 430,413 420,526

In QAR000s 2016f 2017f 2018f 2019f 2020f 2021f

Investment Income 230,259 236,377 247,210 267,668 279,147 291,916

Qatar Gas rental contract 110,000 110,000 110,000 110,000 110,000 110,000

Other rental income generated properties 61,437 61,598 61,706 61,568 61,433 61,433

Qatar Quarries 204,000 204,000 204,000 204,000 204,000 204,000

Residential project - 14,040 28,080 28,080 28,080 28,080

Showrooms project 2,160 4,320 6,480 6,674 6,875 7,081

Logistics project - 21,600 21,600 21,600 21,600 21,600

Gross revenues 607,856 651,935 679,076 699,591 711,135 724,111

Eliminations 3.4% 20,528 22,016 22,933 23,625 24,015 24,453

Net revenues 587,329 629,919 656,143 675,965 687,119 699,657

Comments







Milaha OffshoreMilaha Maritime & Logistics Milaha Trading

Operating

Revenues

Milaha Capital

EBITDA



Gross

Profit

Amount of related allocations

Expenses relating to Milaha corporate in 2015 came in at QAR158mn. These expenses (81% in salaries and benefits) constitute an average of c.13% of total group COGS. The group allocates theseexpenses to each segment. We forecast these expenses to average at QAR160mn throughout projected years and were allocated pro-rata based on historical trends as a percentage of group revenues.We believe these allocations are the main reason causing operating margins to be suppressed across all segments.








[email protected]

Qatar Gas Transport (Nakilat)Qatar

Equities | Energy & Utilities | Initiation of Coverage



A steady operating model with low risk profile and consistent

dividend stream — Initiate with Buy/Low Risk

Buy

Low Risk

Price Target: QAR27.62

ETR: +18.5%

• Qatar’s ‘floating pipeline’, carrying its LNG to global markets.

• Secured revenues visibility backed by long-term charter contracts.

• A fleet of 61 wholly and jointly owned vessels, representing one of the world’s newestand largest LNG fleets.

• High governmental support ensuring leading market position.

• Initiate with Buy/Low Risk; PT QAR27.62/Share (ETR: +18.5%).

Qatar’s primary LNG carrier: Qatar Gas TransportCompany (Nakilat) plays a vital role in Qatar’s LNGsupply chain with its technologically-advancedfleet and exclusive agreements with state-controlled LNG producers, Qatargas and RasGas(both have exclusive rights to process natural gasfrom North field), Nakilat is positioned as the mainshipping company of all Qatar’s gas output toglobal customers.

Stable revenues and recurring cash flows: Nakilatenjoys steady revenues and cash flows through its25-year time charter agreements fixed for bothprice and quantity. This ensures forecastedreturns and a comfortable covered debt servicecapacity.

A state-of-the-art fleet: Nakilat owns andoperates LNG shipping fleet that is considered thelargest in the world, growing to 61 vessels in 2015.Roughly, 75% of these vessels are of the Q-Maxand Q-Flex type, which have the largest capacity inthe world. Nakilat also jointly owns four LPG shipswith Milaha.

High support from the Qatari government:Backed up by the government, Nakilat has a closerelationship with the State of Qatar withgovernment entities collectively owning 51% ofthe company.

Initiate with Buy/Low Risk; Price Target (PT) ofQAR27.62 with Expected Total Return (ETR) of+18.5%: We initiate coverage on Nakilat(QGTS.QE) with a “Buy/Low Risk” rating and a one-year Price Target (PT) of QAR27.62/share based ona 5-year DCF valuation model. At our PT, QGTSwould be valued at 14.0x 2016e PER. Meanwhile,growing dividends is one of QGTS key positiveswith a solid dividend payout ratio, averaging of74% over 2011-2015 with expected attractivedividend yield of 6.4%. We expect this dividenddistribution trend to continue.

