Kuwait in Focus
January 2010 Contents
Kuwait Economic Brief...... 2 Oil Market and Budget Developments...... 3 Monetary Developments November 2009...... 6 Real Estate Activity...... 11
Kuwait Research Coverage ...... 16 Agility...... 17 Jazeera Airways...... 22 The Sultan Center...... 24 Wataniya Telecom...... 25
Companies in Focus...... 27 Al Ahli Bank of Kuwait (ABK) ...... 28 Aviation Lease and Finance Company (ALAFCO)...... 31 Bank of Kuwait and the Middle East (BKME)...... 34 Boubyan Petrochemical...... 37 Burgan Bank (Burgan)...... 40 Burgan Co. for Well Drilling, Trading and Maintenance (Burgan Well Drilling).....43 Commercial Real Estate Company (Altijaria)...... 46 Gulf Cable and Electrical Industries Company (Gulf Cable)...... 49 Gulf Insurance Company (GIC)...... 52 Haj & Umrah Services Consortium Co. (Mashaer) ...... 56 Injazzat Real Estate Development Company (Injazzat)...... 60 Kuwait Cement Company...... 64 Kuwait Finance House (KFH)...... 67 Kuwait Financial Center (Markaz)...... 71 Kuwait Food Group (Americana)...... 75 Kuwait and Gulf Link Transport Company (KGL)...... 78 Kuwait National Cinema Company (KNCC)...... 81 Kuwait Projects (KIPCO)...... 84 Mabanee Company...... 89 Mobile Telecommunications Company (Zain)...... 92 National Industries Group Holding (NIG)...... 98 National Investment Company (NIC)...... 101 National Real Estate Company (NREC)...... 104 Oula Fuel Marketing Company (Oula)...... 107 Tamdeen Investment Company (Tamdeen)...... 110 Tamdeen Group...... 113 The Transport and Warehousing Group (TWG)...... 117 United Real Estate Company (Real Estate Company)...... 120 YIACO Medical Company (YIACO)...... 123
Kuwait Market Statistics...... 126
1 | nbkcapital.com Kuwait Economic Brief
• Oil Market and Budget Developments
• Monetary Developments November 2009
• Real Estate Activity
National Bank of Kuwait NBK Economic Research T. +965 2259 5500 F. +965 2224 6973 E. [email protected]
Disclaimer and Copyright While every care has been taken in preparing this publication, National Bank of Kuwait accepts no liability whatsoever for any direct or consequential losses arising from its use. The Economic Brief is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and previous issues can be found in the “Reports” section of the National Bank of Kuwait’s web site. © Copyright Notice: NBK Economic Brief is a publication of National Bank of Kuwait. No part of this publication may be reproduced or duplicated without the prior consent of NBK.
2 | nbkcapital.com Kuwait Economic Brief Kuwait in Focus - January 2010
Oil Market and Budget Developments
Crude prices renew upward march after early December pullback... Kuwait’s budget outlook remains strong…
After a relatively stable November, crude prices saw considerable volatility throughout December. The price of Kuwait Export Crude (KEC) dropped $8 per barrel (pb) to $71 pb in the first half of December, before rallying back to $77 by the end of the month and to nearly $80 by January 7th—a new post-recovery high. The initial fall may have been driven by a strengthening of the US dollar, which appreciated by 4% in trade-weighted terms between December 1st and 17th. But crude prices began rising again after this burst of support for the dollar abated.
Later in the month, crude prices also drew support from more fundamental factors, notably the continued decline in oil and oil product inventory levels in the US (though admittedly from still high levels), as well as relatively upbeat signals from macro indicators around the world, particularly purchasing manager indices of industrial activity. These data provided backing for the more bullish analysts who expect crude prices to be well supported by supply and demand dynamics through 2010.
Kuwait Export Crude *
90
85
80
75
70
65 $ per barrelper $
60
55
50
45 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
*Note: Future price projections correspond to NBK’s price scenarios Source: NBK Economic Research Department
Global benchmarks climb to The prices of global benchmark crudes also resumed their upward march in the second half of post-crisis highs… December. The price of West Texas Intermediate (WTI) crude, for example—which had traded at a discount to other crudes in early December as a result of storage constraints in the US—had recovered to more than $83 pb by January 6th, its highest since October 2009. On average, the price of WTI stood at $62 in 2009, down 38% on its average for 2008, but ending the year more than double the low of $34 pb recorded in mid-February. For some analysts, the sharp recovery in prices through 2009 was not only a result of dollar weakness but also evidence that demand growth in emerging markets—which was surprisingly robust last year—has become more influential in determining the price of oil than conditions in traditionally important markets, especially the US.
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Further upgrades for global oil In light of growing confidence about the outlook for world economic growth, some of the more demand forecasts for 2010… pessimistic forecasts for global oil demand in 2010 have gradually been upgraded. The Centre for Global Energy Studies (CGES), for example—which has long held downbeat views on the prospects for 2010—has revised up its forecast for incremental oil demand this year to 1.0 million barrels per day (mbpd, 1.2%) from 0.7 mbpd a month earlier. The CGES expects virtually all of the growth to come from outside the OECD. On the other hand, the US-based International Energy Agency (IEA) has consistently been at the bullish end of the spectrum, and has nudged up its forecast for 2010 oil demand growth by 0.1 mbpd to nearly 1.5 mbpd (1.7%). Although the IEA expects no growth from within the OECD, the agency believes that the prospects for the region have improved. Despite these upgrades, it should be noted that, given the sharp drop expected to have been registered in 2009 (perhaps 1.5 mbpd) the forecast increases for 2010 are still not that strong.
Kuwait Export Crude Price Scenarios
Scenario $/barrel Low Base High
4Q09f 74.4 74.4 74.4 2009f 60.4 60.4 60.4 1Q10f 66.8 69.1 72.7 FY09/10f 66.7 67.3 68.2 2Q10f 61.8 66.2 74.5 3Q10f 56.5 64.3 77.0 4Q10f 53.2 62.4 80.5 2010f 59.6 65.5 76.2 1Q11f 52.3 62.4 84.4 FY10/11f 55.9 63.8 79.1
Source: NBK Economic Research Department
OPEC leaves output Crude output of the OPEC-11 (i.e., excluding Iraq) continued to creep up through November, unchanged… cautious about rising by 41,000 bpd to stand at 26.611 mbpd. This was the eighth successive monthly increase, global recovery… leaving output nearly 900,000 bpd (3%) off its March floor and around 7% above the official quota levels. At the meeting on December 22nd, OPEC members appeared to sidestep the issue of ‘official’ versus ‘actual’ production levels by declaring that, although output would be left unchanged, members remain committed to their individual quota allocations—a seemingly contradictory stance. Yet with crude prices now at levels that the organization is comfortable with, members are having to tread carefully to avoid upsetting the market balance. The cartel’s statement made it clear that OPEC members remain cautious about the strength and durability of the world economic recovery, and hence growth in the demand for oil. But should recent signs of recovery be sustained, the organization may look to ease its cautious stance at its next meeting on March 17th.
Prices could ease back despite Despite the apparently improving oil market fundamentals, there is still scope for prices to ease anticipated improvement in back over the coming year, with sluggish demand and high stock levels beginning to weigh on demand … the market once winter demand subsides. On the demand side, global demand growth in 2010 is assumed to come in along the lines of the 1.0 mbpd projected by the CGES. Although OPEC leaves its crude production more or less unchanged from 4Q2009 levels, the global supply is given a boost from both a small (0.2 mbpd) annual increase in non-OPEC supply and a 0.5 mbpd rise in OPEC NGLs (natural gas liquids, which are not subject to quota constraints) in the second half of the year. Under this scenario, the price of KEC slips back to below $70 in 1Q2009 and ends the year in the low-to-mid-$60s range.
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Stronger-than-expected On the other hand, oil demand growth in 2010 could turn out to be stronger—perhaps closer demand presents additional to the 1.5 mbpd assumed by the IEA—as a result of a potentially cold winter and better-than- upside risk … expected world economic growth. In this scenario, modest increases in the non-OPEC supply would not be enough to prevent rising demand eating into global stock cover as the year goes on. The price of KEC would be back in the mid-$80s by the start of next year.
While higher OPEC/non-OPEC Alternatively, a combination of modest demand and a larger-than-expected increase in non- supply could push prices OPEC crude supply in 2010—perhaps an extra 0.2 mbpd on average—could push prices lower… significantly lower, perhaps to just above $50 by the end of the year. Such a scenario, however, would surely require OPEC to be unwilling or unable to cut back production from current levels.
Large budget surplus seen in Assuming that oil prices for the remainder of 1Q2009 do not stray too far, the price of KEC for FY2009/10 almost assured … FY2009/11 as a whole will average $67-68 pb, far higher than many were predicting halfway through the year or the $35 pb assumed in Kuwait’s budget. Indeed, this year’s budget is almost certain to register another huge surplus. If, as we expect, public expenditures come in at 5-10% below the budget plans, the government should record a surplus of between KD 5.2 and 6.4 billion, before allocating 10% of revenues to the Reserve Fund for Future Generations (RFFG).
…and possibility of further Although it is early days, if oil prices end up in the $56-79 range implied by the three scenarios significant surplus in above, the prospects for the FY2010/11 budget seem set to remain fairly favorable. Local FY2010/11… media reports have suggested that planned government spending may rise by around 35% to KD 16.3 billion next year, although this is likely to include a large inter-governmental transfer to the Public Institute for Social Security. Even with this exceptional item of spending, however, the budget is likely to remain in balance and could even see a surplus as high as KD 4.8 billion in our “high” scenario. Two consecutive years of surplus would represent a stark contrast to the fiscal positions of governments in other parts of the world, which are set to embark on a period of huge cutbacks.
Budget Forecasts for Fiscal Years 2009/10 and 2010/11
Under Alternative Oil Price Scenarios FY 2009/10 FY 2010/11 Official Low Base High Possible Low Base High (M illion KD, unless otherwise noted) Budget Case Case Case Budget Case Case Case
Oil Price ($/barrel) 35.0 66.7 67.3 68.2 43.0 55.9 63.8 79.1
Total Revenues 8,075 16,728 17,094 17,312 9,990 13,201 15,688 19,469 Oil Revenues 6,925 15,578 15,944 16,162 8,790 12,001 14,488 18,269 Non-Oil Revenues 1,150 1,150 1,150 1,150 1,200 1,200 1,200 1,200
Expenditures (official) 12,116 12,116 12,116 12,116 16,300 16,300 16,300 16,300 Surplus (deficit) -4,041 4,612 4,978 5,196 -6,310 -3,099 -612 3,169 After RFFG -4,849 2,939 3,268 3,465 -7,309 -4,419 -2,181 1,222
Expenditures (NBK estimate) 11,510 11,207 10,904 15,485 15,078 14,670 Surplus (deficit), NBK estimate 5,218 5,886 6,407 -2,284 610 4,799 After RFFG 3,545 4,177 4,676 -3,604 -958 2,852
Source: NBK Economic Research Department
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Monetary Developments November 2009
Credit growth improves in November with help from rising deposits and better demand
Monetary developments showed signs of further stability as 2009 came to an end. During November, deposits at local banks expanded at a decent pace. Meanwhile, credit showed signs of improvement, with growth surpassing the rise in deposits.
Monetary Highlights – November 2009
Change Nov One Twelve Year-to- 2009 Month Month Date * (M illion KD, unless otherwise noted) mn KD mn KD % mn KD % mn KD %
Local Bank Assets 40,898 662 1.6 891 2.2 1,656 4.2 of which: Claims on Gov't 1,901 0 0.0 -98 -4.9 -84 -4.2 Credit to Residents 25,154 240 1.0 1,659 7.1 1,494 6.3 Foreign Assets 7,357 75 1.0 -2,483 -25.2 -1,439 -16.4
Money Supply (M2) 24,992 265 1.1 2,581 11.5 3,041 13.9 Private Deposits 24,163 199 0.8 2,479 11.4 2,921 13.8 Sight Deposits 4,196 67 1.6 221 5.6 533 14.6 Savings Deposits 2,802 18 0.6 296 11.8 314 12.6 KD Time Deposits & CDs 14,351 -19 -0.1 1,430 11.1 1,160 8.8 FC Deposits 2,814 133 5.0 532 23.3 915 48.2
*As of November 2009 Source: NBK Economic Research Department
As a result, the money supply (M2) expanded 1.1% (+KD 265 million) month on month (MoM) in November compared to 0.6% in the previous month. Since the beginning of 2009, M2 has added more than KD 3 billion. The increase in non-resident deposits for the second consecutive month suggests the end of foreign outflows.
Credit growth improves, driven Credit to residents rose 1% MoM in November, benefiting from the pickup in the demand for by the consumer sector credit and the expansion in deposits in previous months. The increase in credit of KD 240 million in November was 7.1% growth year on year (YoY), and a better 10.2% when annualized for the three months ended in November.
Wajih Boustani Assistant Economist Economics Department T. +965 2259 5356 E. [email protected]
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Credit Indicators – Percentage Growth
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0% Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09
YoY Rate Last-3-Months-annualized
Source: NBK Economic Research Department
The consumer sector was the main engine for credit growth in November. Personal facilities grew by a solid 1.3% MoM (KD 104 million) for the second consecutive month, pushing their annual growth rate to 8.5%. Year-to-date, 83% of the rise in personal facilities came from installment loans. Unclassified loans posted the only other major advance in November, rising KD 106 million MoM. Loans to other sectors were fairly subdued. Growth in the construction and oil and gas sectors was relatively modest at KD 29 million and KD 9 million, respectively, while loans to the trade and real estate sectors fell slightly.
Credit Indicators – November 2009 (Year-on-Year Percentage Growth)
25% 25%
20% 20%
15%
15%
10%
10% 5%
5% 0% Nov-08 Feb-09 May-09 Aug-09 Nov-09 Nov-08 Feb-09 May-09 Aug-09 Nov-09
Private deposits Credit Personal Facilities Loans to Real Estate
Source: NBK Economic Research Department
Deposits grew at a decent rate Private resident deposits rose KD 199 million, mostly in foreign currency. Since the beginning of 2009, private resident deposits have jumped by a remarkable KD 2.9 billion or 14%.
On the other hand, government deposits were down KD 51 million, following a KD 462 million increase the previous month. The government withdrew some of its deposits as banks are
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enjoying a healthy level of liquidity and the crisis-related withdrawals of foreign deposits appear to have ended. In fact, non-resident deposits were up KD 98 million in November, for the second consecutive month.
Banks’ liquidity remains Following the KD 101 million increase in the previous month, local banks’ liquid assets comfortable (including net interbank deposits) were unchanged in November. The subscription in new Central Bank of Kuwait (CBK) bonds amounting to KD 107 million was partially offset by a drop in deposits with the CBK. In general, banks retained their comfortable liquidity profile, and as a consequence, average KIBOR rates remained close to their all-time-lows.
Liquidity Indicators – November 2009 (Year-on-Year Percentage Growth)
Liquid assets to total assets Interbank rates
18% 6%
16% 5%
14% 4%
12% 3%
10% 2%
8% 1%
6% 0% Nov-08 Feb-09 May-09 Aug-09 Nov-09 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Including net foreign interbank deposits Excluding net foreign interbank deposits 1-mnth KIBOR 1-mnth LIBOR
Source: NBK Economic Research Department
Dinar posts slight gains Since the beginning of November through mid-December, the dinar made a slight improvement against the dollar. Meanwhile, during December, the dinar offset some of its previous losses sustained vis-à-vis the Euro, following the recent weakness of the Euro in the FX market.
Monetary Indicators – November 2009 – Exchange Rates
0.31 0.45
0.43 0.30
0.41 0.29
0.39
0.28 0.37
0.27 Stronger 0.35 Dinar
0.26 0.33 17-Sep-07 7-Jan-08 28-Apr-08 18-Aug-08 8-Dec-08 30-Mar-09 20-Jul-09 9-Nov-09
Dinar / Dollar (LHS axis) Dinar / Euro
Source: NBK Economic Research Department
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Monetary Highlights – November 2009
One Month Change 3 Month Change 12 Month Change Year-to-Date Nov Nov Oct Nov Oct Nov Oct Nov Oct Nov Oct Nov Oct Nov mn KD mn KD % mn KD % mn KD % mn KD %
Total Liquidity (M2) 24,992 265 149 1.1 0.6 540 123 2.2 0.5 2,581 3,354 11.5 15.7 3,041 13.9 1) Currency in Circulation 828 66 -2 8.6 -0.2 100 36 13.8 4.9 102 29 14.0 3.9 120 17.0 2) Private Sector Deposits 24,163 199 150 0.8 0.6 440 87 1.9 0.4 2,479 3,326 11.4 16.1 2,921 13.8 KD Deposits 21,349 66 135 0.3 0.6 363 407 1.7 1.9 1,947 2,223 10.0 11.7 2,006 10.4 Sight Deposits 4,196 67 -13 1.6 -0.3 132 240 3.2 6.2 221 261 5.6 6.7 533 14.6 Savings Desposits 2,802 18 -24 0.6 -0.8 15 -54 0.5 -1.9 296 319 11.8 12.9 314 12.6 Time Deposits & CDs 14,351 -19 172 -0.1 1.2 216 222 1.5 1.6 1,430 1,643 11.1 12.9 1,160 8.8 FC Deposits 2,814 133 15 5.0 0.6 77 -320 2.8 -10.7 532 1,103 23.3 69.9 915 48.2
Money (M1) 5,024 133 -15 2.7 -0.3 232 276 4.8 6.0 323 290 6.9 6.3 653 14.9
Quasi-Money 19,968 132 163 0.7 0.8 308 -153 1.6 -0.8 2,258 3,065 12.7 18.3 2,388 13.6
Net Foreign Assets 9,468 60 637 0.6 7.3 651 184 7.4 2.0 1,558 3,328 19.7 54.7 1,861 24.5 1) CBK (net) 5,201 142 181 2.8 3.7 555 450 12.0 9.8 710 1,229 15.8 32.1 691 15.3 Foreign Assets 5,272 142 180 2.8 3.6 557 450 11.8 9.6 678 1,167 14.8 29.5 659 14.3 Foreign Liabilities 72 0 -1 0.4 -1.8 1 0 1.7 -0.1 -31 -62 -30.6 -46.4 -32 -30.6 2) Local Banks (net) 4,267 -82 456 -1.9 11.7 95 -266 2.3 -5.8 848 2,099 24.8 93.3 1,170 37.8 Foreign Assets 7,357 75 489 1.0 7.2 136 -170 1.9 -2.3 -2,483 -1,645 -25.2 -18.4 -1,439 -16.4 Foreign Liabilities 3,090 156 33 5.3 1.1 41 96 1.3 3.4 -3,332 -3,743 -51.9 -56.1 -2,609 -45.8
Domestic Assets 15,524 205 -489 1.3 -3.1 -110 -61 -0.7 -0.4 1,023 27 7.1 0.2 1,181 8.2 1) Claims on Gov't (net) -3,292 -64 -398 2.0 14.0 -302 -203 10.1 6.7 -628 -1,634 23.6 102.4 -618 23.1 CBK (net) -1,165 -114 64 10.9 -5.8 83 255 -6.6 -19.5 306 -36 -20.8 3.5 -40 3.6 Claims 0 0 0 0 0 … … -1 0 … … 0 … Deposits 1,165 114 -64 10.9 -5.8 -83 -255 -6.6 -19.5 -306 36 -20.8 3.5 40 3.6 Local Banks (net) -2,128 51 -462 -2.3 26.9 -385 -458 22.1 26.6 -933 -1,598 78.1 275.3 -577 37.2 Claims 1,901 0 0 0.0 0.0 42 12 2.2 0.6 -98 -133 -4.9 -6.5 -84 -4.2 Deposits 4,028 -51 462 -1.2 12.8 426 470 11.8 13.0 836 1,465 26.2 56.1 493 13.9 2) Claims on Private Sector 27,112 226 124 0.8 0.5 650 501 2.5 1.9 1,781 1,789 7.0 7.1 1,656 6.5 Credit Facilities 25,154 240 136 1.0 0.5 632 488 2.6 2.0 1,659 1,691 7.1 7.3 1,494 6.3 Other Local Investments 1,958 -15 -12 -0.8 -0.6 18 13 0.9 0.6 122 98 6.6 5.2 162 9.0 3) Other (net) -8,296 43 -215 -0.5 2.6 -459 -359 5.9 4.5 -130 -129 1.6 1.6 143 -1.7
One Month Change 3 Month Change 12 Month Change Year-to-Date Nov Nov Oct Nov Oct Nov Oct Nov Oct Nov Oct Nov Oct Nov mn KD mn KD % mn KD % mn KD % mn KD %
Total Bank Assets 40,898 662 857 1.6 2.2 1,848 1,371 4.7 3.5 891 1,384 2.2 3.6 1,656 4.2
Liquid Assets 5,231 156 198 3.1 4.1 890 911 20.5 21.9 1,445 1,228 38.2 31.9 1,563 42.6 Cash and CBK Balances 373 -56 -48 -13.1 -10.1 -174 -63 -31.8 -12.9 -171 16 -31.5 3.9 -160 -30.0 CBK Bonds 948 107 0 12.7 0.0 180 73 23.4 9.5 534 414 … … 574 … Public Debt Instruments 1,901 0 0 0.0 0.0 42 12 2.2 0.6 -98 -133 -4.9 -6.5 -84 -4.2 Inter-Local Bank Deposits 1,036 164 53 18.9 6.5 496 364 91.6 71.8 297 8 40.2 1.0 357 52.5 Time Deposits w/ CBK 974 -59 193 -5.7 23.0 347 526 55.3 103.7 883 922 978.2 837.0 876 900.6
Credit Facilities 25,154 240 136 1.0 0.5 632 488 2.6 2.0 1,659 1,691 7.1 7.3 1,494 6.3 Trade 2,221 -17 26 -0.8 1.2 54 17 2.5 0.7 -29 34 -1.3 1.6 -64 -2.8 Industry 1,449 0 -13 0.0 -0.9 33 59 2.3 4.2 -32 23 -2.1 1.6 -17 -1.1 Construction 1,681 29 32 1.7 2.0 37 13 2.2 0.8 4 -81 0.3 -4.7 7 0.4 Agriculture and Fishing 13 -1 -1 -4.4 -6.3 0 0 -2.3 -0.7 0 0 -2.3 1.5 1 4.0 Non-Bank Financial Institutions 2,947 15 13 0.5 0.5 207 156 7.6 5.6 38 27 1.3 0.9 192 7.0 Personal Facilities 8,409 104 111 1.3 1.3 151 129 1.8 1.6 661 593 8.5 7.7 543 6.9 Purchase of Securities 2,872 62 53 2.2 1.9 39 18 1.4 0.6 186 120 6.9 4.5 78 2.8 Other Pers. Facs. 5,537 42 57 0.8 1.1 113 111 2.1 2.1 475 473 9.4 9.4 465 9.2 Consumer Loans 622 1 6 0.2 1.0 11 9 1.7 1.5 2 3 0.3 0.4 5 0.9 Installment Loans 4,539 31 50 0.7 1.1 92 96 2.1 2.2 481 498 11.8 12.4 453 11.1 Other 375 9 1 2.6 0.4 10 6 2.9 1.7 -7 -29 -1.9 -7.3 6 1.7 Real Estate 6,561 -6 2 -0.1 0.0 68 115 1.1 1.8 791 867 13.7 15.2 596 10.0 Crude Oil & Gas 209 9 6 4.7 3.0 7 19 3.5 10.2 107 105 105.3 110.6 98 88.5 Public Services 0 … … … … … … … … -1 … … … -1 … Other 1,664 106 -40 6.8 -2.5 76 -18 4.8 -1.1 119 125 7.7 8.7 139 9.1
Foreign Assets 7,357 75 489 1.0 7.2 136 -170 1.9 -2.3 -2,483 -1,645 -25.2 -18.4 -1,439 -16.4
Other Assets 3,156 190 35 6.4 1.2 190 141 6.4 5.0 270 110 9.4 3.8 38 1.2
Total Deposit Liabilities 29,203 303 709 1.0 2.5 1,363 909 4.9 3.2 3,619 4,832 14.1 20.1 3,761 14.8 Private Sector Deps 24,163 199 150 0.8 0.6 440 87 1.9 0.4 2,479 3,326 11.4 16.1 2,921 13.8 Gov't Deposits 4,028 -51 462 -1.2 12.8 426 470 11.8 13.0 836 1,465 26.2 56.1 493 13.9 Interbank 1,012 155 97 18.1 12.7 497 353 96.6 70.0 305 41 43.2 5.1 347 52.2
Foreign Liabilities 3,090 156 33 5.3 1.1 41 96 1.3 3.4 -3,332 -3,743 -51.9 -56.1 -2,609 -45.8
Other Liabilities 3,679 186 99 5.3 2.9 398 328 12.1 10.4 -8 -223 -0.2 -6.0 177 5.1
Equity 4,926 16 2 0.3 0.0 47 38 1.0 0.8 611 518 14.2 11.8 327 7.1
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Monetary Highlights – November 2009 (Continued)
Nov Oct Sep Aug Jul Dec Nov 2009 2008 % Balance Sheet Structure: Liquid Assets/Total Assets * 10.3 10.5 10.5 9.8 9.4 7.7 7.7 Credit/Total Assets 61.5 61.9 62.9 62.8 62.8 60.3 58.7 DPBs/Total Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Foreign Assets/Total Assets 18.0 18.1 17.3 18.5 19.2 22.4 24.6 Private Sector Deposits/Total As. 59.1 59.6 60.5 60.8 61.4 54.1 54.2 Loans to Deposits ** 90.3 90.3 91.8 90.6 90.2 89.6 87.2 Reserve Ratio 18.9 19.2 18.6 17.5 16.9 14.6 14.8
* Note: Liquid assets include cash, public debt instruments, time deposits with CBK, and net interbank deposits. ** Note: Loans used in LDR ratio include: resident, non-resident, financial inst., in both KD&FC. Deposits used in LDR ratio include: private, government, and financial institutions. Source: NBK Economic Research Department
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Real Estate Activity
Recovery in real estate sales continues through November
Sales overview
The steady recovery in real estate activity from its lows at the turn of the year continued through November, with the total number of sales (residential, commercial, and retail) rising to 542, up 33% from 408 in October. This is the highest level of sales since July 2008. The commercial sector had two consecutive decent months, following weakness most of the year. Time will tell whether this rise can be sustained—part of it could still reflect a post-Ramadan bounce. But for the first time this year, monthly sales are more or less back to the levels seen during the period of ‘normal’ market activity between 2003 and 2006, though still well down from the 800+ recorded in the boom years.
Total Real Estate Sales
1200 150
1000 100
800 50
600
0 400
-50 200
0 -100 2007 2008 2009
Number of sales ( LHS) KD value of sales (%y/y, RHS)
Source: Ministry of Justice
In KD value terms, total sales registered their highest level since April 2008, at KD 193 million, and are now up 41% on a year ago. This level of sales represents a strong performance—on par with anything seen during the 2003—2006 period. Note that sales values have been strong across the three main market segments (see below), suggesting that any underlying improvement in property sector trends reflects broader market—as opposed to segment-specific—factors.
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Sales - residential
In the residential market, the number of sales climbed to 379 from 280 in October. Again, this was a much stronger performance than that of late (the highest since July 2008). Yet of all the segments, the residential segment remains the one performing most below par; sales numbers are still around 25% below their 2003—2006 average, whereas in other segments, the sales numbers are at or above their historic norms. Average sales prices increased for the fourth successive month and are now up 29% from their July lows.
Residential Sales
1000 120
900 100
80 800
60 700 40 600 20 500 0 400 -20 300 -40
200 -60
100 -80
0 -100 2007 2008 2009
Number of sales (LHS) KD value of sales (%y/y, RHS)
Source: Ministry of Justice
Sales - apartments
November saw 156 sales of investment property (largely apartments), up from 123 a month earlier. Compared to the residential sector, the number of apartment sales has not weakened significantly during the recent downturn. But there has been a notable drop in average sales prices. After peaking at KD 806,000 in May 2008, average prices slumped to just KD 219,000 in March this year, though they have since begun to recover. The extent of the fall in prices may help to explain why sales numbers have remained fairly resilient, with investors seeing more value in these now-cheaper assets.
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Apartment Sales
200 250
180 200 160
140 150
120 100 100 50 80
60 0
40 -50 20
0 -100 2007 2008 2009
Number of sales (LHS) KD value of sales (%y/y, RHS)
Source: Ministry of Justice
Sales - commercial
There were 7 sales of commercial property during November, up from 5 in October and an average of 6 per month in 2009 so far. Performance was stronger in value terms, with November’s sales worth KD 39 million, compared to an average of just KD 15 million in the year to October. But interpreting this requires considerable caution. A look at the more detailed weekly data suggests that one large land sale provided a major boost to the value of sales in November; without it, sales values would have been their second weakest this year. Thus, the spike in the growth in sales values seen this month should not be considered a sign of broad-based improvement in commercial property market conditions.
nbkcapital.com | 13 Kuwait Economic Brief Kuwait in Focus - January 2010
Commercial Sales
25 600
500
20 400
300 15
200
10 100
0 5
-100
0 -200 2007 2008 2009 Number of sales (LHS) KD value of sales (%y/y, RHS)
Source: Ministry of Justice
Savings and Credit Bank loans
The number of loans approved by the Savings and Credit Bank (SCB) rose for the second successive month in November but remains at fairly modest levels. Total loan approvals stood at 313, compared to an average of 372 per month for the year so far and 412 through 2008. The value of loan approvals also remains weak, at KD 9.2 million, down 50% on the same month last year.
The unusual gap that has opened up in recent months in the composition of loans—with the number of loans approved for additions and renovations exceeding those approved for the purchase of properties—widened in November. The number of loans for home purchase stood at 129, barely above the September low of 107 and less than half the average of 268 of the past five years. As we mentioned last month, this may reflect affordability issues, as well as a slowdown in the distribution of land plots made under the government’s housing program. The latter at least could rise through early 2010 with more plots being distributed in the North-West Sulaibikhat and Sabah Al Ahmed areas.
nbkcapital.com | 14 Kuwait Economic Brief Kuwait in Focus - January 2010
SCB Loan Approvals
600 250
550 200
500 150
450 100
400
50 350
0 300
-50 250
200 -100 2007 2008 2009
Number of loans (LHS) KD value of loans (%y/y, RHS)
Source: Savings and Credit Bank
Real Estate Sales and SCB Housing Loans
Monthly Avg. 2009 % Real Estate Sales 2007 2008 Sep Oct Nov M/M Y/Y
Sales Values (mn KD) 233.5 156.2 57.7 143.2 193.2 34.9 41.4 Residential Property 128.6 74.8 36.4 61.7 87.6 42.0 36.8 Apartments 83.6 56.7 21.3 39.0 66.7 71.2 1.1 Commercial 21.3 24.7 0.0 42.5 38.9 -8.6 488.6
Number of Transactions 773.6 513.8 223.0 408.0 542.0 32.8 5.2 Residential Property 648.3 381.4 169.0 280.0 379.0 35.4 11.1 Apartments 117.3 121.3 54.0 123.0 156.0 26.8 -8.8 Commercial 8.0 11.1 0.0 5.0 7.0 40.0 133.3
Average Transaction Size (000 KD) 301.7 320.3 258.7 350.9 356.4 1.6 34.4 Residential Property 201.6 203.3 215.6 220.3 231.0 4.9 23.1 Apartments 703.8 477.2 393.5 316.9 427.8 35.0 10.8 Commercial 2359.7 2563.4 0.0 8500.0 5550.0 -34.7 152.3
Monthly Avg. 2009 % SCB Housing Loans 2007 2008 Sep Oct Nov M/M Y/Y
Value of Approved Loans (mn KD) 12.5 15.0 7.1 8.3 9.2 10.8 -49.7 New Construction 5.7 10.2 2.8 3.0 3.0 -0.7 -77.1 Purchase of Existing Homes 5.3 3.2 3.2 3.7 4.1 13.6 2.5 Additions & Renovations 1.5 1.5 1.1 1.6 2.0 26.2 82.3
Number of Approved Loans 378 412 229 285 313 9.8 -22.5 New Construction 146 195 46 54 48 -11.1 -77.3 Purchase of Existing Homes 118 89 61 78 81 3.8 -13.8 Additions & Renovations 114 128 122 153 184 20.3 85.9
Value of Disbursed Loans (mn KD) 15.1 12.1 9.3 11.5 11.5 -0.1 -11.4 New Construction 8.3 7.0 4.6 6.4 6.7 5.1 -12.9 Purchase of Existing Homes 5.2 3.6 3.7 3.5 3.2 -10.0 -15.2 Additions & Renovations 1.7 1.5 1.0 1.6 1.7 0.9 4.2
Sources: Ministry of Justice and Savings and Credit Bank
nbkcapital.com | 15 Kuwait Research Coverage
• Agility
• Jazeera Airways
• Sultan Center
• Wataniya Telecom
NBK Capital MENA Research T. +965 2224 6663 F. +965 2224 6905 E. [email protected]
16 | nbkcapital.com Kuwait Research Coverage Kuwait in Focus - January 2010
Agility (aglt.kw) - Analyst Comment Issued on December 23, 2009
DynCorp terminated Agility DGS’s participation as a subcontractor for the LOGCAP IV task order. On December 21, 2009, Agility made the following announcement:
Agility clarifies LOCAP IV contract
Agility Defense and Government Services Inc. (“Agility DGS Inc.”), an indirect subsidiary of The Public Warehousing Company KSC (“PWC”), was terminated by DynCorp International (DI) as a subcontractor on the Logistics Civil Augmentation Program IV (“LOGCAP IV) as of December 17, 2009. Agility DGS Inc. believes DI’s termination is in breach of the contractual terms between the parties, and is looking at legal options available to it in this regard.
•• The LOGCAP IV initial task order issued to DGS was valued at KD 185.3 million for the base year, plus four one-year extension options. The task order was to be carried out in southern Afghanistan involving business such as operational and maintenance support (i.e. electrical power, sewage and waste, laundry operations etc.) for the US Forces.
•• Our previous forecasts did not account for the effects of LOGCAP IV task order awarded to DGS. As mentioned in our previous analyst comment (dated November 11, 2009), we were expected to issue an update after meeting with management to discuss the implications of the task order.
•• The effect on Agility’s value if the company is unable to rectify the matter is still uncertain. We maintain our status on Agility as “Under Review” until we receive further information on the implications of the indictment by the U.S. Department of Justice and the implications on the cancellation of the LOGCAP IV task orders.
Wadie Khoury T. +965 2259 5118 E. [email protected]
Related Research
• Update - 25 June 2009
• Update - 20 Nov. 2008
nbkcapital.com | 17 Kuwait Research Coverage Kuwait in Focus - January 2010
Agility (aglt.kw) - Analyst Comment Issued on November 17, 2009
•• Agility (The Public Warehousing Company) was informed that the U.S. Department of Justice had obtained an indictment against the company and has intervened in a civil lawsuit under the False Claims Act. Agility has sent out a statement regarding the matter, which is found below in full.
•• In our previous analyst comment for Agility (dated November 11, 2009), we noted that we will be issuing an update report with new forecasts for Agility to incorporate the LOGCAP IV task order award. We will be meeting with Agility’s management to get a better understanding of this latest development; however, we are placing Agility’s coverage status as “Under Review” to properly assess the matter.
•• Below is a copy of the statement we received from Agility:
Statement by Public Warehousing Co. (PWC)
Concerning Announcement of Indictment and Qui Tam Lawsuit
The Public Warehousing Company (PWC) has for some time worked with the government to seek a mutually agreeable resolution to a contract dispute between the U.S. government and the Company and is surprised and disappointed that the government has decided to take these actions. Today, the Company was informed that the Department of Justice (“DOJ”) had obtained an indictment against the company and has intervened in a civil lawsuit under the False Claims Act, both of which allege that PWC committed fraud against the U.S. government.
The company has been the principal food supplier for the U.S. military in Kuwait and Iraq since 2003. PWC’s service has been timely, reliable and cost effective throughout its work on these competitively awarded contracts, and its performance has been unparalleled. The prices it charges have been negotiated with, agreed to, and continually approved as by the U.S. government since then. The government has consistently found PWC’s prices to be fair and reasonable.
Since 2006, the company’s “fill rates” – the number of cases of food accepted compared with the number ordered – were consistently more than 99 percent, a number that exceeds the fill rates of U.S. domestic service providers. That means that PWC was more successful in delivering food and other items to the military in a hostile war zone than other vendors have been within the safe environs of the continental U.S.
The court documents filed in the United States reveal that the investigation leading tothe indictment and the False Claims Act lawsuit was instigated by Kamal Mustafa Sultan, owner of Kamal Mustafa Sultan Company, who has a long history of strong animosity towards PWC, its officers and its employees. A July 19, 2009 San Antonio (Texas) Express-News story raises major questions about the company: http://www.mysanantonio.com/military/Firm_tied_to_Iraq_ scandal_profited.html
In the PWC matter, Kamal Mustafa Sultan brought a “qui tam” case under the False Claims Act in November 2005, which means that he has a financial interest in the outcome of the case. In Kuwait, Kamal Mustafa Sultan has filed more than 40 court actions against PWC, its executives and its employees, and all of the court actions have been unsuccessful.
nbkcapital.com | 18 Kuwait Research Coverage Kuwait in Focus - January 2010
Agility (aglt.kw) - Analyst Comment (continued) Issued on November 17, 2009
The company has long cooperated with government reviews, inspections, audits and inquiries necessary to ensure taxpayer dollars are being spent appropriately. The company made every effort to resolve this with U.S. contracting agencies, including trying to get a formal interpretation of the contract by a neutral agency and going to mediation, but the government refused.
Our company has provided unparalleled service to U.S. troops and exceptional value for American taxpayers under the most demanding conditions ever faced by a contractor. Our success has come at a very high price. More than 30 employees have been killed and 200 injured in carrying out their work in a warzone. Attacks on our convoys have destroyed more than 300 trucks and damaged another 700.
An indictment and a complaint are merely allegations. PWC is confident that once these allegations are examined in court, they will be found to be without merit. The Defense Logistics Agency (DLA) has temporarily suspended PWC from being awarded any new business until it determines that the company is presently responsible. The company has not been debarred from U.S. government contracting, as no determination has been made by the government at this time, and will not be made until all the facts have been reviewed. The temporary suspension should not impact any current government work being performed by the company.
Samir Murad, CFA T. +965 259 5145 E. [email protected]
Related Research
• Agility update – 25 June 2009
• Agility update – 20 Nov. 2008
nbkcapital.com | 19 Kuwait Research Coverage Kuwait in Focus - January 2010
Agility (aglt.kw) - Analyst Comment Issued on November 11, 2009
•• In continuation of the trend that Agility set in 1H2009, the company posted a 15% increase in net income in 3Q2009 despite an 11% decline in gross revenue over the period.
•• Agility achieved gross revenues of KD 413.5 million in 3Q2009 and net revenues of KD 156.3 million, essentially leading to an expansion in the net revenue margin to 37.8%.
•• Global Integrated Logistics (GIL), which is being affected by the decline in global trade volumes, saw a decline of 21% in revenue in 3Q2009 compared to 3Q2008. However, this was compensated for by the expansion in net revenue margin for GIL from 28% in 3Q2008 to 36% in 1H2009. This led to an almost flat performance at the net revenue level for GIL in 3Q2009.
