The Company
Qatar National Cement Company (QNCC), the first cement producer in Qatar, was set up in 1965 and is 43%-owned by the government and government-related entities. The firm, which trades as QNCD on the Qatar Exchange, is the largest producer of ordinary Portland cement, sulphate-resistant cement, hydrated lime, calcined lime and washed sand in Qatar. QNCC manufacturing units are situated at Umm Bab, close to rich raw material deposits and 82 km from Doha. Total cement production capacity is 14,750 tonnes per day (tpd) and clinker capacity is 11,900 tpd. For investors, the key area to scrutinise is the National Development Strategy’s allocation for infrastructure development, which is set to account for over half of the capital spending budget. This will mainly be directed toward the rail network, roads, real estate, the new Doha port and the expansion of the utilities network. There are several key projects that will affect QNCC. Qatar Rail is an estimated $35bn project, and its initial phases, which involve the core elements of the Doha metro and light rail network, are set for completion by 2020. Meanwhile, road projects are mainly being led by Ashghal, the Public Works Authority, which has two major projects. The first includes the $14.6bn local roads and drainage programme, mainly upgrading the network of roads in Doha, with completion expected in 2016. While the second is $8.1bn of projects to build the Doha, Lusail and Dukhan highways, with completion due in 2016. Other smaller road projects amount to over $1bn, with completion set for 2013-16. The $5.5bn Msheireb real estate regeneration project in the centre of Doha will also receive funding from the capital budget. The project will house more than 27,000 residents, as well as commercial, retail, cultural and entertainment areas, and is set to be completed by 2016. Elsewhere, education accounts for around 28% of the capital spending allocation for 2013/14, with the development of schools receiving a significant portion, along with other key educational facilities, such as Qatar Foundation’s Education City project.
Of the 2013/14 capital spending budget, 18% will go to health, including a number of medical facility expansions, such as Hamad Medical City, health centres, and Sidra Medical and Research Centre, a teaching and research hospital connected to Education City.
Financial Forecasts
Growth will start to kick in from the middle of 2015 onward, when we expect a new production line will increase the company’s overall capacity. For the interim period between 2012 and mid-2015, we expect flat top-line and bottom-line growth for the company, as QNCC is already producing close to its full capacity.
As of December 2013, our estimate of QNCC’s bottom-line compound annual growth rate (CAGR) for 2014-17 is at 12.6% versus 3.1% for 2012-14. We estimate revenue will increase by a CAGR of 8.5% for 2012-17. However, similar to the bottom-line growth, a major rise will be visible once the new line opens in mid-2015.
Risks
There are a few risks. First, demand for cement does not increase as expected and second, the anticipated jump in demand for cement could tempt other players to enter the industry. In addition, QNCC is catering to the Qatari market, which leads to concentration risk. Any downturn in the regional and domestic economy could negatively impact the company.
Development Strategy
In order to benefit from Qatar’s anticipated growing demand for cement, QNCC is likely to expand its capacity by another 5000 to 7500 tpd. We have assumed a 7500-tpd expansion; this new line will increase total capacity from 14,750 tpd to 21,250 tpd. We have assumed that the company will sell or retire its Line 1 (which has a capacity of 1000 tpd) as it is an old plant that is not in the same location as the other lines. Given the anticipated growth in demand for cement, the industry’s second-largest player, Qatari Investors Group, is also planning to expand its capacity by 7500 tpd. As a result, despite the increase in its own production capacity, QNCC’s market share, in terms of overall clinker capacity, is expected to fall to around 40% by 2016, down from about 70% in 2013.