QARmn 2013a 2014a 2015a 2016f 2017f 2018f

Revenue 3,083 3,115 3,140 3,167 3,195 3,222

EBITDA 2,330 2,327 2,329 2,367 2,388 2,408

Net Income 729 894 982 1,094 1,185 1,255

Revenue Growth (%) -1.1% 1.0% 0.8% 0.9% 0.9% 0.9%

EBITDA Growth (%) -3.9% -0.1% 0.1% 1.6% 0.9% 0.9%

Net Income Growth (%) -4.8% 22.6% 9.9% 11.3% 8.3% 6.0%

EBITDA Margin (%) 75.6% 74.7% 74.2% 74.7% 74.7% 74.7%

Net Margin (%) 23.6% 28.7% 31.3% 34.5% 37.1% 39.0%

Net Debt (Cash) 22,608 20,495 20,776 20,046 19,021 18,269

EPS (QAR) 1.316 1.613 1.774 1.974 2.139 2.267

BVPS (QAR) 7.8 6.8 8.0 8.7 9.4 10.0

DPS (QAR) 1.1 1.2 1.3 1.5 1.6 1.7

PER (x) 13.9x 13.6x 13.2x 11.8x 10.9x 10.3x

PBV (x) 2.3x 3.2x 2.9x 2.7x 2.5x 2.3x

Dividend Yield (%) 6.0% 5.5% 5.4% 6.4% 7.0% 7.2%

Stock Performance & Details

QGTS (QAR) vs. DSM Rebased

Stock Details

Last price (QAR) 23.22

52-W High (QAR) 25.30

52-W Low (QAR) 18.70

6M-ADVT (QARmn) 7.40

% Chg: MoM 0.5

% Chg: YoY 3.66

% Chg: YTD -0.6

Mubasher Ticker QGTS.QE

Bloomberg Ticker QGTS QD

Capital Details

No. of Shares (mn) 554.0

Mkt Cap (QARmn) 12,864.5

Mkt. Cap (USDmn) 3,533.5

Free Float (%) 49.0%

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20.00

25.00

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Jun-

15

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15

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-15

Sep

-15

Oct

-15

Nov

-15

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-15

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16

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-16

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-16

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-16

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-16

Volume (RHS) QGTS DSM Rebased




Qatar Gas Transport “Nakilat” | Qatar | Initiation of Coverage


Valuation models: We used the DCF model to value Nakilat. In reaching our FV in each model andhence PT of QGTS, we added:

Our estimated fair value of Subsidiaries & Other Long-Term Investments as of 31 December2016;

Book value of long term loans to subsidiaries as of 31 December 2015.

In addition to, adding our estimated excess cash, deducting the value of debt and accumulatedminority interest as of December 2016 to reach Nakilat Equity Value.

DCF – One-year FV of QAR27.62/share: We have built a two-stage forecasting model — a high-growthperiod through 2021, followed by a stable-growth terminal period. We have discounted free cash flowto the firm (FCFF) at a weighted average cost of capital (WACC) of 6.96%, resulting from a cost ofequity (COE) of 9.51% and after-tax cost of debt of 5.42%. We derived COE as follows:

• 10-year US Treasury yield of 1.69%.

• Qatar equity risk premium (ERP) of 7.29% derived from US Equity risk premium of 6.12% and acountry risk premium of 1.17% based on Aa2 rating.

• Adjusted 5-year monthly historical beta of 0.829.

• Terminal growth rate (TGR): 3.0%.

We reached a one-year fair value (FV) of QAR27.62/share.

One-year PT QAR27.62/share (+18.5%), initiate with Buy/Low Risk: We reached a one-year PT ofQAR27.62/share (including 2016e DPS), implying an upside potential of 18.5%. At our PT, QGTS wouldbe valued at 2016e PER of 14.0x and 2016e EV/EBITDA of 14.9x. We forecast the 2016e dividend yieldat 6.4%.

Investment Rationale

• Long-term agreements that ensures stablerevenue stream and margins.

• Largest LNG ship owner globally with 15%global share of LNG shipping tonnagecapacity.

• Main shipper for Qatari LNG to globalmarkets.

• Promising outlook for LNG demand, as it isexpected to grow at c.1.9% annually till2035, according to BP Energy, reachingaround 490bnbncf/d.

• Qatar is the world’s largest LNG exporter,with a 30% market share of global LNGsupply and an estimated 13.3% of theworld’s natural gas reserves.

• Low cost of debt.

• High barriers to entry, as the industry iscapital intensive.

Key Risks

• A highly leveraged model with debt to Equityratio of 5x as compared to global industrynorm of 1x as of 2015.

• Minimal top-line growth given the long-termcontracts nature limits the benefit of anyanticipated increase in spot rates arisingfrom any demand-supply.

• Nakilat’s revenues rely on shipping LNGvessels through the Straits of Hormuz, theSuez Canal and other internationalwaterways, blockage of theses waters arisingfrom any political tension would adverselyaffect Nakilat.

• Australia becoming the new wave in LNGexports. Industry analysts forecast it to bethe worlds largest LNG supplier by 2019

Company Profile

Qatar Gas Transport Company (Nakilat) was established in 2004 by Qatari Government to own,operate and manage LNG vessels and provide shipping and marine-related services. Nakilatowns the world’s largest LNG shipping fleet, consisting of 61 LNG vessels (with a combinedcapacity of 8.5mn+ cu mt; representing 15% of the global capacity) along with 4 LPG-VLGCs. Italso owns and operates a shipyard and a ship repair facility. In addition to, a port agency,warehousing, vessel support services and towage are provided at the Port of Ras Laffan.