•• Defense and Government Services (DGS) saw an increase in revenue of 4% in 3Q2009 to KD 178.4 million, but had a slight drop in net revenue margin from 33% in 3Q2008 to 32% in 3Q2009.
•• According to Agility’s press release, operating income increased by 5% in 3Q2009 to KD 43 million. We do not have full financials as of yet, and accordingly, we do not know what exactly led to the higher growth in net income compared to operating income. Moreover, Agility said that, excluding non-recurring items, the group’s net income would have increased by 25% (year on year).
•• Agility’s balance sheet remains strong with just KD 39 million in net debt, while cash flow from operations increased by 29% in 9M2009 to KD 188.5 million.
•• Agility mentioned in the press release that GIL saw new customer wins with Nokia Siemens, Pfizer, Adelaide Aqua, and Ras Gas in Qatar. DGS saw the award of a LOGCAP IV task order in southern Afghanistan at an estimated value of KD 185.3 million for the base year.
•• Our current forecasts for Agility do not account for additional revenue from the LOGCAP IV task order in southern Afghanistan. We will be meeting with management to assess the implications that this task order may have on Agility, which we expect to be positive. We will issue an update report on Agility to incorporate the new information.
Samir Murad, CFA T. +965 259 5145 E. [email protected]
Related Research
• Agility update – 25 June 2009
• Agility update – 20 Nov. 2008
nbkcapital.com | 20 Kuwait Research Coverage Kuwait in Focus - January 2010
Agility - Change of Forecast Issued on June 25, 2009
Key Data Highlights
Current Price* Avg. Value Traded per Day 12-Month Fair Value: Under Review KD 0.620 KD 5.5 million Recommendation: Under Review-Risk Level**: 4 52-Week High Market Cap Reason for Report: 1Q2009 Update/Change of Forecast KD 1.220 KD 0.6 billion • Following the announcement of a timetable for the 52-Week Low Current Number of Shares withdrawal of U.S. troops from Iraq by the U.S. government, KD 0.475 1,046.8 million our concerns for Agility have shifted to the Defense and Reuters Bloomberg Government Services (DGS) segment. Our new forecasts AGLT.KW AGLTY KK attempt to reflect such a withdrawal. However, including Ownership Structure this plan in our forecasts is not simple, as we do not know Privately Held: 41% Public: 59% the extent of the actual impact that the Subsistence Prime Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital Vendor Contract (SPVC) and other Iraq-related contracts with the U.S. Army have on Agility—though the impact is Rebased Performance expected to be very substantial.
1.300 • Due to the lack of disclosure of operating profits by 1.200 segments (Agility provides net revenues by segments only),
1.100 we were forced to make several critical assumptions (which
1.000 we elaborate more on in the full report) to establish our
0.900 forecasts. Obviously, with such limited disclosure, the risk
0.800 associated with those assumptions is significantly higher.
0.700 • Agility posted a strong operating performance in 1Q2009 0.600 despite an 8.1% decline in total revenue. Agility’s EBITDA 0.500 margin improved to 13.1% in 1Q2009 (the 1Q2008 0.400 EBITDA margin was 11.4%), which resulted in a 5.6% Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 AGLT MSCI KWT year-on-year increase in EBITDA. This result is 4.5% higher than our EBITDA forecast of KD 51 million, even Sources: MSCI, Reuters, and NBK Capital though we were expecting to see flat growth in revenues.
Key Ratios • Global Integrated Logistics (GIL), the largest contributor to revenue, saw a decline of 13.8% in revenue in 1Q2009 2008 a 2009 f 2010 f 2011 f 2012 f compared to 1Q2008, due to the negative effect the P/E 4.4 4.4 na na na global financial crisis is having on volumes in commercial EPS Growth -8% 4% na na na logistics in general. As expected, DGS was immune to EV/ EBITDA 4.2 4.2 na na na the financial crisis as DGS recorded a 3.4% increase in EBITDA Margin 11% 11% na na na revenues in 1Q2009. EBITDA Growth -7% -1% na na na Dividend Yield 0.0% 0.0% na na na ROAE 19% 17% na na na
1Q2009 EBITDA a 2Q2009 EBITDA f KD 53.3 mln KD 51.0 mln 1Q2009 EBITDA f 3Q2009 EBITDA f KD 51.0 mln KD 50.0 mln a = actual, f = forecast. Sources: Reuters and NBK Capital
Analysts
Samir Murad, CFA Badder Al Ghanim T. +965-2259 5145 T. +965-2259 5330 E. [email protected] E. [email protected] ** Please refer to page 129 for recommendations and risk ratings.
nbkcapital.com | 21 Kuwait Research Coverage Kuwait in Focus - January 2010
Jazeera Airways (jazk.kw) - Analyst Comment Issued on December 22, 2009
•• Jazeera Airways benefited from increased demand for travel in the summer season, and managed to return to profitability in 3Q2009. The airline, which experienced a turbulent performance in 1H2008, is currently portraying signs of recovery from the disruption that resulted from the unplanned exit of the Dubai hub.
•• The number of passengers flying with Jazeera Airways reached 582,490 in 3Q2009, an increase of 57% compared to the same period last year. This result underlines an important milestone for the airline, as this is the first quarter in which the number of passengers flying with Jazeera Airways exceed the half-million mark.
•• Jazeera Airways operated a fleet of 10 Airbus A320s in 3Q2009 (six in 3Q2008) and managed to increase capacity—measured in available seat kilometers (ASK)—by 44% compared to the same period last year.
•• Revenue passenger kilometers (RPK) increased by 38% in 3Q2009 year on year, a rate that is slower than the growth in ASK. Accordingly, the load factor slipped from 73% in 3Q2008 to 70% in 3Q2009; however, this remains much better than the 62% load factor attained in 2Q2008. Management attributes the decline in load factor to three factors: a) a shorter summer season due the overlap with Ramadan, b) the impact of the H1N1 virus on the demand for travel, and c) effects of the restructuring from Dubai. The drop in load factor was in line with our forecasts for the quarter.
•• Yield (calculated as total revenue divided by RPK) had a sharp drop of 25% in 3Q2009 compared to 3Q2008, yet was better than our forecast of a 28% decline. The lower yield is a result of the following: a) competitive pricing from other airlines as a result of excess capacity and b) the reduction in the fuel surcharge.
•• Total revenue increased by 4% to KD 15.9 million in 3Q2009, a result that is in line with our forecast of KD 15.8 million.
•• At the operating level, Jazeera Airways achieved an EBITDAR of KD 3.2 million in 3Q2009, 17% lower than 3Q2008. Moreover, the reported EBITDAR came in 16% below our forecast of KD 3.8 million for 3Q2009. We do not have a breakdown of expenses to assess where the divergence occurred. Net income declined by 53% in 3Q2009 to KD 0.8 million.
•• As part of the restructuring into a single hub, Jazeera Airways has deferred delivery of seven aircraft that the airline had previously scheduled for 2010 and 2011. Based on the new fleet schedule, Jazeera Airways will receive only one aircraft in 2010 and none in 2011. We believe this is a wise move by Jazeera Airways, as this will allow the airline to build traffic for existing capacity, improve load factors, and enhance profitability.
•• We will update our models to incorporate the latest operational results and the deferral in aircraft delivery, and issue a new fair value estimate and recommendation.
Samir Murad, CFA T. +965 259 5145 E. [email protected]
Related Research
• Update - 22 October 2009
• Update - 10 May 2009
nbkcapital.com | 22 Kuwait Research Coverage Kuwait in Focus - January 2010
Jazeera Airways - Turbulence Issued on October 22, 2009
Key Data Highlights
Current Price* Avg. Value Traded per Day 12-Month Fair Value: KD 0.240 KD 0.198 KD 0.1 million Recommendation: Buy-Risk Level**: 5 52-Week High Market Cap Reason for Report: 2Q2009 Update KD 0.327 KD 43.6 million 52-Week Low Current Number of Shares • The unexpected closure of the hub in Dubai created an KD 0.162 220 million operational disruption for Jazeera Airways in 1H2009. Reuters Bloomberg The hub in Dubai accounted for 20% to 25% of total JAZK.KW JAZEERA KK capacity, which suddenly had to be transferred to Kuwait. Accordingly, Jazeera Airways had to build traffic for this Ownership Structure Privately Held: 30% Public: 70% unplanned increase in capacity for the hub in Kuwait.
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • The performance of Jazeera Airways in 1H2009 has been below expectations, as it saw a 10% decline in revenue Rebased Performance and sustained a net loss of KD 2.2 million in the period. The decline in revenue was below our forecast growth of 0.350 17%, due to a lower-than-expected decline in yield and
0.300 load factor and an unexpected drop in aircraft utilization that led to a lower-than-expected growth in capacity (ASK).
0.250 • As of June 30, 2009, the net debt-to-equity ratio of Jazeera Airways stands at a conservative 1.1x. This ratio increases 0.200 to 3.1x if one views the operating leases as additional off- balance-sheet debt. 0.150 • The management of Jazeera Airways is working diligently 0.100 to refinance the KD 29.7 million in short-term debt before Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 JAZK MSCI KWT the end of 2009. We will continue to monitor this area over the coming months. Sources: MSCI, Reuters, and NBK Capital • According to Note 14 in the 1H2009 financial statements, Key Ratios Jazeera Airways has given a guarantee to the aircraft supplier of obligations due from a related company. While 2008 a 2009 f 2010 f 2011 f 2012 f we do not have any reason to believe that these obligations P/E 9.8 nmf 7.1 5.3 2.7 cannot be met, we cannot analyze the potential liability, if Net Income Growth 94% nmf nmf 34% 94% EPS Growth 13% nmf nmf 34% 94% any, that may arise from the guarantee given the limited financial information we have on the related party (a non- EV/ EBITDAR 9.0 9.2 4.3 3.1 2.0 EBITDAR Margin 16% 15% 21% 21% 22% public entity). EBITDAR Growth 26% -2% 115% 40% 49% • According to Jazeera Airways’ aircraft delivery schedule, Dividend Yield 0.0% 0.0% 5.7% 7.6% 18.4% the airline plans to have 34 aircraft in its fleet by 2014. All ROAE 17% nmf 22% 26% 42% these aircraft cannot be allocated to the Kuwait hub only, which makes the establishment of a second hub a critical 2Q2009 EBITDAR a 3Q2009 EBITDAR f step for the airline to achieve its growth targets. KD 0.3 mln KD 3.8 mln 2Q2009 EBITDAR f 4Q2009 EBITDAR f • Our new 12-month fair value estimate for the share price KD 3.0 mln KD 2.7 mln of Jazeera Airways is KD 0.240, which is 21% higher than a = actual, f = forecast. Sources: Reuters and NBK Capital the latest close. Our new recommendation for Jazeera Airways is “Buy”. Analysts
Samir Murad, CFA Wadie Khoury T. +965-2259 5145 T. +965 2259 5118 E. [email protected] E. [email protected] ** Please refer to page 129 for recommendations and risk ratings.
nbkcapital.com | 23 Kuwait Research Coverage Kuwait in Focus - January 2010
The Sultan Center - Top Line Growth Issued on December 17, 2009
Key Data Highlights
Current Price* Avg. Value Traded per Day 12-Month Fair Value: KD 0.320 KD 0.208 KD 0.4 million Recommendation: Buy-Risk Level**: 4 52-Week High Market Cap Reason for Report: 3Q2009 Update KD 0.295 KD 120 million 52-Week Low Shares Outstanding • Sultan Center reported a 20% year-on-year (YoY) increase KD 0.124 578.8 million in total revenue for 9M2009; total revenue was KD 228.3 Reuters Bloomberg million. The significant increase in sales growth is due SCFK.KW SULTAN KK to the 25% increase in grocery sales––the company’s main line of business. The improvement in grocery sales Ownership Structure was driven by Sultan Center’s operations in Oman (26% Privately Held: 44% Public: 56% increase in revenue) and the full consolidation of the Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital Lebanese stores––both of which had strong operating performances in 9M2009. Rebased Performance • Due to the tough economic environment, Sultan Center saw a decline in sales of discretionary items, such 0.300 as household and imported products. This impacted the retailer’s operations in Kuwait and Jordan—which 0.250 exhibited declines in sales per average square meter of 3.6% and 1.3%, respectively.
0.200 • Sultan Center’s EBITDA declined by 8.5% to KD 13.4 million in 9M2009, a result that is 9% lower than our forecast. Selling, general and administrative (SG&A) 0.150 costs increased by 33.7% in 9M2009 mostly due to some non-recurring expenses related to the integration of
0.100 the Lebanese operation. On the other hand, net income Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 declined by 27.6% to KD 8.4 million in 9M2009. SCFK MSCI KWT • We revised our FY2009 forecasts to show respective Sources: MSCI, Reuters, and NBK Capital declines of 2.5% and 0.7% in sales per average square Key Ratios meter in Kuwait and Jordan (previous forecasts were for no growth in Kuwait and a 7% increase in Jordan). In addition, 2008 a 2009 f 2010 f 2011f 2012f we revised our forecast for telecom revenue for FY2009 downwards, as the spike in the 1Q2009 revenue was a Adj. P/E* nmf 13.8 11.0 11.4 12.3 result of maturing contracts rather than new business. Adj. EV/ EBITDA* 11.0 7.7 6.7 6.4 6.6 • On November 16, 2009, the U.S. Department of Justice EBITDA Margin 5% 6% 6% 6% 6% issued two press releases related to two separate lawsuits EBITDA Growth -3% 31% 14% 5% -2% that charge Agility with defrauding the United States. The Dividend Yield 0.0% 0.0% 1.0% 1.1% 1.0% lawsuits allege Sultan Center’s involvement in overcharging the U.S. Army for local market ready items. We do not have 3Q2009 EBITDA a 4Q2009 EBITDA f enough information to make an assessment regarding any KD 4.9 million KD 5.0 million liability that Sultan Center may face, if any, and we have 3Q2009 EBITDA f 1Q2010 EBITDA f not reflected any potential impact from these lawsuits in KD 5.8 million KD 4.9 million our forecasts.
* Adjusted, a = actual, f = forecast. Sources: Reuters and NBK Capital • Our 12-month fair value estimate for Sultan Center is KD 0.320 per share. This value is based solely on our discounted cash flow model (DCF) and is 54% higher than Analysts the latest market price. Our recommendation for Sultan Center is “Buy.” Samir Murad, CFA Wadie Khoury T. +965-2259 5145 T. +965 2259 5118 E. [email protected] E. [email protected] ** Please refer to page 129 for recommendations and risk ratings.
nbkcapital.com | 24 Kuwait Research Coverage Kuwait in Focus - January 2010
Wataniya Telecom (NMTC.KW) - Analyst Comment Issued on October 25, 2009
•• Wataniya announced its results for 3Q2009, which came in line with our expectations. Total revenue for 3Q2009 decreased by 5% YoY and reached KD 119 million; this was in line with our forecast of KD 119.6 million. Revenue from the Kuwaiti operation dropped by 16%, and contributed to 41% of total revenue versus 46% in 3Q2008. This was mainly due to the cancellation of the called-party-pays fee that occurred at the end of December 2008. As for the 9M2009 results, total revenue decreased by just 1% YoY.
•• At the end of September 2009, total active subscribers reached 12.5 million, a growth of 17% compared to the same period last year. Both the Algerian and Tunisian operations were the main contributors to total subscribers: 47.5% and 38% respectively.
•• Consolidated EBITDA declined by 6% in 3Q2009 to KD 49.4 million (5% lower than our forecast), which translates into an EBITDA margin of 41.5%. This decline is mainly due to the slowdown in the Kuwaiti operation. The EBITDA of Kuwait, which constitutes around 44% of the group EBITDA, dropped by 22% in 3Q2009 compared to the same period last year. As for the 9M2009 results, consolidated EBITDA decreased by 5% YoY and reached KD 142 million.
•• Net profit decreased to KD 18.5 million during 3Q2009 compared to KD 25.6 million in 3Q2008 due to a decrease in other operating income. As for 9M2009, net profit increased by 43% due to the cancellation of the Kuwaiti MOC license charges after Wataniya won a court ruling against the ministry in June 2009.
•• Our estimate of Wataniya Telecom’s fair value per share stands at KD 2.240, 45% above the share’s closing price of KD 1.540 on January 18, 2009 — hence, our “Buy” recommendation.
Diala Hoteit T. +971 4 365 2855 E. [email protected]
Related Research
•• Initiation of Coverage - 02 July 2009
nbkcapital.com | 25 Kuwait Research Coverage Kuwait in Focus - January 2010
Wataniya Telecom - Home Market at Risk Issued on October 15, 2009
Key Data Highlights
Closing Price* Avg. Value Traded per Day 12-Month Fair Value: KD 2.240 KD 1.540 KD 309,123 Recommendation: Buy-Risk Level**: 4 52-Week High Market Cap Reason for Report: 1H2009 Update KD 1.760 KD 772 mln 52-Week Low Current Number of Shares KD 1.200 501.16 mln • The financial results posted by Wataniya Telecom for Reuters Bloomberg 2Q2009 were in line with our expectations. The company NMTC.KW NMTC KK achieved revenues of KD 121.3 million, compared to our Ownership Structure forecast of KD 121.8 million. The slow growth in revenue Qatar Telecom: 52.5% KIA: 24% Public: 23.5% (1.2% YoY) is due mainly to increased competition in
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital Kuwait. • As we mentioned in our Initiation of Coverage, “Competition Rebased Performance Heats Up,” published on July 2, 2009, the increased
2.400 competition as well as the cancellation of the called-party- pays fee will have a negative impact on the profitability of 2.200 mobile operators in Kuwait. The 2Q2009 results were a
2.000 good indicator of the effect of the cancellation; revenue from Wataniya’s operation in Kuwait dropped by 11% YoY, 1.800 and revenue from Zain’s operation in Kuwait decreased 8% YoY. 1.600 • At the end of 2Q2009, Wataniya’s consolidated EBITDA 1.400 declined by 5% YoY and totaled KD 48.8 million, compared
1.200 to KD 51.6 million in 2Q2008. The EBITDA margin declined from 43% in 2Q2008 to 40% in 2Q2009 mainly 1.000 due to the slowdown in the Kuwaiti operation. The EBITDA Jan-09 May-09 Sep-09 Jan-10 Wataniya MSCI Kuwait of the Kuwaiti operation, which constitutes around 52% of the group EBITDA, dropped by 18% in 2Q2009 compared Sources: MSCI, Reuters and NBK Capital to the same period last year. This occurred despite the Key Ratios improvement in the cost of revenue as a percentage of total revenue from 36% in 2Q2008 to 29% in 2Q2009 mainly 2008 a 2009 f 2010 f 2011 f 2012 f due to the cancellation of the MOC license charges after
Adj.P/E 9.4 11.4 11.6 11.5 10.9 Wataniya won a court ruling against the ministry in June Adj.EPS Growth 2% -18% -1% 1% 6% 2009.
EV/ EBITDA 4.0 4.1 3.9 3.6 3.4 • Accordingly, the company also reversed the provision EBITDA Margin 42.3% 40.9% 40.6% 41.3% 41.7% EBITDA Growth 26.3% -2.3% 4.9% 7.4% 6.7% Wataniya had been charging its income statement with (for MOC license charges) that totaled KD 58.4 million in Dividend Yield 3.0% 7.4% 3.5% 4.4% 4.6% Adj.ROAE 24% 16% 14% 13% 13% 2Q2009. Hence, Wataniya Telecom’s bottom line surged to KD 63.5 million at the end of 2Q2009 compared to KD 2Q2009 EBITDA a 3Q2009 EBITDA f 26.5 million in 2Q2008. KD 49 mln KD 52 mln 2Q2009 EBITDA f 4Q2009 EBITDA f • Based on Wataniya’s latest performance in each country, KD 52 mln KD 50 mln we reviewed our previous forecast to incorporate these a = actual, f = forecast. Sources: Reuters and NBK Capital changes. Our new 12-month fair value estimate for Wataniya is KD 2.240 (8.7% higher than our previous fair value). With a 45% upside potential compared to Analysts Wataniya’s latest market price, our new recommendation is “Buy.” Diala Hoteit Lisa Fernandes T. +971-4-365 2855 T. +971-4-365 2856 E. [email protected] E. [email protected] ** Please refer to page 129 for recommendations and risk ratings.
nbkcapital.com | 26 Companies in Focus
• Al Ahli Bank of Kuwait (ABK) • Aviation Lease and Finance Company (ALAFCO) • Bank of Kuwait and the Middle East (BKME) • Boubyan Petrochemical • Burgan Bank (Burgan) • Burgan Co. for Well Drilling, Trading & Maintenance (Burgan Well Drilling) • Commercial Real Estate Company (Altijaria) • Gulf Cable and Electrical Industries Company (Gulf Cable) • Gulf Insurance Company (GIC) • Haj & Umrah Services Consortium Co. (Mashaer) • Injazzat Real Estate Development Company (Injazzat) • Kuwait Cement Company • Kuwait Finance House (KFH) • Kuwait Financial Center (Markaz) • Kuwait Food Group (Americana) • Kuwait and Gulf Link Transport Company (KGL) • Kuwait National Cinema Company (KNCC) • Kuwait Projects (KIPCO) • Mabanee Company • Mobile Telecommunications Company (Zain) • National Industries Group Holding (NIG) • National Investment Company (NIC) • National Real Estate Company (NREC) • Oula Fuel Marketing Company (Oula) • Tamdeen Investment Company (Tamdeen) • Tamdeen Group • The Transport and Warehousing Group (TWG) • United Real Estate Company (United Real Estate) • YIACO Medical Company (YIACO)
NBK Capital MENA Research T. +965 2224 6663 F. +965 2224 6905 E. [email protected]
27 | nbkcapital.com Companies in Focus Kuwait in Focus - January 2010
Al Ahli Bank of Kuwait (ABK)
Key Data Highlights
General Liquidity • Al Ahli Bank of Kuwait (ABK) was established in 1967.
KSE Code ABK.KSE 52-week avg. volume 303,714 The Behbehani family, currently ABK’s largest shareholder, Reuters Code ABKK.KW 52-week avg. value (KD) 163,932 holds approximately 35% of the bank’s total share capital. Price (KD) Price Performance • With an asset base of KD 3 billion, as of September 2009, Closing Price 0.490 YTD -5.8% 52-week High/Low 0.61 / 0.47 1-Year Period -19.7% ABK accounts for 8% of the total banking assets in Kuwait. Market Capitalization Shares Outstanding • For the 9M2009 period, ABK’s net profit stood at KD 24 Million KD 560.30 Latest (million) 1,143 million, 66% lower than 9M2008, on the back of weak Ownership Structure non-interest income and large provisioning charges. Closely Held: 50% Public: 50%
Price as of close on January 18, 2010, Sources: Reuters, Zawya, and NBK Capital • In 2008, ABK recorded a 39% drop in net profits below 2007. With the exception of the 2008 and 9M2009 performance, ABK has maintained good profitability and Stock Performance cost efficiency over the past few years.
30 • ABK’s asset quality indicators have been strong, as the
0.620 non-performing loans (NPLs)-to-gross loans ratio has 52-week High: KD 0.610 25 declined from almost 8% in 2003 to 2.5% in 2008. On average, the NPL coverage was 173% over the past five 0.580 20 years. As of December 2008, the coverage ratio stood at 209%. 0.540 15
Millions • ABK has historically maintained adequate capital adequacy Price (KD) Price 0.500 ratios (CAR), above the minimum required by the Central 10 Bank of Kuwait (CBK). As of December 2008, the CAR 52-week Low: KD 0.470 0.460 5 stood at 14.72%. • In September 2009, ABK sued Saudi conglomerate Al Saad 0.420 0 Jan-09 Mar-09 Apr-09 Jun-09 Jul-09 Sep-09 Oct-09 Nov-09 Jan-10 Group owner Maan al-Sanea and Saad Trading, Contracting Volume Close and Financial Services Co. for USD 125 million.
Sources: Zawya and NBK Capital • In the same month, Moody’s downgraded ABK’s bank financial strength rating from C- to D+. Back in June 2009, Analyst Fitch affirmed ABK’s long-term issuer default rating (IDR) at A- and short-term IDR at F2. However, ABK’s individual Munira Mukadam rating was downgraded from C to C/D with a Stable Outlook. T. +971 4 365 2858 In July 2009, S&P reaffirmed ABK’s BBB+/A-2 rating with E. [email protected] a Negative Outlook. Key Ratios
2005 2006 2007 2008 9M2009
Growth in Loans 25.3% 16.6% 30.4% 13.9% -5.9% Growth in Deposits 30.0% 13.0% 40.0% -9.8% -5.3% Growth in Net Profit 73.2% 27.6% 26.7% -39.5% -65.5% Growth in Operating Income 60.9% 34.6% 13.2% -3.7% -10.7%
Loans-to-Assets 57.5% 61.2% 59.1% 63.2% 66.9% NPLs-to-Gross Loans 4.2% 3.6% 3.0% 2.5% N/A NPL Coverage 169.5% 186.6% 169.1% 209.4% N/A Capital Adequacy 18.4% 15.3% 14.0% 14.7% N/A
Growth in Costs 22.8% 21.6% 29.1% 7.4% 5.3% Cost-to-Income 22.3% 20.1% 23.0% 25.6% 27.3% Net Interest Income-to-Operating Income 64.5% 57.3% 56.6% 60.6% 72.7%
RoAA * 2.5% 2.7% 2.8% 1.5% 1.1% RoAE * 19.4% 22.8% 26.1% 14.6% 10.2%
* Annualized figures. Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 28 Al Ahli Bank of Kuwait (ABK) Kuwait in Focus - January 2010
Overview Asset Quality
Al Ahli Bank of Kuwait (ABK) was established in 1967, by • ABK’s non-performing loans (NPLs)-to-gross loans ratio one of Kuwait’s prominent business families — the Behbehani has dropped from 7.8% in 2003 to 2.5% in 2008. family. The family is currently the largest shareholder, holding NPL coverage has been more than adequate, ranging approximately 35% of the bank’s total share capital. The bank from 112% to 209% since 2003. No doubt, the rapid has a fairly small network of 22 branches and 48 ATMs in increase in loans led to simultaneous growth in general Kuwait and two overseas branches in Dubai and Abu Dhabi. provisioning, which accounted for 61% of total provisions ABK is also awaiting approval for licenses to open new as of December 2008. Taking a closer look at provisions branches in Oman and Qatar. The bank has created a strong though, we see that specific NPL coverage also improved franchise in corporate and commercial banking, which is continuously between 2003 and 2006. In 2007, however, ABK’s main focus. Retail lending, considered very secure and specific NPL coverage declined sharply from 99% to 82%, highly profitable in Kuwait, is another key area of focus. As and stayed at 81% in 2008. Total NPL coverage at the end of September 2009, ABK had an asset base of KD 3 billion, of 2008 stood at 209%. resulting in a market share of approximately 8% of the total banking assets in Kuwait. ABK’s loans and deposits market NPLs-to-Gross Loans and NPL Coverage Ratio shares stood at approximately 8% and 7%, respectively. The 9.0% 250% bank provides commercial banking and asset management services, and investment banking services via its wholly owned 8.0% 200% subsidiary Ahli Capital Investment Company. 7.0%
6.0% Latest News 150% 5.0%
4.0% • September 2009: ABK sued Saudi conglomerate Al Saad 100% Group owner Maan al-Sanea and Saad Trading, Contracting 3.0%
and Financial Services Co. for USD 125 million, for 2.0% 50% an alleged breach of contract and fraud over a credit 1.0% agreement. ABK accused Saad of breaking a USD 60 0.0% 0% million credit facilities agreement in 2007. In July 2009, 2003 2004 2005 2006 2007 2008 ABK announced an exposure of less than USD 30 million NPLs-to-Gross Loans NPL Coverage to the troubled Saudi conglomerate and no exposure to the Al Gosaibi Group. Sources: Company’s financial statements and NBK Capital
• September 2009: Moody’s downgraded ABK’s bank NPL Analysis – Pre-invasion versus Post-liberation financial strength rating from C- to D+. Consequently, Pre-invasion ABK’s long-term global local currency and long-term KD '000 2004 2005 2006 2007 2008
foreign currency deposit ratings were also downgraded to NPLs 39,689 39,034 38,628 36,463 36,863 Specific Provisions 39,689 39,034 38,628 36,463 36,863 A2 from A1. Back in June 2009, Fitch affirmed ABK’s % of total NPLs 68% 71% 69% 61% 66%
long-term issuer default rating (IDR) at A- and short- Post-liberation term IDR at F2. However, ABK’s individual rating was KD '000 2004 2005 2006 2007 2008 NPLs 18,700 15,867 17,093 23,191 18,757 downgraded from C to C/D with a Stable Outlook. Earlier in Specific Provisions 14,315 13,374 16,675 12,588 8,446 the year, in February 2009, S&P placed ABK, along with % of total NPLs 32% 29% 31% 39% 34% Post-Liberation four other Kuwaiti banks, on “credit watch negative” for NPL Growth -15% 8% 36% -19% Provisions Growth -7% 25% -25% -33% a possible downgrade, after the institutions were exposed NPL Coverage 77% 84% 98% 54% 45% to the distressed local investment sector. However, in KD '000 Total July 2009, S&P affirmed ABK’s BBB+/A-2 rating with a NPLs 58,389 54,901 55,721 59,654 55,620 Specific Provisions 54,004 52,408 55,303 49,051 45,309 Negative Outlook. Sources: Company’s financial statements and NBK Capital • September 2009: ABK’s shareholders approved the board of directors’ proposal to increase the bank’s share capital by 25% to KD 144 million via a rights issue. The increase is subject to approval by an Amiri decree.
nbkcapital.com | 29 Al Ahli Bank of Kuwait (ABK) Kuwait in Focus - January 2010
Financial Statement Analysis Balance Sheet
Income Statement • After recording consistent balance sheet growth of 20% between 2004 and 2007, ABK’s total assets grew by only • ABK announced a net profit of KD 4.09 million for 3Q2009, 3% in 2008 and declined by 1.4% in 9M2009. 84% lower than the net profit in 3Q2008. For the 9M2009 • Net loans and advances grew by a CAGR of 24% between period, ABK’s net profit stood at KD 24 million, 66% lower 2005 and 2007. In 2008, lending growth stood at 14% than 9M2008, on the back of weak non-interest income with the loan book reaching KD 2.13 billion by December. and large provisioning charges. Almost all the growth in 2008 occurred during the first • Core earnings were strong as net interest income grew three quarters. In fact, 4Q2008 saw a slight decline by 13% compared with 9M2008. However, fees and in the loan book. During 2009, net loans declined for commissions, and net investment income were weaker, three consecutive quarters to KD 2 billion at the end of declining by 18% and 73%, respectively. September 2009, 6% lower than the December 2008 level. • Total operating income reached KD 84 million, down 11% compared to 9M2008. Total operating costs increased by • The growth in customer deposits was slightly quicker in just 5% during 9M2009. the past, as they grew by a CAGR of 27% in the three years ending 2007. During 2008, however, total deposits • ABK took net loan loss provisions of KD 16 million declined by 10%, standing at KD 1.99 billion as of during 2Q2009 and another KD 13 million in 3Q2009. December 2008. Deposits were almost flat in the first six Investment provisions also increased from KD 1.5 million months of 2009, but fell by around 6% during 3Q2009, in 9M2008 to KD 5 million in 9M2009. This brought net putting total deposits at KD 1.89 billion, down 5% during profit for 9M2009 down to KD 24 million (66% YoY drop). 9M2009. • ABK recorded net profits of KD 46 million in 2008, 39% Financial Statements lower than the KD 76 million achieved in 2007. Net interest
income growth was slow at 3%, as interest expenses grew Income Statement (KD '000) 2007 2008 9M2008 9M2009
slightly faster than interest income. Operating income Interest Income 175,002 185,341 141,902 106,310 growth was hurt despite a surge in fee and commission Interest Expense (108,610) (116,869) (87,821) (45,224) Net Interest Income 66,392 68,472 54,081 61,086 income (+33% growth YoY), primarily due to weaker net Fees and Commissions 18,415 24,493 19,687 16,054 investment income, which declined by 27% during the Foreign Exchange Income 5,135 5,073 4,049 2,855 year. The bank was aggressive in terms of provisioning, Net Investment Earnings 11,951 8,729 10,482 2,872 Other Operating Income 15,412 6,235 5,822 1,180 with loan loss provisions of KD 15 million and investment Total Operating Income 117,305 113,002 94,121 84,047
provisions of KD 26.6 million lowering overall net income. Staff Expenses (17,355) (18,393) (14,111) (14,575) ABK also recorded a one-time gain of KD 4.8 million from Depreciation (1,645) (1,238) (831) (1,280) Other Expenses (7,938) (9,302) (6,843) (7,083) the sale of land; excluding that, the bank’s 2008 profits Total Operating Expenses (26,938) (28,933) (21,785) (22,938)
would have recorded a decline of 46% YoY. Loan Loss Prov. (1,872) (15,213) 3,453 (29,786) Investment and Other Prov. (8,544) (19,489) (1,509) (5,044) • ABK maintained a fairly stable cost-to-income ratio Other Income / (Exp.) (3,910) (3,331) (3,886) (2,021) between 2005 and 2007, averaging around 22%. In Net Income 76,041 46,036 70,394 24,258
2008, however, the ratio crept up each quarter, taking the Balance Sheet (KD '000) 2006 2007 2008 Sep-09
FY2008 ratio to 25.6%. The increase was due to weaker Assets operating income. In fact, costs were well controlled in Cash and Cash Equivalents 708,192 842,748 679,916 809,050 Loans and Advances 1,433,932 1,870,012 2,129,103 2,002,497 2008, growing by only 7%, compared to the double-digit Net Investments 249,512 205,095 159,273 120,100 growth of more than 20% seen in each of the previous Net Fixed Assets 14,306 13,956 33,822 34,408 Others 18,584 29,346 34,845 28,978 three years. The cost-to-income ratio for 9M2009 Total Assets 2,424,526 2,961,157 3,036,959 2,995,033
increased further to stand at 27.3%, once again due Liabilities and Shareholders' Equity to weak operating income. A senior bank official stated Due to Banks and Oth.Fin.Inst. 417,378 335,401 648,567 723,637 Customers' Deposits 1,576,669 2,207,998 1,991,676 1,886,481 earlier in 2009 that ABK was aiming to control costs going Other Liabilities 167,296 98,664 84,304 63,560 forward, given the expected general slowdown in 2009 Total Liabilities 2,161,343 2,642,063 2,724,547 2,673,678 banking profits; this cost control strategy included curbing Total Shareholders' Equity 263,183 319,094 312,412 321,355 expansion plans in the coming years. Total Liabilities and Sh. Equity 2,424,526 2,961,157 3,036,959 2,995,033
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 30 Companies in Focus Kuwait in Focus - January 2010
Aviation Lease and Finance Company (ALAFCO)
Key Data Highlights
General Liquidity • Aviation Lease and Finance Company (ALAFCO) is a KSE Code ALAFCO.KSE 52-week avg. volume 1,741,271 Shari'ah-based commercial aircraft leasing company. Reuters Code ALAF.KW 52-week avg. value (KD) 281,149
Price (KD) Price Performance • ALAFCO has a very diverse client base, from Asia to the
Closing Price 0.202 YTD 63.0% Middle East, Africa, and the United States. Additionally, 52-week High/Low 0.082 / 0.213 1-Year Period 198.0% many of ALAFCO’s clients are government entities, which Market Capitalization Shares Outstanding represent less risk. Million KD 150.01 Latest (million) 743
Ownership Structure • ALAFCO’s main revenue stream comes from operating Closely Held: 65.09% Public: 34.91% leases, effectively turning the company into an asset-heavy
Price as of close on January 18, 2010 Sources: Zawya and NBK Capital company. • ALAFCO recorded revenue of KD 27 million in FY2008- 2009, a decline of 1% from KD 27.3 million in FY2007- Stock Performance 2008.
0.250 16 • As of FY2008-2009, ALAFCO reported net profit of KD 52-week High: KD 0.213 14 10.2 million, a 1.3% growth from the KD 10 million 0.200 reported in FY2007-2008. 12 52-week Low: KD 0.082
10 0.150
8 Millions Price (KD) 0.100Price 6
4 0.050 2
0.000 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Badder Al Ghanim T. +965-2259 5330 E. [email protected]
Key Ratios
FY2004-2005 FY2005-2006 FY2006-2007 FY2007-2008 FY2008-2009
EBIT (KD Millions) 6.1 9.6 15.3 16.2 13.6 EBIT Margin 43% 42% 57% 59% 50% Net Profit Margin 15% 36% 34% 37% 38%
Investment-to-equity 0% 0% 2% 0% 0% Net debt-to-equity 1.2 1.5 1.4 1.4 2.1 Interest Coverage Ratio 1.9 1.9 2.0 2.5 2.2
ROA (%) 2% 3% 4% 4% 3% ROE (%) 6% 11% 12% 12% 11%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 31 Aviation Lease and Finance Company (ALAFCO) Kuwait in Focus - January 2010
Overview • ALAFCO has reported steady growth in operating profit over the previous four fiscal years up to FY2007-2008 at Aviation Lease and Finance Company (ALAFCO) is a provider a CAGR of 31%. As for the last full-year financials, the of Shari'ah-based commercial aircraft leasing products. story is a little different: ALAFCO reported a 16% decline in operating profit to KD 13.6 million for FY2008-2009. Headquartered in Kuwait, ALAFCO was established in 1992 Furthermore, ALAFCO’s operating profit margin has and listed on the Kuwait Stock Exchange in 2000. ALAFCO fluctuated historically between 42% and 59%. In FY2008- also offers a variety of consultative services in relation to 2009, ALAFCO achieved an operating profit margin of aircraft acquisition and disposal, lease management, and 50%. technical monitoring. Currently, 54% of the company is owned by Kuwait Finance House; Kuwait Airways owns 11%, and the • ALAFCO reported KD 10.2 million in net profit for FY2008- remaining 35% is publicly listed. 2009, a 1.3% increase from KD 10 million in FY2007- 2008. Moreover, the net profit margin expanded slightly to ALAFCO has a diverse client base with clients from Asia, the 38% for FY2008-2009, up from 37% in FY2007-2008. Middle East, Africa, and the United States. The company’s largest client base comes from China and Turkey, but a • Throughout the years, ALAFCO has had some non-recurring recently announced agreement with Saudi Arabian Airlines contributors to its bottom line: gain on disposal of available will add another large client. for sale investments and gain on disposal of property and equipment. After adjusting net income for the impact of these non-recurring items, we notice a 28% decline in Latest News adjusted net profit for FY2008-2009 to KD 7 million from the KD 9.7 million reported in FY2007-2008. • January 19, 2010: ALAFCO reported preliminary first quarter results (quarter ending December 31, 2009). The Adjusted Net Income company posted a 53.8% YoY increase in net profit to KD 2.23 million but did not provide further details. ALAFCO FY2005-2006 FY2006-2007 FY2007-2008 FY2008-2009 Net income (KD million) 8.2 9.1 10.1 10.2 also plans on delivering 16 additional aircraft on lease in Net Income Margin (%) 36% 34% 37% 38% Net income ex. Non-recurring items (KD million) 4.8 7.6 9.7 7.0 CY2010 to various customers bringing the total number of Adjusted Net Income Margin (%) 21% 29% 36% 26% aircraft in its portfolio to 47. Sources: Company’s financial statements and NBK Capital
Financial Statement Analysis Balance Sheet
Income Statement • Naturally, ALAFCO is a very asset-heavy company, as the majority of the company’s leases are structured as • ALAFCO saw a marginal decline of 1% in total revenue for operating leases. Thus, the asset is recorded on ALAFCO’s FY2008-2009 to KD 27 million. This decline was driven balance sheet as property, plant, and equipment (PP&E). by an 80% drop in consultancy and service income during • Examining PP&E, we notice that ALAFCO had an addition the year. of KD 120 million under aircraft and engine that resulted • Operating lease income represented 97.4% of total in 61% growth in PP&E during the last full year. This addition is in line with ALAFCO’s announcement that the revenue in FY2008-2009, up from 89% in FY2007-2009. company had agreed to buy four new Airbus aircraft with Consultancy income represented 2.1% of income during delivery between 2009 and 2010. the same period, down from 10.4% during FY2007-2008. Finally, finance lease income accounted for 0.5%, the • According to the FY2008-2009 financials, ALAFCO is a smallest contributor to the top line. zero investment company, an indication of the company’s focus on core operations. • Asia is the region with the highest contribution to • As of FY2008-2009, ALAFCO has total debt amounting to ALAFCO’s revenue, as this region contributed 52% of the KD 225 million, up 85% from FY2007-2008. However, FY2008-2009 top line. In FY2008-2009, the Middle East only 12% of the total debt is short term. Additionally, the contributed 24% of total revenue, overtaking Europe as company has a net debt-to-equity ratio of 2.1x, up from the second-largest contributor to revenue. 1.4x from FY2007-2008.
