Qatar Gas Transport -Equity Report -19-07-2012

2Q2012 Results Show Improvement Despite Net Income Miss; Maintaining Estimates

2Q2012 results show sequential and YoY improvement. While Nakilat reported somewhat softer than expected 2Q2012 results, as expected the company posted a sequentially (and YoY) stronger 2Q2012 after two quarters (1Q2012 & 4Q2011) of sequential declines. Nakilat?s revenue from wholly-owned vessels (under long-term charters) came in right in line with our estimate. Further, QGTS? share of operating profits from joint-venture ships benefited from the higher LPG freight rates and came in marginally stronger-than-expected. We continue to view Nakilat as a stable yield play albeit with limited top-line growth prospects in the medium term. QGTS remains Qatar?s primary LNG carrier and benefits from stable/visible revenue and cash flow through 25-year fixed (price and quantity) charter contracts with the state-controlled LNG producers, Qatargas and RasGas. With fleet expansion completed in 2010, we expect strong FCF generation to allow the company to meet its debt repayments (total debt was QR24.3bn as of 2Q2012) comfortably and lead to EPS accretion.

Where do we go from here? While we remain positive on Nakilat longer-term, the headline miss on net income could portend further near-term weakness in the stock price. Thus far this year, the stock has come under pressure (down 10.3% vs. a 5.1% decline in the QE Index) given its tepid top-line (LNG vessels are under long-term charters with no benefit from spot rate increases) and fears about shipping disruptions. However, we continue to believe that QGTS? wholly-owned LNG shipping business should post stable EBITDA on an annual basis despite quarterly volatility. Moreover, strong FCF leaves open the avenue for further dividend increases. Nakilat remains a vital link in the State of Qatar?s LNG value chain. We maintain our estimates and 12-month target price.