Board of directors structure

HE Dr. Mohammed Bin Saleh Al SadaChariman

Mr. Khalid Bin Khalifa Al-ThanVice Chariman

Dr. Abdullah Bin Ali Bin

Seoud Al-ThaniMember

Mr. Hitmi Ali Al-HitmiMember

Mr. Ali Ahmad Al-KuwariMember

Ms. Aisha Fahad S A Al-

NuaimiMember

Mr. Ismail Omar Al-Dafa

Member


Valuation & Recommendation





Sensitivity analysis of our PT



DCF valuation PER and PBV

EV/Sales and EV/EBITDA

Dividend payout and dividend yield

Valuation & Recommendation (Cont.’d)



27.62 2.0% 2.5% 3.00% 3.5% 4.5%

7.51% 35.19 37.20 39.83 43.40 56.59

8.51% 30.11 31.40 33.03 35.17 42.38

9.51% 25.86 26.64 27.62 28.86 32.75

10.51% 22.26 22.68 23.20 23.85 25.78

11.51% 19.16 19.33 19.53 19.78 20.50

Terminal Growth Rate (TGR)

Co

st o

f Eq

uit

y

(CO

E)

Economic Profit Analysis 2017f 2018f 2019f 2020f 2021f TV

ROIC (excluding goodwill & intangibles) 7.0% 7.3% 7.6% 7.8% 8.1% 8.4%

WACC 7.0% 7.0% 7.0% 7.1% 7.1% 7.1%

Terminal growth rate 3.0%

QARmn, except per-share figures 2017f 2018f 2019f 2020f 2020f TV

EBIT (1 - t) 1,727 1,760 1,793 1,825 1,857

Non-Cash Items (D&A) 660 648 637 626 615

Gross Cash Flow 2,388 2,408 2,429 2,451 2,472

Change in Operating Working Capital (10) (10) (10) (10) (10)

Capital Expenditures (240) (242) (244) (246) (249)

Gross Investment (250) (252) (254) (256) (259)

Free Cash Flow to the Firm (FCFF) 2,138 2,156 2,175 2,194 2,213 29,433

Present Value of FCFF 2,063 1,945 1,833 1,725 1,623 21,585

DCF Enterprise Value 30,775

Net Debt (20,046)

Minority Interest (6)

Long Term Investments 3,748

DCF Equity Value 14,471

Number of Shares Outstanding 554

DCF Price Target (QAR) 26.13

2016 DPS 1.49

1-year Price Target (QAR) 27.62




Financial Summary



Balance Sheet (QARmn) Per-Share Data

FY End: December 2013a 2014a 2015a 2016f 2017f 2018f 2013a 2014a 2015a 2016f 2017f 2018f

Current Assets Price 18.3 22.0 23.4 23.3 23.3 23.3

Cash & Cash Equivalent 1,931 2,902 2,736 2,699 3,010 3,074 # Shares (WA,in mn) 554 554 554 554 554 554

Marketable securities - - - - - - EPS 1.32 1.61 1.77 1.97 2.14 2.27

Trade & other receivables 17 25 23 22 22 22 DPS 1.10 1.20 1.25 1.49 1.62 1.68

Other Current Assets 268 295 285 288 291 293 BVPS 7.84 6.85 8.02 8.75 9.40 10.04

Total Current Assets 2,216 3,222 3,043 3,009 3,323 3,389

Fixed Assets (net) 24,855 24,395 23,829 23,394 22,974 22,568 Valuation Indicators

Other Non-Current Assets 3,622 3,452 3,869 3,801 3,733 3,662 2013a 2014a 2015a 2016f 2017f 2018f

Total Assets 30,693 31,069 30,740 30,205 30,030 29,620

Liabilities & Equity PER (x) 13.9x 13.6x 13.2x 11.8x 10.9x 10.3x

Short-Term Debt - - - - - - PBV (x) 2.3x 3.2x 2.9x 2.7x 2.5x 2.3x

Current Portion of LT Debt 844 753 778 725 701 677 EV/Sales (x) 10.6x 10.5x 10.7x 10.4x 10.0x 9.7x

Accounts Payable 343 497 514 505 509 514 EV/EBITDA (x) 14.1x 14.0x 14.5x 13.9x 13.4x 12.9x

Other Current Liabilities 5 2 3 3 3 3 Dividend Payout Ratio 83.6% 74.4% 70.5% 75.2% 75.9% 74.0%

Total Current Liabilities 1,191 1,252 1,295 1,233 1,213 1,194 Dividend Yield 6.0% 5.5% 5.4% 6.4% 7.0% 7.2%

Long-Term Debt 22,274 22,188 21,415 20,690 19,989 19,312

Other Non-Current Liabilities 2,881 3,829 3,583 3,432 3,615 3,543 Profitability & Growth Ratios