• On the expense front, total expenses grew by 21% year • Although the net debt-to-equity ratio has grown considerably on year in FY2008-2009. Staff costs and other operating over the last full year, ALAFCO has maintained solid expenses increased by 24% and 65%, respectively. interest coverage numbers. As of FY2008-2009, ALAFCO recorded an interest coverage ratio of 2.2x.
nbkcapital.com | 32 Aviation Lease and Finance Company (ALAFCO) Kuwait in Focus - January 2010
• Looking at cash flows, we notice an increase in PP&E by KD 79.8 million in FY2008-2009, which we believe was financed by KD 106 million of financing facilities obtained during the year.
• Examining the return on assets (ROA) and return on equity (ROE) for ALAFCO, we notice strong numbers for both categories. ALAFCO currently has an ROA of 3% for FY2008-2009, down from 4% the previous year. Additionally, ROE for FY2008-2009 stands at 11%, down from 12% the previous year.
Financial Statements
Income Statement (KD '000) FY2005-2006 FY2006-2007 FY2007-2008 FY2008-2009
Operating lease income 22,356 26,317 24,278 26,291 Consultancy and service income 296 471 2,840 561 Finance lease income - 39 165 141 Total Revenue 22,652 26,827 27,282 26,993
Murabaha income 554 526 339 103 Gain on disposal of AFS - - 313 - Gain on disposal of PP&E 2,509 1,482 - 3,173 Gain on foreign exchange 904 - - - Other income - - 237 134 Staff costs (861) (679) (1,043) (1,297) Depreciation (10,831) (10,287) (9,465) (11,194) Finance costs (5,163) (7,775) (6,553) (6,294) Other operating expenses (1,406) (580) (550) (904) Directors fees (60) (60) (60) (60) Profit before tax 8,298 9,454 10,501 10,653
Zakat - - (86) (107) KFAS (75) (86) (95) (96) NLST - (238) (264) (268) Profit for the Year 8,222 9,130 10,055 10,182
Balance Sheet (KD '000) FY2005-2006 FY2006-2007 FY2007-2008 FY2008-2009
PP&E 225,940 205,332 186,338 299,518 Capital advances - 26,077 63,004 59,538 AFS - 1,448 - - Investment in joint venture 1 - - - Receivables 737 440 200 1,651 Finance lease receivables - 2,669 2,128 1,817 Cash and balances 16,425 9,105 9,264 27,706 Total Assets 243,103 245,070 260,935 390,230
Due to financial institutions 122,269 118,829 121,720 224,887 Security deposits 6,646 9,228 14,798 30,782 Maintenance reserve 4,859 6,466 5,764 7,032 Other liabilities 36,677 31,985 37,506 33,971 Total Liabilities 170,450 166,507 179,788 296,672
Total Equity 72,652 78,563 81,147 93,558
Total Liabilities & Equity 243,103 245,070 260,935 390,230
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 33 Companies in Focus Kuwait in Focus - January 2010
Bank of Kuwait and The Middle East (BKME)
Key Data Highlights • The Bank of Kuwait and the Middle East (BKME) was General Liquidity established in 1941 as the first banking and financial KSE Code BKME.KSE 52-week avg. volume 376,088 Reuters Code BKME.KW 52-week avg. value (KD) 180,717 institution in Kuwait. The bank currently holds a 6% share
Price (KD) Price Performance of total assets in the Kuwait banking sector. Ahli United
Closing Price 0.510 YTD 0.0% Bank (AUB) took control of 48% of the bank’s capital in 52-week High/Low 0.56 / 0.355 1-Year Period 14.6% 2002, and increased this to 74.8% in August 2005. Market Capitalization Shares Outstanding Million KD 448.00 Latest (million) 878.43 • In January 2010, BKME announced that it had converted into an Islamic bank and that the name of the bank was Ownership Structure Closely Held: 87% Public: 13% changed to Ahli United Bank. The bank is set to start
Price as of close on January 18, 2010, Sources: Reuters, Zawya and NBK Capital transactions in compliance with Islamic Shari’ah laws by 2H2010. This followed a resolution passed by the Central Bank of Kuwait (CBK) in December 2009, recognizing the Stock Performance transition of BKME into a Shari’ah-compliant bank.
0.600 6 • BKME has displayed strong profitability in the past, which has been historically supported by both net interest income 52-week High: KD 0.560 0.550 5 and non-interest income. Return on average assets (RoAA) and return on average equity (RoAE) have been stable at 0.500 4 around 2.3% and 20%, respectively, over the past four years. 0.450 3 Millions Price (KD) Price • Strong competition has eroded BKME’s market share since 0.400 2 2005. BKME’s share of total sector deposits has fallen
52-week Low: KD 0.355 from 7% in 2005 to 4.9% at the end of September 2009. 0.350 1 • BKME’s capital adequacy ratio (CAR), albeit lower than 0.300 0 the level in 2007, was strong at 14.8% as of December Jan-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10
Volume Close 2008. BKME benefits from comfortable asset quality indicators — the non-performing loan (NPL) coverage ratio Sources: Zawya and NBK Capital has generally exceeded 100%.
Analyst • At the end of September 2009, Fitch affirmed BKME’s ratings with a stable outlook. Earlier that month, Moody’s Munira Mukadam rating agency downgraded BKME’s long-term foreign T. +971 4 365 2858 currency deposits rating to A3 from A1 and BKME’s bank E. [email protected] financial strength rating to D+ from C-. Key Ratios
2005 2006 2007 2008 9M2009
Growth in Loans -7.8% 21.8% 35.6% 17.7% 4.8% Growth in Deposits -1.7% 13.8% 19.7% 12.0% -6.0% Growth in Net Profit 75.3% 13.0% 6.8% 6.6% -70.0% Growth in Operating Income 42.9% 3.4% 20.1% 14.3% -28.9%
Loans-to-Assets 47.0% 47.8% 55.9% 65.8% 69.1% NPLs-to-Gross Loans 3.49% 3.27% 2.67% 3.05% N/A NPL Coverage 136% 122% 127% 127% N/A Capital Adequacy N/A 18.14% 15.60% 14.80% N/A
Growth in Costs 30.2% 14.5% 22.2% 3.9% -15.5% Cost-to-Income 29.2% 32.3% 32.9% 29.9% 30.2% Net Interest Income-to-Operating Income 50.8% 54.9% 45.9% 40.0% 63.4%
RoAA * 2.4% 2.5% 2.3% 2.3% 0.9% RoAE * 19.9% 20.5% 19.1% 20.0% 8.8% * Annualized figures Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 34 Bank of Kuwait and the Middle East (BKME) Kuwait in Focus - January 2010
Overview Asset Quality
The Bank of Kuwait and the Middle East (BKME) was established • Asset quality indicators for BKME have generally improved in 1941, making it the first banking and financial institution in since 2003. However, there was a slight deterioration in Kuwait. BKME was initially established as the Kuwaiti branch 2008. of a British bank (the Iranian Imperial Bank at the time), and • After dropping for two consecutive years (2006 and was later acquired by the HSBC Group in 1959. In 1971, the 2007), the non-performing loans (NPLs)-to-gross loans Kuwait Investment Authority (KIA) took over the bank, following ratio increased to 3.05% in 2008, due to 35% growth in local regulations that restricted foreign ownership of banks. In NPLs compared to 18% growth in total loans. 2002, AUB took control of 48% of the bank’s capital, which AUB increased to 74.8% in August 2005. The bank offers • Total NPL coverage has exceeded 120% since 2004 a full range of services, including retail, corporate, treasury, and stood at 127% as of December 2008. The specific and investment management services. At the end of 2007, provisions-to-NPLs ratio for post-liberation impaired loans the bank had a network of 23 branches and 56 ATMs across averaged between 58% and 62% between 2005 and Kuwait. At the end of September 2009, BKME’s total assets 2008. BKME’s pre-liberation NPLs accounted for only 4% stood at KD 2.2 billion, accounting for nearly 6% of the total of the total NPLs at the end of 2008, much lower than banking sector assets. In June 2008, BKME received approval most of the bank's peers. from the CBK to convert into a fully Shari’ah-compliant bank. In January 2010, the bank announced that it had converted NPLs-to-Gross Loans and NPL Coverage Ratio into a purely Islamic bank. The bank’s principal subsidiary is 4.00% 160% the Kuwait and Middle East Financial Investment Company (KMEFIC), which offers investment and portfolio management 3.50% 140% services. BKME currently owns a 50.2% stake in KMEFIC, one 3.00% 120% of the largest brokerage houses in Kuwait, with operations in 2.50% 100% Oman, UAE, Jordan, and Egypt.
2.00% 80% 3.49% 3.27% 3.12% Latest News 1.50% 2.96% 3.05% 60% 2.67%
1.00% 40% • January 2010: BKME announced that it had converted into an Islamic bank and that the name of the bank was 0.50% 20% changed to Ahli United Bank. The bank is set to start 0.00% 0% transactions in compliance with Islamic Shari’ah laws by 2003 2004 2005 2006 2007 2008 2H2010. This followed a resolution passed by the Central NPLs-to-Gross Loans (Left) Total NPL Coverage (Right)
Bank of Kuwait (CBK) in December 2009, recognizing the Sources: Company’s financial statements and NBK Capital transition of BKME to a Shari’ah-compliant bank. In June 2008, BKME had received initial approval from the CBK NPL Analysis - Pre-invasion versus Post-liberation
to take appropriate action for the conversion process with Pre-invasion a one-year deadline. KD '000 2004 2005 2006 2007 2008 NPLs 2,114 1,980 1,970 1,870 1,860 Specific Provisions 2,114 1,980 1,970 1,870 1,860 • September 2009: Fitch affirmed BKME’s ratings with a % of total NPLs 8% 7% 6% 5% 4%
stable outlook. The long-term and short-term issuer default Post-liberation ratings of A- and F2 reflect the high probability of support KD '000 2004 2005 2006 2007 2008 NPLs 24,571 25,770 29,469 32,673 44,868 from the Kuwaiti authorities. Specific Provisions 10,531 15,839 17,122 20,235 26,934 % of total NPLs 92% 93% 94% 95% 96%
• September 2009: Moody’s rating agency downgraded Post-Liberation NPL Growth - 5% 14% 11% 37% BKME’s long-term foreign currency deposit rating to A3 Provisions Growth - 50% 8% 18% 33% from A1 and BKME’s bank financial strength rating to NPL Coverage 43% 61% 58% 62% 60% D+ from C-. The downgrade was based on the weakening KD '000 Total NPLs 26,685 27,750 31,439 34,543 46,728 credit conditions, added pressure on asset quality, lower Specific Provisions 12,645 17,819 19,092 22,105 28,794 Total Provisions 32,537 37,692 38,476 43,766 59,423 market-related revenues, and exposure to high-risk sectors, including real estate and construction, in addition to the Sources: Company’s financial statements and NBK Capital risk of transitioning into an Islamic bank.
nbkcapital.com | 35 Bank of Kuwait and the Middle East (BKME) Kuwait in Focus - January 2010
Financial Statement Analysis • Total deposits reported a lower CAGR of 11% between 2004 and 2008. In 2008, deposit growth was slightly Income Statement slower than loan growth, at 12%. Deposits fell to KD 1.3 billion at the end of September 2009, down 6% since • BKME recorded a net profit of KD 15 million during December 2008. 9M2009, 70% lower than 9M2008. The 3Q2009 net • BKME has consistently been losing market share in deposits profits were only KD 891 thousand. The bank earned over the past four years. In 2005, BKME’s total deposits KD 16 million in net interest income during the quarter, accounted for 7% of total sector deposits. However, as of but loan loss provisions of KD 13.8 million wiped out September 2009, this share had dropped to 4.9% due to almost all of these earnings. tough competition in the corporate sector. • For 9M2009, net interest income growth was strong at 25%, as the cost of funds continued to drop. Financial Statements Furthermore, during 9M2009, fees and commissions remained weak, dropping 37% YoY, and investment Income Statement (KD '000) 2007 2008 9M2008 9M2009
earnings also showed no signs of improvement. This Interest Income 130,163 139,945 108,220 83,635 led to a 29% decline in total operating income during Interest Expense (87,624) (97,515) (74,271) (41,016) Net Interest Income 42,539 42,430 33,949 42,619 9M2009. Fees and Commissions 24,763 23,019 18,434 11,578 • Total operating costs declined by 16% during the Foreign Exchange Income 4,749 5,015 4,468 2,998 Net Investment Earnings 20,012 35,629 37,218 10,016 period. However, the bigger drop in operating income Other Operating Income 599 (149) 392 (37) pushed the cost-to-income ratio up to 30% compared Total Operating Income 92,662 105,944 94,461 67,174 to 25% in 9M2008. Staff Expenses (16,948) (18,222) (14,755) (12,683) Depreciation (2,010) (2,153) (1,375) (1,739) • In 2008, the bank posted 7% growth in earnings that Other Expenses (11,506) (11,267) (7,902) (5,874) reached KD 51.4 million. Net income for 9M2008 Total Operating Expenses (30,464) (31,642) (24,032) (20,296) stood at KD 50.4 million, indicating that 4Q2008 Loan Loss Prov. (5,466) (15,848) (12,840) (33,712) Investment and Other Prov. 258 (2,683) - - profits were almost flat. Operating income in 2008 was Other Income / (Exp.) (1,515) (2,243) (2,483) (720) supported by large gains in the investment portfolio. Minority Interest (7,296) (2,163) (4,707) 2,669 Specifically, during 2Q2008, BKME recorded a profit of Net Income 48,179 51,365 50,399 15,115
KD 20.6 million when the bank sold its share in Bank of Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Bahrain and Kuwait (BBK). BKME took KD 15.8 million Assets in net loan loss provisions in 2008, compared to KD 5.5 Cash and Cash Equivalents 495,685 430,336 490,032 395,973 Due From Banks 248,105 297,128 43,424 105,670 million in the previous year. Loans and Advances 922,987 1,251,476 1,472,932 1,544,311 Net Investments 192,321 172,758 128,804 88,766 • Net interest income growth was flat in 2007 and 2008 Investment in Associates - 8,774 8,048 8,142 despite rapid growth in lending — the primary reason Net Fixed Assets 20,178 35,503 49,772 52,107 being higher funding costs due to intense competition Others 50,130 42,574 44,006 39,600 Total Assets 1,929,406 2,238,549 2,237,018 2,234,569 in the corporate sector. Liabilities and Shareholders' Equity Balance Sheet Due to Banks and Oth.Fin.Inst. 428,766 609,790 483,271 605,408 Customers' Deposits 1,068,443 1,278,618 1,432,511 1,346,011 Borrowings 132,414 - - - • BKME’s total assets grew by a CAGR of 6% between Other Liabilities 42,852 46,877 49,344 41,616 2004 and 2008. Following a decline in assets in 2005, Total Liabilities 1,672,475 1,935,285 1,965,126 1,993,035 2006 and 2007 were strong years, with assets growing by Total Shareholders' Equity 235,097 269,884 243,066 215,338 20% and 16%, respectively. However, between December Minority Interest 21,834 33,380 28,826 26,196
2007 and September 2009, assets remained nearly flat at Total Liabilities and Sh. Equity 1,929,406 2,238,549 2,237,018 2,234,569 KD 2.2 billion. Sources: Company’s financial statements and NBK Capital • Total loans followed a similar trend: declining slightly in 2005 (-8%), and then growing rapidly by 22% and 36% in 2006 and 2007, respectively. Lending growth in 2008, although not as rapid as in prior years, was still impressive at 18%, given the change in the operating environment. During 9M2009, loans grew by only 5%, reaching KD 1.5 billion at the end of September 2009.
nbkcapital.com | 36 Companies in Focus Kuwait in Focus - January 2010
Boubyan Petrochemical
Key Data Highlights
General Liquidity • Due to Boubyan Petrochemical’s dependence on income KSE Code BPCC.KSE 52-week avg. volume 2,936,260 from investments, the company must effectively be looked Reuters Code BPCC.KW 52-week avg. value (KD) 1,339,654 at as an investment vehicle. Price (KD) Price Performance
Closing Price 0.410 YTD 0.0% • Boubyan’s most notable single investment is the company’s 52-week High/Low 0.320 / 0.560 1-Year Period 9.0% stake in EQUATE—a private company founded in 1995 as Market Capitalization Shares Outstanding a joint venture between government-owned Petrochemical Million KD 198.89 Latest (million) 485 Industries Company (PIC) and Union Carbide Corporation, Ownership Structure now a wholly owned subsidiary of the Dow Chemical Closely Held: 13.36% Public: 86.64% Company, and Boubyan Petrochemical Company. Price as of close on January 18, 2010 Sources: Zawya and NBK Capital • Boubyan’s net profit figure is highly dependent on two non- core income streams, dividend income and investment Stock Performance income.
• Boubyan Petrochemical reported a net profit of KD 20.3 0.600 25 52-week High: KD .560 million in FY2008-2009, a drop of 61% year-on-year. As for 1H2009-2010, Boubyan reported a net profit of 52-week Low: KD 0.320 20 KD 8.4 million, a 55% drop from the KD 18.6 million achieved in 1H2008-2009. 15
0.400 • Boubyan’s balance sheet sheds light on the company’s Millions Price (KD) Price 10 investment dependence as investments total 87% of total assets.
5 • With the exception of EQUATE, we are uncertain about the exact composition of the majority of Boubyan’s 0.200 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 investments. Volume Close
Sources: Reuters and NBK Capital
Analysts
Badder Al Ghanim May Zuaiter T. +965 2259 5330 T. +965 2259 5597 E. [email protected] E. [email protected]
Key Ratios
2005-2006 2006-2007 2007-2008 2008-2009 1H2009-2010
Net debt to Equity 25.9% 30.5% 34.0% 68.5% 80.7% Investments/Total Assets 88.2% 91.0% 86.6% 86.6% 87.4% Investments/Equity 115.4% 123.4% 126.1% 154.7% 167.4%
ROA 8.8% 12.6% 13.1% 5.1% N/A ROE 11.5% 17.2% 19.0% 9.1% N/A
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 37 Boubyan Petrochemical Kuwait in Focus - January 2010
Overview for sale, without which the company would have recorded a net profit figure of KD 72.4 million, an increase of 38% Boubyan Petrochemical, operationally, is a company that above the previous recorded full-year net profit figure of acts as a third party between customers and petrochemical KD 52.6 million in FY2007-2008. manufacturers that specialize in products such as polyethylene 1H2009-2010 (May – October 2009) and ethylene glycol. • Boubyan reported a net profit figure of KD 8.4 million in However, taking into account Boubyan’s operational structure 1H2009-2010, a 55% drop from the KD 18.6 million and its dependence on core and non-core investments, the achieved during the same period last year. company must be analyzed as an investment company above anything else. The size of Boubyan’s investment portfolio • The company’s bottom line was highly dependent on greatly outweighs the company’s core operation, which is dividend and investment income. In 1H2009-2010, highlighted by Boubyan’s stake in EQUATE—the company’s Boubyan Petrochemical recorded dividend income of most notable investment. KD 2.9 million, 50% higher than the KD 1.9 million recorded the same period last year. In addition, Boubyan EQUATE Overview Petrochemical recorded KD 10.2 million in net investment income for 1H2009-2010, a drop of 45% from the EQUATE Petrochemical Company is a private company KD 18.6 million recorded in 1H2008-2009. founded in 1995 as a joint venture between government- • Net profit was also negatively affected by a 64% increase owned Petrochemical Industries Company (PIC) and Union in general and administrative expenses, as well as a 23% Carbide Corporation, now a wholly owned subsidiary of the Dow increase in finance costs. Chemical Company, and Boubyan Petrochemical Company. • Boubyan Petrochemical impaired investments in 1H2009- Currently, both Dow Chemical Company & PIC own 42.5% of 2010 to the tune of KD 3.6 million, without which the EQUATE. Boubyan Petrochemical Company holds 9%, and the company would have recorded a net profit figure of remaining 6% is owned by Qurain Petrochemical Industries KD 12 million for the period, a decrease of 35% year Company, a publicly traded company established in Kuwait on year. Boubyan Petrochemical had no impairments in in 2004. Producing polyethylene and ethylene glycol for the 1H2008-2009. markets of Asia, the Middle East, Africa, and Europe, EQUATE owes its success to Kuwait’s rich hydrocarbon resources. In Balance Sheet 2008, EQUATE reported net income of USD 683 million, a decline of 11% from FY2007. • Boubyan Petrochemical’s asset portfolio effectively transforms the company into an investment entity. The Financial Statement Analysis chart below breaks down Boubyan’s asset portfolio.
Income Statement Boubyan Asset Breakdown
FY2008-2009 Total Assets KD 408 million • Boubyan Petrochemical’s dependence on investments has rendered typical income statement analysis, such as Operating Assets Investments KD 37.7 million KD 370.3 million EBITDA analysis, meaningless, as the majority of the story 9.2% 90.8% lies in the company’s balance sheet. Investment in Equate (AFS) Other Associates KD 120 million KD 236.6 million • With that said, the company is highly dependent on two KD 13.7 million 32.4% 63.9% sources for income—dividend income and investment 3.7% Held for AFS income. In FY2008-2009, Boubyan Petrochemical Trading KD 199.8 KD 36.8 million recorded dividend income of KD 23.6 million and million investment income of KD 52.9 million. Sources: Company’s financial statements and NBK Capital • The company recorded a net profit figure of KD 20.3 million in FY2008-2009, a drop of 61% year on year. For the same period, Boubyan Petrochemical took an impairment of KD 52.1 million for investments available
nbkcapital.com | 38 Boubyan Petrochemical Kuwait in Focus - January 2010
• The chart above highlights the vast difference in size Financial Statements between Boubyan’s operating assets and its investments. The majority of the investments are classified as available Income Statement (KD '000) 2007-2008 2008-2009 1H2008-2009 1H2009-2010 Sales 16,782 25,189 11,635 14,417 for sale (AFS), which in total amounts to 78% of Boubyan’s EBIT (1,209) 1,365 1,099 2,485 total assets. Broken down, AFS includes investments in Dividend income 23,625 23,641 1,945 2,926 Net investment income 32,592 52,900 18,614 10,235 EQUATE as well as quoted and unquoted investments (for Share of results of associates 3,266 2,784 591 (259) Finance cost (5,728) (6,682) (2,736) (3,756) which information is limited). Other Income 2,571 (20) 160 1,524 Profit before impairment 55,116 73,988 19,675 13,154
• Examining Boubyan Petrochemical’s cash flows, we notice Impairment of investments AFS - (52,105) - (3,641) additions to AFS of KD 27.6 million and proceeds from the Taxes (2,109) (936) (819) (372) Minority Interest (378) (612) (291) (734) sale of AFS of KD 15 million, resulting in a net movement Profit for the year after impairment 52,630 20,335 18,565 8,407
of KD 12.6 million for 1H2009-2010. Balance Sheet (KD'000) 2006-2007 2007-2008 2008-2009 Oct-09
Cash and cash equivalents 3,387 17,797 7,590 8,228 • Boubyan currently has a net debt-to-equity ratio of 81% Accounts receivable & prepayments 6,635 6,422 8,756 9,981 Inventories 1,987 2,525 2,620 3,200 for 1H2009-2010, up from 69% in FY2008-2009. This Investments carries at fair value 43,229 46,983 35,508 36,804 is due to a 5% decline in equity and a 13% increase in Total Current Assets 55,238 73,728 54,474 58,212 Investments AFS (Equate) 125,565 131,500 120,000 120,000 net debt. Investments AFS (Others) 123,443 170,549 189,459 199,849 Investments in associates 9,893 13,544 14,674 13,685 Exchange of deposits 314 602 7,250 3,808 Property, plant and equipment 5,063 10,525 10,080 9,910 Goodwill 1,717 2,575 2,575 2,575 Total Assets 321,232 403,023 398,512 408,038
Accounts payable and accruals 6,564 11,435 11,271 9,755 Murabaha payable - - - 10,000 Dividends Payable 1,767 1,640 2,334 2,962 Term loans 75,593 111,814 160,330 170,191 Total Liabilities 83,925 124,889 173,935 192,908
Share capital 42,000 46,200 48,510 48,510 Share premium 2,400 2,400 2,400 2,400 Treasury shares (457) (457) (1,130) (462) Treasury shares reserves - - 659 951 Statutory reserve 12,343 17,817 19,944 19,944 Voluntary reserve 12,343 17,817 19,944 19,944 Revaluation reserve - 1,363 1,363 1,363 Cumulative changes in fair value 125,756 132,644 90,796 83,520 Retained earnings 42,465 59,017 40,556 36,857 Equity attributable to Parent Co. 236,850 276,800 223,043 213,027
Minority interest 457 1,333 1,534 2,103
Total Equity 237,307 278,134 224,577 215,130
Total Liabilities and Equity 321,232 403,023 398,512 408,038
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 39 Companies in Focus Kuwait in Focus - January 2010
Burgan Bank (Burgan)
Key Data Highlights
General Liquidity • Burgan Bank was established in 1977. Kuwait Investment Projects Company (KIPCO) currently owns 54.60% of the KSE Code BURG.KSE 52-week avg. volume 2,311,573 Reuters Code BURG.KW 52-week avg. value (KD) 926,891 bank. As of September 2009, Burgan held approximately 10% of the total banking assets in Kuwait. Price (KD) Price Performance Closing Price 0.320 YTD -5.9% • In January 2010, Burgan became a majority shareholder 52-week High/Low 0.5 / 0.285 1-Year Period -34.0% of Bank of Baghdad (BOB), after purchasing an additional Market Capitalization Shares Outstanding 5.3% stake for USD 10.7 million from United Gulf Bank Million KD 323.76 Latest (million) 1,011.76 (UGB), which increased Burgan's total ownership in Ownership Structure BOB to 50.6%. In April 2009, the bank had transferred Closely Held: 61% Public: 39% 45.31% of the shares of the BOB and 60% of the shares Price as of close on January 18, 2010, Sources: Reuters, Zawya, and NBK Capital of Algeria Gulf Bank (AGB) from UGB. Burgan completed the acquisition of Jordan Kuwait Bank (JKB) by purchasing a 43.86% stake from UGB in July 2008. Stock Performance • Burgan has experienced rapid loan growth over the past
0.550 30 few years (+50% in 2007 and 2008). However, lending slowed down during 9M2009, with Burgan recording 7%
0.500 52-week High: KD 0.500 growth between December 2008 and September 2009. 25 Total deposits, which grew by 11% during 1Q2009, fell 0.450 in 2Q2009 and 3Q2009, resulting in 9M2009 deposit 20 growth of negative 3%. 0.400 15 • Burgan’s 3Q2009 net profit fell by 91% YoY to KD 1.7
0.350 Millions Price (KD) Price million, putting the 9M2009 net profit at KD 14 million, 10 down 78% YoY, on the back of high provisioning. However, 0.300 52-week Low: KD 0.285 net interest income (NII) growth was strong, up 50% over
5 0.250 9M2008, as funding costs declined sharply. • Burgan displays strong asset quality indicators: non- 0.200 0 Jan-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10 performing loans (NPLs)-to-gross loans stood at 1.39%, Volume Close while NPL coverage exceeded 300% at the end of 2008. Burgan’s capital adequacy ratio (CAR) fell to 13.77% at Sources: Zawya and NBK Capital the end of December 2008 from 16.58% at the end of Analyst December 2007. • In January 2010, Burgan received approval from its Munira Mukadam shareholders to increase its share capital by KD 36 million. T. +971 4 365 2858 E. [email protected] • On August 26, 2009, Moody’s downgraded Burgan’s bank financial strength rating to D+ from C-. Key Ratios
2005 2006 2007 2008 9M2009
Growth in Deposits 11.3% 6.1% 33.2% 46.6% -2.8% Growth in Net Profit 43.2% 31.5% 34.3% -49.5% -78.4% Growth in Operating Income 28.8% 25.8% 20.7% 14.6% 15.8%
Loans-to-Assets 42.3% 42.8% 49.9% 54.5% 57.2% NPLs-to-Gross Loans 4.00% 3.42% 1.71% 1.39% N/A NPL Coverage 148% 165% 224% 321% N/A Capital Adequacy 18.37% 16.50% 16.58% 13.77% N/A
Growth in Costs 18% 15% 18% 15% 55% Cost-to-Income 29.6% 27.1% 26.4% 26.5% 27.1% Net Interest Income-to-Operating Income 62% 61% 48% 56% 64%
RoAA * 2.3% 2.7% 3.0% 1.1% 0.5% RoAE * 18.1% 22.0% 24.5% 11.4% 5.9% * Annualized figures Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 40 Burgan Bank (Burgan) Kuwait in Focus - January 2010
Overview to “Stable” to factor in the lower likelihood of a near- term upgrade, resulting primarily from a weaker operating Established in 1977, Burgan Bank (Burgan) is the youngest environment and the uncertainties surrounding Burgan’s commercial bank in Kuwait. Burgan was primarily government expansion strategy. owned for two decades. The bank underwent a major structural change in 1997, when Kuwait Investment Projects Company Expansion Strategy (KIPCO), Kuwait’s leading holding company, took over the government’s share to become the largest shareholder. KIPCO • Although the bank has operated only within the country, in currently owns 54.60% of the bank. Along with the change in 2008, Burgan announced its expansion strategy involving ownership came a shift in strategic focus and management the purchase of JKB, AGB, BOB, and Tunis International style. The bank is now among the country’s top banks and has Bank (TIB). created a strong presence with a wide network of 22 branches • The shares of these banks were to be bought from UGB and more than 130 ATMS around Kuwait as of the end of for KD 194 million. UGB, an investment bank based in 2008. The bank’s activities can be broadly divided into four Bahrain, is also majority-owned (88%) by KIPCO. main categories: retail banking, corporate banking, private and international banking, and treasury and investments. As • In July 2008, Burgan acquired a 43.86% equity stake of September 2009, with an asset base of KD 3.9 billion, in JKB. Burgan had previously owned 7.24% of JKB; the Burgan held approximately 10% of the country’s total banking acquisition of this stake increased Burgan's total ownership assets. Burgan operates on the three main strategic pillars to 51.1%. As of December 2008, JKB’s financials have of client delight and care, leveraging its operational and been consolidated. JKB accounts for approximately 20% technological capabilities, and nurturing its staff. Thus, the of Burgan’s consolidated assets. bank has focused its efforts on bringing innovative products • In January 2010, the bank acquired a 5.30% stake of and services to the market, enhancing customer satisfaction, BOB’s shares from UGB. Burgan previously held 45.31% and improving delivery channels. The long-term strategy of BOB, so the bank's total ownership increased to remains focused on transforming branches and taking a more 50.61%. In 2Q2009, the bank completed the transfer of customer-centric approach. Burgan is the only bank in the GCC 60% of AGB’s shares, increasing Burgan's total ownership with ISO 9001:2000 certification for all its banking business. to 65.11%.
Latest News • The transfer of TIB’s shares from UGB to Burgan has not yet been completed. Burgan currently owns a 76.5% stake in TIB, which will increase by 10%. • January 2010: Burgan became a majority shareholder of Bank of Baghdad (BOB), after purchasing an additional 5.3% stake for USD 10.7 million from United Gulf Bank Post-transaction Shares in Subsidiaries (UGB), which increased Burgan's total ownership in BOB Burgan to 50.6%.
• January 2010: Burgan received approval from the Jordan Kuwait Bank Bank of Baghdad Algeria Gulf Bank Tunisia International Bank* 51.1% 50.61% 65.11% 86.5% shareholders, at the general assembly meeting, to increase the bank's share capital by KD 36 million. The bank plans * Note: Burgan currently owns 76.5% of TIB Source: NBK Capital on issuing 360 million shares for the price of KD 0.100 and a premium of KD 0.180 per share, increasing the total subscription value to KD 100.8 million. Financial Statement Analysis
• August 26, 2009: Moody’s downgraded Burgan’s bank Income Statement financial strength rating to D+ from C-. Consequently, Burgan’s long-term global currency and long-term foreign • Burgan’s 9M2009 net profit stood at KD 14 million, 78% currency deposit ratings were also downgraded to A2 from lower than 9M2008. The bank recorded a net profit of A1. KD 11.3 million in 1Q2009, which compared favorably • February 2009: S&P placed Burgan (along with four to the net losses of KD 28.5 million posted in 4Q2008. other Kuwaiti banks) on “credit watch negative” for a possible downgrade, given the exposure to the distressed local investment sector. Previously, in October 2008, the agency had revised its outlook on the bank from “Positive”
nbkcapital.com | 41 Burgan Bank (Burgan) Kuwait in Focus - January 2010
However, the combined net profits of 2Q2009 and and September 2009. Total deposits, which grew by 11% 3Q2009 stood at a mere KD 2.9 million, due to a surge in during 1Q2009, fell in 2Q2009 and 3Q2009, resulting in provisioning charges. 9M2009 deposit growth of negative 3%.
• Net interest income growth in 9M2009 was robust, • Burgan adopted IAS 39 in October 2008, thereby increasing by 50%, as funding costs continued to decline reclassifying some of the bank’s “trading” securities as since 4Q2008. Income from fees and commissions grew by “available for sale.” As of September 2009, the bank 38%, while foreign exchange income and net investment had recorded unrealized losses of KD 1.04 million within income declined by 10% and 80%, respectively. its equity. Had the investments not been reclassified, an unrealized profit of KD 194 thousand would have been • A one-off gain amounting to KD 4.2 million pushed “other recorded on the interim income statement. income” up during 9M2009. Total operating income witnessed an increase of 16%, supported primarily by the growth in net interest income. Financial Statements
• A 55% increase in operating costs added further pressure Income Statement (KD '000) 2007 2008 9M2008 9M2009
on the bottom line. Burgan’s cost-to-income ratio crept Interest Income 167,713 208,744 152,714 154,124 up to 27.1% in 9M2009, compared to 20.2% during Interest Expense (116,600) (140,727) (102,861) (79,590) Net Interest Income 51,113 68,017 49,853 74,534 9M2008. However, this was still in line with the average Fees and Commissions 17,089 22,416 16,257 22,371 cost-to-income ratio of approximately 27% over the Foreign Exchange Income 4,363 (237) 4,436 3,984 previous four years. Net Investment Earnings 32,256 26,435 26,039 5,095 Other Operating Income 868 4,474 3,430 9,810 • In 2008, the bank posted a 50% drop in earnings to Total Operating Income 105,689 121,105 100,015 115,794 KD 37.8 million. However, operating income grew by 15% Staff Expenses (12,641) (17,985) (11,654) (15,474) Other Expenses (15,241) (14,100) (8,538) (15,850) to KD 121.1 million, supported by strong net interest Total Operating Expenses (27,882) (32,085) (20,192) (31,324) income, which increased by 33%. Loan Loss Provisions (264) (36,396) (6,863) (50,205) Investment Provisions - (10,158) - (2,304) • Income from fees and commissions grew by 31%, while Other Income / (Exp.) (2,725) (5,331) (4,406) (4,585) Minority Interest - 646 (2,650) (13,172) foreign exchange income declined from KD 4.4 million in Net Income 74,818 37,781 65,904 14,204 2007 to a loss of KD 237 thousand in 2008. Balance Sheet (KD '000) 2006 2007 2008 Sep-09 • Net loan loss provisioning charges were KD 36.4 million in Assets Cash and Cash Equivalents 677,237 864,899 938,333 927,896 2008, compared to KD 264 thousand in the previous year. Due From Banks 411,801 380,568 532,412 408,884 The bank also took impairment charges on its investments Loans and Advances 946,317 1,421,104 2,132,990 2,276,063 Net Investments 120,735 110,146 107,404 115,687 amounting to KD 10.2 million in 2008. Investment in Associates - - - 15,280 Net Fixed Assets 18,062 17,804 30,618 34,935 Others 36,063 53,026 173,455 197,569 Balance Sheet Total Assets 2,210,215 2,847,547 3,915,212 3,976,314
Liabilities and Shareholders' Equity • Burgan’s total assets recorded a CAGR of 22% between Due to Banks and Oth.Fin.Inst. 525,959 732,112 795,486 962,595 Customers' Deposits 1,237,936 1,648,538 2,416,101 2,349,019 2004 and 2008. Growth in total assets in 2005 was Borrowings 138,540 42,998 197,943 123,351 moderate at 9%. However, in 2006, 2007, and 2008, Other Liabilities 47,626 72,759 147,601 143,807 Total Liabilities 1,950,061 2,496,407 3,557,131 3,578,772 total assets grew by 17%, 29%, and 37%, respectively. Minority Interest - - 47,728 67,119
• The growth in the balance sheet was supported by a rapid Total Shareholders' Equity 260,154 351,140 358,081 397,542
increase in the bank’s loan book, as well as by a surge in Total Liabilities and Sh. Equity 2,210,215 2,847,547 3,915,212 3,976,314 the funding base. Net loans and advances grew by a CAGR Sources: Company’s financial statements and NBK Capital of 30% between 2004 and 2008, underpinned by a 4-year CAGR of 23% in customer deposits.
