By Satish Kanady
DOHA: While it is important to have a credible view on outlook for oil prices as evaluating stocks for 2016, it is equally important to quantify the impact of oil price changes over long term profit prospects of each company.
Talking to The Peninsula, the award-winning investment company Amwal’s Asset Management Head Afa Boran (pictured) said simply comparing P/Es of companies with differing future profits will give misleading conclusions. “We currently find a consumer company trading at a P/E of 19 times based on 2016 profits to be cheaper than another (a bank) that is valued at a P/E of 15 times, because of their materially different longer term profitability prospects.”
The past year was a unique year for GCC economies due to decline of oil prices to “unexpectedly low” levels. A year back, while not many expected price of oil to remain above $100 per barrel indefinitely, no one predicted it could be as low as $35 either. Compared to this steep decline, the 15 percent decline of Qatari stocks is not a cause for worry, broadly in line with other GCC markets.
Drilling down, bank stocks declined between 10-15 percent; chemicals and telecoms around 30 percent, though due to different reasons;, and “utility” stocks like Nakilat and Qatar Electricity actually went up by around 5 percent and 15 percent respectively, he said.
At Amwal, it groups Qatari stocks into three categories based on the degree of impact of oil prices and future government spending--the stocks those are directly impacted by oil such as IQ, Mesaieed Petchem and GIS; those impacted indirectly from change in future government spending and those stocks that are not much affected by either.
The second category, the tricky one and which makes the bulk of the stock market requires a more complex approach to valuation than a simple P/E. This is because of the government’s pro-active spending and investments in the new oil paradigm, Afa said.
While there is no imperative to put the brakes on immediately, the government is showing a willingness to cut unproductive spending. This nuanced approach in turn affects different companies differently. For example, a company could be expected to earn good profits until 2022 but perhaps its business activity and profits could be less afterwards. To different degrees, banks, real estate and telecoms all fall into this category of businesses that will likely be indirectly impacted by change in future government spending.
What differentiates Qatar from other GCC countries like Saudi is that even if oil prices stayed at current low levels, Qatar’s government can cope with its current spending plans, without resorting to much borrowings. “Even when we assume a conservative oil price outlook, we currently see many stocks valued cheaper than their peers in other markets. For example Several banks are now valued even below their book values, and even on conservative assumptions valued at attractive P/Es. However, being selective is now more important than in the past. We see both stocks that could decline materially as well as those that could rise materially without even much dependence on oil, and if oil prices were to recover modestly, then the market could see a strong rally.”