Total Liabilities 26,346 27,269 26,293 25,355 24,816 24,049 2013a 2014a 2015a 2016f 2017f 2018f

Minority Interest 7 8 4 6 8 10

Total Equity 4,340 3,792 4,443 4,844 5,206 5,562 Revenue Growth -1.1% 1.0% 0.8% 0.9% 0.9% 0.9%

Total Liabilities & Equity 30,693 31,069 30,740 30,205 30,030 29,620 EBITDA Growth -3.9% -0.1% 0.1% 1.6% 0.9% 0.9%

EPS Growth -4.8% 22.6% 9.9% 11.3% 8.3% 6.0%

Income Statement (QARmn) EBITDA Margin 75.6% 74.7% 74.2% 74.7% 74.7% 74.7%

2013a 2014a 2015a 2016f 2017f 2018f Net Margin 23.6% 28.7% 31.3% 34.5% 37.1% 39.0%

Total Revenue 3,083 3,115 3,140 3,167 3,195 3,222 ROAE 23.9% 22.0% 23.9% 23.5% 23.6% 23.3%

COGS (650) (676) (698) (687) (693) (699) ROAA 2.4% 2.9% 3.2% 3.6% 3.9% 4.2%

GP 2,433 2,439 2,441 2,480 2,502 2,524

Other operating (exp.)/ Inc. (103) (111) (113) (113) (114) (115) Liquidity & Solvency Multiples

EBITDA 2,330 2,327 2,329 2,367 2,388 2,408 2013a 2014a 2015a 2016f 2017f 2018f

Depreciation & Amortization (606) (661) (688) (672) (660) (648)

Interest Income 37 39 44 39 37 36 Net Debt (Cash) 22,608 20,495 20,776 20,046 19,021 18,269

Investment Income 301 435 498 564 572 568 Net Debt/Equity 521.0% 540.5% 467.6% 413.8% 365.4% 328.5%

Net finance exp., taxes (1,306) (1,246) (1,199) (1,202) (1,150) (1,107) Net debt to EBITDA 9.7x 8.8x 8.9x 8.5x 8.0x 7.6x

NP Before XO & MI 756 895 984 1,095 1,186 1,257 Debt to Assets 0.75x 0.74x 0.72x 0.71x 0.69x 0.67x

XO & Minority Interest (27) (1) (1) (2) (2) (2) Current ratio 1.9x 2.6x 2.3x 2.4x 2.7x 2.8x

Net Income 729 894 982 1,094 1,185 1,255

Consensus Estimates

Cash Flow Statement (QARmn) 2016f 2017f 2018f

2013a 2014a 2015a 2016f 2017f 2018f Revenues 3,715 3,760 3,791

Cash from Operating 2,421 3,412 1,497 2,343 2,378 2,398 MubasherTrade Research vs. Consensus -14.8% -15.0% -15.0%

Cash from Investing (2,319) 1,348 (287) 243 583 324 Net Income 1,128 1,208 1,311

Cash from Financing (239) (2,825) (2,239) (2,634) (2,661) (2,671) MubasherTrade Research vs. Consensus -3.1% -1.9% -4.2%

Net Change in Cash (138) 1,935 (1,028) (48) 300 51 Fwd PER (x), Last Price 11.8x 10.9x 10.3x

Fwd PER (x), Price Target 14.0x 12.9x 12.2x

Capex (269) (261) (116) (238) (240) (242) Fwd DY (%), Last price 6.4% 7.0% 7.2%

Source: Company data, MubasherTrade Research estimates a = Actual; f = Forecasted Share price at 22-Jun-16




Business Model

Nakilat currently operates 67 LNG and 4 VLGC vessels with a total

investment of approximately USD11bn


Nakilat fleet of

vessels

25

wholly-owned

LNG vessels

4

jointly-owned

LPG vessels


Nakilat operates through several subsidiaries and joint ventures

36

jointly-owned

LNG vessels

ShipyardMarine

Services

LNG

shipping

NSQL Fleet

Warehousing

services

Marine

support

services

Port agency

servicesShip repair and

construction

Nakilat is a marine company established in 2004 by theQatari government to own, operate and manage LNGvessels and provide shipping and marine-relatedservices. Nakilat is considered the world’s leading ownerand operator of vessels for the transportation ofliquefied natural gas (LNG), and associated products.The company also provides ship repair and constructionservices. Its LNG shipping fleet is the largest in theworld, growing to 61 LNG vessels in 2015.

Nakilat’s business operates through the followingservices:

(1) Fleet: This segment has a fleet of 61 wholly- andjointly-owned vessels, which represents one of theworld’s youngest and largest LNG fleets.