• In 2008, loans advanced by 50%, while deposits grew by 47%. However, lending slowed down during 9M2009, with Burgan recording 7% growth between December 2008
nbkcapital.com | 42 Companies in Focus Kuwait in Focus - January 2010
Burgan Co. for Well Drilling, Trading and Maintenance (Burgan Well Drilling)
Key Data Highlights
General Liquidity • Burgan Well Drilling offers a full range of services to the KSE Code BURG.KSE 52-week avg. volume 437,598 oil sector, most notably equipment maintenance and Reuters Code BURG.KW 52-week avg. value (KD) 256,872 manpower for the operation of oil rigs. Price (KD) Price Performance
Closing Price 0.580 YTD 0.0% • Burgan Well Drilling is focused on its core operations, as it 52-week High/Low 0.460 / 0.633 1-Year Period 13.0% lacks any investments in equity markets. Market Capitalization Shares Outstanding Million KD 121.58 Latest (million) 210 • Burgan Well Drilling is a high-margin business with
Ownership Structure FY2008-2009 (fiscal year ends in March) EBITDA and net Closely Held: 82.29% Public: 17.71% profit margins at 36.5% and 23%, respectively.
Price as of close on January 18, 2010 Sources: Zawya and NBK Capital • This trend has carried over to the 1H2009-2010 margins as EBITDA and net profit margins were reported at 38% and 25%, respectively. Stock Performance • The company’s loan book and net debt-to-equity ratio are 0.700 6 growing as the company has recently taken on new debt. 52-week High: KD 0.633 During 1H2009-2010, Burgan Well Drilling secured an 5 Islamic Ijara facility amounting to KD 35.8 million. This
0.600 4 influx in new debt has caused the company’s net debt- to-equity ratio to expand to 1.2x, a high relative to the 3 company's previous four fiscal years. The company reported Millions Price (KD) Price that this new loan was taken to finance the purchase of 0.500 2 four new oil rigs.
52-week Low: KD 0.460 1
0.400 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Badder Al Ghanim T. +965 2259 5330 E. [email protected]
Key Ratios
FY2005-2006 FY2006-2007 FY2007-2008 FY2008-2009 1H2009-2010
EBITDA (KD millions) 6.2 11.2 12.1 10.9 8.0 EBITDA Margin 40.6% 48.3% 45.1% 36.5% 38.3% EBIT (KD millions) 5.3 9.9 10.5 9.6 6.7 Gross Margin 44.2% 42.8% 39.5% 32.3% 32.0% Operating Margin 36.2% 39.0% 35.7% 27.3% 28.3% Net Profit Margin 31.8% 36.1% 35.4% 23.0% 25.4%
Quick Ratio 0.3 1.4 0.6 0.1 0.3 Current Ratio 0.5 1.7 1.1 0.3 0.5 Net Debt to Equity 0.7 0.0 0.3 0.7 1.2 Interest Coverage Ratio 7.8 11.0 16.5 6.1 9.8
ROA 12.0% 14.0% 14.5% 7.0% 3.9% ROE 26.6% 26.6% 24.7% 14.9% 10.0%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 43 Burgan Well Drilling Kuwait in Focus - January 2010
Overview • Gross profit increased by 32% in 1H2009-2010 toKD 6.7 million, an increase that is slightly lower that the Burgan Company for Well Drilling, Trading and Maintenance 40% increase in revenue. Accordingly, the gross profit (Burgan Well Drilling) is an oil service company that provides margin contracted from 34% in 1H2008-2009 to 32% in manpower for well drilling and rig mobilization, as well as repair 1H2009-2010. and maintenance services for Burgan Well Drilling-owned and • EBITDA for the period grew 33% year on year to KD 8 non-owned wells and rigs. Burgan Well Drilling’s sole source of million, but the EBITDA margin declined to 38% in revenue are service contracts with various government-operated 1H2009-2010 from 40% in 1H2008-2009. Burgan Well oil companies. The company has operations principally in Drilling reported a net profit figure of KD 5.3 million in Kuwait and Bahrain and has a longstanding relationship with 1H2009-2010, 33% higher than the KD 4 million in Kuwait Oil Company (KOC) and its parent, Kuwait Petroleum 1H2008-2009. Corporation. Burgan Well Drilling was founded in 1970 and was listed on the Kuwait Stock Exchange in 2005. Balance Sheet
Financial Statement Analysis • During 1H2009-2010, Burgan Well Drilling's loan book has grown substantially. As of 1H2009-2010, the company Income Statement reported total loans of KD 60.4 million, 168% higher than the KD 22.5 million reported by end of FY2008-2009. FY 2008-2009 This is mainly due to an Ijara facility amounting to KD 35.8 million taken by Burgan Well Drilling to purchase four • Burgan Well Drilling reported revenue of KD 30 million new oil rigs. The Ijara facility is repayable over 11 quarterly in FY2008-2009, 11% higher than the previous year. installments commencing December 2009 and carries a In addition, revenue has grown at a CAGR of 23% since contracted cost of LIBOR plus 3.5%. Additionally, of this 2004-2005. Burgan reports revenue using the percentage total debt, short-term debt accounts for KD 18.4 million of completion method. • This growth in loans has naturally led to an expansion in • Offsetting growth in revenue is a 25% increase in contract the company’s net debt-to-equity ratio. As of 1H2009- costs—mainly due to a 28% rise in staff costs as well as an 2010, the company reported a net-debt-to equity ratio increase of 52% in repair and maintenance costs. of 1.2x, up considerably from 0.7x reported in FY2008- • Uneven growth in revenue and contract costs resulted in 2009. Though the net debt-to-equity ratio has increased a 9% decline in gross profit for the year. Nonetheless, the during the year, Burgan Well Drilling has a strong interest gross profit margin remains at a healthy level of 32%. coverage ratio of 10x.
• EBITDA dropped 10% in FY2008-2009, year on year, • With Burgan Well Drilling taking on new loans as well though it has historically grown at a CAGR of 22%. This as further advances from KOC for future projects, the drop is due to the combination of the aforementioned company's current and quick ratios remain low, settling at decline in gross profit and the considerable growth in 0.5 and 0.3, respectively. SG&A for the year. The decline in EBITDA resulted in the EBITDA margin declining to 37% in FY2008-2009 from 45% in FY2007-2008.
• The company reported a net profit figure of KD 7 million for FY2008-2009, a 28% decline from the previous year due to a 143% increase in finance costs. Naturally, net profit margins declined as well, from 35% in FY2007-2008 to 23% in FY2008-2009.
1H2009-2010
• Examining half-year numbers for Burgan Well Drilling, it is safe to say that the company has had a solid fiscal year thus far. Revenue for 1H2009-2010 was reported at KD 21 million, a 40% increase when compared to the KD 15 million reported during the same period last year.
nbkcapital.com | 44 Burgan Well Drilling Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) FY2007-2008 FY2008-2009 1H2008-20091H2009-2010
Contract revenue 26,846 29,870 14,952 20,908 Contract costs (16,247) (20,234) (9,880) (14,218) Gross Profit 10,599 9,636 5,071 6,690
SG&A (959) (1,387) (682) (776) Depreciation (58) (83) (41) - Operating Profit 9,582 8,166 4,348 5,914
Profit/(loss) on sale of PP&E 3 (5) (8) - Other income 933 580 316 321 Finance costs (640) (1,557) (473) (682) Profit Before Taxes 9,877 7,183 4,183 5,553
Contribution to KFAS (89) (65) (38) (50) NLST (247) (184) (105) (139) Zakat (33) (74) (41) (55) Net Profit for the Year 9,509 6,861 4,000 5,309
Balance Sheet (KD '000) 2006-2007 2007-2008 2008-2009 Sep-09
Cash on hand and at banks 9,778 916 185 556 Contract receivable 6,931 4,313 4,277 8,225 Unbilled contract receivables 102 237 139 1,579 Prepayments and other receivables 477 678 782 2,732 Inventory & construction in progress 2,588 3,731 5,490 5,062 Total Current Assets 19,876 9,875 10,872 18,154
Property, plant and equipment 39,984 55,603 86,781 118,164 Total Assets 59,860 65,478 97,653 136,318
Due to bank 1,968 - 1,906 2,078 Term loans - current portion 3,823 3,139 10,939 4,370 Ijara Payable - current portion - - 11,916 Advances from KOC 741 1,302 1,179 2,232 Notes Payable - - 1,277 1,200 Murabaha contract - - 8,754 - Accounts payable 5,071 4,369 8,406 12,074 Total Current Liabilities 11,603 8,809 32,462 33,871
Term loans - non-current portion 4,673 7,654 9,711 18,106 Ijara Payable - non-current portion - - 23,922 Advances from KOC 11,814 10,271 9,214 7,045 Provision for indemnity 253 319 354 343 Total Liabilities 28,343 27,053 51,741 83,286
Total Equity 31,516 38,425 45,912 53,032
Total Liabilities and Equity 59,860 65,478 97,653 136,318
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 45 Companies in Focus Kuwait in Focus - January 2010
Commercial Real Estate Company (Altijaria)
Key Data Highlights
General Liquidity • The Kuwait-based Commercial Real Estate Company KSE Code ALTIJARIA.KSE 52-week avg. volume 2,183,000 (Altijaria) is a Shari'ah-compliant real estate investment, Reuters Code CRCK.KW 52-week avg. value (KD) 226,124 development, and management company. Its main focus Price (KD) Price Performance is residential and commercial property development, along Closing Price 0.116 YTD -3.3% 52-week High/Low 0.150 / 0.077 1-Year Period 19.6% with investment in Kuwait and the region. Market Capitalization Outstanding Shares • Altijaria has major projects across various business Million KD 198.91 Latest (million) 1,714.80 segments and geographic locations. Ownership Structure Closely Held: 13.30% Public: 86.7% • Historically, both top-line and bottom-line growth has been
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital driven mainly by the change in the fair value of real estate properties (revaluation gains on real estate properties) and profit from the sale of available-for-sale (AFS) investments. Stock Performance Changes in the fair value of real estate properties and profit from AFS investments accounted for an average of 64% of 0.180 25.0 net profit over the past five years (2004-2008), with the percentage rising to almost 95% in 9M2009. 0.160 20.0 52-week High: KD 0.150 • The company’s investment book (both available-for-sale 0.140 (AFS) and held-for-trading) stood at KD 44.2 million 15.0 0.120 according to the 9M2009 financials, accounting for 19% of shareholder equity. Almost 82% of AFS investment is in
0.100 Millions Price (KD) Price 10.0 the unquoted category.
0.080
52-week Low: KD 0.077 5.0 0.060
0.040 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Mariam Al-Bahar T. +965 2259 5138 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Rental Income (% of Real estate related rev.) 23% 34% 16% 30% 18% Profit from sale of real estate (% of real estate-related rev.) 33% 32% 34% 8% 19% Change in fair value (% of Real estate-related rev.) 19% 32% 49% 62% 63% Revaluation gains as a % of net profit 56% 43% 59% 86% 95%
EBITDA (KD million) 16.2 14.2 37.4 19.5 24.0 EBITDA Interest Cover (x) 4.3 3.9 5.8 2.5 3.0 Net Debt-to-Equity (x) 0.3 0.2 0.4 0.7 0.7
Operating Profit Margin 76% 77% 89% 83% 90% Net Profit Margin 135% 191% 105% 61% 68% Adjusted Net Profit Margin 60% 58% 73% 50% 61%
Investment Book (% of Total Assets) 17% 9% 12% 12% 11% Investment Book (% of Total Equity) 25% 14% 18% 22% 19%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 46 Commercial Real Estate Company (Altijaria) Kuwait in Focus - January 2010
Overview Al Yarmouk Villas, Phase 2 – This project includes 14 plots, each covering an area of around 386 sq. m. The built-up area The Kuwait-based Commercial Real Estate Company (Altijaria) is around 450 sq. m. per plot. is a Shari'ah-compliant real estate investment, development, Rester Beach Resort – Located on the Gulf beach in the Al- and management company. The main focus of the company Egila area, the project consists of 31 townhouses, each of is residential and commercial property development and which has two floors, a garden, and private parking. The resort investment in Kuwait and in the region. The company was includes other facilities such as squash courts, a health club, established in 1968 and was listed on the Kuwait Stock landscaped gardens, and a swimming pool. Exchange at the end of 2004. Altijaria aims to drive growth by seizing investment and real estate opportunities and expanding Al-Shrooq Tower – Located on Jaber Al-Mubarak Street in abroad in order to diversify the company's revenue stream. The the Sharq area, this tower consists of 21 floors and includes company has adopted the following business model: commercial shops in the basement, on the ground floor, and on the mezzanine. • Altijaria engages in business activities related to commercial and residential real estate. Within the real Budoor Tower – Located in Sharq area on the Ahmed Al Jaber estate sphere, the company handles the sale, purchase Street, this office tower consists of 17 floors and includes and lease of land and property. commercial shops in the basement, on the ground floor and on the mezzanine. • Altijaria’s network expansion through alliances and consortiums with various firms in the Gulf Cooperation Major ongoing projects - Kuwait Council (GCC) drives the company's focus toward developing large-scale projects rather than smaller residential and Symphony – This is a mixed-use project located in Salmiya and commercial projects. is built on an area of 11,500 sq. m., consisting of commercial The company’s latest ventures and acquisitions, like First shops (divided into a basement, ground floor, mezzanine, and Investment Bank (Islamic Bank), are radically strengthening first floor) with two towers on top. The office tower is composed its business model in favor of greater diversification. of 11 floors, and the other tower is a hotel with 20 floors.
Al Tijaria Tower – This is another mixed-use project and will Latest News include malls and office space. The tower is located in the Sharq area and is built on an area of 4,295 sq. m. The top • October 2008: Commercial Real Estate Company acquired part of the tower is designated for office space and consists an 8.3% stake in Bahrain First Investment Bank. of 40 floors.
• October 2008: Commercial Real Estate is a part of The Dome – Located in Abu-Halifa on the coastal road, the a consortium consisting of regional and international project is built on an area of 15,195 sq. m. and consists of development companies, which has been entrusted with restaurants, coffee shops, and facilities for entertainment the development of the Jeddah Central District Project. activities. The endeavor is the first of its kind in terms of size and the partnership between the private and public sectors. The Juman Residential Complex – Built on an area of 7,950 sq. project will cover an area of 6 million sq. m. in Jeddah. m., this residential project is located in Mahboula, facing the Fahaheel Express Road. The project consists of two buildings Major Projects of 12 floors each, which includes apartments, penthouses, and townhouses. The project also includes swimming pools, a paradise island for children, a waterfall, and other facilities Major completed projects - Kuwait such as tennis courts, a gymnasium, and commercial shops.
Al-Manar – Located in Bnaid Al Gar, this project consists of a Major upcoming projects - Kuwait 16-floor residential tower (two- and three-bedroom apartments) and six townhouses. One of the most important features of this X-Zone Project – This will be an entertainment project on super-deluxe residential complex is its sea view. an area of 5,940 sq. m. It will consist of restaurants, coffee Al Yarmouk Villas, Phase 1 – Located in the Yarmouk area, the shops, a games area, two movie theaters, and other advanced development consists of 18 plots, each 400 sq. m. in size. entertainment facilities. The built-up area of each plot ranges from 460 sq. m. to 550 Ruba – The Ruba Project will be a residential building located sq. m. in Mahboula, and will be built on an area of 5,373 sq. m.
nbkcapital.com | 47 Commercial Real Estate Company (Altijaria) Kuwait in Focus - January 2010
adjacent to the Fahaheel Expressway. The project will consist to KD 7 million in 2008, mainly due to the significant of 15 floors, and will contain a mix of dwelling units such decrease in hotel income. In 9M2009, the real estate as individual townhouses and penthouses. The project will recurring income decreased slightly, by 6% to 4.9 million also include provisions for outdoor and indoor recreational (year on year), entirely due to the decline in rental income. activities. • The company’s rental income decreased slightly, by 8%, to KD 4.8 million in 9M2009, compared to the same Salmiya Park – This is one of the most important tourism period last year. Historically, rental income grew at a five- projects launched in Kuwait and is spread over an area of year CAGR of 18% for the period from 2003 to 2008 380,000 sq. m. The estimated cost of the project is KD 19 accounting for 24% of real estate-related revenue in the million. last five years. Kuwait International Tennis Complex – Built over an area of • Operating profit increased by 26% to KD 24.2 million 70,000 sq. m., this will be a one-of-a-kind project in the in 9M2009, compared to 19.1 million in 9M2008. This region. The project will include a hotel, a commercial complex, resulted from the increase in total real-estate-related a major adapted and covered stadium, and tennis and squash revenue and a decline in administrative expenses. courts, all for an estimated investment of KD 28 million. • Net profit decreased by 35% to KD 18.1 million in 9M2009, compared to KD 27.8 million in 9M2008. This Major international projects was due mainly to the decrease in the group’s share of associate results, profit from AFS investments and foreign House Towers Project – Hajer and Al Mukam Towers are exchange losses. residential towers that will be located very close to Kaaba in Saudi Arabia. This project will cater mainly to the housing Balance Sheet needs of pilgrims. The Hajer Tower will be a mixed-use project and will consist of 31 floors, 10 floors of which will be • The company had a net debt-to-equity ratio of 0.7x as of occupied by the Mövenpick Hotel. The remaining floors will September 2009, with 85% of the company’s debt due consist of furnished hotel apartments. Al Mukam Tower, also within a year. a mixed-use tower, will consist of 45 floors and will include a • The company’s investment book (both AFS and hotel and hotel apartments. held-for-trading) stood at KD 44.2 million according to the 9M2009 financials. The company’s investment book Ain Athari – Bahrain Park – This is an international accounts for 19% of shareholder equity. Almost 82% of build-operate-transfer (BOT) project and will be developed the AFS investment is in the unquoted category. in participation with two other companies in the region. It is located in Bahrain and will be built over an area of 170,000 Financial Statements sq. m.
Income Statement (KD' 000) 2007 2008 9M2008 9M2009 Financial Statement Analysis Rental Income 6,830 7,075 5,233 4,794 Hotel income 403 6 0 101 Income statement Gain from investment properties 21,177 16,549 17,853 18,771 Investment Income 5,865 -2,370 1,690 354 • Real-estate-related revenue increased by 16% to KD Other operating income 15,366 241 50 3,302 Total income 48,269 21,411 24,771 27,112 26.8 million in 9M2009 compared to KD 23.1 million Operating expenses -6,086 -4,032 -3,901 -2,698 in 9M2008––entirely due to the profit from land and real Operating profit 46,477 16,285 22,149 21,689 estate held for trading. Net Profit 44,650 14,465 27,750 18,119
• Historically, change in the fair value of real estate Balance Sheet (KD' 000) 2006 2007 2008 Sep-09
properties has been one of the main drivers of real- Cash and Bank Balances 38,589 535 4,284 1,167 estate-related revenue. The contribution of the change Investment Properties 84,173 123,248 128,825 158,544 in the fair value of real estate properties to real-estate- Total Assets 311,077 337,493 398,697 410,557 related revenue averaged 38% in the last five years Short-Term Debt 23,146 29,727 102,565 134,833 (2004-2008). In 9M2009, the change in the fair value Long-Term Debt 50,019 55,489 46,512 23,852 Total Debt 73,166 85,216 149,077 158,685 of real estate properties accounted for 63% of the total Total Liabilities 112,556 112,039 179,959 176,476 real-estate-related revenue. Shareholders' Equity 198,521 225,455 218,738 234,080 • The company’s real estate recurring income (rental income Total Liabilities and Equity 311,077 337,493 398,697 410,557 and hotel income) declined from KD 12 million in 2005 Sources: Company’s financial statements, and NBK Capital
nbkcapital.com | 48 Companies in Focus Kuwait in Focus - January 2010
Gulf Cable and Electrical Industries Company (Gulf Cable)
Key Data Highlights
General Liquidity • Gulf Cable and Electrical Industries Company (Gulf Cable) KSE Code CABL.KSE 52-week avg. volume 159,227 is the market leader in Kuwait, with the largest market Reuters Code CABL.KW 52- week avg. value (KD) 224,834 share in the electric cable business. Price (KD) Price Performance Closing Price 1.440 YTD -12.2% • Gulf Cable set up new plants in 2009 across the GCC. The 52-week High/Low 1.980/0.900 1-Year Period 44.0% company boosted production capacity to 75,000 tons/year Market Capitalization Outstanding Shares from the previous 50,830 tons/year. Million KD 293.90 Latest (million) 209.90
Ownership Structure • The company has large investments in the financial Closely Held: 39.9% Public: 60.1% markets. Investments represent more than 100% of Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital shareholders’ equity and 75.9% of total assets. Investment income accounts for 62.7% of total net income.
Stock Performance • Gulf Cable gained a foothold in the regional market in 2006 by acquiring 94.5% of a cable producer in Jordan (KD
2.000 2.5 8 million investment) capable of producing an additional 52-week High: KD 1.980 20,000 tons of cable per year. 1.800 2.0 • Acting as a regional player allows Gulf Cable to take 1.600 advantage of the increased spending by governments 1.5 1.400 on major development projects (e.g., infrastructure).
Price (KD) Price 1.200 Approximately 50k to 60k MW of power generation capacity 1.0 Millions is likely to be added within the Middle East region over the 1.000
52-week Low: KD 0.900 0.5 next four years. According to Middle East Electricity, Arab 0.800 nations are expected to spend up to USD 120 billion on
0.600 0.0 power projects between 2008 and 2012. Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close • Copper prices (Gulf Cables' main raw material) dropped
Sources: Reuters and NBK Capital from USD 288/lbs in 9M2008 to USD 283.15/lbs in 9M2009.
Analyst
Wadie Khoury T. +965 2259 5118 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Gross Margin* 32.0% 34.2% 31.1% 21.2% 17.2% EBITDA Margin 29.6% 31.0% 27.2% 17.6% 13.3% EBIT Margins 27.9% 29.3% 26.1% 16.4% 11.2% Net Income Margin 31.0% 30.4% 32.0% 2.9% 17.3%
Investment Book-to-Assets 79.5% 70.0% 75.6% 54.2% 75.9% Investment Book-to-Equity 93.7% 73.9% 87.1% 84.7% 111.3% Investment Income-to-Net Income 17.7% 17.2% 31.4% -400.7% 62.7%
ROAA 11.8% 11.2% 10.1% 1.1% -3.7% ROAE 13.5% 12.4% 11.3% 1.5% -5.3% Adjusted ROAA 37.5% 27.2% 23.0% 14.9% 1.3%
Debt-to-Equity 12.6% 2.2% 12.3% 50.9% 41.9%
* Depreciation included Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 49 Gulf Cable and Electric Industries Company (Gulf Cable) Kuwait in Focus - January 2010
Overview • Net income fell by 62.5% in 9M2009 mainly due to the drop in revenue by 33.9% and drop in investment income With a production capacity of 75,000 tons/year, Gulf by 32.6%. Cable is one of the most dominant regional players in the • Looking at net profit strictly from an operational point of manufacturing and supply of cables. Established in 1975, view (i.e., excluding any profit from investments), we find the company has core operations around cables to distribute that the adjusted net income was more stable. Looking at electricity. These cables are strictly low- and medium-voltage the company’s return on average assets (ROAA) and the cables made of copper (approximately 70% of total produced company’s adjusted return on assets (excluding investment cables) or aluminum (approximately 30%). Gulf Cable’s income), we find that the company would produce better production facilities allow it to produce other forms of cables returns strictly from operations, as shown in the figure such as data transmission cables, conductors, and telephone below: cables. Furthermore, Gulf Cable has its own copper rod plants, enabling it to produce 12,000 tons of copper per year (the Return on Assets main raw material used in the production of cables). The group 2006 2007 2008 9M2009 is composed of the parent company along with its subsidiary ROAA 11.2% 10.1% 1.1% -3.7% Gulf Cable and Multi Industries Company–JSC, located in Adjusted ROAA 27.2% 23.0% 14.9% 1.3% Jordan. The company sells its products within the Middle East, Sources: Company report and NBKC including the United Arab Emirates (UAE), Oman, Jordan, Qatar, Bahrain, and Saudi Arabia. Balance Sheet
Latest News • The company has a significant portion of assets allocated to market investments. As of 2008, the company had • October 2009: Gulf Cable signed a 10-month contract available-for-sale (AFS) investments (fair value of KD 128.5 with the Kuwait Ministry of Electricity and Water to supply million) accounting for 85% of the total shareholders’ welding materials for tension power cables. The contract is equity (54% of total assets). By the end of September valued at KD 1.9 million. 2009, AFS increased to KD 230.4 million, accounting for 111% of total equity (76% of total assets). • April 2009: Gulf Cable signed a nine-month contract, valued at KD 1.4 million, to supply the Ministry of • Since the AFS portfolio is counted at fair value, any mark- Electricity and Water with electric cables. to-market gains or losses are reflected in the revaluation reserve account. Per the 2008 results, the fair value Financial Statement Analysis reserve account dropped to KD 35.1 million, from KD 163.9 million in 2007, knocking off KD 128.8 million Income Statement of shareholders’ equity due to the effects of the financial crisis. The fair value reserve account rallied to KD 95.3 • Sales have shown an upward trend, growing at a CAGR million in September 2009. of 32.8% between 2005 and 2008. There was a large • Looking at Gulf Cable from an operational standpoint, increase in credit sales during the period. Sales declined 5.4% of the company’s assets consists of property, plant, by 34% in 9M2009 compared to 9M2008. This affected and equipment (PP&E). This represents KD 16.3 million gross profit margins as the cost of goods sold did not as of September 2009, an increase of 9% since the decline as fast as sales. Gross margins dropped from 27% beginning of the year. in 9M2008 to 17% in 9M2009. • Inventory balances increased at a CAGR of 54% between • The company’s bottom line is highly dependent on income 2005 and 2008 to reach KD 48.8 million. In September from investments. In 2008, the loss from investments 2009, the inventory balance fell to KD 33.7 million due stood at KD 12.9 million. The losses incurred in 2008 to the decline in the price of raw materials (raw materials wiped out any profits made from investments in 2006 and dropped from KD 20.4 million in 2008 to KD 6.1 million 2007. In 9M2009, income from investments stood at KD in September 2009). It is worth noting that the company 8.8 million, a 32.6% decline from 9M2008. The income was able to improve its ability to convert inventory into generated from investments represented 62.7% of total cash in 2008, as the average dropped from 195 days in income in the first nine months of 2009. 2007 to 173 days in 2008. In 9M2009, days inventory outstanding increased to a high of 223 days (ttm).
nbkcapital.com | 50 Gulf Cable and Electric Industries Company (Gulf Cable) Kuwait in Focus - January 2010
• In 2008, days receivable on hand increased to 108 days • The company continued to purchase investments with the from 100 days in 2007. The company then improved additional cash. However, debt was also paid down, and receivable collection in the first nine months of 2009 as additional dividends were paid out. days receivable outstanding decreased to 99 days. Financial Statements Days Sales Outstanding and A/R as a Percentage of Sales Income Statement (KD '000) 2007 2008 9M2008 9M2009
Total Revenue 83,983 109,858 77,584 51,248 40% 120 Cost of Revenue (58,765) (87,817) (56,812) (42,456) 34.0% Gross Profit 25,217 22,041 20,772 8,792 35% 32.8% Selling/General/Admin Expenses (3,328) (4,027) (2,553) (3,029) 100 Operating Income 21,889 18,014 18,219 5,763 Inv. Income (Exp), Net Non-Op. 6,308 (15,360) 6,604 2,235 30% 28.1% Other, Net (98) 919 (121) 1,297 80 Net Income before Taxes 28,099 3,573 24,702 9,294 25% 22.8% Contributions to KFAS (281) (36) (247) (93) NLST (624) - (486) (101) 20% 60 Zakat (15) - (182) (31) 108 Directors Remuneration (310) (310) (233) (233) 100 99 Net Income 26,868 3,227 23,555 8,836 A/R % of Salesof % A/R 15% Days of Number 77 40 Balance Sheet (KD '000) 2006 2007 2008 Sep-09 10% Property, plant and equipment 11,849 11,627 14,975 16,318 20 Available for sale investment 142,039 248,450 128,446 230,397 5% Good will 760 - - - Non-Current Assets 154,648 260,078 143,421 246,716 0% 0 Inventories 26,055 34,713 48,756 33,721 2006 2007 2008 9M2009 Trade Account Receivable 18,536 27,519 37,351 19,069 Other Reveivable and prepayments 126 3,064 4,913 1,415 Days Sales Outstanding (DSO) A/R as % of Sales Fixed deposit 2,639 201 186 387 Cash and bank balances 1,009 2,983 2,403 2,346 Current Assets 48,365 68,479 93,609 56,939 Total Assets 203,013 328,556 237,030 303,655 Sources: Company’s financial statements and NBK Capital Long term provisions 1,203 1,376 1,229 1,294 Long term loans 3,233 2,574 12,925 10,857 Non Current Liabilities 4,437 3,950 14,155 12,152 Trade A/P 667 1,019 1,089 1,607 • The debt-to-equity ratio increased from 13% in 2005 to Other Payables and accruals 4,737 5,635 5,771 7,096 Current Portion of LT loans 359 572 4,939 5,128 51% in 2008. However, by September 2009, the debt- Short term loans - 27,399 56,412 68,000 Due to banks 689 4,683 2,936 2,741 to-equity ratio had dropped to 42%, indicating that the Current Liabilities 6,452 39,307 71,147 84,573 company has paid part of its debt obligations back through Total Liabilities 10,889 43,257 85,301 96,724 Fair Value reserve 90,736 163,861 35,076 95,931 cash generated from better management of working capital Other Equity 101,388 121,437 116,653 110,999 Total Equity 192,124 285,299 151,729 206,931 (i.e., decreases in accounts receivable and inventory). This Total Liabilities and Equity 203,013 328,556 237,030 303,655 is further explained in the cash flow analysis. Sources: Company’s financial statements and NBK Capital
Cash Flow
• In 2007, a cash dividend payment of KD 8 million (30% of profits) was made. The dividend payments were made from raising debt as cash flow from operations was negative.
• In 2008, Gulf Cable took out KD 54.9 million worth of loans. Only KD 4.6 million was used for capital expenditure, leaving the company with KD 50.3 million. Gulf Cable paid off KD 11.6 million in short-term debt in 2008, bringing the balance down to KD 38.7 million. The company also continued with the purchase of investments (KD 31 million purchased in 2008) and payment of dividends (KD 8.1 million in 2008), adding up to just over KD 38.7 million.
• In 9M2009, things changed. Cash flow from operations increased to KD 46 million in 9M2009 from KD 0.6 million in 9M2008 due to an improvement in management of working capital. This comes from declining inventory and receivables. The results come as a surprise; however, additional details have not been provided to shed more light on the matter.
nbkcapital.com | 51 Companies in Focus Kuwait in Focus - January 2010
Gulf Insurance Company (GIC)
Key Data Highlights
General Liquidity • Gulf Insurance Company (GIC) is the largest insurance KSE Code GINS.KSE 52-week avg. volume 68,606 company in Kuwait in terms of written and retained Reuters Code GINS.KW 52- week avg. value (KD) 31,132 premiums. Price (KD) Price Performance
Closing Price 0.420 YTD 0.0% • Approximately 66.7% of GIC is owned by KIPCO (the 52-week High/Low 0.800/0.365 1-Year Period -42.9% largest major shareholders are the Al Sabah family). Market Capitalization Outstanding Shares Million KD 69.56 Latest (million) 169.70 • GIC holds an investment book worth KD 85.9 million as of September 2009, which represents 34% of total assets, or Ownership Structure Closely Held: 66.6% Public: 33.4% 127% of total equity.
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • Looking at the company's underwriting profit, GIC is paying out KD 0.990 in claims for every KD 1.000 underwritten in contracts. If the discounts on claims are included, the Stock Performance claims paid out tops KD 1.000.
0.900 0.6 • A large portion of GIC’s assets are liquid, allowing sufficient 52-week High: KD 0.800 payback of claims. In addition, the company has high cash 0.800 0.5 balances capable of paying off 88.7% of outstanding claim
0.700 0.4 reserves. The company shares a large portion of its risks, passing on more than 50% of claims to reinsurers. 0.600 0.3 Price (KD) Price
Millions • GIC is a relatively illiquid stock; the average daily value 0.500 0.2 traded reaches KD 30,669.
0.400 52-week Low: KD 0.365 0.1
0.300 0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Wadie Khoury T. +965 2259 5118 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Premiums written Growth N/A 63.1% 5.0% 16.9% 17.7% Underwriting Profit Growth N/A -16.5% -16.9% 264.2% -35.8%
Loss Ratio 68.2% 77.7% 70.9% 61.0% 73.5% Expense Ratio 23.3% 19.2% 26.1% 25.3% 25.5% Combined Ratio 91.5% 96.9% 97.0% 86.3% 99.0%
Adjusted RoAA 5.1% 5.2% 3.8% 1.5% 8.3% Adjusted RoAE 11.5% 13.8% 10.6% 4.3% 28.2%
Inv Book-to-total Assets 49.4% 43.5% 41.8% 38.2% 33.9% Inv Book-to-total Equity 111.7% 134.6% 107.7% 118.9% 126.6%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 52 Gulf Insurance Company (GIC) Kuwait in Focus - January 2010
Overview Underwriting Profit
8.0 7.6 Gulf Insurance Company (GIC) is the largest insurance 7.0 company in Kuwait in terms of written and retained premiums. Established in 1962, GIC covers life and non-life segments 6.0 throughout the region through subsidiaries. Areas of non-life 5.0 insurance covered involve risks associated with motor, marine and aviation, and property and casualty insurance. 4.0
3.0 3.0 KD Millions KD 2.5 Latest News 2.1 2.0
• June 2009: GIC increased its stake in the Arab Orient 1.0 Insurance Company, Jordan’s largest insurance company, to 0.0 55%, making GIC the largest shareholder of the company. 2005 2006 2007 2008
• April 2009: Saudi Arabia’s Buruj Cooperative Insurance Source: Company reports Company, a subsidiary of GIC, is preparing an IPO, selling off 40% of the company’s shares. • “Commissions received on ceded reinsurance” are fees • March 2008: S&P maintained a BBB+ credit rating for received from reinsurers to share costs for a share of the GIC. profits from premiums. We examined the effect if these were removed from the underwriting profits. Excluding Financial Statement Analysis these from the equation drops GIC’s underwriting profit significantly; the company would have incurred a loss of Income Statement KD 2.4 million in 2006 and a loss of KD 3.8 million in 2007 only to reach a profit of KD 0.8 million in 2008. This • In the insurance industry, there are two main drivers for will be clarified further when we take a look at its combined revenue growth. The first involves the number of issued ratio. Underwriting profit (excluding commissions from insurance contracts alongside the level of risk associated ceded reinsurance) dropped to a loss of KD 2.6 million in with those contracts. The higher the risk, the higher the 9M2009 from a KD 0.20 million profit in 9M2008. expected premiums, and, hence, the higher the potential • The quality of earnings is measured by the company’s revenue from written premiums. The second driver of combined ratio. The combined ratio determines how much revenue involves the investment income/gains from investing a company is paying out on claims versus how much it is premiums received from clients. making on claims. A combined ratio of more than 100% • Examining underwriting profit is the most important indicator indicates the company is paying out more in claims than in the insurance industry. This determines how well the it is taking in, and a ratio of less than 100% means the company is generating profits strictly from its core business. company is making more on claims than it is giving out. The underwriting business involves premiums earned, as GIC displayed a significant improvement in the company’s well as commission on reinsurance and issuance fees less combined ratio, which dropped from 91.5% in 2005 to any operating expenses (i.e., claims incurred and changes 86.3% in 2008. This means that for every KD 1.000 in in expense accounts). GIC has produced a profit from its written contracts, GIC paid out KD 0.860 in claims in underwriting business throughout the years, as a result of 2008. However, the company’s combined ratio increased a large contribution from commissions received on ceded in 9M2009 to 99%, up from 90.3% in 9M2008. The reinsurance. Underwriting profit jumped from KD 2.5 million calculations were conducted without including discounts in 2006 to KD 7.6 million in 2008. However, the company’s on claims offered by GIC. If these were included in the underwriting profit declined by 35.8% in 9M2009 to KD 3.5 calculation, the combined ratio would have been pushed million as a result of a spike in claims incurred throughout to higher than 100%. the first nine months.
nbkcapital.com | 53 Gulf Insurance Company (GIC) Kuwait in Focus - January 2010
Coverage Ratio • Running an insurance business requires an investment
100% 96.9% 97.0% 99.0% book of premiums collected from clients. GIC held an 91.5% investment book worth KD 85.9 million as of September 90% 86.3% 2009. The main criterion here is to determine how risky 80% 77.7% 73.5% 70.9% these investments are. This is difficult to tell, as the 68.2% 70% 61.0% breakdown of these investments is formed under general 60% categories; however, just to get an idea, held for trading 50% (HFT) investments and AFS investments in quoted 40% securities represented more than 47% of the company’s
30% 26.1% 25.3% 25.5% 23.3% total investments as of September 2009. 19.2% 20% • The success of an insurance business is determined by 10% whether the company is capable of paying insurance claims 0% 2005 2006 2007 2008 9M2009 through premiums on its investments. The outstanding Loss Ratio Expense Ratio Combined Ratio claims account under liabilities determines how much GIC owes in claims that have been reported. The company Source: Company financial statements reported outstanding claims of KD 66.9 million as of September 2009, of which KD 37.4 million has been • Investment income is an integral part of generating profits reinsured (56% reinsured). Taking these factors into as well. GIC has broken up its income generated from consideration, we find that GIC’s total liquid investments investments into life insurance and non-life insurance (HFT and AFS) will cover up to 2.5 times the insurance investments. On the life insurance front, GIC invested in claims. Even if reinsurance claims are not taken into three types of securities: investments held for trading, debt account, the company’s AFS investments alone will be able securities, and time and call deposits. The relatively safer to cover 1.1x of total claims reported. Furthermore, the investments, the debt securities as well as time and call company’s cash balance of KD 59.3 million covers 2.1x of deposits, were responsible for generating interest income total outstanding claims reported (reinsurance recoverable of KD 1.6 million, while investments held for trading accounted for). So GIC is in a good condition to pay off the reported unrealized losses of KD 1.1 million in 2008. company’s claims.
• On the non-life insurance front (the larger of the two • The company’s claims coverage ratios have been declining investment portfolios), GIC ran into a loss of KD 1 since 2006 due to an increase in the outstanding claims million. This can be attributed to unrealized losses on reserve. The majority of the increase in claim reserves investments of KD 4.07 million in 2008. The gain from the comes from an increase in contracts written on casualties available-for-sale (AFS) investments of KD 6.2 million was between 2007 and 2008. Although claims on insurance not enough to offset the losses due to large impairment properties have also increased, more than 90% of these provisions of up to KD 4.7 million. claims were passed on to reinsurers in 2007 and 2008.
