Nakilat: Shipping

The Company

Qatar Gas Transport (Nakilat), which trades as QGTS on the Qatar Exchange, is the world’s largest owner of liquefied natural gas (LNG) ships. Nakilat was incorporated in 2004 to address the need to ship the large quantities of LNG being produced by Qatar across the globe. With a total effective LNG shipping capacity of around 8.6m cu metres, the company provides 16% of global LNG shipping capacity. Nakilat’s LNG fleet consists of 54 state-of-the-art vessels, of which 25 are wholly owned by Nakilat. Apart from LNG, Nakilat also jointly owns four very large gas carriers for transporting liquefied petroleum gas (LPG). Nakilat enjoys stable revenue and cash flows due to long-term (25 years) and fixed-rate (with operating cost inflation adjustments on some vessels) time charter contracts with Qatargas, RasGas and Tasweeq. Besides its shipping business, the group also oversees the activities of Qatar’s shipyard in Ras Laffan and provides several maritime industrial services to vessels in Qatari waters. Nakilat operates via several subsidiaries and joint ventures (JVs). Nakilat, which is 100% owned, was set up for the sole purpose of obtaining financing to acquire wholly owned LNG vessels. Nakilat Shipping, which is also 100% Qatari owned, was incorporated in March 2007 and manages the operations of all of Nakilat’s wholly owned LNG vessels and the LPG vessels owned by Gulf LPG Transport Company. Nakilat Agency Company, which is 95% owned, acts as an exclusive agent for all local and international ships arriving at Ras Laffan Port (RLP). Other subsidiaries include Nakilat Marine Services, Nakilat Investment and Nakilat Holding. Key JVs include Nakilat-Keppel Offshore and Marine Limited. Incorporated in November 2008, this 80%- owned JV with Keppel Offshore and Marine Limited is engaged in the development and management of the shipyard facility at the RLP. Nakilat Damen Shipyards Qatar is a 70%-owned JV with Damen Shipyards Group, which manages the ship-building facility for the construction of high-value ships at RLP shipyard. Nakilat SvitzerWijsmuller is a 70%-owned JV with Svitzer Middle East that owns and operates tugboats, pilot boats and harbour crafts at RLP. Finally, Gulf LPG Transport Company is a 50%-owned JV that owns and operates four LPG vessels. Milaha (through Q-Ship) owns the remaining 50% stake.

Nakilat is a long-term core holding in Qatar and remains a vital link in the LNG value chain. We maintain our long-term bullish stance on the firm. We do note that near-term catalysts remain limited beyond earnings per share (EPS) accretion due to debt repayments and refinancing. However, we expect its LNG shipping business to post stable earnings before interest, taxes, depreciation and amortisation on an annual basis, despite quarterly volatility. Nakilat is a stable yield play with strong free cash flow generation that could provide upside to our dividend estimates.

Financial Forecasts

We expect moderate top-line growth, with adjusted revenue projected at QR3.4bn ($931m) and QR3.5bn ($959m), respectively, for 2013 and 2014. This implies a 1.4% year-on-year growth for both years. EPS is, however, expected to increase by 4% and 11.6% in 2013 and 2014 to QR1.40 ($0.38) and QR1.56 ($0.43), respectively, driven primarily by lower finance charges. We anticipate that dividends per share (DPS) will increase to QR1.10 ($0.30) in 2013 from QR1 ($0.27) in 2012. For 2014, we expect DPS to further climb to QR1.20 ($0.33).

Risks

Risks include lower-than-expected price realisations via JVs and shale gas discoveries in key markets crimping LNG fundamentals. Further, the limited operating history of the Q-Max and Q-Flex LNG vessels may lead to unexpected and prolonged downtimes.

Development Strategy

The announced fleet expansion of jointly held LNG vessels from 29 to 31 by early 2014 is incrementally, albeit marginally, positive in terms of earnings. However, this deal could be a sign of things to come if Nakilat can indeed replicate its success beyond its primary customers, Qatargas and RasGas, respectively. In addition, the shipyard business could add positive momentum later in 2014/15.