(2) Shipyard: Nakilat operates the shipyard via two jointventures:

Leading ship repairer NAKILAT-KEPPEL OFFSHORE &MARINE (N-KOM) to focus on the repair, conversionand maintenance of marine vessels and conversionas well as fabrication of offshore and onshorestructures, such as jack-up drilling rigs, lift-boats,land rigs and their components.

Premier shipbuilder NAKILAT DAMEN SHIPYARDSQATAR (NDSQ) to focus on the construction of steel,aluminum and fiber-reinforced plastic (FRP) boats,of up to 170m in length. Its production capabilityincludes a wide range of commercial vessels (such

as tugs, offshore supply boats and cargo vessels),naval vessels and super yachts. NDSQ can alsoundertake the refit of super yachts and navalvessels.

(3) Marine Services: Nakilat offers a comprehensiverange of marine services to vessels operating in Qatariwaters and for those calling at the Ports of Ras Laffanand Mesaieed through (A) Port agency services viaNakilat Agency Company (NAC) offering port andshipping agency services, (B) Warehousing services viaNakilat’s Vessel Support Unit (VSU). VSU offers theability to manage, store, preserve and maintain any shipmaterials and provide a broad range of materialsupplies, and (C) Marine support services via Nakilat-SvitzerWijsmuller (NSW) operating a fleet of 30 vessels,including 25 NSW-owned vessels. NSW offers a range ofservices including towing, escorting, berthing, pilotsupport, line handling services afloat and ashore,emergency response, and marine maintenance support.

Through its subsidiary Nakilat Shipping Qatar Limited(NSQL), Nakilat manages and operates four very largeLPG carriers through Gulf LPG, a joint venture owned50% by Nakilat and 50% by Milaha. Gulf LPG’s four verylarge LPG carriers are fully operated and managed byNakilat Shipping Qatar Limited (NSQL), a wholly-ownedsubsidiary of Nakilat.


Nakilat’s shareholder structure

Source: Company reports, MubasherTrade Research analysis

Qatar LNG flow process

North Field gas reserve

Nakilat transport to LNG

from Rad Laffan port

Processing &

Liquefied plant

LNG Sales to

global markets

Qatar

liquefies

77mn tons

per annum of

LNG







Nakilat’s history and backgroundNakilat’s LNG fleet composition

Nakilat LNG fleet is one of the world’s newest and largest LNG fleets, with all vessels incorporating state-of-the-art technology to ensure the safe, environmentally-sound and cost-effective transportation of LNG. Around 78%of these vessels are Q-Max and Q-Flex types which have the world’s largest capacities and most advanced LNGvessels technology. Nakilat fleet has a combined aggregate carrying capacity of nearly 9mn cubic meters of LNGcargo space.

Nakilat’s LNG vessels are chartered through long-term (25-year) charter agreements with Qatargas and RasGasand mid-term charters to British Gas (BG) through joint venture with Maran Gas. Nakilat’s four LPG carriers arechartered for between two and four years to Shell, Clearlake (Guvnor) and ExxonMobil.

Experienced operating partner: Nakilat partners with Shell International Trading & Shipping Company Ltd.(STASCO), a leading international vessel operator for operating and managing of Nakilat’s 26 wholly-owned LNGships.

Q-Max has c.80% more cargo capacity andconsumes 40% less energy than conventional LNGcarriers. Q-Max ship can transfer up to 266,000cubic meters of LNG which according to estimatescan light up 70,000 US homes for one year.

Q-Flex has c.40% more cargo and consumes 40%less energy than conventional LNG carriers. Priorto the introduction of Q-Max (please see below),Q-Flex ships were the largest LNG carriers with amaximum capacity of 216,000 cubic meters.

Nakilat connects Qatar’s natural gas to most major natural gas consuming markets which include the US, Mexico, the UK, Belgium, France, Spain, Italy, India, South Korea, Japan and Taiwan.


2004 Establishment of Nakilat.

2005 Listing of Nakilat on Qatar Exchange; NAC formed; delivery of 2 LNG vessels.

2006 NSQL awarded a 25-year time charter by Qatargas for 17 LNG vessels; NSW awarded 22- year service contract by Qatar Petroleum; strategic alliance with STASCO; delivery of 2 LNG vessels.

2007 NSQL awarded 25-year time charter by Qatargas for 8 LNG carriers; delivery of first Q-Flex; delivery of 8 LNG vessels.

2008 Delivery of first Q-Max; N-KOM incorporated; delivery of 21 LNG vessels.

2009 Delivery of 4 LPG vessels; delivery of 18 LNG vessels.

2010 NDSQ incorporated; N-KOM and NDSQ begin operations; delivery of 3 LNG vessels.

2011 N-KOM completes first LNG dry-docking project; Gulf Drilling International and N-KOM sign major contract.

2012 Nakilat assumes management of its four LPG carriers; NDSQcompletes construction of its first vessel; First Qatari marine cadets sign with Nakilat.