• Looking at historical values, we find that profits increased • The majority of GIC’s liabilities come from the required by 54% in 2007 due to a significant increase in investment reserves. These reserves are divided into four categories: 1) income. This is attributed to the fact that GIC sold its 51% outstanding claim reserve, 2) unearned premium reserve, stake in Wataniya to Q-tel for a realized gain of KD 29.9 3) life mathematical reserve, and 4) additional reserve. The million in 2007. After adjusting for this, we find that the reserves make up 63.6% of the total liabilities and 42.7% profit increased by 3% in 2007, and then by 2% in 2008. of the total assets. The outstanding claims reserve makes up 41.5% of the total reserves (adjusted for reinsurance Balance Sheet recoverable on outstanding claims), the largest of all reserves. This reserve represents all the claims that have • AFS investments constituted the largest portion of GIC’s yet to be paid out. assets as of December 2008, contributing 27% of total • Another significant chunk of the liability pie is insurance assets. This share dropped to 23.4% as of September payable. It represents 20.4% of the total liabilities. This 2009. The “lion’s share” of these investments is allocated includes any premium to the reinsurance business and to quoted securities. The remaining AFS investments are policyholders. unquoted securities and managed funds recorded at cost.
nbkcapital.com | 54 Gulf Insurance Company (GIC) Kuwait in Focus - January 2010
• The total debt accumulated by GIC reached KD 12.8 Financial Statements million as of September 2009, up from KD 7 million at the end of 2008. This increased the company’s total debt-to- Income Statement (KD '000) 2007 2008 9M2008 9M2009 Premiums written 74,085 86,609 62,749 73,831 equity ratio to 0.19x in September 2009, up from 0.09x Reinsurance premiums ceded (35,385) (44,211) (29,218) (33,025) Net premiums written 38,700 42,398 33,531 40,806 in September 2008. Movement in unearned premiums (797) (901) (437) (1,449) Net premiums earned 37,903 41,497 33,094 39,357 • Other assets were subject to a 12% increase in 2008, and Commission on ceded reinsurance 5,897 6,723 5,205 6,116 Policy issuance fees 1,194 1,434 961 1,390 currently represent 5% of the total assets. This is a result Net Inv. income from life insurance 2,384 480 837 1,735 Net Revenue 47,378 50,134 40,097 48,597 of KD 5 million in premiums ceded in advance. This means Claims incurred (24,916) (23,984) (18,327) (25,924) Commission and discounts (6,147) (6,263) (3,912) (4,386) that GIC has made a payment in advance to reinsurers. Inc. in life mathematical reserve (1,198) (693) (2,367) (2,408) Inc. in additional reserve (59) (192) (237) (70) Maturity & cancel of life ins. policy (694) (450) (309) (533) • The company witnessed an increase in writing insurance Gen. and Admin. expenses (9,903) (10,506) (8,657) (10,045) Expenses (42,917) (42,088) (33,810) (43,365) on credit at a CAGR of 22% between 2006 and 2008. Net Underwriting Results 4,461 8,046 6,287 5,232 Furthermore, GIC also witnessed an increase in passing on Net Investment (loss) income 39,123 (1,048) 7,542 3,935 Sundry Income 95 59 153 96 the associated risk on claims to reinsurers at an astonishing Other Charges (4,628) (2,158) (1,797) (2,173) Net Income 39,052 4,899 12,185 7,090 CAGR of 68% between 2006 and 2008. Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Property and Equipment 5,666 6,192 6,459 5,586 Investments in ass. comp. 982 4,051 5,371 5,551 Intangible assets 2,700 2,725 2,934 8,309 Financial Instruments 81,422 92,775 90,820 85,185 Loans sec.by life ins. policies 127 438 732 719 Prem. and insurance receivable 18,668 22,961 27,842 37,757 Reins. recoverable on out.claims 15,806 22,225 37,231 37,431 Property held for sale 1,314 291 229 192 Other Assets 6,230 6,365 12,164 13,408 Cash and Cash Equivalents 54,514 65,009 56,195 59,313 Total Assets 187,429 223,031 239,976 253,452 Total liab. from ins. contracts 64,826 76,232 95,258 108,341 Bank Overdraft 8,727 7,889 7,016 12,805 Premiums received in advance 5,768 2,737 6,320 6,836 Isurance payables 27,300 25,507 30,771 31,412 Other liabilities 6,773 11,011 11,196 10,581 Amt. to policy holders-Takaful fund - - - 290 Total Liabilities 113,393 123,376 150,560 170,265 Equity 60,565 86,571 76,977 67,861 Minority interest 13,470 13,084 12,440 15,325 Total Equity 74,036 99,655 89,416 83,186 Total liabilities and equity 187,429 223,031 239,976 253,452
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 55 Companies in Focus Kuwait in Focus - January 2010
Haj & Umrah Services Consortium Co. (Mashaer)
Key Data Highlights
General Liquidity • Mashaer is a Kuwait-based company that provides a range KSE Code MASHAER.KSE 52-week avg. volume 1,034,746 of services (such as accommodation and transportation Reuters Code MASK.KW 52- week avg. value (KD) 235,692 packages) for Haj and Umrah pilgrims. Price (KD) Price Performance
Closing Price 0.310 YTD 17.0% • Mashaer acts as a “middle man” by providing Haj and 52-week High/Low 0.310/0.118 1-Year Period 74.2% Umrah services. As a result, gross margins are extremely Market Capitalization Outstanding Shares low. Million KD 48.84 Latest (million) 160.20
Ownership Structure • People will continue to attend Haj and Umrah, thus ensuring Closely Held: 35.8% Public: 64.2% a sustainable revenue stream going forward. Risks, such as
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital the swine flu epidemic, could have a significant effect on the company’s revenue stream going forward.
Stock Performance • The company is increasing its investments in associates. These associates perform similar functions as the company, whereby they tailor services to the Hajj and 0.350 12.0 Umrah demographic. As a result, investments in associates 52-week High: KD 0.310 10.0 0.300 are increasingly contributing to operating profits and net income. 8.0 0.250 • There was a large discrepancy in sales between 2007 6.0 and 2008. The difference arose as a result of a sale of Price (KD) Price 0.200 52-week Low: KD 0.118 Millions 4.0 property in 2008 to repay debt to one of the company's subsidiaries. The sale of this property was included as part 0.150 2.0 of revenue, causing a large difference.
0.100 0.0 • The company managed to pay back a significant portion of Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close its debt in September 2009 by liquidating the collateral
Sources: Reuters and NBK Capital pledged against the debt (including murabaha investments, a commercial complex, and land). Total debt dropped by 46% from 2008 to the end of September 2009. This is expected to decrease finance charges (one of the largest portion of expenses) going forward. The liquidation of the company’s collateral affected the company’s liquidity, causing some concern about how Mashaer will pay its Analyst current debt of KD 22.4 million.
Wadie Khoury T. +965 2259 5118 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Sales Growth N/A 49.6% 13.6% 157.4% N/A Net Income Growth N/A 85.1% 60.1% -353.5% N/A
Gross Margin 10.9% 10.9% 14.6% 8.7% 5.1% EBITDA Margin 0.0% -3.3% -1.6% 13.0% -0.1% Net Profit Margin 61.4% 76.0% 107.2% -105.6% 214.8%
Investment Book-to-Equity 76.6% 72.7% 24.7% 21.0% 17.3% Associates Contribution to Net Profit 0.0% 0.0% 1.2% -11.2% 28.4%
Debt-to-Equity 27.1% 21.9% 41.9% 64.8% 32.9% Interest Coverage Ratio 0.0 x -0.7 x -0.1 x 1.3 x 0.0 x
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 56 Haj & Umrah Services Consortium Co. (Mashaer) Kuwait in Focus - January 2010
Overview Gross Margin Breakdown
Margins 2007 2008 Haj & Umrah Services Consortium Company (Mashaer) is a Properties under development 35.9% 6.9% Kuwait-based company that provides a range of services for Haj Hotel Reservation 13.9% 5.6% Tickets 4.6% 10.1% and Umrah pilgrims in accordance with Islamic Shari'ah. The Transport 7.3% 15.5% services include providing hotel reservations and transportation Other 14.5% 13.3% packages; trading and leasing real estate, warehouses, and Sources: Company’s financial statements and NBK Capital means of transportation; importing and exporting of foodstuff and consumable items; organizing conferences, seminars, and exhibitions; and providing medical services arrangements. • Investment income contributed KD 4.4 million, the single largest contributor to net income in 9M2009. As a matter Latest News of fact, investment income was the sole reason for the positive net income in 9M2009. The company suffered a loss on the operational front, as EBITDA generated was • June 2009: Mashaer announced that its board of directors negative KD 2.5 million. Net income improved significantly has appointed Jassem Mohammed Al Awadi as the YoY, as Mashaer rallied from a loss of KD 2.8 million in company’s new CEO as of May 10, 2009. 9M2008 to a profit of KD 3.8 million in 9M2009. • March 2009: Mashaer announced that its board of • The largest contributor to investment income is unrealized directors has decided not to pay any dividend for the fiscal gain on the revaluation of investment property, valued year ending December 31, 2008. In the previous year, the at KD 2.9 million. The valuation of these properties was cash dividend was KD 0.030 per share. conducted by an independent expert. In addition, the company included provisions that are no longer required, Financial Statement Analysis valued at KD 1 million. This is due to a receivables settlement with a debtor, whereby the debtor transferred Income Statement its stake in Al-Ofoq Real Estate Investment Company to Mashaer valued at KD 1.1 million. • Sale of properties under development was included as part • Share of profits from associates provides a significant of sales in 2008. This is the sole reason for the jump in sales, contribution to Mashaer’s operations. In 9M2009, Mashaer and a blow to gross margins, which dropped from 14.6% reported a negative EBITDA of KD 0.002 million; however, in 2007 to 8.3% in 2008. The reason Mashaer included excluding profits from associates, the company would have this line item as part of sales is unclear; however, we do know why the company sold properties under development reported a larger decline in EBITDA of KD 1.1 million. in 2008. Mashaer sold these properties, valued at KD Profits from associates declined 29.2% in 9M2009 from 10.5 million, to Hajer Tower (one of Mashaer’s associates) 9M2008; however, we expect this to be an important and to settle a portion of the company’s debt. The company recurring source of income for Mashaer as the company is recognized a profit of KD 0.13 million, thus generating a continually investing in associates. This will be discussed gross margin of 1.4%. This dragged down the overall gross further in the balance sheet analysis section. margins for the remainder of the year. • In 9M2009, finance costs made up the largest portion of • Without the sale of properties, revenues would have expenses as a result of the company’s debt. However, it is actually decreased in 2008, dropping from KD 5.7 million important to highlight that finance costs dropped by 46% to KD 4.5 million. The breakdown of sales for 9M2009 has compared to 9M2008. not been provided in the financials. Balance Sheet • Normally, gross margins from properties under development have the highest margins (in 2007, margins hit 36%, compared to 7% in 2008). The settlement clearly brought • Mashaer’s total debt, as of December 31, 2008, was KD margins down in 2008. Under hotel reservations, there was 41.6 million. The majority (78.1%) was short-term debt a large decline in margins, which dropped from 14% in (STD). The company’s current ratio stood at 0.64x at the 2007 to 6% in 2008. Tickets and transport margins both end of 2008. As a matter of fact, in 2008, Mashaer’s total increased YoY. Looking at the 9M2009 results, the gross current assets were insufficient to pay off just short-term margin declined to 5.1% from 15.6% in 9M2008. This debt. comes mainly as a result of a 23.2% decline in revenues (COGS dropped by 13.7%).
nbkcapital.com | 57 Haj & Umrah Services Consortium Co. (Mashaer) Kuwait in Focus - January 2010
Short-term Debt vs. Current Assets • The largest portion of assets is in investments in associates,
35 which make up 23.5% of the company’s total assets as 32.5 of September 2009. Going forward, we can expect this 30 block on the balance sheet to rise because of the increased 25.8 contributions to entities under establishment amounting to 25 22.9 22.4 KD 19.5 million as of September 2009.
20 17.5 • Mashaer’s investments in associates have grown by more
KD Millions KD 15 than six times over the past three years. Investments in
10.5 associates grew by 12.2% in the first nine months of 10 2009. Due to this increase in investments in associates,
5 4.1 their contribution to net profit has increased over the years. 3.2 3.0 2.2
- 2005 2006 2007 2008 9M2009 Investments in Associates
Current Assets Short-term Debt
Sources: Company’s financial statements and NBK Capital 2006 3.37
• In the first nine months of 2009, the company’s total debt 2007 16.53 balance fell by 46.1% to KD 22.4 million. Mashaer’s STD decreased to KD 21.6 million, and the long-term debt was
completely wiped out. The company was able to repay its 2008 20.52 debt mainly from the liquidation of the pledged collateral. By September 2009, the company settled a tawarruq finance facility of KD 7.5 million from pledged murabaha 9M2009 23.01 collateral, and transferred investment property rights valued at KD 8.1 million. Over and above, the company 0 5 10 KD Millions 15 20 25 settled KD 2.1 million of debt in cash. As a result, the company’s cash balance declined to KD 0.3 million in Sources: Company’s financial statements and NBK Capital 9M2009 from KD 1.6 million in 9M2008, and investment properties declined by 60% to KD13.3 million within the • The company’s holdings in available-for-sale (AFS) same period. investments grew at a CAGR of 18% over the past three • The majority of debt was used for investment in properties years. The breakdown of these investments include and as contributions to entities under establishment. The local quoted shares, local unquoted shares, and foreign investments in properties include a commercial complex unquoted shares. Local unquoted shares made up 64% used as a housing facility for pilgrims in Saudi Arabia of AFS in 2008. All companies that fall under the local that is expected to be completed by the end of 2009. unquoted shares category are recorded at cost less The contribution to entities under establishment includes impairments (if any). Increases or decreases in the value of capital contributed by Mashaer in companies that will these assets have no bearing on equity due to the difficulty eventually become associates or subsidiaries. The entities in determining the fair value of the unquoted securities; are expected to provide services tailored to the same however, according to management, no impairment demographic as Mashaer, and will be treated as operating charges were recorded for the year ending 2008. activity. • Another large contributor to assets is properties under • We are a little concerned about the company’s ability to development. In 2007, properties under development pay off its upcoming debt. Although some of the debt is were the largest portion of assets, making up 23.5% pledged against collateral, the company’s liquidity has of total assets. In 2008, the value of properties under declined, and the upcoming debt due is valued at KD 22.4 development dropped significantly (43% decline between million. 2007 and 2008) because several of the properties under development were sold to settle a debt account with one of Mashaer’s associates—Hajer Tower. This explains the significant increase in the absolute value of the company’s revenue and the decrease in the margins.
nbkcapital.com | 58 Haj & Umrah Services Consortium Co. (Mashaer) Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Sales 7,325 18,857 2,333 1,792 COGS (6,259) (17,210) (1,969) (1,700) Gross Profit 1,067 1,647 363 92 SG&A (1,603) (1,276) (817) (920) Share of Results from Associates 94 2,225 1,546 1,094 Net Rental Income (Expense) 324 (144) (120) (268) EBITDA (118) 2,453 972 (3) Depreciation and Ammortization (563) (2,240) (385) (249) EBIT (681) 213 587 (252) Comission Income on Marketing 8,519 8 - - Net Investment Income (Expense) 527 (20,299) (3,489) 4,358 Interest 21 87 - - Other Income 50 55 47 7 EBT 8,436 (19,936) (2,855) 4,113 Taxes (571) - - (206) Net Income (before Minority Interest) 7,865 (19,936) (2,855) 3,907 Minority Interest 13 (27) (35) 58 Net Income 7,853 (19,910) (2,820) 3,849
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
AFS Investments 9,554 13,814 13,353 11,720 Associates & Contribution to Entities 3,366 30,976 38,261 42,547 Prop. Under Development 2,326 30,319 17,356 - PP&E 222 417 1,640 1,673 Intangible Assets - 24,281 11,000 11,000 Other Non Current Assets 231 6,418 6,175 13,570 Total Non Current Assets 15,699 106,225 87,785 80,511 HFT Investments 290 4,908 110 96 C&CE, Deposits, Murabaha 1,319 2,059 8,640 763 A/R and Other Receivables 1,625 15,921 17,038 16,676 Total Current Assets 3,234 22,888 25,787 17,536 Total Assets 18,933 129,113 113,572 98,046 Total Equity 13,545 76,172 64,571 68,587 Loans - 21,315 9,109 - Other Non Current Liabilites 36 73 58 56 Total Non Current Liabilities 36 21,387 9,168 56 Loans 2,967 10,475 32,493 22,404 A/P and Due to Related Parties 2,384 21,079 7,340 6,998 Total Current Liabilities 5,351 31,554 39,833 29,403 Total Liabilities 5,387 52,941 49,001 29,459 Total Liabilities and Equity 18,933 129,113 113,572 98,046
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 59 Companies in Focus Kuwait in Focus - January 2010
Injazzat Real Estate Development Company (Injazzat)
Key Data Highlights
General Liquidity • Injazzat Real Estate Development Co. (Injazzat) is a KSE Code INJAZZAT.KSE 52-week avg. volume 811,934 Kuwait-based real estate development company and Reuters Code INJA.KW 52-week avg. value (KD) 186,019 operates across various segments, including commercial, Price (KD) Price Performance residential, hotels, and entertainment. The company also Closing Price 0.168 YTD -4.5% 52-week High/Low 0.150 / 0.265 1-Year Period -17.6% owns a portfolio of indirect investments in funds and shares in real estate companies. Injazzat is diversified Market Capitalization Outstanding Shares Million KD 58.07 Latest (million) 345.65 across regions and countries.
Ownership Structure • Real-estate-related revenue for Injazzat increased Closely Held: 58.03% Public: 41.97% significantly by 33%, to KD 22 million in 9M2009 Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital compared to KD 16.6 million in 9M2008. This increase was mainly due to a significant increase in management Stock Performance and placement fees, profit from the sale of investment properties, and an increase in rental income.
0.280 12.00 • Historically, both top-line and bottom-line growth has been 52-week High: KD 0.265 0.260 driven mainly by a change in the fair value of investment 10.00 0.240 properties and profit from the sale of investment properties.
0.220 8.00 • Injazzat has major projects that are currently under
0.200 construction. We feel that upcoming projects in Kuwait, 6.00 the Middle East, Europe, and the United States will act 0.180 Millions Price (KD) Price as income boosters and provide the company with further 0.160 4.00 diversification, both region-wise and project-wise. 52-week Low: KD 0.150 0.140 2.00 0.120
0.100 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Mariam Al-Bahar T. +965 2259 5138 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Rental Income (% of Total Income) 4% 3% 5% 12% 10% Change in Fair Value of Inv. Prop.(% of Real-Estate Related Rev.) 54% 62% 49% 37% 28% Change in Fair Value of Inv. Prop. (% of Net Profit) 63% 73% 61% 65% 43% Investment Income (% of Total Income) 3% 15% 13% 1% 6% Investment Income (% of Net Profit) 3% 21% 19% 2% 10%
EBITDA (KD million) 16.6 10.7 18.6 24.5 19.9 EBITDA Interest Cover (x) 16.6 8.9 4.6 4.1 4.3 Debt-to-Equity 0.4 0.5 0.9 1.0 1.0 Net Profit Margin 84% 72% 69% 56% 62%
Investment Book (% of Total Assets) 20% 16% 15% 14% 14% Investment Book (% of Total Equity) 31% 30% 40% 33% 34%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 60 Injazzat Real Estate Company Kuwait in Focus - January 2010
Overview Injazzat Tower
This office tower is located next to the Dhow Tower in Sharq Established in 1998, Injazzat is a Kuwait-based company on 1,000 sq. m. The tower consists of 28 floors covering a that was listed on the Kuwait Stock Exchange in 2002. built-up area of about 15,750 sq. m. The tower is due for The company is active in owning and operating residential completion in 2010. properties, retail development, mixed-use commercial development, build-operate-transfer (BOT) projects, and Major completed projects – International hospitality and entertainment properties. The company also engages in real estate activities and investments, including Al Qouz Residential Project direct and indirect investments, buying and selling of real estate and management of properties within Kuwait, the The project consists of two labor accommodations buildings Middle East, Europe, and the United States. providing 620 rooms along with offices and commercial shops. Located in Dubai, the project is built on an area of 100,000 Shareholder Structure sq. feet with an estimated total built-up area of approximately
Name Type Country Holding 224,180 sq. feet. In June 2007, subsequent to the project Alshaya Group Corportate Kuwait 25.26% reaching full occupancy, the company sold 50% of its share in A H Alsager and brothers Corportate Kuwait 18.81% International Gulf Company for Investment Corportate Kuwait 8.58% the project to a Kuwaiti company. Shurooq Investment Fund Corportate Kuwait 5.33% Public - - 42.02% Foreign Ownership Structure Al Muhaisna Project (Labor Accommodation) Open to GCC Investors 100.00% Open to Foreign Investors 100.00% This project is situated in the Al Muhaisna area in Dubai and Sources: Company’s financial statements and NBK Capital covers an area of about 56,914 sq. feet. The project consists of two floors and is composed of 401 rooms. It has been fully Major Projects leased for five years. Injazzat acquired this project in 2007, a 50% joint venture with First Real Estate Co. (Bahrain), as Major completed projects – Kuwait part of the company’s strategy of holding income-generating properties. Al Dhow Tower Land Trading This office tower consists of 33 floors and a total built-up area of 24,129 sq. m. The tower is strategically built in Sharq on An integral part of Injazzat’s investment activities involves an approximate total land area of 2,000 sq. m. Al Dhow Tower land trading, which includes buying parcels of land for direct is an income-generating asset. resale or to be split into sub-plots and sold to one or more buyers. The company has experience in land trading in Kuwait, Al Dajeej Ministries Building Bahrain, and several other international venues.
Injazzat acquired the Al Dajeej Ministries Building, located in Kuwait Farwaniya, in 2003 as another source of rental income. The property has an office space area of 10,634 sq. m. and is fully Al Mal and Aqar Joint Projects Company was established occupied by the departments of various ministries under long- in 2005, in cooperation with Aqar Real Estate Investment term leases. Company (Aqar). Injazzat owns 66.7% of the company, while Aqar owns a 33.3% stake. The new company merged Injazzat’s Major upcoming projects – Kuwait two plots with Aqar’s plot in Sharq, covering an area of 3,000 sq. m., to develop an office tower with a built-up area of nearly Shuwaikh Project 35,000 sq. m.
The company acquired a plot of 25,300 sq. m. in the Shuwaikh Bahrain industrial area to develop a multi-use complex. This complex will include commercial shops and offices, with a total built-up The company acquired several well-situated parcels in Al Seef, area of 96,900 sq. m. The project is expected to be completed Ras Al Zuwaid, Al Janabeah Bahrain Investment Wharf, and by the end of 2010. the Sar areas in Bahrain.
nbkcapital.com | 61 Injazzat Real Estate Company Kuwait in Focus - January 2010
Saudi Arabia Financial Statement Analysis
In December 2007, the company acquired, in association with Income Statement other parties, a multi-use plot of land in the eastern area of Damam, covering an area of 223,372 sq. m. The company • The company’s total income increased by 13% in 9M2009, intends to develop part of the land and sell the rest. to KD 20.5 million, compared to KD 18.1 million in Qatar 9M2008, entirely due to the increase in real-estate-related revenue. Real-estate-related revenue accounted for 94% The company acquired several lands in the Lusail area for of the company’s total income in 9M2009, compared to an development and trading. In addition, the company has average of 89% in the last five years (2004-2008). acquired shares in a Qatari company that owns land in the Al • Real-estate-related revenue for the company increased Khor area resort. significantly by 33%, to KD 22 million in 9M2009 UAE compared to KD 16.6 million in 9M2008. This increase was due to a significant increase in management and placement fees, profit from the sale of investment The company acquired various plots of land in Um Al Quwain properties, and an increase in rental income. in the United Arab Emirates (UAE). One group of land, covering an area of about 56,700 sq. m., is situated at Um Al Tho’oub, • Rental income more than quadrupled to KD 2.2 million and the second one, covering an area of about 6,272 sq. m., is in 9M2009, compared to KD 0.5 million in 9M2008. As situated in the Al Maidan area. The aim is to hold on to these a result, rental income as a percentage of total income parcels and sell them at a gain. jumped from 3.1% in 9M2008 to 10.2% in 9M2009.
Bulgaria • Injazzat’s rental income has not been sufficient to meet operating expenses in addition to the finance charges, Injazzat has invested in a land acquisition program in Luilin resulting in deficits of KD 5.1 million and KD 5.7 million on the northeastern side of Sofia and Bistritsa Hills on the for 2007 and 2008, respectively. This has been the trend southwestern side of Sofia, Bulgaria. for 9M2009 with a deficit of KD 4.5 million.
United States • Historically, both top-line and bottom-line growth has been mainly driven by a change in the fair value of investment Injazzat, in partnership with other investors, purchased two properties and profit from the sale of investment properties. adjacent tracts of land totaling 28.71 acres in McKinney, Texas, in the United States, for trading purposes. • Income from the sale of investment properties increased by 30% to KD 9.1 million in 9M2009, compared to KD 7.1 million in 9M2008. Income from the sale of investment properties accounted for 41.5% of total real-estate-related revenue in 9M2009, compared to 33.7% in 2008.
• The change in the fair value of investment properties decreased by 21% to KD 6.2 million in 9M2009, compared to KD 7.8 million in 9M2008, due to the decline in real estate prices. The change in the fair value of investment properties accounted for an average of 54% of the real- estate-related revenue in the last five years (2004-2008), with the share dropping to 28% in 9M2009. The change in the fair value of investment properties accounted, on average, for 67% of the net profit in the last five years (2004-2008), with the share dropping to 43% in 9M2009.
• Operating profit increased significantly to KD 19.8 million in 9M2009, compared to KD 15.4 million in 9M2008, due to the increase in real-estate-related revenue.
nbkcapital.com | 62 Injazzat Real Estate Company Kuwait in Focus - January 2010
• Investment income decreased slightly by 7%, to KD Financial Statements 1.4 million in 9M2009, compared to KD 1.5 million in 9M2008. Investment income accounted for 6% of total Income Statement (KD '000) 2007 2008 9M2008 9M2009 income in 9M2009, compared to an average of 11% in the Rental Income 1,112 3,264 516 2,237 last five years (2004-2008). Profit on sale of dev. properties 0 0 0 0 Management and placement fees 450 3,752 351 3,676 • Net profit increased by 6% to KD 14.5 million in 9M2009, Income from sale of inv. properties 7,576 9,182 7,036 9,137 compared to KD 13.7 million in 9M2008. This increase Change in fair value of inv. properties 10,132 9,953 7,808 6,181 1,450 1,097 851 760 is mainly due to the rise in real-estate-related revenue. Other operating income Total real-estate-related revenue 20,720 27,246 16,563 21,992 Injazzat is one of the few listed real estate companies in Operating expenses 2,245 2,946 1,150 2,196 Kuwait that posted profits during 9M2009. Operating profit 18,475 24,300 15,413 19,796 Investment Income 3,052 280 1,511 1,400 Balance Sheet Total Income 23,772 27,526 18,073 23,392 Total expenses 6,254 8,943 3,886 6,781 • The company’s investment book stood at KD 28 million Net Profit 16,479 15,326 13,705 14,476
as of 9M2009, which accounted for 14% of total assets Balance Sheet (KD '000) 2007 2008 9M2008 Sep-09 and 34% of total equity. Although the investments-to- Cash and Bank Balances 14,705 22,882 19,521 6,362 equity ratio is quite high, we would like to highlight that Investment Properties 102,411 125,232 93,809 120,044 the company’s available-for-sale investments primarily Total Assets 167,021 203,026 149,403 204,335 represent investments in real estate development projects Short-Term Debt 11,000 52,722 18,403 39,496 and portfolios through specialized real estate investment Long-Term Debt 49,535 29,241 37,416 41,490 managers. Total Debt 60,535 81,963 55,819 80,986 Total Liabilities 98,171 112,611 84,145 116,746 • The company has maintained an average debt-to-equity Shareholders' Equity 63,920 85,305 60,273 82,578 ratio of 0.5x over the five years from 2003 to 2007. The Minority Interest 4,929 5,109 4,984 5,011 Total Liabilities and Equity 167,021 203,026 149,403 204,335 company’s debt-to-equity ratio increased significantly from 0.3x in 2003 to 1.0x in 9M2009. The company’s equity Sources: Company’s financial statements, and NBK Capital and total debt stand at KD 82.6 million and KD 80.96 million, respectively, as of 9M2009. A closer look at the debt shows that the increase was mainly due to short-term loans, which currently account for 49% of the total debt, as of 9M2009.
nbkcapital.com | 63 Companies in Focus Kuwait in Focus - January 2010
Kuwait Cement Company
Key Data Highlights
General Liquidity • Kuwait Cement Company is a dominant player in the local KSE Code KCEM.KSE 52-week avg. volume 120,706 cement market, with a production capacity of 3.8 million Reuters Code KCEM.KW 52- week avg. value (KD) 65,074 tons. Price (KD) Price Performance Closing Price 0.540 YTD 5.9% • Kuwait Cement has a large investment book on the 52-week High/Low 0.600/0.357 1-Year Period 7.0% company’s balance sheet. Among the largest of the Market Capitalization Outstanding Shares company's investments is an 8.92% share in National Million KD 312.32 Latest (million) 578.40
Ownership Structure Industries Group (NIG). NIG is one of the largest companies Closely Held: 63.4% Public: 36.6% in terms of market capitalization on the Kuwait Stock
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital Exchange (KSE). • Major development projects have been delayed. Since oil is the main source of revenue in Kuwait, government Stock Performance spending on large projects may be put on hold or cancelled. As a result, the demand for cement will decrease, affecting 0.700 3.0 revenues for cement companies. 52-week High: KD 0.600 2.5 • Saudi Arabia’s excess cement production may cause a 0.600
2.0 commotion in the Kuwaiti market due to the competitive advantage of Saudi cement producers. This is the result 0.500 1.5
Millions of subsidies provided by the Saudi government on energy Price (KD) Price
1.0 costs.
0.400 52-week Low: KD 0.357 • Kuwaiti companies enjoy a geographic advantage in terms 0.5 of access to the Iraqi market. Kuwait Cement’s planned 0.300 0.0 capacity addition is likely to play an important role in Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close exporting cement for the reconstruction activity in Iraq.
Sources: Reuters and NBK Capital
Analyst
Wadie Khoury T. +965 2259 5118 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Sales Growth 17.4% 13.9% 14.0% 4.8% -27.9% Net Income Growth 95.6% 6.6% 36.1% -92.1% -25.9%
Gross Profit Margin 39.1% 40.2% 50.0% 32.1% 30.6% EBITDA Margin 35.3% 37.2% 46.9% 28.6% 24.9% Profit Margin 59.5% 55.7% 66.5% 5.0% 31.9% Adj Profit Margin (w/o Investment Income) 19.9% 27.9% 26.2% 17.7% 18.1%
Investment Book-to-Assets 71.4% 76.1% 83.3% 52.5% 52.2% Investment Book-to-Equity 89.4% 97.9% 100.4% 94.3% 80.6%
ROAA 18.5% 14.9% 16.8% 1.4% -0.3% Adjusted ROAA 17.4% 29.5% 35.4% 13.4% 10.4% ROAE 24.1% 18.9% 20.9% 2.0% -0.5%
Debt-to-Equity 20.0% 24.6% 17.2% 72.9% 46.0% Interest Coverage Ratio 8.6 x 8.5 x 8.1 x 5.2 x 4.4 x
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 64 Kuwait Cement Company Kuwait in Focus - January 2010
Overview (in spite of the still large investment books); however, a reversal on impaired property, plant, and equipment Kuwait Cement Company is one of the three cement players (PP&E) valued at KD 24 million helped boost net income in Kuwait. Kuwait Cement is the largest local cement player to KD 14.9 million in 9M2009. involved in the production and distribution of ordinary cement, • Kuwait Cement operates better as a cement company than sulphate resistant Portland cement, Portland cement for as an asset management firm. Looking at the operational industrial purposes as well as other types of cement. The return on assets (adj. ROAA) vs. the actual return on assets company has the capacity to produce up to 3.8 million tons of (ROAA), we notice a more stable set of returns. Between cement, and a clinker capacity of 4 million tons per year, with 2005 and 2008, operational ROAA fell from 17% to the majority of Kuwait Cement’s core operations driven by the 13%; whereas actual ROAA (including investments) fell housing market. The company strictly caters to the Kuwaiti from 19% to 1%. In 9M2009, ROAA was -0.3%, while market, which consumes approximately 5.5 to 6 million tons operational ROAA reached 10%. of cement a year. • EBITDA margins also dropped from 29% in 9M2008 to Latest News 25% in 9M2009. This was a result of a 23% increase in sellilng, general, and administrative (SG&A) costs.
• January 28, 2009: Kuwait Cement signed a deal worth • EBIT margins also dropped in spite of a decline in USD 53.5 million with Descon Engineering, a Pakistan- depreciation charges. The reason for the drop in based company, to expand its cement plant in Shuaiba. depreciation is unclear; however, one possibility could be a This will increase clinker capacity from 2.5 million tons to result of the halt in charging depreciation costs for some of 5 million tons. the company’s larger assets due to the length of time these assets were held for.
Financial Statement Analysis • Interest coverage ratios dropped from 7x in 9M2008 to 4.4x in 9M2009 as a result of a 31% deline in EBIT and Income Statement a 10% increase in finance charges due to increased debt. The company has been able to pay some of its debt back • Despite an increase in sales, gross margins dropped from since its peak in 1Q2009. 50% in 2007 to 32% in 2008. The decline was a result of a 30.7% YoY increase in the cost of raw materials (which Balance Sheet constitute 84% of the cost of sales) in 2008.
• The 9M2009 results showed a similar trend. Sales dropped • Kuwait Cement has significant exposure to the stock 28% in 9M2009 compared to 9M2008, taking gross profit market, whereby the investment book made up 81% of margin down from 32.5% to 30.6% within the same time shareholders’ equity as of September 2009. frame. This comes despite a 29% drop in cost of goods • Amendments to IAS 39 allowed Kuwait Cement to prevent sold (COGS). showing any losses on the income statement associated • The drop in COGS is mainly due to the 32% drop in raw with mark-to-market changes in AFS investments going material costs, as well as the 39.7% decline in maintenance forward. The amendments were made in the third quarter and spare parts (the second largest contributor to COGS). of 2008, whereby the fair value of the reclassified investments was KD 34.2 million. • Operationally, the company started to feel the pinch of the economic slowdown; however, historically, the bulk • Shareholders’ equity fell by 56% between 2007 (KD of Kuwait Cement’s profit was driven by non-operational 302.7 million) and 2008 (KD 133.3 million) as a result investments. This explains the large volatility in the profit of a major drop in the fair value from investments, as well margin. as a drop in retained earnings. By the end of September 2009, shareholders’ equity increased to KD 162.5 million • Normally, the largest contributor to profits comes from as fair value reserves and retained earnings improved. The non-operating income (i.e., investment income). Between retained earnings value would have been far lower had 2004 and 2007, non-operating income contributed an the company not reversed the impairment on its PP&E average of 59.4% of net income throughout that period. In (extraordinary item). 2008, investment income actually accounted for a loss of KD 15.6 million (not including any adjustments to AFS). In 9M2009, investment income contributed a loss to income
nbkcapital.com | 65 Kuwait Cement Company Kuwait in Focus - January 2010
• AFS contributes the largest portion of assets, taking up Financial Statements 46.1% of total assets as of September 2009. From 2008 to the end of September 2009, AFS increased by 7.5%, Income Statement (KD '000) 2007 2008 9M2008 9M2009 Total Revenue 82,432 86,399 64,904 46,764 mainly due to an increase in the fair value of the assets. Cost of Revenue (54,004) (63,572) (47,003) (33,173) Gross Profit 28,429 22,827 17,901 13,591 Kuwait Cement’s largest position held in AFS is an 8.92% Selling/General/Admin Expenses (2,635) (2,991) (2,147) (2,650) stake in a cross holding with NIG. This investment alone Other Operating income 2,366 (610) 1,016 (808) Provisions & Impairment (13,204) - 33 16,799 constitutes 29.7% of the total assets. The value of this Operating Income 14,955 19,226 16,802 26,931 Inv. Income (Exp), Net Non-Op 39,599 (15,564) 3,521 (10,920) investment increased from KD 46.8 million in 2008 to KD Associate Results 2,153 833 480 (344) Net Income before Taxes 56,707 4,495 20,803 15,666 52.3 million in 9M 2009. Contributions to KFAS (569) (43) (208) (153) NLST (1,146) - (244) (360) • PP&E increased significantly from KD 12.8 million in Zakat (27) - (90) (218) Directors Remuneration (161) (140) (105) - 2008 to KD 45.9 million in September 2009. This is a Net Income 54,803 4,312 20,156 14,936
result of a reversal on impairment of KD 24.1 million. Balance Sheet (KD '000) 2006 2007 2008 Sep-09 PP&E actually increased to KD 21.8 million in September AFS Investments 135,370 197,555 107,616 115,676 PP&E 25,864 8,430 12,807 45,887 2009 (only a 70% increase from 2008) if the reversal on Other Non Current Assets 10,864 11,944 16,189 15,687 Total Non Current Assets 172,098 217,929 136,612 177,251 impairment is not taken into account. HFT Investments 82,140 106,090 17,727 14,987 C&CE 8,358 17,143 41,516 26,555 • The company has increased its production capacity to Other Current Assets 23,729 23,963 43,529 32,034 Total Current Assets 114,227 147,195 102,771 73,577 3.8 million tons of cement per year, with expectations of Total Assets 286,325 365,125 239,384 250,828 Total Equity 222,463 302,711 133,339 162,516 reaching 5 million tons. The clinker capacity expansion Loans 13,519 11,200 38,798 21,072 Other Non Current Liabilites 1,290 1,291 1,498 1,515 would require approximately an additional KD 15 million Total Non Current Liabilities 14,809 12,491 40,296 22,587 capex going forward. How will this be financed? The KD Loans 41,180 40,750 58,356 53,641 Other Current Liabilities 7,874 9,174 7,392 12,084 26.6 million in cash will come in handy to help finance Total Current Liabilities 49,054 49,923 65,748 65,725 Total Liabilities 63,863 62,414 106,044 88,312 the project. Total Liabilities and Equity 286,325 365,125 239,384 250,828
• Kuwait Cement has raised plenty of debt over the years. Sources: Company’s financial statements and NBK Capital Total debt has grown from KD 40.7 million in 2005 to KD 97.2 million in 2008. Despite the increase in debt over the years, the company’s debt dropped to KD 74.7 million in September 2009. Kuwait Cement took the initiative to pay back KD 22.4 million of debt as of September 2009.
• In 2006 and 2007, Kuwait Cement used the bulk of the company’s cash flows from operations (CFFO) along with non-core sources of cash (dividends from investments) to purchase AFS investments and pay out dividends. In 2008, the company took on KD 45.2 million in debt to help pay out dividends and purchase additional AFS and PP&E. This changed in September 2009, whereby debt was being repaid, more AFS investments were being sold than purchased, and the largest portion of Kuwait Cement’s CFFO was being invested in PP&E (KD 7.2 million).
• Kuwait Cement’s CFFO (adjusted for investments at fair value) improved from KD 8.8 million in 9M2008 to KD 19.4 million in 9M2009. More importantly, free cash flows (using the adjusted cash flow from operations) jumped from KD 1.8 million in 9M2008 to KD 9.8 million in 9M2009.
nbkcapital.com | 66 Companies in Focus Kuwait in Focus - January 2010
Kuwait Finance House (KFH)
Key Data Highlights • Kuwait Finance House (KFH) was established in 1977 General Liquidity as the first fully Shari’ah-compliant bank in Kuwait, and KSE Code KFIN.KSE 52-week avg. volume 5,282,998 Reuters Code KFIN.KW 52-week avg. value (KD) 6,171,408 is currently the largest Islamic bank in Kuwait and the second-largest Islamic bank in the world. As of September Price (KD) Price Performance 2009, KFH’s assets accounted for 28% of Kuwait’s total Closing Price 1.080 YTD -1.8% 52-week High/Low 1.4 / 0.786 1-Year Period 8.0% banking assets.
