QNBFS upgrades IQ to outperform on expectations of high DPS for 2021

Satyendra Pathak Doha QNB Financial Services (QNBFS) has announced that it has upgraded Industries Qatar (IQ) to an ‘outperform’ and raised its price tar...

Satyendra Pathak Doha QNB Financial Services (QNBFS) has announced that it has upgraded Industries Qatar (IQ) to an ‘outperform’ and raised its price target from QR14.25 to QR16.40 per share. In light of very strong results in the second quarter of 2021 and continued strength in commodity prices, QNBFS said, it has raised 2021 net income estimate for IQ to QR7.5 billion that translates into earnings per share (EPS) of QR1.24. “Our earnings estimate is now the highest among analysts covering the stock. We also now forecast a dividend per share (DPS) of QR0.85 for 2021. This implies a very healthy dividend yield of 6.5 percent, the highest in our coverage universe,” it said.“IQ reported a DPS of QR0.33, paying out 100 percent of its earnings in 2020. If the company decided to do the same this year, DY should jump significantly to 9.4 percent. A doubling of DPS from 2020 translates into a DY of 5 percent. Using an average dividend payout of 85 percent recorded over the past five years, DPS for 2021 jumps to QR1.05, which is a yield of 8 percent. In any event, we foresee a significant increase in DPS for 2021, which is a positive catalyst for this stock,” it said.With IQ well on track to posting significant earnings growth this year, along with a sizable uptick expected in DPS, QNBFS said, the stock’s underperformance relative to its peers is surprising. “We believe the stock should rerate in the medium-term and upgrade IQ from ‘accumulate’ to outperform,” it said.Despite paying $1 billion for the QAFCO deal, IQ’s balance sheet continues to remain solid with QR11.1 billion in cash and bank balances and zero long-term debt. “Net-net, given IQCD’s strong balance sheet, we expect the company to withstand difficult market conditions, when they arise, while retaining dry powder to take advantage of potential acquisition opportunities in the future,” QNBFS said.“In terms of long-term catalysts, similar to the QAFCO deal, IQCD could look to acquire Total’s 20 percent stake in Qapco that could also be perceived positively by investors. Expansion, acquisition-related news flow and upside in dividends could be key going forward,” it said.“We expect 2022 earnings to moderate to QR5.8 billion. With volumes relatively flattish, the decline in earnings is primarily based on lower prices in 2022 as we chose to adopt a conservative view in light of the significant pricing strength seen in 2021,” it said. Strength in urea and a pickup in PE prices should bode well for IQ in the second half of 2021, QNBFS said.“Previously, we were of the view that the second half of 2021 would moderate in comparison to QR3.5bn in earnings in the first half of the year. However, petrochemical prices that began to ease in May after benefiting from the US winter storm, have again started to strengthen from late July given capacity shutdowns due to Hurricane Ida,” it said.