2013 Nakilat increases its ownership in Maran Nakilat Co.; Nakilat signs MoU with Algerian state energy company Sonatrach; NDSQ and NSW signs contracts with QP

2014 N-KOM signs contracts worth USD130mn; NDSQ signs two MoUsworth a total of QAR3.1bn with Qatar Armed Forces; Nakilat add 3 new vessels to its JV Maran Nakilat Co.







Historical income statement

Source: Company data, MubasherTrade Research analysis

Revenue mix by segment Q1 2015 vs. Q1 2016 profitability Profitability margins

Source: Company data, MubasherTrade Research analysis Source: Company data, MubasherTrade Research analysis Source: Company data, MubasherTrade Research analysis

Historical Performance Review

Nakilat mainly recognizes its revenues fromtransportation of LNG through its wholly-owned vessels.

Q1 2016 financial highlights

Nakilat’s earnings rose 7.9% YoY toQAR240mn in Q1 2016 compared toQAR222mn a year ago, beating marketconsensus of QAR234mn by 3%. YoY earningsgrowth in Q1 2016 came mainly on the backof better performance from JV companies,higher dividend and interest income fromIslamic banks, and lower finance cost.Meanwhile, Q1 2016 revenues grew by 2% toQAR782mn from QAR765mn in Q1 2015.

2015 full-year financial highlights

2015 net income grew by 10% YoY toQAR982mn compared to QAR894mn in 2014.This was clearly demonstrated by theaddition of three new LNG vessels toNakilat’s fleet during 2015. This is in additionto the growing operating activities at theshipyard facilities, which the company

believes will continue to underpin the futurefinancial results of the company.

Profits from JVs showed a better aperformance and increased 14% YoY toQAR498mn. This was driven by significantgains in LPG shipping rates and expansion ofthe jointly-held LNG fleet (through the MaranNakilat JV).

Stable EBITDA margins and bottom linegrowth have allowed EPS and dividends ofthe company to consistently increase. 2015QGTS EPS grew to QAR1.77 withrecommendations to pay a dividend ofQAR1.25 per share (a 71% payout ratio),implying a yield of 5.4% at time ofannouncement.




12m FY13 12m FY14 12m FY15 Q1 2015 Q1 2016

In QAR 000s (Audited) (Audited) (Audited) (Reviewed) (Reviewed)

Vessels 3,015,138 3,040,313 3,045,939 745,379 759,936

Marine and Agency services 47,108 58,345 60,624 14,045 13,962

Sub Catering & Other income 21,234 16,268 33,013 6,535 8,119

Revenues 3,083,480 3,114,926 3,139,576 765,959 782,017

Cost of sales (650,301) (676,287) (698,196) (153,720) (163,410)

Gross profit 2,433,179 2,438,639 2,441,380 612,239 618,607

GP Margin 79% 78% 78% 80% 79%

G&A (103,407) (111,428) (112,570) (30,899) (31,962)

EBITDA 2,329,772 2,327,211 2,328,810 581,340 586,645

EBITDA Margin 76% 75% 74% 76% 75%

Depreciation (606,129) (661,029) (688,330) (167,981) (173,081)

EBIT 1,723,643 1,666,182 1,640,480 413,359 413,564

EBIT Margin 56% 53% 52% 54% 53%

Finance Cost (1,305,597) (1,245,552) (1,198,602) (297,899) (296,795)

Share from JV Profits 300,753 435,203 497,954 91,298 106,152

Interest income on loans JV 19,687 13,432 10,334 2,755 2,552

Interest&Dividend income from Islamic banks 17,259 25,734 33,559 13,206 14,811

Gains/ Losses on derivative from JV (25,713) - - - -

Minority (1,006) (1,412) (1,423) (281) (313)

Profit for the period 729,026 893,587 982,302 222,438 239,971

Net Income Margin 24% 29% 31% 29% 31%




Revenue contribution by segmentRevenue mix, 2015-2021

Interest coverage ratio

* Our assumptions are made based on the best of our knowledge, industry and sector research, absent management guidance.

Debt to invested capital


Stable cash flows with no additional debt allows

QGTS to comfortably cover its debt obligations

Profitability margins DPS & dividends yield

Forecast Assumptions*

Revenues

• Revenues from wholly-owned vessels, marine and agency services andvessels sub-chartering and other income are assumed to grow at aconservative marginal rate of 1% per annum.

• Through the long-term agreements signed, we assumed charter rates arefixed and inflation has been factored into these long-term deals. Weassumed a 100% utilization rate and operating number of days per vesselto be at 350 days, with the remaining days of the year accounted forscheduled maintenance.