Market Capitalization Shares Outstanding • In November 2009, KFH-Turkey received a license to Million KD 2,456.23 Latest (million) 2,274.29 operate in the Dubai International Financial Center. Earlier, Ownership Structure in September 2009, the bank also won a license to open Closely Held: 43% Public: 57% the first Islamic banking branch in Germany. Price as of close on January 18, 2010, Sources: Reuters, Zawya, and NBK Capital • KFH has been expanding aggressively, purchasing stakes in companies domestically and abroad, over the past few years. As of December 2008, KFH had 12 consolidated Stock Performance subsidiaries and seven associates in the region. 1.500 30 • KFH announced a net profit of KD 106 million for 9M2009,
1.400 52-week High: KD 1.400 52% lower than the 9M2008 net profit, on the back of 25 surging provisioning charges during the period. Balance 1.300 sheet growth during the period was muted as total assets 20 1.200 52-week Low: KD 0.786 grew by just 5%, while total financing and deposits grew by 6% each. 1.100 15 Millions
Price (KD) Price • KFH is the market leader in terms of deposit accumulation, 1.000 10 holding more than a quarter of the total banking sector
0.900 customers’ deposits as of September 2009. Due to the
5 inaccessibility of borrowing options typically available to 0.800 conventional banks, KFH’s deposits base is the prime
0.700 0 source of funding for KFH’s lending portfolio. Jan-09 Mar-09 Apr-09 May-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10
Volume Close • KFH reported a strong total capital adequacy ratio (CAR) of 21.7% as of December 2008, higher than the 18.9% Sources: Zawya and NBK Capital recorded in 2006, according to Basel I requirements. Analyst • KFH saw a significant deterioration in asset quality during Munira Mukadam 2008 as non-performing receivables (NPRs)-to-gross receivables surged to 12.6% and NPR coverage declined T. +971 4 365 2858 E. [email protected] to 47%. Key Ratios
2005 2006 2007 2008 9M2009
Growth in Receivables 41.7% 32.0% 43.6% 19.9% 5.3% Growth in Leased Assets 19.3% 7.4% 43.6% 27.0% 7.0% Growth in Depositors' Accounts 24.4% 16.9% 43.7% 23.3% 6.1% Growth in Net Financing Income ** 8.7% 76.9% 33.2% 65.9% 48.0% Growth in Operating Income 97.3% 42.1% 41.1% 12.2% 0.0% Growth in Net Profit 59.5% 36.5% 69.9% -43.0% -51.8%
NPRs-to-Gross Receivables 4.4% 4.1% 3.8% 12.6% N/A NPR Coverage 150.6% 136.8% 97.0% 46.6% N/A Capital Adequacy N/A 18.9% 23.3% 21.7% N/A
Growth in Costs 132.5% 59.9% 3.4% 30.6% 24.7% Cost-to-Income 34.8% 39.1% 28.7% 33.3% 43.1% Net Financing Income-to-Operating Income 25.8% 32.1% 30.3% 44.9% 46.1%
RoAA * 2.92% 2.95% 3.64% 1.62% 1.31% RoAE * 25.63% 24.87% 28.79% 12.81% 11.46%
* Annualized figures. ** Financing Income less distribution to depositors’ accounts less murabaha and ijara costs Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 67 Kuwait Finance House (KFH) Kuwait in Focus - January 2010
Overview Latest News
Kuwait Finance House (KFH) is the second-largest bank • November 2009: KFH-Turkey received a “Category Five” (28% market share of the total banking assets in Kuwait as license, designed for Islamic banking activities, from the of September 2009), and the largest Islamic bank in Kuwait. Dubai Financial Services Authority (DFSA), to operate in KFH is also the world’s second-largest Islamic bank. KFH was the Dubai International Financial Center (DIFC) in the established in 1977 as Kuwait’s premier Shari’ah-compliant UAE. This makes KFH-Turkey the first Category 5 entity to banking institution and has since grown to hold the lion’s share operate in the DIFC. of the country’s Islamic banking business. The government of • September 2009: KFH-Turkey also won a license to open Kuwait is the largest shareholder, holding approximately 43% the first Islamic banking branch in Germany. of the bank’s share capital via several public institutions, including the Kuwait Investment Authority (24.1%), the Asset Quality Public Authority for Minors’ Affairs (10.5%), and the Kuwait Awqaf Public Foundation (8.2%). KFH’s activities can be KFH saw a significant deterioration in asset quality during broadly divided into retail and corporate banking, treasury, 2008. Non-performing receivables (NPRs), which grew by and investments. The bank provides solely Shari’ah-compliant a CAGR of 17% between 2004 and 2007, shot up by more products and services through nearly 50 branches in Kuwait. than 300% to KD 642 million in 2008. This took the NPRs- KFH is also the leader in auto and real estate financing in to-gross receivables ratio to 12.6% in 2008, compared with Kuwait. An aggressive expansion strategy over the past few the low-single digit figures seen in prior years. The increase years has helped the bank expand its international network in impaired loans (ILs) in 2008, according to Fitch Ratings, to Bahrain, Saudi Arabia, the United Arab Emirates (UAE), was due to a reclassification of performing loans as non- Turkey, and Malaysia, wherein KFH offers Islamic banking, performing in 4Q2008, based on sector-wide concerns investments, real estate, and leasing services via subsidiaries primarily relating to KFH’s exposure to domestic investment and associates. companies. Furthermore, despite rapidly growing provisions during the year (from KD 151 million in 2007 to KD 299 Subsidiaries and Associates as of December 2008 million in 2008), the NPR coverage ratios fell to 47%, much Consolidated Subsidiaries Country Stake Principal Activities lower than the levels seen during the boom years until 2007, and one of the lowest in the Kuwaiti banking sector. We would Kuwait Finance House (Malaysia) Berhad Malaysia 100% Islamic banking services KFH Private Equity Ltd. Cayman 100% Islamic investments like to note that our ratios do not include leased assets, Islamic finance and Al Muthana Investment Co. Kuwait 100% investments another form of financing, as information on impaired leased Real estate development assets is unavailable. According to a credit analysis report by Al Nakheel United Real Estate Co. Kuwait 100% and leasing Infrastructure and Industrial Fitch Ratings in November 2009, KFH’s impaired loans as of Development Enterprises Holding Co. Kuwait 100% investments Real estate development December 2008 stood at KD 665 million, compared with KD Baitak Real Estate Investment Co. Saudi Arabia 100% and investment 175 million in the previous year. Thus, ILs-to-gross financing Kuwait Finance House Bahrain 93% Islamic banking services Kuwait Turkish Participation Bank Turkey 62% Islamic banking services (including receivables and leased assets) stood at 10.6% in Aref Investment Group Kuwait 52% Islamic investments 2008, compared to 3.7% at the end of 2007, indicating the Aircraft leasing and ALAFCO - Aviation Lease and Finance Co. Kuwait 52% financing services weakening in asset quality mentioned previously. Real estate, investment, trading and real estate Al Enma'a Real Estate Company Kuwait 51% mgmt. Islamic finance and Liquidity Management House Kuwait 100% investments
Associates Country Stake Principal Activities
Direct Investments First Takaful Insurance Co. Kuwait 27% Islamic Takaful Insurance Gulf Investment House Kuwait 20% Islamic investments Islamic banking and Liquidity Management Centre Co. Bahrain 25% financial services National Bank of Sharjah UAE 20% Islamic banking services
Indirect Investments Leasing and Islamic A'ayan Leasing and Investment Co. Kuwait 16% investment Real estate projects Munsha'at Real Estate Projects Co. Kuwait 30% management Sokouk Real Estate Development Co. Kuwait 49% Real estate development
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 68 Kuwait Finance House (KFH) Kuwait in Focus - January 2010
NPRs-to-Gross Receivables and NPR Coverage Ratio peers in the region. Islamic banks typically operate on a higher cost base than their conventional peers. KFH’s 14.0% 160% 151% 12.6% lower operating efficiency further pertains to the building 140% 12.0% 137% of a wider international network, the implementation of 125% 120% Basel II reporting systems, and continuous improvements 10.0% in information technology (IT). 100% 97% 8.0% • The 9M2009 bottom line was heavily impacted by 80% 6.1% impairments of KD 137 million taken during the period, 6.0% 47% 60% toward exposures in the high-risk real estate sector as 4.4% 4.1% 4.0% 3.8% well as troubled investment companies. Income before 40% provisions, however, increased by 2% over 9M2008. 2.0% 20% • KFH’s 2008 net profit fell by 43% to KD 157 million, 0.0% 0% on the back of soaring provisions of KD 211 million in 2004 2005 2006 2007 2008
NPRs-to-Gross Receivables NPR Coverage 2008 versus KD 38 million in 2007. Income before provisions, however, increased by 17% during 2008. Core Sources: Company’s financial statements and NBK Capital earnings, in the form of financing income, grew by 20%, while distribution to depositors declined by 11%. Fee and
NPR Analysis – Pre-invasion versus Post-liberation commission income improved (up 25%), but investment income, which is the second-largest contributor to the Pre-invasion KD '000 2004 2005 2006 2007 2008 bottom line (see the figure below), declined by 21%, due
NPRs 31,790 31,737 31,693 6,368 6,309 to depressed valuations and higher impairment charges Specific Provisions 31,790 31,737 31,693 6,368 6,309 % of total NPRs 32% 32% 26% 4% 1% than in 2007. Operating costs were up 31%, in line with
Post-liberation KFH’s expansion strategy, taking the cost-to-income ratio KD '000 2004 2005 2006 2007 2008 up to 33%, compared to 29% in FY2007. NPRs 66,526 67,189 88,531 149,663 635,859 Specific Provisions 55,486 59,050 67,954 71,866 158,428 % of total NPRs 68% 68% 74% 96% 99% • In 2008, KFH took impairment provisions of KD 211 Post-Liberation million, primarily due to a weakening in the local murabaha NPR Growth 1% 32% 69% 325% Provisions Growth 6% 15% 6% 120% and wakala portfolio (specifically real estate exposures), NPR Coverage 83% 88% 77% 48% 25% and deterioration in the investment portfolio. Impairments KD '000 Total for local murabahas and wakalas increased from KD 9.8 NPRs 98,316 98,926 120,224 156,031 642,168 Specific Provisions 87,276 90,787 99,647 78,234 164,737 million to KD 125 million, while investment impairments Sources: Company’s financial statements and NBK Capital increased from KD 7 million to KD 48.4 million between 2007 and 2008.
Financial Statement Analysis Operating Income Breakdown
100% Income Statement 6% 8% 7% 8% 7% 90% 11% 13% 12% 11% 12% • KFH announced a net profit of KD 106 million for 9M2009, 80% 52% lower than the 9M2008 net profit, on the back of 70% 37% 36% surging provisioning charges during the period. Despite 60% 49% 51% 54% slightly weaker core earnings, net financing income posted 50%
robust growth of 48% year on year (YoY), supported by 40% large declines in financing costs. 30%
47% 45% • However, operating income remained flat at KD 405 20% 32% 30% 26% million during the period, owing to weaker fee and 10%
commission income (down 13%), foreign exchange losses, 0% and investment income (down 28%) in 9M2009. 2004 2005 2006 2007 2008 Net Financing Income * Investment Income Fee and commission Income Other Income • Operating costs grew by 25%, taking the cost-to-income * Net financing Income = Financing Income less distribution to depositors’ accounts ratio up to 43% for 9M2009, compared to 33% during less murabaha and ijara costs Sources: Company’s financial statements and NBK FY2008, higher than the ratios of most of the bank’s Capital
nbkcapital.com | 69 Kuwait Finance House (KFH) Kuwait in Focus - January 2010
Balance Sheet Receivables Breakdown
100% 1% 6% 5% 6% • KFH’s balance sheet grew by a robust compound annual 13% 90% 21% 17% 15% growth rate (CAGR) of 37% between 2004 and 2007. In 17% 80% 17% 2008, however, as the global financial crisis reached the 70% 19% Gulf Cooperation Council (GCC), this rapid growth slowed 60% 31% 45% down to 20%. In the following nine months, the bank’s 54% 50% 43% assets grew by only another 3%. 40%
• As with most other Kuwaiti banks, KFH’s lending book grew 30% 59% 46% substantially between 2004 and 2007, with receivables 20% 34% and leased assets growing at a CAGR of 39% and 23%, 26% 28% 10% respectively. Receivables' growth slowed down slightly in 0% 2008 but was still strong at 20%, while leased assets 2004 2005 2006 2007 2008 continued their momentum, expanding by 27%. Growth Trading and Manufacturing Banks and financial institutions Construction and real estate Other in 2009 was conservative as receivables and leased assets reached KD 5.04 billion (up 5% during 9M2009) and Sources: Company’s financial statements and NBK Capital KD 1.26 billion (up 7% during 9M2009) as of September 2009. Financial Statements • KFH’s total customer deposits stood at KD 7.02 billion as of September 2009, accounting for more than a quarter Income Statement (KD '000) 2007 2008 9M2008 9M2009 of the total deposits in the Kuwaiti banking sector. The Financing Income 466,893 561,271 416,776 401,975 Distribution to Depositors (242,528) (216,800) (233,970) (170,283) deposit base is the primary source of funds for KFH’s Murabaha and Ijara costs (65,712) (81,194) (56,530) (44,780) lending portfolio as Islamic banks are restricted from Net Financing Income 158,653 263,277 126,276 186,912 accessing longer-term wholesale funding, due to issues Fee and commission Income 56,125 70,140 53,753 47,026 Foreign Exchange Income 14,696 13,547 11,138 (3,837) surrounding Shari’ah law. KFH is, however, able to borrow Investment Income 266,397 209,897 191,709 138,982 via short-term murabaha facilities (equivalent to interbank Other Income 27,037 29,998 22,432 36,321 Operating Income 522,908 586,859 405,308 405,404 borrowing, which increased by 34% in 2008 but declined Impairments (38,179) (210,940) (17,287) (137,250) by 5% in 9M2009), issuing Sukuks, or Shari’ah-compliant Staff Costs (73,783) (96,254) (66,721) (84,450) structured financing. Gen and Admin expenses (48,134) (70,873) (51,575) (62,264) Depreciation (27,939) (28,547) (21,772) (27,917) Operating Profit 334,873 180,245 247,953 93,523 • KFH’s investment portfolio stood at KD 1.04 billion Other expenses (9,478) (5,593) (8,860) (4,746) at the end of December 2008 with direct and indirect Minority Interest (50,129) (17,692) (18,507) 17,610 equity investments accounting for nearly 70% of the total Net Income 275,266 156,960 220,586 106,387
portfolio. By the end of September 2009, this portfolio Balance Sheet (KD '000) 2006 2007 2008 Sep-09
stood at KD 1.08 billion, up 4% during 9M2009. KFH Assets also held investments in properties worth KD 290 million Cash and bank balances 231,996 553,565 368,062 548,960 Short-term international 1,050,599 1,067,291 1,312,153 1,094,667 as of September 2009, up 4% in 9M2009. Receivables 2,778,166 3,988,131 4,779,788 5,035,208 Trading properties 90,463 126,413 57,590 51,461 • KFH reported a strong total CAR of 21.7% as of December Leased Assets 647,939 930,657 1,181,825 1,264,597 Investments 583,351 896,098 1,038,602 1,076,259 2008, higher than the 18.9% recorded in 2006. The Investments in associates 210,538 341,279 449,496 410,748 Central Bank of Kuwait (CBK) requires all conventional Investment properties 191,407 247,300 279,574 290,282 Other assets 128,327 239,694 485,713 509,110 banks to calculate and report CARs per Basel II regulations Fixed assets 401,005 407,488 591,339 809,997 as of January 1, 2005. However, this is not yet binding Total Assets 6,313,791 8,797,916 10,544,142 11,091,289 for Islamic banks. Therefore, KFH and the other Islamic Liabilities and Sh. Equity Due to banks and fin. inst. 1,080,004 1,186,391 1,595,452 1,517,277 banks in Kuwait currently report CAR based on Basel I Depositor's Accounts 3,729,930 5,361,155 6,611,556 7,015,196 norms. However, KFH is in the process of implementing Other liabilities 289,325 380,853 394,033 529,595 Total Liabilities 5,099,259 6,928,399 8,601,041 9,062,068 systems to enable the bank to report based on Basel II Minority Interest 137,443 196,094 354,545 351,730 requirements, if and when the CBK directives require the Deferred Revenue 299,263 374,608 344,426 463,835 Islamic banks to do so. Fair Value Reserve 66,654 86,843 11,394 (21,181) Foreign Currency Trans. Res. 8,683 1,972 (7,548) (1,073)
Total Shareholders' Equity 702,489 1,210,000 1,240,284 1,235,910
Total Liabilities & Sh. Equity 6,313,791 8,797,916 10,544,142 11,091,289
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 70 Companies in Focus Kuwait in Focus - January 2010
Kuwait Financial Center (Markaz)
Key Data Highlights
General Liquidity • Kuwait Financial Center (Markaz) was established in 1974 KSE Code MARKAZ.KSE 52-week avg. volume 1,545,514 and has become one of the leading asset management and Reuters Code MARKZ.KW 52-week avg. value (KD) 177,545 investment banking institutions in the Middle East and Price (KD) Price Performance North Africa (MENA) region. Closing Price 0.118 YTD 1.7% 52-week High/Low 0.15 / 0.05 1-Year Period 96.7% • Since the invasion in 1990, Markaz has gone through a
Market Capitalization Shares Outstanding major restructuring process, divested non-core assets, Million KD 54.03 Latest (million) 457.91 increased its paid-up capital, and listed on the Kuwait Ownership Structure Stock Exchange (KSE). Closely Held: 28% Public: 72% • Markaz was the first to offer a derivatives trading platform Price as of close on January 18, 2010, Sources: Reuters, Zawya, and NBK Capital in 2005, and is currently the only options market maker for KSE-listed stocks.
Stock Performance • Markaz recorded a net profit of KD 1.9 million during 3Q2009, increasing the 9M2009 net profit to KD 4.2 0.160 16 million, compared to net losses of KD 973 thousand logged 52-week High: KD 0.150
14 during 9M2008, supported primarily by an improvement 0.140 in investment income. Almost all the other income 12 components dropped compared to 9M2008; however, 0.120 10 operating expenses declined by 31% YoY.
0.100 8 • Markaz’s operating income breakdown has not been
52-week Low: KD 0.050 Millions
Price (KD) Price consistent over the years. Since 2004, management fees 6 0.080 and investment income have continually changed roles as
4 the largest contributor to operating income.
0.060 2 • Furthermore, Markaz’s cost-to-income ratio has been equally volatile, primarily due to the nature of the operating 0.040 0 Jan-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10 income. As of September 2009, Markaz’s cost-to-income Volume Close ratio stood at 52%.
Sources: Zawya and NBK Capital • Markaz’s assets under management (AUMs) grew by a CAGR of 24% between 2003 and 2007 to reach KD 1.2 billion, with most of the growth achieved in the first Analyst two years of the period in question. In 2008, the AUMs declined by 34% to KD 820 million, as liquidity tightened Munira Mukadam and investors became more cautious. Between December T. +971 4 365 2858 2008 and September 2009, the AUMs increased slightly E. [email protected] to KD 886 million.
Key Ratios
2005 2006 2007 2008 9M2009
Management fees and comm-to-Op.Income 30.7% 89.5% 42.4% -102.6% 66.9% RoAA * 30.5% 3.6% 16.4% -11.7% 4.4% RoAE * 36.8% 4.6% 22.8% -18.1% 6.9%
Total Debt-to-Total Equity 13.7% 31.2% 38.7% 66.8% 38.5% Net Debt-to-Total Equity 10.9% 28.3% 36.8% 51.9% 31.7% Interest Coverage Ratio 75.91 4.02 13.18 -5.81 5.81 Operating Cash Flow Ratio 0.71 2.77 -1.74 2.61 2.62
Liquid Assets-to-Total Assets 41.8% 38.5% 39.7% 39.7% 41.0% Debt-to-Assets 11.6% 23.1% 26.8% 36.6% 26.8% Equity-to-Assets 85.0% 74.1% 69.9% 58.0% 69.7%
* Annualized figures Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 71 Kuwait Financial Center (Markaz) Kuwait in Focus - January 2010
Overview • In the US, Mar-Gulf Management Incorporated (Mar-Gulf) has acted as Markaz’s asset management arm since 1988. Kuwait Financial Center (Markaz) was established in 1974 The fully owned subsidiary is involved in the ownership and has become one of the leading asset management and development of industrial, retail, and commercial and investment banking institutions in the MENA region. properties in the Los Angeles area in California. Other The primary services of the company include investment major subsidiaries include an asset management firm in management, corporate financing, investment and financial Syria, real estate development and investment companies advisory services, private equity, mutual funds and real estate in Jordan and Saudi Arabia, and some consultancies in fund management, money market, and foreign exchange. Kuwait. Following the invasion in 1990, Markaz went through a major restructuring process as the company began divesting Major Subsidiaries a substantial portion of non-core assets, affiliates, and Proportion Subsidiary Country Principal Activity subsidiaries abroad. Markaz then increased its paid-up capital of Ownership Mar-Gulf Management Inc. USA 100% Asset Management and listed on the Kuwait Stock Exchange (KSE) by April 1997. KFC Lone Star, Inc USA 100% Asset Management Markaz has since expanded its operations via subsidiaries KFC Lone Star 1, Inc USA 100% Asset Management in the United States (US), Syria, Jordan, and Saudi Arabia Kuwait Financial Center - Syria Syria 100% Asset Management Markaz Real Estate Development Company Jordan 100% Real Estate and representative offices in Algeria and Lebanon. Markaz Markaz Real Estate Investment Company Saudi Arabia 100% Real Estate has brought several innovative products to the markets, First Management and Economic Consultancy Co. Kuwait 100% Economic Consultancy Marsoft for Computer Programming, Operations including Kuwait’s first domestic mutual fund, the first and Consultancy Services Co. Kuwait 67% Computer Consultancy Real Estate Investment Trust (REIT), and the first derivative Source: Company’s financial statements and NBK Capital products trading platform. In fact, Markaz is the only options market maker for stocks listed on the KSE since 2005. As of September 30, 2009, Markaz’s assets under management Financial Statement Analysis (AUMs) were close to KD 900 million (USD 3.1 billion). Income Statement Latest News • Markaz recorded a net profit of KD 1.9 million during • October 2009: Markaz revealed its plans to raise its real 3Q2009, increasing the 9M2009 net profit to KD 4.2 estate exposure in Syria, Saudi Arabia, and Egypt. The million, compared to net losses of KD 973 thousand logged company’s real estate assets in the Middle East and the during 9M2008, supported primarily by an improvement US stood close to USD 800 million. in investment income. Almost all the other income • July 2009: Markaz announced that it had received approval components dropped compared to 9M2008; however, from the Central Bank of Kuwait (CBK) to buy back up to operating expenses declined by 31% YoY. 10% of the company's shares within a six-month period, • Markaz recorded a net loss of KD 3.4 million in 1Q2009, effective July 23, 2009. much smaller than the net losses of KD 10 million and KD 17.8 million recorded in 3Q2008 and 4Q2008, Strategy respectively. In 2Q2009 and 3Q2009, however, there was an improvement as Markaz recorded net profits, supported • Markaz embarked on a rapid expansion strategy across the by higher management fees and commissions, improved globe soon after the company’s incorporation in 1974. In income on the trading portfolio, and lower operating costs. 1976, Markaz established its first merchant bank in Korea • Management fees and commissions were up 22% in partnership with Hyundai Engineering and Construction QoQ during 3Q2009, but dropped by 29% YoY during Company. In 1978, Markaz began its real estate activity 9M2009. The trading portfolio posted positive results in Los Angeles, California. A year later, the company of KD 3 million during 9M2009, supported by a KD 5.4 acquired a majority stake in the Bank of Lebanon and million net gain in 2Q2009 (the highest in the past seven Kuwait. Although the 1990 invasion resulted in a halt of quarters). The income from the available-for-sale (AFS) major operating activities, Markaz maintained its ground, portfolio, however, continued to weaken, posting losses of focusing on the management of existing investments. As KD 2.4 million during 9M2009. Total operating income the restructuring process was completed in 1999, Markaz reached KD 9 million, up 54% compared to 9M2008. once again began looking for investment opportunities in the region.
nbkcapital.com | 72 Kuwait Financial Center (Markaz) Kuwait in Focus - January 2010
• Markaz’s costs improved during 9M2009, as general and • In terms of financing, Markaz’s short-term borrowings rose administrative expenses fell by 24% and finance costs to KD 4 million in September 2009, after falling to KD dropped by 51%, compared to 9M2008. 861 thousand in June 2009, from KD 20.8 million at the end of December 2008. Shareholders’ equity increased to • During 2008, Markaz reported a net loss of KD 18.8 KD 85 million during 3Q2009. million. Management fees were down 31% compared to 2007, at KD 10.9 million, due to a steep decline in • During 2008, total assets fell by 30% to KD 132 million, AUMs. However, losses in both the trading and AFS due to a steep decline in the investment portfolio. portfolios weighed heavily on the operating income. • As the stock markets plunged in 2008, Markaz’s trading The total operating loss at the end of 2008 stood at portfolio bore the brunt of the crisis as the investments’ KD 10.6 million. value halved during the year to KD 37 million.
• Operating costs decreased by 17% last year, while finance • The AFS portfolio also declined by 34% during the year, to costs increased by 19%. KD 51 million. Shareholders' equity fell by 42% compared • Markaz’s operating income breakdown has not been to the end of 2007, not only due to negative earnings but consistent over the years. Since 2004, management fees also because of a massive drop in the fair value reserve, and investment income have continually changed roles as which fell from KD 23 million in 2007 to KD 1.7 million the largest contributor to operating income. in 2008.
• Furthermore, Markaz’s cost-to-income ratio has been • Markaz’s AUMs grew by a CAGR of 24% between 2003 equally volatile, primarily due to the nature of the operating and 2007 to reach KD 1.2 billion, with most of the growth income. As of September 2009, Markaz’s cost-to-income achieved in the first two years of the period in question. ratio stood at 52%. In 2008, however, the AUMs declined by 34% to KD 820 million, as liquidity tightened and investors became more cautious. Between December 2008 and September 2009, Operating Income Breakdown the AUMs increased slightly to around KD 900 million. 50
40 Assets Under Management
30 1.40 25.6 12.2 1.23 1.24 20 1.20 1.18
10 7.5 14.1 15.7 3.0 11.4 10.9 1.00 KD Million KD 7.2 6.0 0 0.89 0.82 -8.9 0.80 (10) 0.71 -23.8
(20) Billion KWD 0.60
(30) 0.40 2004 2005 2006 2007 2008 9M2009
Management Fees and Commissions FVIS Portfolio AFS Portfolio Others 0.20
Sources: Company’s financial statements and NBK Capital 0.00 2004 2005 2006 2007 2008 Sep-09
Balance Sheet Sources: Company’s financial statements and NBK Capital
• As of September 30, 2009, total assets had dropped by 8% to KD 122 million, compared to the end of 2008. On the asset side, the trading investments portfolio grew by 14% to KD 42 million. The AFS investment portfolio and the loans to customers, however, fell by 3% and 14%, respectively. Short-term financing has been declining continuously since December 2008, down 51% at the end of September 2009.
nbkcapital.com | 73 Kuwait Financial Center (Markaz) Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Interest and Dividend Income 2,408 3,206 2,605 1,469 Management fees and commissions 15,700 10,854 8,451 6,032 Net gain/(loss) from FVIS Invest. 12,168 (23,834) (8,366) 2,974 Net gain/(loss) from AFS Invest. 7,709 (858) 3,515 (2,371) Net income on sale of Invest. Prop. - 428 609 - Provision for credit losses (145) (131) 9 143 Foreign Exchange gain/ (loss) (824) (302) (984) 749 Other Income - 61 15 16 Total Operating Income 37,016 (10,576) 5,854 9,012
General and admin expenses (6,567) (5,436) (4,968) (3,784) Finance Costs (2,310) (2,758) (1,847) (900) Total Operating Expenses (8,877) (8,194) (6,815) (4,684)
Other expenses (1,110) - - (193) Minority Interest (12) (14) (12) 20 Net Income 27,017 (18,784) (973) 4,155
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Assets Cash and Cash Equivalents 3,006 2,430 11,416 5,768 Trading Investments 51,842 66,978 37,153 42,241 AFS Investments 66,704 76,829 50,954 49,581 Acc. Receivables and Oth. Assets 4,187 12,211 9,206 4,650 Short-term financing - 5,207 3,972 1,955 Loans to customers 16,439 20,388 17,472 15,078 Invest. Prop and Prop. Under Development 36 3,101 1,321 1,931 Fixed Assets 269 574 738 608 Total Assets 142,483 187,718 132,232 121,812
Liabilities and Shareholders' Equity Due to banks and fin. Inst. 12 432 2,774 19 Acc. Payables and Oth. Liabilities 3,345 5,336 3,900 3,758 Dividends Payable 562 424 416 379 Short term borrowings 32,894 22,990 20,820 4,009 Bonds - 27,300 27,595 28,660 Total Liabilities 36,813 56,482 55,505 36,825
Minority Interest 54 66 80 60
Total Shareholders' Equity 105,616 131,170 76,647 84,927
Total Liabilities and Sh. Equity 142,483 187,718 132,232 121,812
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 74 Companies in Focus Kuwait in Focus - January 2010
Kuwait Food Group (Americana)
Key Data Highlights
General Liquidity • Operationally, Americana has solid revenue numbers as KSE Code FOOD.KSE 52-week avg. volume 132,358 well as healthy margins historically. This is evident as Reuters Code FOOD.KW 52-week avg. value (KD) 194,013 Americana posted an 8% increase in revenue for 9M2009 Price (KD) Price Performance year on year. Closing Price 1.440 YTD -1.0% 52-week High/Low 0.740 / 1.840 1-Year Period 64.0% • Americana reports revenues in three different segments: Market Capitalization Shares Outstanding restaurants, industries, and commercial and retail, with Million KD 578.88 Latest (million) 402 the former contributing the majority to annual sales. Ownership Structure Closely Held: 66.33% Public: 33.67% • Additionally, gross profit and EBITDA have grown
Price as of close on January 18, 2010 Sources: Zawya and NBK Capital considerably, by 14% and 18%, respectively. This only confirms Americana’s operational stability.
• Top line numbers aside, the company has a sizable Stock Performance investment portfolio with investments accounting for 31% of total assets and 63% of total equity as of the end of 2.000 3 52-week High: KD 1.840 September 2009. 1.800 2 • Americana’s dependence on investment income has led the 1.600 company to have a very volatile net profit figure. Currently,
2 1.400 a sharp drop in investment income has led Americana to a 56% drop in net income during 9M2009 compared to Millions
Price (KD) 1.200Price 1 9M2008.
1.000 • Americana has consistently paid dividends over the last 52-week Low: KD 0.740 1 0.800 five years.
0.600 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Badder Al Ghanim T. +965-2259 5330 E. [email protected]
Key Ratios
FY2005 FY2006 FY2007 FY2008 9M2009
EBITDA (KD millions) 28.77 52.68 61.21 103.82 65.41 EBITDA Margin 12% 16% 67% 111% 51% Gross Profit Margin 18% 22% 19% 22% 17% Net Profit Margin 22% 10% 13% 6% 4% Operating Margin 18% 22% 19% 22% 17%
ROE (%) 26% 14% 17% 14% 5% ROA 17% 8% 9% 6% 3% Net Debt to Equity 0.02 0.20 0.27 0.58 0.43 Current Ratio 1.96 1.24 1.25 0.95 0.91 Quick Ratio 0.62 0.42 0.40 0.31 0.33
Day Sales Outstanding (DSO) 24 31 30 27 N/A Interest Coverage 9.80 11.08 8.08 9.96 5.94 Investment/Equity 0.74 0.75 0.75 0.51 0.62
* Annualized figures Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 75 Kuwait Food Group (Americana) Kuwait in Focus - January 2010
Overview for 9M2009, the gross profit margin remained flat from 9M2008 to 9M2009 at 17%. Although the company has Kuwait Food Group (Americana) is a franchising and restaurant yet to witness any expansion in gross profit margin for the management company established in 1964. Americana’s year, Americana seems to show a trend of stronger gross most notable assets across the MENA region include franchise profit margins during the second half of the year, as was rights to KFC, Hardees, Pizza Hut, and TGI Fridays. the case in 2H2007 and 2H2008.
Since 1988, when Americana had 166 stores distributed • Historically, Americana has posted impressive EBITDA across seven chains, the company’s store portfolio has grown growth. Over 2005-2008, EBITDA has grown at a CAGR of exponentially. As of FY2008, Americana boasted 1,064 53%. Although this growth is impressive, it must be noted outlets, under 18 different chains, across 17 countries. that EBITDA growth hasn’t been stable, with fluctuations In 2008 alone, Americana opened 179 new outlets, which from 83% growth in 2006 to 16% in 2007. Americana translates into a new outlet opening every two days. has kept up EBITDA growth in 9M2009 as it grew by 18% to KD 65 million compared to KD 56 million in 9M2008. Additionally, Americana’s portfolio includes a range of consumer Additionally, the EBITDA margin saw a small increase to food products that are manufactured in 18 company-owned 14% in 9M2009, up from 13% in 9M2008. plants, such as Americana Meat. The company opened the first factory for meat products in the Middle East in 1973 in • Operationally, Americana appears to be a sound company, Kuwait. Since then, the number of commercial and industrial but the exposure the company has to non-core investments affiliated companies reached 22 by the end of FY2008. has a substantial impact on the company’s net profit. Americana’s income from AFS and investments at fair value Financial Statement Analysis dropped by 134% in 9M2009 over 9M2008. This resulted in a 56% decline in net profit year on year from KD 38 million in 9M2008 to KD 17 million in 9M2009. Due to Income Statement the company’s dependence on investments, Americana’s bottom line has been rather volatile. According to FY2008 • When we consider Americana on an operational basis, we financials, Americana moved KD 53 million worth of see a stable company with healthy operational numbers investments at fair value to AFS and currently shows no and solid operational margins. The company’s operational investments at fair value on the balance sheet. strength is evident historically as Americana has posted strong revenue growth, with revenue growing at a CAGR Balance Sheet of 32% over 2005-2008. This trend of strong top-line performance did not subside in 9M2009 as Americana posted an 8% increase in revenue to KD 457 million • Americana has a sizable investment book with an versus KD 423 million in 9M2008. array of cross investments with other Al-Kharafi-owned counterparts. As of September 2009, Americana’s • Americana breaks down revenue into three segments: investment book represents 31% of total assets. As of restaurants, industries, and commercial and retail. The 9M2009, Americana’s investment to equity ratio is at restaurants’ segment, which consists of Americana’s 63%, though this ratio has declined over the years from endeavors into fast food and quality service restaurants, 75% in FY2006. Americana’s most notable investments generated 50% of the company’s total revenue in are in National Investments Company, Gulf Cable and Gulf 9M2009. Americana’s manufacturing activities, such as Franchising. The table on the following page illustrates the Americana Meat and Americana Cake, are represented change in value of Americana’s three main investments at through the industries sector, which contributed to 46% three different time periods. of total revenue in 9M2009. Finally, commercial and retail contributed to 4% of total revenue in 9M2009.
• With respect to gross profit, Americana has been able to consistently grow this figure in line with revenue. On a four- year basis (2005-2008), gross profit has actually outpaced revenue with a CAGR of 41%. As for 9M2009, gross profit grew to KD 79 million, an increase of 14% year on year.
• Over the years, Americana has had a fairly consistent gross profit margin trend with the margin fluctuating between a high of 22% and a low of 18% during 2005-2008. As
nbkcapital.com | 76 Kuwait Food Group (Americana) Kuwait in Focus - January 2010
Americana Investments Financial Statements
As of Company % ownership MCAP (millions) Value (millions) Income Statement (KD '000) 2007 2008 9M2008 9M2009 National Investments Company 6.61% 613 40.5 Dec. 30 Gulf Cable 9.09% 281 25.6 Sales 434,873 557,449 423,182 457,188 2008 Gulf Franchising Company 7.33% 12 0.9 Cost of sales (354,208) (435,934) (353,327) (377,898) Gross Profit 80,665 121,515 69,855 79,290 National Investments Company 6.61% 324 21.4 June 1 Other income 312 453 363 245 Gulf Cable 9.09% 269 24.4 2009 Selling and marketing expenses (34,130) (40,277) (29,720) (36,822) Gulf Franchising Company 7.33% 9 0.6 General and administrative (2,972) (3,405) (3,995) (3,245) National Investments Company 6.61% 359 23.7 Amortization (1,112) (1,541) (1,095) - Nov. 1 Gulf Cable 9.09% 390 35.5 Gain/ Losses from investments 23,681 12,060 12,060 (5,395) 2009 Gulf Franchising Company 7.33% 5 0.4 Gains from AFS 4,572 4,055 4,055 - Loss from drop of value in AFS - (36,872) - - Sources: Company’s financial statements and NBK Capital Share of associates results 569 745 564 1,639 Net foreign exchange gain/losses 470 (978) 1,029 (241) Borrowing Cost (7,572) (10,425) (8,375) (11,018) • Examining Americana’s day sales outstanding (DOS), we Profit Before Taxes 64,483 45,330 45,836 24,453 notice that the number declined from 30 days in FY2007 Income tax of subsidiaries (3,208) (2,965) (1,851) (2,030) Contribution to KFAS (490) (259) (259) (171) to 27 days in FY2008, which indicates more efficient National Labour Support Tax (1,320) (791) (848) (352) collection of outstanding receivables. Zakat (31) (305) (237) (151) Board of Directors' remuneration (72) (72) - - Net Profit for the Year 59,362 40,938 42,641 21,749 • Americana has a net debt-to-equity ratio of 0.4x as of Minority Interest 4,398 5,715 4,673 5,018 September 2009, with total debt amounting to KD 150 Net Profit Attributable to Parent Co. 54,964 35,223 37,968 16,731 million. Short-term debt accounts for 62% of the total debt. Americana has a solid interest coverage ratio of 6x Balance Sheet (KD '000) 2006 2007 2008 Sep-09 based on 9M2009 financials, which indicates that the Inventories 41,801 67,603 91,280 78,807 Trade receivables and others 27,390 35,324 40,729 46,268 company is well positioned to service its debt. Other debit balances 19,274 26,224 33,878 36,257 investments at fair value 47,021 52,768 - - • Finally on the dividend front, the company has paid Cash and cash equivalent 27,812 34,572 21,662 19,486 Total Current Assets 163,298 216,491 187,549 180,818 dividends in each of the last five years, but with a very Property, plant and equipment 111,611 167,720 223,792 233,011 inconsistent payout ratio ranging between 15% and 83%. Biological assets - 2,151 2,444 2,978 Intangible assets 8,999 10,684 13,557 13,576 Investments in associates 1,728 1,849 2,662 3,383 Available for sale investments 128,227 185,221 124,602 189,586 Investments in subsidiaries 2,435 - - - Total Assets 416,298 584,116 554,606 623,352
Loans and bank facilities 52,849 77,414 109,438 92,507 Payables and other credit balances 79,043 96,279 88,813 107,009 Total Current Liabilities 131,892 173,693 198,251 199,516
Loans 22,341 42,297 55,805 57,431 Provision for indemnity 12,361 14,157 17,029 18,425 Total Liabilities 166,594 230,147 271,085 275,372
Total Equity 249,704 353,969 283,521 347,980
Total Liabilities and Equity 416,298 584,116 554,606 623,352
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 77 Companies in Focus Kuwait in Focus - January 2010
Kuwait and Gulf Link Transport Company (KGL)
Key Data Highlights
General Liquidity • Kuwait and Gulf Link Transport Company offers a full range KSE Code KGL.KSE 52-week avg. volume 4,606,585 of transportation and logistics services, namely overland Reuters Code KGL.KW 52-week avg. value (KD) 685,776 cargo transport, passenger transport through buses, and Price (KD) Price Performance car rental services. Closing Price 0.160 YTD 11.0% 52-week High/Low 0.100 / 0.204 1-Year Period 21.0% • Of the company’s associates, the largest two are KGL Market Capitalization Shares Outstanding Logistics and KGL Ports International. KGL owns 45.9% of Million KD 42.28 Latest (million) 264 KGL Logistics and 41.7% of KGL Ports International. KGL Ownership Structure Logistics, which is publicly listed, focuses on warehousing, Closely Held: 15.37% Public: 84.63% freight forwarding, and stevedoring, while KGL Ports Price as of close on January 18, 2010, Sources: Zawya and NBK Capital International develops and manages container terminals.
