IQ cash flow remains strong despite challenges: Report

August 4, 2020

QNB Financial Services (QNBFS) has announced that it maintains its market perform rating on Industries Qatar (IQ) with price target of QR10 as the company’s balance sheet continues to remain solid with QR11.3bn in cash, bank balances and zero debt.
The company generated operating cash flow of QR1.7 billion and the free cash flow of QR1.5 billion in the first half of 2020 that highlights its operational efficiency and ability to generate significant positive cash flows despite challenging conditions, QNBFS said in a company report released recently.
“Given IQ’s strong balance sheet, we expect the company to withstand difficult market conditions while retaining dry powder to take advantage of potential acquisition opportunities in the future,” it said.
“We maintain our market perform rating and QR10 price target. With earnings under pressure in the medium-term, investors will seek answers about the deployment of IQ’s cash pile and its strategy,” the report said.
“IQ remains optimistic about a recovery in the second half pointing to a gradual easing of lockdown restrictions and stimulus measures undertaken by major governments, along with a recovery in oil prices from June 2020,” it said.
Highlighting IQ’s better than expected financial results in the first half of 2020, the report said that petrochemical margins improved despite weaker-than-expected revenue.
“The segment revenue of QR709 million was below our model, while earnings were much higher than forecasted. Segment earnings of QR186.1 million fell 47.9 percent year-on-year (YoY) but increased 51.3 percent quarter-on-quarter (QoQ). Net margin expanded from record lows of 12.9 percent in the first quarter of 2020 to 26.3 percent in the second quarter of 2020,” the report said.
“Reversal of gas charges recorded last year helped boost margins for the quarter. Relative to the first half of 2019, realised prices fell 24 percent YoY offsetting sales volume that increased roughly 3 percent. This led to the segment revenue decline of 22 percent in the first half of 2020. Prices remained under pressure given dual macro headwinds of crude price weakness and economic malaise created by COVID-19. Production volumes were flattish in the first half of 2020 as slightly lower PE production was offset by higher fuel additives volumes,” it said.
QNBFS said in the report that IQ’s fertilisers revenue fell short of its expectations with modest margin improvement on a sequential basis as the interim QAFCO 1-4 agreement remains in place serving to lower sales volume.
“Profits were in-line with our forecast given QoQ margin improvement despite revenue coming in roughly 9 percent lower than our forecast,” it said.
“We continue to expect QP and QAFCO to replace the interim agreement for QAFCO 1-4 with a permanent one in the future that should be in-line with the original agreement that expired back in end-2019. Fertiliser production, unlike sales volume, remained relatively robust, up approximately 8 percent YoY in the first half of 2020 with the segment experiencing minimal planned and unplanned maintenance shutdowns,” the report said.
About IQ’s steel segment, the report said the steel revenue in the second quarter of 2020 was below its model with segment losses possibly prompted by a phased approach to mothballing capacity.
“We expect the segment to turn profitable in the second half of 2020. We think activities related to the mothballing of facilities happened in a more gradual manner than we had anticipated thus dragging profitability for the quarter. We believe the company’s strategy to avoid international markets and cater to domestic demand exclusively should help profitability going forward,” it said.