• Overall, Nakilat’s revenues are projected to grow 4.4% over 2016-2021 at aCAGR of 0.9%.

Profitability

• We expect operating margins to stabilize and remain in the range of 78%and 74% for the gross profit and EBITDA margins, respectively.

• Profit from joint venture ships is assumed to grow at similar rates to thatregistered during 2015.

• We forecast operating cost at 22% of total revenues.

• We assumed G&A at a conservative 3.6% of total revenues.

Dividends and Leverage

• We assumed the dividend policy to continue at the same trend over theforecast period and EPS to grow at a CAGR of 8.5% over 2015-2018.

• We assumed no additional financing to be obtained in the medium term,and current high leverage profile of QGTS (QAR20.6bn as of 2015 at aneffective interest rate of 5.4%) will decrease, which will easily allow QGTSto meet its debt repayments and lead to EPS acceleration.

• We believe Nakilat retains the cash ability to expand its fleet, targetingacquisitions without obtaining new debts.

Capex

• Due to the lack of management guidance, we expect no furtherexpansionary capex in the medium term.

• We assumed 2015 capital work-in-progress balance (QAR54mn) will betransferred to fixed assets during 2016.

• We assumed average maintenance capex of 7.5% of total sales.




2015a 2021f



Low

(1)

Moderate

(2)

High

(3)

Buy

(B)Higher than RRR Higher than RRR Higher than RRR

Hold

(H)

Between RRR

and 20% of RRR

Between RRR

and 40% of RRR

Between RRR

and 60% of RRR

Sell

(S)

Lower than 20%

of RRR

Lower than 40%

of RRR

Lower than 60%

of RRR

Not Rated

(NR)

Not Covered

(NC)

We do not currently cover this stock or we are

restricted from coverage for regulatory reasons.

Inv

es

tme

nt

Ra

tin

g

Risk Rating

We have decided not to publish a rating on the

stock due to certain circumstances related to the

company (i.e. special situations).

If

Total Return

is …

Disclosure Appendix

Important DisclosuresMETHODOLOGY: We strive to search for the best businesses that trade at the lowest valuation levels as measured by an issuer’s intrinsic value on a per-share basis. In doing so, we follow both top-down and bottom-up approaches. Under the top-down approach, we attempt to study the most important quantitative and qualitative factors that we believe can affect a security's value, includingmacroeconomic, sector-specific, and company-specific factors. Under the bottom-up approach, we focus on the analysis of individual stocks by running our proprietary scoring model, includingvaluation, financial performance, sentiment, trading, risk, and value creation.

COUNTRY MACRO RATINGS: We analyze the four main sectors of a country’s macroeconomics, then we assign , , and star for low risk, moderate risk, and high risk, respectively. We usedifferent weights for each economic sector: (a) Real Sector (30% weight), (b) Monetary Sector (10% weight), (c) Fiscal Sector (25% weight), (d) External Sector (15% weight), and (e) Credit Rating andOutlook (20%).

STOCK MARKET RATINGS: We compare our year-end price targets for the subject market index on a total-return basis versus our calculated required rate of return (RRR). Taking into account ourCountry Macro Rating, we set the “Neutral” borderline (below which is “Underweight”) as 20% of RRR for Country Macro Rating, 40% of RRR for Country Macro Rating, and 60% of RRR for Country Macro Rating. That said, our index price targets are based on the average of two models. Model (1): Estimated index levels based on consensus price targets of all index constituents. Stockswith no price targets are valued at market price. Model (2): Estimated index levels based on our expected re-pricing (whether re-rating, de-rating, or unchanged rating) of the forward price-earningsratio (PER) of each index in addition to consensus earnings growth for the forward year.

SECTOR RATINGS: On the sectors level, we focus on six major sectors, namely (1) Consumer and Health Care, (2) Financials, (3) Industrials, Energy, & Utilities, (4) Materials, (5) Real Estate, and (6)Telecom Services & IT. To assess each sector, we use the SWOT analysis to list the strengths, weaknesses, opportunities, and threats in each country. We then translate our qualitative SWOT analysisinto a quantitative model to evaluate all six sectors across countries. Each of the measures we used, although mostly subjective, is assigned a score as either +1 (high impact), 0 (medium impact), or -1(low impact). At a later stage, when assigning the final rating – Overweight, Neutral, or Underweight – for each sector in each country, we realize that sometimes it is unfair to assign equal weights forthe sub-sectors in each major sector assessed. Hence, some of the sub-sectors are given different weights for their significant profile in each country. Additionally, the final rating for each sector in eachspecific country is assigned based on a relative calculation comparing this sector to all other sectors in this country.