• KGL’s operational profitability has improved, as the Stock Performance company recorded a 31% increase in EBITDA for 9M2009 despite a 3% year-over-year (YoY) decrease in revenue. 0.300 40
35
52-week High: KD 0.204 30
0.200 25
20 Millions Price (KD) Price 52-week Low: KD 0.100 15 0.100
10
5
0.000 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Zawya and NBK Capital Analyst
May Zuaiter T. +965 2259 5597 E. [email protected] Key Ratios
2005 2006 2007 2008 9M2009
Sales (KD million) 40.8 52.8 57.8 58.0 40.8 EBITDA (KD million) 17.1 13.0 18.9 20.3 18.6 Net Income to Shareholders (KD million) 16.8 24.2 10.6 -8.3 -1.4
Gross Profit Margin (%) 39.6% 20.1% 29.6% 26.5% 30.0% Net Profit Margin (%) 41.2% 45.8% 18.3% -14.4% -3.4% EBITDA Margin (%) 42.0% 24.7% 32.7% 35.0% 45.6%
ROA 10.5% 13.8% 4.4% -3.3% N/A ROE 25.0% 36.2% 12.9% -10.6% N/A
Current Ratio (X) 0.41 0.76 0.61 0.87 0.97 Quick Ratio (X) 0.39 0.74 0.59 0.84 0.95 Debt to Assets (X) 0.45 0.50 0.52 0.55 0.54 Net Debt to Equity (X) 0.99 1.25 1.45 1.67 1.68 Interest Coverage Ratio (X) 12.11 0.53 1.01 0.33 0.81 Investment to Equity (X) 0.09 0.07 0.12 0.08 0.04
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 78 Kuwait and Gulf Link Transport Company (KGL) Kuwait in Focus - January 2010
Overview • April 2008: KGL shipping, a subsidiary of KGL, officially launched the “Ameer al Koloub” vessel in Mina Shuwaikh. Established in 1982, Kuwait and Gulf Link Transport Company This makes KGL Shipping the owner of one of the fastest is one of the leading providers of transport-related services passenger transport catamarans in the GCC. in the Gulf region. Headquartered in Kuwait, KGL provides integrated supply chain management services throughout the Financial Statement Analysis Gulf and MENA (Middle East and North Africa) region. Income Statement: KGL’s core business lies in logistics, transportation, port management, shipping, and freight forwarding. Through the 9M2009 Performance company’s transportation unit, KGL provides overland cargo transportation services for manufactured goods, consumables, • In 9M2009, KGL reported revenue of KD 40.8 million, petroleum, raw materials, and heavy equipment. KGL’s representing a slight decline of 3% from 9M2008. The passenger transport service includes bus transportation three reporting segments for KGL are land transport, through local and international lines, in addition to private passenger and petrol transport, and car rental. Land taxi and limousine operations. The company’s car rental transport remained the highest contributor to revenue unit focuses on renting and leasing vehicles to commercial, with a 70% share. The second-highest contributor was corporate, and government clients within Kuwait. car rental at 14%, passenger and petrol transport at 13%, KGL Logistics followed by other unallocated revenue at 4%. • KGL continued to post growth in its operational KGL Logistics, a 45.9%-owned associate of KGL, provides performance, as EBITDA increased by 31% from KD supply chain services specializing in warehousing, freight 14.2 million in 9M2008 to KD 18.6 million in 9M2009. forwarding, and stevedoring. The warehousing unit offers Moreover, the EBITDA margin expanded from 34% in second-, third-, and fourth-party logistics services. Freight 9M2008 to 46% in 9M2009. forwarding includes air, sea, and land transport in addition • KGL registered a net loss attributable to shareholders of to customs clearance and cargo insurance. The stevedoring KD 1.4 million in 9M2009 compared to the net profit function entails the establishment of partnerships with port of KD 1.2 million achieved in 9M2008. Though the authorities and shipping lines within Kuwait and the Gulf performance in 9M2009 may appear weak at first glance, Cooperation Council (GCC). the company’s performance has actually improved as net KGL Ports International income in 9M2008 was buoyed by an unrealized gain on investments at a fair value of KD 7 million. A 41.7%-owned associate of KGL, KGL Ports International covers the development, operations, and management of Income Statement: container terminals and roll-on-roll-off operations. This company is headquartered in Kuwait and has additional 2008 Performance operations within Egypt and the United Arab Emirates (UAE). Locally, KGL PI manages and operates the terminal at Shuaiba • KGL reported revenue of KD 58 million in FY2008. We Port. note that revenue has grown at a CAGR of 12.5% since 2005. In 2008, land transport was the highest contributor Latest News to total revenue with a 58% share. • In 2008, KGL demonstrated improved profitability at the • January 2010: KGL reported that the company’s wholly operating level, as EBITDA increased by 8% from KD 18.9 owned subsidiary, KGL Car Rental Company, won a KD 9.7 million in 2007 to KD 20.3 million in 2008. In contrast, million contract to rent cars to Kuwait Petroleum Company. revenue growth was flattish on a YoY basis in 2008. KGL’s KGL Car Rental’s contract is for 30 months, effective EBITDA margin has witnessed some volatility over the past January 7, 2010. years, as the margin dropped from 42% in 2005 to 25% • May 2008: KGL along with the Al Khorafi Group invested in 2006 before increasing to 33% and 35% in 2007 and in Egypt’s transport sector. The company is expected to 2008, respectively. operate the port of Dimyat for 40 years in a contract worth USD 650 million.
nbkcapital.com | 79 Kuwait and Gulf Link Transport Company (KGL) Kuwait in Focus - January 2010
• Net profit, however, declined from KD 10.6 million in Financial Statements 2007 to a net loss of KD 8.3 million in 2008. This came about because of the following factors: a) a KD 5.5 million Income Statement (KD '000) 2007 2008 9M2008 9M2009 allowance for doubtful debt and b) an 86% increase in Revenue 57,755 57,972 41,935 40,836 Cost of Sales (40,680) (42,600) (32,675) (28,601) finance costs, to KD 11.5 million, in 2008. Gross Profit 17,074 15,373 9,260 12,234 Share of results of associates 3,998 206 330 748 Gain on sale of associates - 1,431 1,431 - Balance Sheet Gain on Sale of share of subsidiaries - 2,069 - - Gain/Loss on sale of AFS - (2,962) 1,338 369 Unrealized gain on inv.at fair value - 7,001 7,001 - Share of results of unconsol. subsidiaries (340) - - - • As of September 30, 2009, the company had a current Increase in fair value of inv. property 3,797 139 - - ratio of almost 1.0x, which represented an improvement Unrealized gain on investment property - - - - Profit on sale of investment property 2,101 433 430 - from the current ratio of December 31, 2008, of 0.9x. Gain/Loss on sale of PP&E (13) (1,957) (1,178) (1,573) Impairment loss of investments - (2,308) (2,099) (255) • KGL’s property, plant, and equipment (PP&E), which stand Impairment on loss in joint venture - (116) - - Allowance for doubtful debts (55) (5,500) (1,700) (500) at KD 123.5 million as of September 30, 2009, accounted Other income 1,875 1,386 2,927 1,271 G&A expenses (10,795) (11,575) (7,942) (6,048) for 53% of total assets. Provision for impairment of receivables - - - - Finance costs (6,190) (11,531) (8,103) (7,639) • As of September 30, 2009, the current portion of the term Profit Before Taxes 11,453 (7,911) 1,697 (1,393) loans was 30% of the total outstanding term loans of KD KFAS (218) - (70) - NLST (281) - (42) - 106.3 million. The company’s net debt-to-equity ratio on Zakat (10) - (35) - Directors Remuneration (170) - - - September 30, 2009, stood at 1.7x, which was relatively Profit for the Year 10,775 (7,911) 1,550 (1,393) unchanged compared to year-end 2008. Minority Interest 223 426 348 7 Net Profit 10,552 (8,338) 1,201 (1,400) • KGL’s interest coverage ratio increased to 0.8x in 9M2009 Balance Sheet (KD '000) 2006 2007 2008 Sep-09 from 0.3x in 2008. Property, plant, and equipment 98,402 142,168 134,904 123,524 Intangible assets 868 857 1,029 1,029 • The company has very little exposure to equity markets, Investment properties 2,510 13,257 7,156 7,185 Investment in associates 18,087 21,454 14,565 15,037 with just KD 2.8 million in available-for-sale investments, Investment in uncon.subsidiaries 1,944 4,563 5,178 5,260 Investment in joint venture 244 116 - - most of which are quoted securities. Available-for-sale investments 4,489 10,337 5,613 2,826 Total non-current assets 126,545 192,751 168,445 154,861 Inventory and spare parts 1,696 1,267 2,352 1,555 Land held for trading - - - 3,006 Receivables 20,464 35,798 29,912 27,354 Due from related parties 14,193 9,468 19,406 27,063 Other debit balances 8,002 - - - Cash and cash equivalents 4,784 7,508 6,414 7,275 Investments at FV through IS - - 13,467 13,467 Total current assets 49,139 54,041 71,551 79,720
Total assets 175,683 246,792 239,996 234,581
Equity attributable to shareholders 66,404 79,250 70,581 67,275 Minority interest 500 4,063 4,089 3,958
Total equity 66,904 83,313 74,670 71,233 Provision for employees' indemnity 1,664 2,068 1,829 2,051 Non-current portion of term loans 37,022 64,775 74,184 74,316 Non-current Murabaha payable 5,814 7,696 6,737 5,050 Total non-current liabilities 44,501 74,540 82,750 81,417 Current portion of term loans 34,198 41,584 28,557 31,980 Current portion of Murabaha payable 3,752 6,410 4,361 8,603 Bonds issued 6,000 - - - Trade Payables 7,576 11,206 7,654 8,169 Due to related parties 557 9,847 6,399 9,009 Other credit balances 10,816 12,227 18,501 16,928 Bank overdraft 1,379 7,665 17,104 7,244 Total current liabilities 64,279 88,939 82,576 81,932
Total liabilities 108,779 163,479 165,325 163,349
Total equity and liabilities 175,683 246,792 239,996 234,581
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 80 Companies in Focus Kuwait in Focus - January 2010
Kuwait NATIONAL CINEMA COMPANY (KNCC)
Key Data Highlights • Kuwait National Cinema Company (KNCC) is a Kuwait- General Liquidity based company engaged in the cinema and entertainment KSE Code KCIN 52-week avg. volume 503,512 Reuters Code KCIN.KW 52-week avg. value KD 474,300 industry in Kuwait. The company imports and distributes
Price (KD) Price Performance video and cinema film and equipment; KNCC is also
Closing Price 0.910 YTD 5.8% involved in the construction of cinema theatres and 52-week High/Low 1.000 / 0.750 1-Year Period 0.0% handles the operations of those cinemas. Market Capitalization Shares Outstanding Million KD 91.97 Latest (million) 101.06 • In 2008, operating revenue grew by 28% and reached KD 12 million. As for 9M2009, this revenue declined by 1% Ownership Structure Closely Held: 60% Public: 40% to KD 8.5 million compared to 9M2008.
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • The company’s operating costs outpaced revenue growth, which pushed down the gross profit margin from 32% in 2007 to 24% in 2008. As for the first nine months of Stock Performance 2009, despite the flat top-line growth, the gross profit margin improved from 22% at the end of 9M2008 to 1.050 16 25% at the end of 9M2009, mainly because the company 52-week High: KD 1.000 14 1.000 reduced its operating costs by 4%.
12 0.950 • In 2008, the company had several impairments related to
10 property and equipment, intangible assets, and inventory, 0.900 which amounted to a little more than KD 9 million; these 8 impairments resulted in an operating loss of KD 6.5 million. 0.850 Millions Price (KD) Price 6 At the end of 9M2009, the company had an operating 0.800 profit of KD 2.4 million, compared to an operating loss of 4 KD 2.4 million during 9M2008. 0.750 52-week Low: KD 0.750 2 • In 2007 and 2008, KNCC did not generate profits from 0.700 0 its core operations; rather, it was counting on gains Jan-09 Feb-09 Apr-09 May-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10
Volume Close from available-from-sale (AFS) investments, gains from associates, and gains from the sale of investment properties Sources: Zawya and NBK Capital to generate positive profit. Net income declined by 48% in 2008 and reached KD 4.7 million compared to 2007. As Analyst for 9M2009, the company’s bottom line declined by 79%, Lisa Fernandes mainly due to the above-mentioned gains in 9M2008 that T. +971 4 365 2856 boosted net income at the time. E. [email protected] • KNCC has a debt-to-equity ratio of 0.4x. Total debt at the Key Ratios end of September 2009 stood at KD 18.3 million.
2005 2006 2007 2008 9M2009
Gross Profit Margin (%) 26.4% 23.6% 31.8% 23.6% 24.8% Operating Profit Margin (%) 29.5% 36.7% 24.2% -54.1% 28.4% Net Profit Margin (%) 136.2% 106.6% 96.6% 39.2% 25.9%
ROA 31.1% 19.0% 15.5% 7.3% 3.3% ROE 39.7% 22.8% 20.9% 10.4% 4.6% Current Ratio (X) 0.5 0.4 0.1 0.5 0.6 Quick Ratio (X) 0.5 0.4 0.1 0.5 0.6 Debt to Assets (X) 0.1 0.1 0.2 0.2 0.3 Debt to Equity (X) 0.1 0.1 0.3 0.3 0.4
Receivables Turnover Ratio 5.3 3.5 4.3 9.6 1.7 Inventory Turnover Ratio 40.4 59.5 25.0 32.5 27.4 Payables Turnover ratio 4.2 3.2 2.3 2.4 1.4
Source: NBK Capital
nbkcapital.com | 81 Kuwait National Cinema Company (KNCC) Kuwait in Focus - January 2010
Overview which amounted to a little more than KD 9 million; these impairments resulted in an operating loss of KD 6.5 million. Kuwait National Cinema Company (KNCC) was established in At the end of 9M2009, the company had an operating 1954. KNCC, an affiliate of Tamdeen Real Estate Company profit of KD 2.4 million, compared to an operating loss of and formerly known as Kuwait Cinema Company, is a Kuwait- KD 2.4 million during 9M2008. based company engaged in the cinema and entertainment • In 2008, the company disposed of an investment property industry in Kuwait. The company imports and distributes video representing the value of a real estate portfolio of one of and cinema film and equipment; KNCC is also involved in the KNCC’s associate companies, Tamdeen Shopping Centers. construction of cinema theatres and handles the operations As a result, the company recognized a gain of KD 6.2 of those cinemas. In addition, the company invests in foreign million from the sale. shares and funds. In 2005, KNCC enhanced its corporate and consumer image by rebranding as “Cinescape.” • In 2007 and 2008, KNCC did not generate profits from its core operations; rather, it was counting on gain from The company has investment stakes in Tamdeen Shopping available-from-sale investments, gain from associates, and Centers Company (30%), Tamdeen Entertainment Company gain from the sale of investment properties to generate (25%), and Tamdeen Holding Company (20%). positive profit. In 2008, despite a weak set of operational KNCC has been listed on the Kuwait Stock Exchange since results, the saving grace for the company’s bottom line 1984. The company’s stock is relatively illiquid, with a came from the KD 6.2 million gain from the sale of 12-month average daily trading volume of 502 thousand. the investment property; as a result, the decline in net income was limited to 48%, and net income reached KD Financial Statement Analysis 4.7 million compared to KD 9 million in 2007. As for 9M2009, the company’s bottom line declined by 79%, mainly due to the inclusion of the above-mentioned gains Income Statement in 9M2008 that boosted net income. From an operations’ point of view, the company performed better in 9M2009 • Before 2006, KNCC had two business lines: the than it did in 9M2008. cinema division and the video division. However, KNCC discontinued the video division in 2006 since this segment • In May 2009, a cash dividend of KD 0.040 per share for was witnessing declining profitability. 2008 was approved by the shareholders of the parent company. • In 2008, operating revenue grew by 28% and reached KD 12 million. As for 9M2009, this revenue witnessed almost Balance Sheet flat growth compared to 9M2008 and reached KD 8.5 million. Given the limited opportunities for entertainment in Kuwait, KNCC is one of the few sources of entertainment • In March 2008, the company’s share capital was increased for the population of Kuwait, and hence, the company has from KD 8 million to a little more than KD 10 million, the capability to continue to generate revenue over the through a stock dividend of 25% of outstanding shares. foreseeable future. • KNCC’s investments in associates consist of a 30% stake • In 2008, the company’s operating costs outpaced revenue in Tamdeen Shopping Centers, a 25% stake in Tamdeen growth, which pushed down the gross profit margin from Entertainment, and a 20% stake in Tamdeen Holding. This 32% in 2007 to 24% in 2008. Since we do not have a makes up 43% of total assets at the end of September breakdown of the company’s operating costs, we cannot 2009, compared to 45% at the end of December 2008. analyze the reason behind this increase. We believe that, • At the end of September 2009, the company had AFS with the increase in the number of cinemas across Kuwait, investments amounting to KD 5.9 million, out of which the cost could be spread over a larger number of cinemas the majority lay in unquoted investments; these unquoted and would therefore decrease as a percentage of revenue. investments include investments carried at cost that As for the nine months of 2009, despite the flat top-line amount to KD 459 thousand as of September 2009 since growth, the gross profit margin improved from 22% at the the fair value of this portion cannot be reliably measured. end of 9M2008 to 25% at the end of 9M2009, mainly because the company reduced its operating costs by 4%.
• In 2008, the company had several impairments related to property and equipment, intangible assets, and inventory,
nbkcapital.com | 82 Kuwait National Cinema Company (KNCC) Kuwait in Focus - January 2010
• During the nine months of 2009, KNCC sold projects under Financial Statements progress to Tamdeen Shopping Centers Development, with KD 5.5 million representing their book value at the date of Income Statement (KD '000) 2007 2008 9M2008 9M2009 disposal. This amount was classified under trade and other Operating Revenues 9,405 12,002 8,528 8,470 Operating Costs -6,419 -9,164 -6,613 -6,369 receivables. Gross Profit 2,986 2,838 1,915 2,102 Other operating income 3,458 4,056 2,924 2,637 • KNCC has a debt-to-equity ratio of 0.4x. Total debt at the G&A -1,098 -1,971 -1,211 -934 end of September 2009 stood at KD 18.3 million; the Gain/Loss from inv. at fair value through P&L-4 -162 -175 -14 Impairment in value of P&E -489 -8,294 -3,200 0 debt was classified as short-term loans, with an effective Impairment in intangible assets 0 -921 -921 0 interest rate of 5.5%. Impairment in inventory 0 -137 -137 0 Contingent liabilities provision 0 0 -304 0 Other operating exp. -2,514 -1,883 -1,284 -1,078 Provision for doubtful debts -63 -18 -18 -310 Dec. in inv.'s net realizable val. 0 0 0 0 Operating Profit 2,276 -6,492 -2,410 2,402 Impairment in AFS -107 -522 0 0 Gains from available for sale investments7,540 493 486 120 Gain from associates 218 6,111 7,446 575 Gain on sale of inv. prop. 0 6,235 6,235 0 Finance costs -424 -810 -701 -812 Board of Directors renum. -90 -90 0 0 Net Profit before tax 9,413 4,924 11,057 2,286 Contribution to KFAS -95 -45 -102 -15 National Labour Support Tax -230 -121 -272 -56 Zakat -6 -52 -111 -20 Net Profit for the year 9,081 4,707 10,573 2,195
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
PP&E 18,472 22,611 17,737 14,989 Intangible Assets 0 1,366 1,074 1,116 Inv. Property 8,564 14,487 0 0 Inv. In associates 8,794 17,577 28,237 28,399 Available for sale investments 11,916 7,559 5,889 5,943 Adv. payment to purchase films 0 907 687 1,172 Total Non Current Assets 47,746 64,506 53,625 51,620
Inventories 173 341 223 241 Trade and other recievables 2,137 831 1,076 6,596 Inv. At fair value through P&L 923 0 62 501 Cash 252 214 7,323 7,722 Total Current Assets 3,485 1,386 8,684 15,060 Total Assets 51,231 65,892 62,308 66,680
Share Capital 8,085 8,085 10,106 10,106 Treasury Shares 0 -841 -903 -903 Statutory reserve 4,244 4,244 4,745 4,745 Gen Reserve 4,210 5,160 5,662 5,662 Land revaluation reserve 8,870 8,808 8,144 8,144 Change in fair value reserve 2,383 2,742 615 256 Retained earnings 13,853 17,196 16,745 14,943 Total Equity 41,645 45,394 45,114 42,952
Post Employment benefits 337 401 461 515 Total Non Current Liabilities 337 401 461 515
Trade and other payables 1,893 3,683 3,986 4,223 Dividend payables 471 582 478 650 Due to a related party 830 223 0 0 Loans and bank facilities 6,055 15,608 12,270 18,340 Total Current Liabilities 9,249 20,097 16,734 23,213 Total Liabilities 9,586 20,498 17,195 23,728
Total Equity and Liabilities 51,231 65,892 62,308 66,680
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 83 Companies in Focus Kuwait in Focus - January 2010
Kuwait PROJECTS (KIPCO)
Key Data Highlights
General Liquidity • Kuwait Projects (KIPCO) is one of the region’s largest KSE Code KPROJ.KSE 52-week avg. volume 2,826,768 investment holding companies, with a significant stake held Reuters Code KPROJ.KW 52- week avg. value (KD) 1,256,270 by Kuwait’s ruling family. The company has investments in Price (KD) Price Performance over 50 companies across different industries and regions. Closing Price 0.325 YTD 0.0% 52-week High/Low 0.580/0.280 1-Year Period 1.0% • The investment holding company has four main Market Capitalization Outstanding Shares subsidiaries: a) Burgan Bank (refer to pg. 40), b) United Million KD 554.20 Latest (million) 1,154.58 Gulf Bank, c) Showtime, and d) Gulf Insurance Company Ownership Structure (refer to pg. 52). The subsidiaries are fully consolidated, Closely Held: 66.2% Public: 33.8% and make up the largest portion of KIPCO's assets. Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • The largest portion of KIPCO's assets is made up of loans and advances (46.5% of assets). Of the total KD 2.4 Stock Performance billion in loans and advances, Burgan Bank is responsible for KD 2.3 billion.
0.600 50 52-week High: KD 0.580 • Burgan Bank and United Gulf Bank, both subsidiaries 45 of KIPCO, have completed several transactions over the 40 0.500 past year; whereby, United Gulf Bank sold several of its 35 subsidiaries and an associate (which include banks within 30 the region) to Burgan Bank. The subsidiaries and associate 0.400 25
Price (KD) Price sold include Jordan Kuwait Bank, Algeria Gulf Bank, and
20 Millions 52-week Low: KD 0.280 Bank of Baghdad. 15 0.300 10 • Showtime, the subsidiary that provides media services 5 within the MENA region, entered into a joint venture 0.200 0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 agreement with its largest competitor, Al Mawarid (Orbit Volume Close TV), to form the largest pay-satellite television service in
Sources: Reuters and NBK Capital the Middle East. • KIPCO's total revenue declined by 3.7% between 9M2008 and 9M2009 due to respective declines of 3.5% and 44.1% in the company's two largest revenue generators, the commercial banking and asset management sectors.
• Net income fell 45.4% between 9M2008 and 9M2009 as a result of a decline in sales coupled with an increase Analyst in expenses. Furthermore, the company experienced a decline in profit margins across the majority of its business Wadie Khoury units. T. +965 2259 5118 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Current Ratio 0.88 0.62 1.14 1.08 1.11 Net Debt-to-Equity 1.44 1.48 -0.47 -0.74 -0.73
Investment -to-Equity (HFT + AFS) 112.7% 123.8% 71.7% 65.8% 63.0%
Profit Margin 32.1% 21.9% 59.0% 5.5% 12.4% Growth In Revenue N/A 92.6% 287.6% -50.2% -3.7%
Source: NBK Capital
nbkcapital.com | 84 Kuwait Projects (KIPCO) Kuwait in Focus - January 2010
Overview Burgan Bank
Established in 1977, Burgan Bank is the youngest Kuwait Projects (KIPCO) is one of the region’s largest commercial bank in Kuwait. Burgan Bank was primarily investment holding companies and one of the largest Kuwaiti government owned for two decades. It underwent a major companies in terms of assets. It currently has direct and structural change in 1997, when KIPCO purchased the indirect stakes in more than 50 companies (subsidiaries and government’s share to become the largest shareholder. associates) across 21 countries. The company’s primary lines of investment are in banking (commercial and investment), For more details on Burgan Bank, please refer to page 40. insurance, and digital satellite services. The company was Gulf Insurance Company incorporated in 1975, and is largely held by members of the royal family. Gulf Insurance Company is the largest insurance company Some of KIPCO’s direct investments include the following: in Kuwait in terms of written and retained premiums. Established in 1962, GIC covers life and non-life segments throughout the region through subsidiaries. KIPCO’s Major Direct Investments as of 2008 For more details on Gulf Insurance Company, please refer Subisidary Country of Incorporation KIPCO interest United Gulf Bank Bahrain 92% to page 52. Burgan Bank Kuwait 56% Gulf Insurance Company Kuwait 69% Gulf DTH L.D.C. (“Showtime”) Gulf DTH (Showtime) Cayman Islands 78% United Gulf Management Incorporation USA 100% Overview United Gulf Management Ltd. UK 100% Hunter Capital Company USA 100% Showtime Arabia operates as a digital satellite pay Kuwait United Consultancy Company Kuwait 98% television network in the MENA region. The company began Kuwait Projects Company Cayman Islands 100% KIPCO Private Equity Company Cayman Islands 100% operations in 1996 as a joint venture between KIPCO Global Direct Television for General (majority stakeholder) and CBS Corporation (minority Trading and Contracting Company Kuwait 100% stakeholder). The company is recognized for broadcasting Source: KIPCO financials famous shows from Hollywood. Financial Overview Latest News • Although information on Showtime’s financial performance is limited, it is evident the company has • January 2010: Burgan Bank, one of KIPCO's subsidiaries, been operating at a loss. Despite this, there have been announced itself as the majority stakeholder in the Bank signs of improvement. of Baghdad in an attempt to diversify the bank's regional footprint. • Revenue steadily increased year on year between 2006 and 2008. The trend continued even in the first • October 2009: The National Bank of Kuwait signed a five- nine months of 2009, as revenue increased by 18.4% year KD 80 million loan agreement with Kuwait Projects. between 9M2008 and 9M2009. • October 2009: KIPCO issued a USD 500 million bond, the • Net losses improved over the years, but declined first out of Kuwait in 2009. The bond was oversubscribed, between 2006 and 2008. However, net losses whereby subscriptions reached more than USD 3.3 billion. increased by 14.2% between 9M2008 and 9M2009. Although details are not provided, some of the losses Financial Statement Analysis may be attributed to the costs associated with the newly established joint venture. Balance Sheet Orbit Showtime Deal
• KIPCO is Kuwait’s largest investment holding company, • As of August 2009, KIPCO entered into a joint venture and we therefore need to look at some of its important agreement with Al Mawarid Investments and other subsidiaries. The company has more than 50 investments companies to form Panther. The newly established in different companies; however, there are four main joint venture is responsible for distributing pay-satellite subsidiaries we need to focus on: television services throughout the MENA region.
nbkcapital.com | 85 Kuwait Projects (KIPCO) Kuwait in Focus - January 2010
• Panther acquired Showtime, Global Direct Television, • In 2008, the company realized USD 53.8 million and Orbit in order to carry out its designated service. in profits from discontinued operations due to the transfer of its subsidiary, Jordan Kuwait Bank, to • KIPCO owns 60.5% of Panther, and Al Mawarid the Burgan Bank. This is discussed in more detail in the remaining 39.5%. Moreover, Al Mawarid holds a call Balance Sheet Analysis section. option to purchase an additional 10.5% stake in the company between November 2010 and February UGB Balance Sheet Analysis 2011. If Al Mawarid decides to exercise the entire • UGB’s balance sheet experienced a major transition call option, each company will have a 50% stake in between 2007 and 2008 as the bank was expected to Panther. sell some of its major subsidiaries and an associate to • The merger of Orbit and Showtime marks the widest its sister company, Burgan Bank. The subsidiaries and choice of premium channels offered in the Middle associate included Jordan Kuwait Bank (JKB), which East on a single platform. The new service gives was sold in July 2008, Algeria Gulf Bank (AGB) and subscribers access to 75 channels with up-to-date Bank of Baghdad (BOB), which were sold in the first Hollywood shows. quarter of 2009, and Tunis International Bank (TIB), which is expected to be sold in the first quarter of • As the company looks to improve profitability, the 2010. merger between the two could be the solution to climb into profit. There will be higher economies of scale, • UGB experienced a significant drop in loans between resulting in declined costs and improved efficiency, 2007 and 2008 as a result of the signed transfer of and buying power will increase as competition its subsidiaries and associate (i.e., AGB, TIB, and declines. BOB) to Burgan Bank. The assets held by the banks were reclassified as held for sale. Loans and advances United Gulf Bank (UGB) from TIB and AGB alone accounted for USD 388 Overview million in December of 2008. UGB recorded loans and advancements of USD 7.8 million in 2008, down The United Gulf Bank (UGB) was incorporated in 1980 from USD 291.9 million in 2007. By September and was acquired by KIPCO in 1988. KIPCO increased its 2009, loans and advancements had increased to USD ownership to 91.72% by the end of 2008. 81.6 million. Financial Overview • The largest portions of UGB’s assets are classified UGB Income Statement Analysis under non-trading investments, which are composed • Total income (including investment income, income of available-for-sale (AFS) investments. At the end of from fees, commissions, foreign exchange (FX) 2008, non-trading investments represented 30.6% revaluation and the share of results from associates) of total assets, with the bulk of UGB’s investments was weaker in 2008 than 2007, despite a stronger coming from unquoted debt securities. By September performance in investment income. The result comes 2009, non-trading investments represented 34.4% from a 62.5% drop in fees and commissions, as well of total assets. No details about the allocation of as a loss of USD 17.8 million from associates. The investments have been provided. 9M2009 results were similar. Total income dropped • Another large portion of UGB’s assets include 78.3% year on year as a result of lower profit from investments in associated companies. As of September investment income and a loss in results from 2009, these made up 34.4% of total assets. Some of associates. Details of the significant decline in the the company’s recognized investments in associates nine-month results are not provided, so the reason for include KAMCO, the Kuwait Education Fund, Syria the steep drop is still unknown. Gulf Bank, and United Cable Company. • The drop in total income trickled down to operating income. Operating profit from continuing operations (after provisions) declined by 96.9% between 9M2008 and 9M2009.
• UGB recognized an impairment loss of USD 15.7 million in the first nine months of operation in 2009. This played a role in the drop in net income.
nbkcapital.com | 86 Kuwait Projects (KIPCO) Kuwait in Focus - January 2010
• Looking at the entire KIPCO group, the following graph and 127.6% respectively. The calculation of the growth shows the company’s holdings and the change in its does not take into consideration the effects of inter- proportionate stake in each of its main subsidiaries. segmental operations.
• The largest portion of KIPCO's revenue is derived from Proportionate Stake in KIPCO's Main Subsidiaries interest income, stemming mainly from the company's
100% 56% holding in Burgan Bank, which accounted for more 92% 90% 88% than 97.4% of KIPCO's total interest income. Interest
78% 78% 78% income increased more than nine times between 2006 80% 76% 69% and 2007. The large jump comes as a result of the 70% 68% full consolidation of Burgan Bank in 2007. As KIPCO 60% 56% 51% displayed impressive growth from interest income in 2008 50% (almost doubling from 2007 levels), the trend halted as 40% 37% the company experienced a 7% decline in net income in 30% 9M2009 compared to 9M2008. 20% • Under investment income, KIPCO recognized KD 43 10% 0% million based on the fair value of the businesses acquired 0% by Panther. 2006 2007 2008 Burgan Bank Gulf Insurance Company Showtime United Gulf Bank • Net income fell 45.4% between 9M2008 and 9M2009
Source: Company reports as a result of a decline in sales coupled with an increase in expenses. Furthermore, the company experienced a • Burgan Bank, historically treated as an associate, was fully decline in profit margins across the majority of its business consolidated in 2007 as a result of KIPCO purchasing a units. controlling stake. In the same year, the company (along with the proportional stakes held by KIPCO's subsidiaries) sold Net Income and Profit Margin Breakdown by Segment
its entire stake in National Mobile Telecommunications Net Income Margins Company (Wataniya) to Qtel for a gain of KD 468.1 million. 9M2008 9M2009 9M2008 9M2009 Commercial Banking 67,678 25,906 33.9% 13.5% • Of KIPCO's total assets, 46.5% consists of loans and Asset Management and Investment Bank 126,533 56,679 71.8% 57.5% Insurance 12,185 7,090 25.1% 12.6% advances as of September 2009, mainly due to the Media (6,118) (6,989) -16.3% -15.8% consolidation of Burgan Bank’s KD 2.3 billion loans and Others 1,519 1,947 50.4% 28.4% advances. However, despite the increase in Burgan Bank’s Inter-segmental (72,311) (19,999) Total 129,486 64,634 33.9% 17.6% and UGB's loans and advances in the first nine months of 2009, KIPCO’s loans and balance account actually Sources: Company reports and NBK Capital dropped by 5.2% in that period. The reason for the drop is unclear. • Although interest expense (the company’s largest expense, contributing 30.2% of total expenses) declined by 27.3% • The company is in a solid position to repay its KD 530 between 9M2008 and 9M2009, the company incurred million debt, as its cash balance represents the second large losses on provisions and impairments on investments largest asset (KD 935 million) as of September 2009. This amounting to KD 67 million in 9M2009 compared to KD puts the company’s net debt at negative KD 405 million. 7.4 million in 9M2008. Burgan Bank contributed KD 50.2 million to provisions from credit losses, and an additional Income Statement KD 2.3 million to impairments on investments. However, there was a different reason for the decline in profits of • KIPCO divides its revenue generation into five major KIPCO's investment in the Gulf Insurance Company (GIC). sectors: a) commercial banking, b) asset management and The insurance company seemed to incur more claims in investment banking, c) insurance, d) media, and e) others. 9M2009 compared to the same period last year, thus Total revenue declined by 3.7% between 9M2008 and affecting the company's margins (for additional details, 9M2009 due to respective declines of 3.5% and 44.1% in refer to page 52). its two largest revenue generators, the commercial banking and asset management sectors. The losses in these sectors were slightly offset by growth in the company’s insurance, media, and other sectors, which grew by 15.7%, 18.4%,
nbkcapital.com | 87 Kuwait Projects (KIPCO) Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Interest income 121,002 232,018 170,739 158,794 Investment Income 554,847 52,975 81,106 73,127 Fees and commission income 56,874 53,989 40,930 37,759 Share of results from associates 52,735 (3,002) 11,549 360 Net insurance premium earned 37,903 40,055 32,073 37,970 Digital satellite television services 44,095 52,883 37,454 44,276 Foreign exchange gain 15,787 (5,924) 4,668 1,514 Other Income 1,438 17,302 3,642 14,118 Total Revenue 884,681 440,296 382,161 367,918 Total Expenses (294,258) (394,316) (252,675) (303,284) Profit Before Tax 590,423 45,980 129,486 64,634 Tax (14,671) (3,534) (2,743) (4,616) Profit for the year 575,752 42,446 126,743 60,018 Parent Company 521,691 24,125 83,561 45,615 Minority Interest 54,061 18,321 43,182 14,403
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Cash in Hand and at Banks 212,381 878,576 972,021 935,324 T Bills and Bonds - 433,709 387,378 383,054 Loans and advances 71,870 1,696,456 2,518,992 2,386,977 Fair Value thru profit and loss 112,856 204,309 75,853 53,404 Financial Assets Available for sale 166,117 264,362 266,327 283,898 Financial assets held to maturity 8,159 6,872 15,367 11,368 Other Assets 79,310 165,070 212,039 227,084 Investments in Associates 536,060 246,393 238,889 245,617 Investment Properties 6,792 7,958 7,003 11,079 Property and Equipment 22,738 56,488 67,180 63,980 Intangible Assets 142,245 318,805 416,886 530,382 Total Assets 1,358,528 4,278,998 5,177,935 5,132,167 Liabilities Due to banks and Fin. Institutions 209,199 829,614 917,125 1,022,604 Deposits from customers 113,242 1,622,298 2,484,034 2,321,784 Loans payable 262,446 297,943 396,969 363,634 Bonds 88,123 64,829 50,995 48,886 Medium term notes 205,214 202,754 122,605 117,732 Other Liabilities 154,555 279,126 362,560 369,537 Total Liabilities 1,032,779 3,296,564 4,334,288 4,244,177 Total Equity 325,749 982,434 843,647 887,990 Total Liabilities and Equity 1,358,528 4,278,998 5,177,935 5,132,167
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 88 Companies in Focus Kuwait in Focus - January 2010
Mabanee Company
Key Data Highlights
General Liquidity • Mabanee owns the Avenues project, which is a landmark KSE Code MABANEE.KSE 52-week avg. volume 849,739 development in Kuwait’s retail industry and the largest Reuters Code MABK.KW 52-week avg. value (KD) 561,228 shopping mall of its kind in the country. Price (KD) Price Performance
Closing Price 0.690 YTD -1.4% • The company is currently the largest Kuwaiti real estate 52-week High/Low 0.790 / 0.377 1-Year Period 51.6% company in terms of market capitalization. Mabanee is a Market Capitalization Outstanding Shares pure rental play in the retail segment. Though Mabanee Million KD 316.85 Latest (million) 459.20 is a Kuwaiti story now, the company has plans to expand Ownership Structure regionally. Closely Held: 63.06% Public: 36.94%
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • The company plans to embark on a strategy of consolidating its position by executing Phase lll of the Avenues, resulting in a unique mix of a mass market and luxury/concept mall Stock Performance under the same umbrella.
