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Industries Qatar Co

Source: Shuaa Capital

Q4 2008 Results Note

Q4 08 earnings collapse on weak pricing & steel losses: Industries Qatar (IQ) posted FY 08 net income of QAR 7.28bn (up 46% YoY), implying Q4 08 net income of QAR 94mn, down by a significant 96% from QAR 2.59bn in Q3 08. Revenues in Q4 08 witnessed a sizeable 61% QoQ decline (-22%YoY) driven by lower sales across IQ’s four business segments (steel, petrochemicals, fuel additives, and fertilizers), bringing FY 08 total revenues to QAR 14.74bn, up 58% YoY. The sequential decline of QAR 2.49bn in Q4 08 earnings is mostly attributed to a QoQ drop of QAR 2.31bn in operating profit, in addition to higher finance costs and lower income from associates. We believe IQ’s earnings performance was hit in Q4 08 on the back of 1) a severe decline in commodity prices reflecting directly on group revenues; and 2) negative performance of the steel segment; both leading to a substantial contraction in the group’s net margin from 51% in Q3 08 to about 5% in Q4 08.

Steel margins in negative territory on falling prices, lower volumes and write offs: FY 08 preliminary financials reveal that the company undertook, during the year, “a write off on finished good and work in progress inventories worth QAR 329mn – representing the difference between net realizable value and cost”. Since commodity prices witnessed most of their decline in Q4 08, we presume the inventory write-off could have occurred during that quarter. Given that the cost structure of IQ’s gas-based fertilizer and petrochemical products is fixed, we suspect the inventory write-down is located within the steel segment. The steel segment results reached QAR 1.02bn in FY 08, compared to QAR 1.61bn in 9M 08, implying losses of QAR 0.59bn in Q4 08. Again, if we assume 100% of the write-off is situated within steel operations, we calculated ‘ongoing’ steel Q4 08 net results were QAR 263mn loss, corresponding to a negative 39% net margin – (and which compares to SABIC’s Q4 08 steel net margin of -20%). We believe steel losses stem from a steep fall in steel prices, suspected weaker demand and high cost of iron ore feedstock (the latter likely purchased at a higher price in previous quarters). Middle-East import steel rebar prices averaged USD 522/ton in Q4 08, 45% lower than IQ’s disclosed Q3 08 average realization price of USD 954/ton. Based on Q4 08 steel revenues of QAR 675mn (-66% QoQ), we estimate Q4 08 steel sales volumes amounted to 355 KT, down 39% sequentially.

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