SECURITY INVESTMENT RATINGS: We combine intrinsic value, relative valuation, and market sentiment into a singlerating. Our three-pronged methodology involves (1) discounted cash flows “DCF” valuation model(s), (2) relativevaluation metrics, and (3) overall sentiment. Whenever possible we attempt to apply all three aspects on the issuers orsecurities under review. In certain cases where we do not have our own financial and valuation models, we attempt toscan the market for other analysts’ value estimates and ratings (i.e. consensus view) on average. We compliment thiswith relative valuation and sentiment drivers, such as positive/neutral/negative news flows. For all issuers/securitiescovered, we have three investment ratings (Buy, Hold, or Sell), comparing the security’s expected total return (includingboth price performance and expected cash dividend) over a 12-month period versus its Required Rate of Return “RRR”as calculated using the Capital Asset Pricing Model “CAPM” and adjusted for the Risk Rating we attach to each security.Our price targets are subjective and are estimates of the analysts where the securities covered will trade within thenext 12 months. Price targets can be derived from earnings-based valuation models (e.g. Discounted Cash Flow “DCF”),asset-based valuation models (e.g. Net Asset Value “NAV”), relative valuation multiples (e.g. PER, PBV, EV/EBITDA, etc.),or a combination of them. In case we do not have our own valuation model, we use a weighted average of marketconsensus price targets and ratings. We review the investment ratings periodically or as the situation necessitates.

SECURITY RISK RATINGS: We assess the risk profile of each issuer/security covered and assign one of three risk ratings(High, Moderate, or Low). The risk rating is weighted to reflect different aspects specific to (1) the sector, (2) the issuer,(3) the security under review, and (4) volatility versus the market (as measure by beta) and versus the security’s averageannualized standard deviation. We review the risk ratings at least annually or as the situation necessitates.

Other DisclosuresMFS does not have any proprietary holding in any securities. Only as a nominee, MFS holds shares on behalf of itsclients through Omnibus accounts. MFS is not currently a market maker for any listed securities.

Analyst CertificationI (we), Amr ElDaly, Senior Equity Analyst, and Mohamed Bassuny, Analyst, employed with Mubasher International, a company under the National Technology Group of Saudi Arabia being ashareholder of Mubasher Financial Services BSC (c) as Senior Equity Analyst and author(s) to this report, hereby certify that all the views expressed in this research report accurately reflect my (our)views about the subject issuer(s) or security(ies). I (we) also certify that no part of my (our) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s)expressed in this report. Also, I (we) certify that neither myself (ourselves) nor any of my (our) close relatives hold or trade into the subject securities.

Head of Research CertificationI, Amr Hussein Elalfy, Global Head of Research of Mubasher Financial Services BSC (c) confirm that I have vetted the information, and all the views expressed by the Analyst in this research reportabout the subject issuer(s) or security(ies). I also certify that Amr ElDaly the author(s) of this report, has (have) not received any compensation directly related to the contents of the Report.

DisclaimerThis document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Mubasher Financial Services BSC (c) (‘MFS’) has basedthis document on information obtained from sources it believes to be reliable but which it has not independently verified; MFS makes no guarantee, representation or warranty and accepts noresponsibility or liability as to its accuracy or completeness. The opinions contained within the document are based upon publicly available information at the time of publication and are subject tochange without notice. This document is not intended for all recipients and may not be suitable for all investors. Securities described in this document are not available for sale in all jurisdictions or tocertain category of investors. The document is not substitution for independent judgment by any recipient who should evaluate investment risks. Additionally, investors must regard this document asproviding stand-alone analysis and should not expect continuing analysis or additional documents relating to the issuers and/or securities mentioned herein. Past performance is not necessarily aguide to future performance. Forward-looking statements are not predictions and may be subject to change without notice. The value of any investment or income may go down as well as up and youmay not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates mayhave an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognized market, it may be difficult for investors to sell their investments or toobtain reliable information about its value or the extent of the risk to which it is exposed. References to ratings/recommendations are for informational purposes only and do not imply that MFSadopts, supports or confirms in any way the ratings/recommendations, opinions or conclusions of the analysts. This document is not directed or intended for distribution to, or use by, any person orentity who is a citizen or resident of or located in any locality, state, country, or other jurisdiction where such distribution, publication, availability or use would be contrary to law, regulation or whichwould subject MFS or its affiliates to any registration or licensing requirements within such jurisdiction. MFS accepts no liability for any direct, indirect, or consequential damages or losses incurred bythird parties including its clients from any use of this document or its contents.

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Issuer of ReportMubasher Financial Services BSC (c) is an Investment Business Firm Category 1, licensed and regulated by the Central Bank of Bahrain.Website: www.MubasherTrade.comE-mail: [email protected]



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