0.900 6.0 • We would like to highlight that the Avenues boasts high occupancy rates backed by tenants that are well-known all 0.800 52-week High: KD 0.790 5.0 across the Gulf Cooperation Council (GCC).
0.700 • The company has grown significantly in terms of rental 4.0 income since completing Phase Il of the Avenues project. 0.600 3.0 Rental revenue increased appreciably, by 38.6%, to KD 0.500
Millions 22.9 million in 9M2009, compared to KD 16.5 million Price (KD) Price 2.0 in 9M2008. 0.400 • The company owns investment properties (Phases l and ll 52-week Low: KD 0.377 1.0 0.300 of the Avenues Mall) that are worth around KD 340 million
0.200 - (December 2008) per an independent valuation, compared Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close to a book cost of KD 164 million as of September 30, 2009, resulting in a mark-to-market gain (MTM) of around Sources: Reuters and NBK Capital KD 176 million.
Analyst
Mariam Al-Bahar T. +965 2259 5138 E. [email protected]
Key Ratios
2007 2008 9M2008 9M2009
Rental Income (% of Total Income) 40% 102% 51% 80% Investment Income (% of Total Income) 43% -58% 22% 5% Investment Income (% of Net Profit) 65% -217% 34% 9%
EBITDA (KD million) 12.8 28.4 20.4 19.6 EBITDA Interest Cover (x) 4.8 4.7 5.4 4.9 Net Debt-to-Equity 0.6 0.8 0.8 0.6 Operating profit margin 59% 71% 74% 67% Adjusted Net Profit Margin 40% 54% 55% 53% Net Profit Margin 115% 17% 83% 58%
Investment Book (% of Total Assets) 21% 11% 15% 9% Investment Book (% of Total Equity) 45% 27% 34% 18%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 89 Mabanee Company Kuwait in Focus - January 2010
Overview Shareholder Structure
Name Type Country Holding Mabanee, a pure rental play in the Kuwaiti retail segment, is Alshaya Group [via AlShaya United Commercial Company] Corportate Kuwait 36.45% National Industries Group Holding Corportate Kuwait 20.01% currently the largest real estate company in terms of market Orient Investment Company Corportate Kuwait 6.59% Public - - 36.95% capitalization. The company owns the Avenues mega-mall, Foreign Ownership Structure which is a landmark development in Kuwait’s retail industry Open to GCC Investors 100.00% and the largest shopping mall of its kind in the country. Open to Foreign Investors 100.00% Mabanee plans to embark on a strategy to consolidate its *Per 1Q2009 financials. Sources: Company’s financial statements and NBK Capital position by executing Phase lll of the Avenues, resulting in a unique mix of a mass market and luxury/concept mall under The Avenues Project the same umbrella. Though Mabanee is a Kuwaiti story now, The Avenues - Key Statistics Phase l Phase ll Phase lll the company has plans to expand regionally. Segment Mass Market Upmarket Luxury/Concept
Completion April 2007 April 2008 4Q2011
The Avenues Project Occupancy Rate* (%) 97% 86% -
Net Leasable Area (sq.m.) 124,608 42,089 99,000 426 445 The Avenues is the first-of-its-kind mega-mall in Kuwait, with No. of stores Development Cost KD 164 million KD 99 million no other comparable retail mall in terms of leasable area (166,697 sq. m. – Phases I and II only). The mall is divided Sources: Zawya and NBK Capital into three phases built over 425,000 sq. m. of land located in the Al Rai area. Phases I and II of the project were completed Financial Statement Analysis in April 2007 and April 2008, respectively. Meanwhile, the development of Phase III is currently in progress and should Income Statement be completed in 4Q2011. Upon the completion of Phase lll, the Avenues will have a net leasable area (NLA) of 265,697 • Real-estate-related revenue (mainly rental income and sq. m. and a parking lot that can accommodate more than placement fees) for the company reached KD 26 million 14,000 cars. Phase lll of the Avenues will include an Old in 9M2009, 3% higher than KD 25.3 million in the same Souk, Gold Souk, Bazaar, Luxury Mall, SOKU, Grand Avenue period a year before, driven entirely by the increase in Mall, and three underground parking lots. rental income. Placement fees dropped to KD 1.5 million • Old Souk: will deliver a traditional Kuwaiti Souk in 9M2009 from KD 7.5 million in 9M2008. Placement atmosphere, and will consist of many smaller stores with fees were higher last year due to the opening of phase II. local sellers. • The company reported significant growth in rental income • The Bazaar will be a vivid and vibrant section, similar to as a result of the completion of Phase ll. Rental revenue the Istanbul Bazaar, featuring large household items and increased significantly, by 38.6%, to KD 22.8 million in goods. 9M2009, compared to KD 16.5 million in 1H2008.
• The Luxury Mall will include designer boutiques and high- • Operating expenses increased by 32%, to KD 6.41 million, end stores. in 9M2009, compared to KD 4.9 million in 9M2008. • The SOKU area is inspired by New York’s SoHo, and will Increase in both leasable area and repairs and maintenance evoke a youthful experience. expenses led to the overall increase in operating expenses.
• The Grand Avenue will be an indoor avenue with an outdoor • As a result of the increase in operating expenses, EBITDA feeling; it will be flanked by flagship stores on each side. dropped by 4%, to KD 19.6 million from KD 20.4 million, in 9M2008. Accordingly, EBITDA margins decreased to The 37% ownership stake by the regional retail giant Alshaya 75% in 9M2009 compared to 81% in 9M2008. group gives the company a strategic advantage over its competitors. Alshaya-run stores comprise a sizeable area of • The company’s investment income decreased significantly, the Avenues, which lends a degree of stability to the tenant from KD 7.1 million in 9M2008 to KD 1.4 million in profile. The company has pulled in major retail groups, and 9M2009, due to large hits taken on its investment book, these groups constitute 86% of all of tenants in Phase l and as well as a reclassification of certain investments (per IAS 54% in Phase ll. Also worth highlighting is the long waiting 39 in 2008). This affected the net profit for 9M2009. list for tenants, which is likely to be advantageous in times of adversity.
nbkcapital.com | 90 Mabanee Company Kuwait in Focus - January 2010
• The company’s net profit decreased by 28% to KD Financial Statements 15.2 million in 9M2009, compared to KD 21.1 million in 9M2008. This decrease resulted mainly from the Income Statement (KD '000) 2007 2008 9M2008 9M2009 significant decline in investment income. Rental Income 13,326 23,556 16,482 22,848 Placement fees 4,688 11,007 7,511 1,464 Other Inv. properties revenue 855 1,750 1,272 1,694 Total Inv. properties revenue 18,868 36,312 25,266 26,005 Balance Sheet Inv. properties expenses 3,905 5,588 3,733 5,103 Gross Profit 14,963 30,724 21,533 20,902 General & administrative expenses 2,201 2,296 1,127 1,307 • The company owns investment properties (Phases l and ll EBITDA 12,762 28,427 20,406 19,595
of the Avenues Mall) that are worth around KD 340 million Depreciation 1,572 2,528 1,792 2,237 (December 2008) per an independent valuation, compared EBIT 11,189 25,899 18,614 17,358 to a book cost of KD 164 million as of September 30, Finance costs 2,659 6,068 3,797 4,026 EBT 8,530 19,831 14,817 13,332
2009, resulting in MTM of around KD 176 million. Net (loss) gain from investments 14,205 (13,485) 7,081 1,419 Other Income (130) 225 113 1,090 • Mabanee owns 9,516 sq. m. of a plot in Salmiya. Net Profit 21,751 6,225 21,078 15,170 According to company sources, this Salmiya land is worth Balance Sheet (KD '000) 2007 2008 Sep-09 KD 39 million, 10 times higher than its book cost of KD Cash & Cash Equivelant 3,916 24,017 8,944 3.9 million. Investment properties 100,653 157,122 164,427 Investment Book 41,726 26,267 20,107 • The company owns an 186,692 sq. m. piece of land Total Assets 195,239 230,819 217,970 adjacent to the Avenues Mall in Al Rai. Of this land, 99,327 Short-term loans 32,903 66,184 60,925 sq. m. is set aside for the construction of Phase lll of the Long-term loans 37,857 40,779 22,857 Avenues. The remaining portion of the land is worth KD Total liabilities 102,242 133,211 105,223 Shareholders' Equity 92,997 97,608 112,747 59.2 million (per the valuation performed by independent Total liabilities and SHE 195,239 230,819 217,970 property assessors). Mabanee also owns a 40% stake in a Sources: Company’s financial statements and NBK Capital 223,000 sq. m. piece of land in Saudi Arabia, and a 10% stake in a 5.5 million sq. m. piece of land in Abu Dhabi.
• The company’s net debt-to-equity ratio decreased slightly, from 0.81 in 2008 to 0.62 in 9M2009. Mabanee’s total debt stood at KD 69 million in 9M2009, compared to KD 103.5 million in 2008. The company’s EBITDA interest cover increased slightly, from 4.7x in 2008 to 4.9x in 9M2009. Taking into account Mabanee’s robust core operations and healthy cash-generating abilities, we believe that it is comfortably placed to service its debt obligations.
• Mabanee’s investment book (both available-for-sale (AFS) and held for trading) stood at KD 20.1 million as of 9M2009, accounting for a significant 17.8% of shareholders’ equity and a notable 9.2% of total assets. Unquoted investments make up 43% of the AFS investments in 9M2009 while the remaining 67% is invested in locally listed securities.
nbkcapital.com | 91 Companies in Focus Kuwait in Focus - January 2010
Mobile Telecommunications Company (Zain)
Key Data Highlights • In November 2009, Zain’s CEO lowered the company’s General Liquidity 2009 revenue guidance by USD 1 billion from the previous KSE Code ZAIN 52-week avg. volume 11,951,024 Reuters Code ZAIN.KW 52-week avg. value KD 14,095,016 guidance of USD 9 billion. The company’s CEO blamed the
Price (KD) Price Performance global financial crisis, which has changed usage patterns,
Closing Price 0.980 YTD -3.9% and foreign exchange rate losses. 52-week High/Low 1.560 / 0.640 1-Year Period 24.1% • In September 2009, the Kuwait Stock Exchange (KSE) Market Capitalization Outstanding Shares Million KD 4,190 Latest (million) 4,275.18 announced that National Investments Co. (NIC), owned by the Kharafi Group, reported that one of its portfolio clients, Ownership Structure Closely Held: 35.47% Public: 64.53% Al Khair National for Stocks & Real Estate Co., was set to
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital sell up to 46% of Zain to a Malaysian-Indian consortium. The consortium consists of Malaysia’s al-Bukhary Group and India’s Bharat Sanchar Nigam Ltd. (BSNL), Mahanagar Stock Performance Telephone Nigam Ltd. (BSNL), and the Vavasi Group. This 46% stake is a combination of various shareholders’ stakes 1.700 160 in Zain. However, since then uncertainty has prevailed, 52-week High: KD 1.560 140 with news reports of the Indian telecom players, especially 1.500 BSNL, reportedly dropping out of the deal. 120 1.300 • The company reported a 24% increase in total revenue 100 1.100 to KD 1.78 billion for the nine months of 2009. EBITDA 80 reached KD 757.3 million, with the EBITDA margin
0.900 Millions Price (KD) Price increasing to 43%, compared to 38% at the end of 60 9M2008. The company’s net profit was hit by currency 0.700 40 fluctuations of KD 37.3 million, as well as increased
0.500 52-week Low: KD 0.640 20 financing and depreciation costs due to Zain’s network expansion. As a result, at the end of 9M2009, the 0.300 0 Jan-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10 company reported a 17% decline in the parent company’s Volume Close net profit to KD 195.7 million. At the end of September 30, 2009, the company’s total debt stood at a little more Sources: Zawya and NBK Capital than KD 2 billion. Zain’s growth and expansion through Analyst various mergers and acquisitions came at the expense of increased leverage. The debt-to-equity ratio stood at 0.73x Lisa Fernandes at September 30, 2009, up from 0.36x at the end of 2005. T. +971 4 365 2856 E. [email protected] Key Ratios
2005 2006 2007 2008 9M2009
Gross Profit Margin (%) 84.3% 78.8% 77.3% 77.0% 73.1% EBITDA Margin (%) 47.3% 43.7% 41.0% 37.3% 42.6% Operating Profit Margin (%) 34.4% 30.8% 26.9% 19.0% 25.6% Net Profit Margin (%) 31.4% 22.7% 19.1% 16.1% 11.0%
ROA 13.4% 10.6% 8.2% 6.6% N/A ROE 22.6% 21.7% 19.7% 15.5% N/A Current Ratio (X) 0.81 0.66 0.54 0.69 0.59 Debt to Equity (X) 0.36 0.92 1.14 0.79 0.73 Debt to Assets (X) 0.21 0.40 0.45 0.35 0.33 Investment/Equity 32.7% 10.8% 26.4% 13.7% 12.9%
Receivables Turnover Ratio 1.41 9.81 7.79 7.42 N/A Inventory Turnover Ratio 21.12 25.19 20.70 17.57 N/A Payables Turnover Ratio 0.49 0.82 0.77 0.63 N/A Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 92 Mobile Telecommunications Company (Zain) Kuwait in Focus - January 2010
Overview combination of various shareholders’ stakes in Zain. However, since then uncertainty has prevailed with news reports of the Zain is a leading telecom operator, on regional as well as Indian telecom players, especially BSNL, reportedly dropping global levels. Operating under the brand name “Zain,” Mobile out of the deal. All these news reports have affected the Telecommunications Company was established in Kuwait in performance of Zain’s stock, which has been very volatile. 1983 as the Gulf’s first mobile operator. The company’s shares are listed on the Kuwait Stock Exchange (KSE); Zain’s largest What Is the Story in Zain’s Key Markets? shareholder is the Kuwait Investment Authority with a 24.6% stake. Zain’s main strategic objective is to become one of the Kuwait: Fierce Competition top 10 mobile telecommunications companies in the world in As we have stated in our previous publications, with the 2011, with 150 million customers and an EBITDA of USD 6 award of the third mobile license to a consortium led by STC billion. To reach this goal, Zain initiated the “Drive 11” program (branded as Viva, which formally launched its services in in May 2009 that “will focus on customer-facing services and September 2008), Kuwait witnessed a revival of competition commercial activities while centralizing or outsourcing some in the mobile market. Over the previous years, the Kuwaiti back-office, non-core functions to strategic partners.” Zain mobile market had drifted into a lull compared to neighboring has grown to become the fourth-largest operator in the world countries where fierce competition was raging, as both Zain in terms of geographic footprint. At the end of September and Wataniya had been enjoying duopoly status. The first 2009, the company’s number of active subscribers reached significant move with the entry of Viva was the cancellation around 72 million. Currently, the company is the leading of the long-standing called-party-pays fees. Both Zain and mobile operator in 16 countries, and the second or third player Wataniya were directly affected. Zain’s Kuwaiti operation in a majority of other countries. reported a 15% year-over-year (YoY) decrease in revenues and Zain’s relatively mature Middle East operations fuel its growth a decrease in the EBITDA margin from 52% in 9M2008 to prospects in Africa. Through acquisitions, the company has 51% in 9M2009. As for Wataniya, it seems that the company diversified its business operations into markets with different was more affected by the cancellation of incoming calls dynamics, mainly in two distinct geographic clusters, namely fees compared to Zain. The company witnessed a 20% YoY the Middle East and Africa, which include 24 countries. decrease in revenues from Kuwait, and a decrease in the The Middle Eastern markets are characterized by high gross EBITDA margin from 51% in 9M2008 to 47% in 9M209. domestic product (GDP) per capita, high average revenue We believe that Zain will continue to witness weak growth per user (ARPU), a high penetration rate, and lower potential due to the aggressive competition among the three operators. growth. On the other hand, the African markets have low GDP However, due to the importance of the Kuwaiti operation to per capita, low ARPU, a low penetration rate, and higher Zain Group (the third-highest contributor to group revenue, growth potential. The African and the Middle Eastern clusters after Iraq and Nigeria, and the highest ARPU in the group), cover a population of 600 million. The company’s exposure to the company should strive to differentiate itself from the other Africa has put more pressure on Zain’s margin as the company operators. is operating in low-ARPU countries that involve significant Nigeria: A Challenge for Zain investments in network roll-outs. A direct effect of expanding the network is the increase in Zain’s depreciation expenses Backed by a liberalization program, the Nigerian mobile and finance costs. However, in our view, these costs should market witnessed a boom in the past few years. The entry of allow Zain to fuel its longer-term growth prospects in Africa. new telecom operators, the expansion of coverage, and the Zain’s stock price has been volatile recently given the news provision of low-cost services pushed the penetration rate from of the potential sale of a 46% stake. Recently, Zain has 1.2% in 2002 to around 45% at the end of September 2009. been in the news frequently, as one of the company’s major Today, Nigeria is the largest and most attractive market in shareholder, the Kharafi Group, has expressed interest in Africa. As of 9M2009, the total number of mobile subscribers selling its stake. In September 2009, the KSE announced that in Nigeria reached around 70 million, representing around National Investments Co. (NIC), owned by the Kharafi Group, 16% of the African mobile subscribers. Three mobile operators reported that one of its portfolio clients, Al Khair National out of 12, namely MTN, Zain-Nigeria, and Glomobile, lead for Stocks and Real Estate Co., was set to sell up to 46% the mobile market, controlling 89% of the market. However, of Zain to a Malaysian-Indian consortium. The consortium Zain is facing many challenges in Nigeria, especially given consisted of Malaysia’s al-Bukhary Group and India’s Bharat that the market is overcrowded with 12 operators (GSM and Sanchar Nigam Ltd. (BSNL), Mahanagar Telephone Nigam CDMA). The strong competition has led to lower growth in the Ltd. (BSNL), and the Vavasi Group. This 46% stake was a number of subscribers, while putting pressure on revenue and
nbkcapital.com | 93 Mobile Telecommunications Company (Zain) Kuwait in Focus - January 2010
EBITDA levels. According to Zain’s management, the company guidance of USD 9 billion. The company’s CEO blamed the took new measures to overcome the obstacles by appointing global financial crisis, which has changed usage patterns, a new CEO for Zain-Nigeria, restructuring and outsourcing the and foreign exchange rate losses. network to Ericsson and Nokia Siemens, and restructuring • September 2009: The Kuwait Stock Exchange (KSE) sales and distribution. announced that National Investments Co. (NIC) reported Sudan: Good Performance that one of its clients, Al Khair National for Stocks & Real Estate Co., is set to sell up to 46% of Zain. However, We believe that there is still plenty of room for growth in since then uncertainty has prevailed, with news reports of Sudan. With increased competition, the mobile market is the Indian telecom players, especially BSNL, reportedly growing at a rapid pace: the penetration rate increased from dropping out of the deal. 12% in 2006 to 40% as of 9M2009. Zain is the market leader in Sudan (58% market share as of September 30, 2009); the • August 2009: Zain’s board of directors voted to remove company was able to grasp around 50% of the net additional limits on the company’s share ownership. Shareholders in subscribers since December 2008. Zain agreed to amend company regulations that included removing caps that restrict a shareholder to owning no Iraq: More Competition on the Way more 2% of the company’s capital or subscribe to no more Increased competition could put pressure on Zain-Iraq’s than 1,000 shares. margin. Back in 2004, the three mobile operators in Iraq • May 2009: Given the impact of the financial crisis, Zain did not fully compete with each other as each operator was announced a new strategy, “Drive2011.” The new strategy licensed to cover separate parts of the country. It was not until will focus on the operating model: (a) consolidating and 2007 that real competition started after the regulator awarded reducing advertising and marketing expenses and (b) nationwide licenses. The number of mobile subscribers grew at enhancing the company’s control over company functions a CAGR of 86% between 2004 and 2008, and the penetration by either centralizing them or outsourcing them to strategic rate reached 71% at the end of September 2009. Zain-Iraq is partners. the market leader, commanding a market share of around 49% • May 2009: Zain acquired 56.53% of the equity shares and at the end of September 2009. Zain-Iraq achieved several voting rights of Paltel, in exchange for Zain’s 96.156% major steps over the past two and a half years by winning a 15- equity shares and voting rights in Pella Investment year mobile license, fully integrating MTC Atheer and Iraqna, Company in Jordan. Pella is still a subsidiary of Zain as and increasing the company’s ownership to 71.67%. During the group retains 56.53% of the equity shares and voting 2009, the competition intensified, and Asiacell adopted a rights in Pella through Paltel. The Palestinian operation very aggressive acquisition strategy to the extent that during was expected to join Zain’s “One Network,” which would 3Q2009 Zain-Iraq witnessed a slight decrease in its subscriber encourage the relatively large Palestinian community living base. We believe that the mobile market will witness increased in Jordan to use Zain’s network and enjoy the low tariffs. competition, which could put pressure on Zain-Iraq’s margin. This acquisition in turn would be an added benefit for Zain in Jordan. However, the merger between Zain’s Jordanian Latest News unit and Palestine Telecommunications Co. was called off in November. • January 2010: Due to a disagreement over the quality of service in Niger, the country’s communication ministry • March 2009: Through a joint venture with Al Ajial stated that it has cut the license duration of its two mobile Investment Fund Holding, Zain invested USD 324 million operators, Zain and Moov (majority owned by Etisalat), to acquire 31% of Wana Telecom, the third mobile operator until the operators' services returns to the stated levels in Morocco. of service quality. The 15-year license awarded to Zain in 2000 has been reduced by five years, and the 15-year Financial Statement Analysis license awarded to Moov (also in 2000) has been reduced by three years. Income Statement
• November 2009: Zain halted the merger between its Jordanian unit and Palestine Telecommunications Co. • Looking for growth outside Zain’s saturated home market, after failing to receive regulatory approval. over the past few years, the company has gone on a lavish spending spree, acquiring existing telecom companies and/ • November 2009: Zain’s CEO lowered the company’s 2009 or greenfield licenses. The company believed that future revenue guidance by USD 1 billion from the previous growth would depend on Zain’s ability to expand regionally
nbkcapital.com | 94 Mobile Telecommunications Company (Zain) Kuwait in Focus - January 2010
as management forecasted that Zain’s home market • On the EBITDA front, Zain’s EBITDA grew at a CAGR of would eventually face increased competition and reach 40% between 2005 and 2008. However, if we look at the saturation. Zain’s top line grew at an impressive CAGR of EBITDA margin, we will notice that it decreased from 47% around 51% between 2005 and 2008. In 2008, Zain’s in 2005 to 38% in 2008 mainly due to Zain’s aggressive consolidated revenue grew by 19% to exceed KD 2 billion. expansion plan. The “Drive 11” initiative has had a Zain benefited on the top-line level from the company’s positive impact in 2009. Zain has focused on controlling diversification strategy: the Nigerian operation (included operating expenses related to marketing and distribution in sub-Saharan Africa in the figure below) was the highest during 2009. contributor to the group’s top line (22%); this operation • The 9M2009 EBITDA (in KD) grew by 37% to KD 757.3 witnessed significant growth, 40%, in 2008. The reason million implying an EBITDA margin of 42.5%, up from behind this increase was the 55% growth in the mobile 38% in 9M2008. This improvement is due to the program, subscriber base. The company’s home operation, Kuwait, “Drive 11,” that Zain adopted earlier in 2009. Iraq, Kuwait, was the second-highest contributor to total revenue (19%). Sudan, and Nigeria together accounted for 64% of the Another high contributor to the group’s consolidated consolidated group EBITDA in 9M2009. Kuwait and Iraq revenue was Sudan (12%). were the highest contributors to group EBITDA, with each • In 9M2009, the company’s total revenues grew by contributing around 18% to the total group EBITDA. With 24% to KD 1.78 billion compared to the same period the cancellation of called-party pays, Kuwait’s approximate in 2008. This growth is mainly due to the effect of the contribution to the total group EBITDA declined from 27% consolidation of the Iraqi operation and the merger of the in 9M2008 to 18% in 9M2009. According to management, Paltel operation in May 2009. Zain announced at the end Zain is planning to continue improving margins through of November 2009 that the merger agreement between more cost-cutting on an operational level as a way to limit Paltel and Zain-Jordan would not take place as Zain did the pressure on revenue growth due to competition and the not receive the required government approvals. Hence, ongoing economic instability. we expect Zain’s revenue to be negatively affected. The • As for the bottom line, although the company still displays cancellation of called-party-pays fees in Kuwait had an solid financial results, its profitability has been decreasing; impact on Kuwait’s mobile operators in the beginning of the net profit margin dropped to 16% in FY2008 compared 2009. If we look at revenue from the Kuwaiti operation, to 31% in FY2005. In 2008, the bottom line witnessed we will notice that revenues declined by 15% YoY, and flat growth and reached around KD 322 million. This the contribution to the total group revenue declined from was mainly because of a loss of KD 37.1 million due to 20% in 9M2008 to 15% in 9M2009. Iraq and Nigeria currency revaluation. Four key markets saw major currency were the main contributors to the group’s total revenues, weakness against the USD in 2008: Zambia, Nigeria, at 16% each, while Sudan contributed 12% in 9M2009. Tanzania, and Democratic Republic of Congo (DRC), Consolidated revenues from African operations were highly with currency depreciation of 24%, 18%, 14%, and 9%, affected by the deprecating value of their local currencies respectively. relative to the US dollar. Total foreign exchange (FX) losses doubled in 9M2009 versus 9M2008 to reach roughly USD • After growing at CAGR of 16% over 2005–2008, net 130 million. income (in KD) witnessed a decline of 17% during 9M2009. Several factors were behind this YoY decline in Revenue Breakdowns by Geography 9M2009, including the following:
2008 9M2009 • Zain’s share of the loss from the company’s associate Zain-KSA was included in the bottom line.
Others, 10% • A direct effect of the expansion plan was the increase Others, 13% Kuwait, 15% Kuwait, 19% in fixed costs from depreciation and amortization and finance costs. Sudan, 12% Sudan, 12% • An increase in provision for doubtful debts from KD Sub-Saharan Iraq, 16% Sub-Saharan Iraq, 3% Africa, 44% 2.9 million to KD 9 million, Africa, 56% • A loss of KD 3.1 million from investment income.
Source: Company reports
nbkcapital.com | 95 Mobile Telecommunications Company (Zain) Kuwait in Focus - January 2010
• The share of loss of associates reached KD 50.1 needs to pay a final installment of USD 725 million for the million, compared to KD 5.2 million in 9M2008. Iraqna acquisition (by the end of 2009), and has paid a USD 200 million tranche for the Iraqi mobile license (the EBITDA and Net Income Profile in USD Billions company restructured USD 600 million license payables for three years, so Zain will need to pay USD 200 million 4.00 50% 47% in 2010 and 2011). In the following figure, we list Zain’s 44% 45% 3.50 41% 41% debt maturity profile over 2010—2013. 38% 40% 3.00
35% 32% Zain Debt Maturity Profile in USD Millions* 2.50 30% 5,000 2.00 23% 25% 4,500 19% 20% 1.50 16% 3.38 4,000 2.43 12% 15% 1.00 2.65 3,500 10% 2.02 1.12 1.13 0.50 0.96 1.04 0.99 3,000 5% 0.65 2,500 - 0% 2005 2006 2007 2008 LTM2009 2,000 EBITDA Net Income EBITDA Margin Net Income Margin 1,500 Sources: Company reports and NBK Capital 1,000
Balance Sheet 500 - 2010e 2011e 2012e 2013e • The growth in assets has been funded by a mix of debt and equity. The use of equity to fund growth has helped * Figures are approximate. Source: NBK Capital contain leverage, albeit at the expense of lower returns. Zain’s growth and expansion through various mergers and Debt Capacity Sensitivities acquisitions came at the expense of increased leverage; Zain has a net debt-to-equity ratio of 0.74x as of September • Our analysis reveals Zain has limited capacity to take on 2009. additional debt. As of September 2009, Zain has a net debt-to-LTM EBIT ratio of 3.5x. We performed a debt Net Debt-to-Equity Ratio capacity sensitivity analysis to determine the incremental debt capacity of Zain. We noticed that the company has 1.20 limited headroom to take on additional debt.
1.00 Debt Capacity Sensitivity in USD Millions
0.80 Net Debt/ LTM EBIT 3.5x 4.0x LTM EBIT 1,777 1,777 Net Debt Capacity 6,220 7,109 Add: Current Cash Balance 1,157 1,157 0.60 Total Debt Capacity 7,378 8,266 1.09x Less: Existing Debt 7,443 7,443 Incremental Debt Capacity -66 823 0.40 0.74x 0.67x 0.69x Sources: Company reports and NBK Capital
0.20
0.12x - 2005 2006 2007 2008 9M2009
Sources: Company reports and NBK Capital
• As of September 30, 2009, the company’s total debt stood at KD 2.1 billion. Zain does not have significant debt repayments before 2011. In 2009, the company will have a cash outflow related to its Iraqi operations. Zain
nbkcapital.com | 96 Mobile Telecommunications Company (Zain) Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Revenue 1,677,270 2,003,080 1,439,349 1,779,607 Cost of Goods sold (381,206) (461,070) (409,469) (478,487) Gross Profit 1,296,064 1,542,010 1,029,880 1,301,120 Distribution, Mktg. and OPEX (461,655) (577,348) (342,376) (375,918) G&A (142,873) (210,749) (130,564) (158,922) Depreciation & Amortization (236,062) (303,363) (212,304) (302,421) Impairment losses-Goodwill - (63,262) - - Prov. For doubtful debt (3,832) (6,587) (2,873) (8,956) Operating Income 451,642 380,701 341,763 454,903 Interest Income 26,289 31,489 19,623 8,586 Investment Income 21,537 (599) 7,222 (3,140) Inc. from sale of shares in subs. - - 26,543 - Share of loss of associates (3,135) (20,659) (5,187) (50,133) Fair val. gain on prev. held equity int. - 152,413 - - Other income 6,092 21,470 21,872 9,546 Finance Costs (123,586) (128,002) (93,798) (118,596) Loss of currency revaluation 13,144 (37,091) (16,573) (37,334) Board of directors renum. (28) (32) (21) (24) Contribution to KFAS (2,973) (2,978) (2,430) (2,029) Nat. Labor Support Tax & Zakat (5,447) (5,877) (5,434) (5,194) Profit before Tax 383,535 390,835 293,580 256,585 Taxes (40,874) (53,720) (45,974) (33,282) Profit for the year 342,661 337,115 247,606 223,303 Minority interest 22,206 15,113 12,442 27,612 Shareholders of the company 320,455 322,002 235,164 195,691
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Cash and bank balances 474,322 261,263 367,871 329,859 Trade and other receivables 184,485 246,276 293,903 517,990 Loan to an associate - - 79,673 57,280 Inventories 14,791 22,047 30,427 33,662 Inv. - at fair val. through P&L 18,455 23,002 16,676 15,368 Current Assets 692,053 552,588 788,550 954,159 Deferred tax assets 40,618 64,724 88,805 112,405 Investments - AFS 134,842 179,468 96,904 110,667 Investment in associates 8,026 259,640 216,389 251,412 Loan to associates - 170,875 - 82,665 Property and equipment 1,131,189 1,495,602 2,026,790 2,213,111 Intangible assets 1,477,557 1,637,255 2,234,423 2,609,691 Other financial assets 6,648 6,850 2,378 2,591 Total Non Current Assets 2,798,880 3,814,414 4,665,689 5,382,542 Total Assets 3,490,933 4,367,002 5,454,239 6,336,701 Trade and other payables 427,396 557,889 908,773 1,164,292 Due to banks 460,721 453,747 231,138 453,743 Due to non-control. int. holders 155,262 18,509 - - Current Liabilities 1,043,379 1,030,145 1,139,911 1,618,035 Due to banks 921,117 1,531,512 1,670,788 1,667,608 Deferred tax liabilities 9,980 31,763 30,283 33,455 Other non current liabilities 16,023 25,276 212,128 97,642 Non Current Liabilities 947,120 1,588,551 1,913,199 1,798,705 Total Liabilities 1,990,499 2,618,696 3,053,110 3,416,740 Share capital 126,182 189,398 427,240 428,059 Share premium 624,465 624,465 1,690,772 1,690,772 Treasury shares (15,576) (15,576) (567,834) (567,834) Legal reserve 63,091 94,699 127,788 127,788 Voluntary reserve 63,091 63,091 63,091 63,091 Foreign currency translation res. (24,390) (26,014) (97,692) (53,283) Treasury shares reserve - - 1,967 1,967 Equity issue trans. cost of assoc. - - (1,746) (1,812) Investment fair valuation res. 41,778 67,704 (9,201) 5,949 Share based compensation res. 5,736 12,222 20,395 23,949 Hedge reserve - - (60,382) (53,645) Retained earnings 470,055 571,938 625,014 762,128 Non- controlling interests 146,002 166,379 181,717 492,832 Total equity 1,500,434 1,748,306 2,401,129 2,919,961 Total Liabilities and Equity 3,490,933 4,367,002 5,454,239 6,336,701
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 97 Companies in Focus Kuwait in Focus - January 2010
National Industries Group Holding (NIG)
Key Data Highlights
General Liquidity • National Industries Group Holding (NIG) is one of the KSE Code NIND.KSE 52-week avg. volume 10,129,593 largest listed investment holding companies in Kuwait. Reuters Code NIND.KW 52-week avg. value (KD) 3,809,005 Established in 1961, NIG was listed on the Kuwait Stock Price (KD) Price Performance Exchange in 1984. Closing Price 0.315 YTD 3.0% 52-week High/Low 0.210 / 0.510 1-Year Period 5.0% • NIG’s net profit figure is highly dependent on investment Market Capitalization Shares Outstanding income. For 9M2009, income from investments dropped Million KD 407.96 Latest (million) 1,295 by 49% to KD 62 million, down from KD 121 million in Ownership Structure 9M2008. Closely Held: 25.1% Public: 74.9%
Price as of close on January 18, 2010 Sources: Zawya and NBK Capital • NIG has investments spread across several regions spanning an array of industries. As of 9M2009, NIG’s investments account for almost 79% of total assets. Stock Performance • NIG’s net profit in 9M2009 fell to KD 0.43 million from KD 102 million in 9M2008, a drop of almost 100%. 0.600 70
52-week High: KD 0.510 60
0.500 50
40 0.400 Millions
Price (KD) Price 30 52-week Low: KD 0.210
20 0.300
10
0.200 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analysts
Badder Al Ghanim May Zuaiter T. +965-2259 5330 T. +965 2259 5597 E. [email protected] E. [email protected]
Key Ratios
2006 2007 2008 9M2009
Net Debt to Equity 67% 84% 238% 168% Investments/Total Assets 73% 81% 77% 79% Investments/Equity 128% 155% 273% 222%
ROA 14% 10% 4% N/A ROE 25% 19% 13% N/A
* Annualized figures Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 98 National Industries Group Holding (NIG) Kuwait in Focus - January 2010
Overview Balance Sheet
National Industries Group Holding (NIG) is one of the largest • As a holding company, NIG’s balance sheet is naturally listed investment holding companies on the Kuwait Stock dominated by a sizable investment book. The company’s Exchange since its initial public offering in 1984. Incorporated latest financials show that investments account for 79% in 1961, NIG was established with the sole purpose of of total assets. participating in the advancement of Kuwait’s infrastructure • The KD 1.3 billion that NIG has in investments is dominated and promoting its progression through the development of by available-for-sale investments (KD 890 million), Kuwait’s building materials industry. In its early stages, NIG followed by investments in associates (KD 258 million). was instrumental in the development of Kuwait’s industrial The remaining KD 184 million is distributed among held base through the company’s establishment of companies such for trading, property investments, and Murabaha and as Kuwait Cement Company, Kuwait Metal Pipes Industries, Wakala investments. and Gulf Cables. As the company grew throughout the years, it embarked on a policy of product diversification and • NIG investments are spread in different regions of the international expansion during the latter decade, with the GCC world. Below is a list of subsidiaries and associates that serving as its first target market outside Kuwait. As a result, fall within NIG’s investment book based on the company’s NIG has a web of operations across the GCC, Pakistan, Europe, latest financial statements. and the Americas spanning several industries, including petrochemicals, infrastructure, and financial services. NIG Subsidiaries and Associates
National Industries Group Holding (NIG) Local Subsidiaries % Ownership Associates % Ownership Foreign Subsidiaries % Ownership National Industries Co. 51% Kuwait Privatization 28% Proclad Companies 100% Latest News Proclad International 100% Kuwait Cement 25% NIG Bahrain 100% Eagle Propriety 100% Kuwait National Real Estate 16% NIC Holding Guernsey 100% Ikarus Petroleum 72% Marsa Alam Holding 20% NIG Guernsey LTD 100% Noor Financial 51% Al Rayah 23% Gw/Gas Division 100% • December 02, 2009: NIG filed a lawsuit against a unit Lulua National Industries 100% Eastern United Petroleum 20% NIC Holding UK 100% Gas & Oil Field Services 100% Kuwait Rocks 38% of U.S. private equity firm Carlyle Group over a USD 25 NIC for Combined Energy 100% Karachi Electric 40% National Land Transport 100% Meezan Bank 45% National Combined Health 100% Noor Telecom 39% million investment loss. NIG has taken provisions to cover Al Durra Real Estate 100% this investment loss in 2008. Thus, this loss will not affect Denham Investment 100% 2009 results, according to the company. Sources: Company’s financial statements and NBK Capital
• June 23, 2009: NIG subsidiary, Ikarus Petroleum National Industries Company Industries Company, announced the acquisition of 11% of the shares in Saudi Arabia-based International Acetyl • NIG’s 51%-owned subsidiary, National Industries Company Company and International Vinyl Company. The shares (NIC), is one of the largest building materials manufacturers were valued at SR 240 million. in the region. Listed on the Kuwait Stock Exchange with a market cap of KD 140 million, NIC is principally Financial Statement Analysis engaged in the provision of complementary products to meet the demands of housing and infrastructure projects. Income Statement The company has production facilities in both Kuwait and Saudi Arabia, with a product portfolio that includes • NIG reported a 20% drop in sales during 9M2009 when aerated concrete blocks, sand lime bricks, ready mix and compared to 9M2008. NIG’s revenue is broken down into concrete pipes. three major segments: investments, specialist engineering, and building materials. Ikarus Industrial Petroleum (Ikarus), Saudi International Petroleum (SIPCHEM), and National Industrialization • In 9M2009, NIG recorded a gross profit figure of KD 12.5 Company (Tasnee) million, a 32% drop from 9M2008. Additionally, gross profit margin declined from 21% in 9M2008 to 18% in • Ikarus is an investment vehicle with a range of investments 9M2009. in petrochemicals and the oil and gas sector within the • NIG’s bottom line is highly affected by investment income MENA region. Incorporated in Kuwait, Ikarus was listed as is evident in 9M2008 when this line item accounted on the Kuwait Stock Exchange in 2008. The company’s for 119% of net income. As for 9M2009, income from current business strategy entails investing in start-ups or investments dropped by 49% year on year. acquisitions of at least a 20% stake in large and mature operations with stable cash flows. • NIG’s net profit in 9M2009 fell to KD 0.43 million from KD 102 million in 9M2008, a drop of almost 100%.
nbkcapital.com | 99 National Industries Group Holding (NIG) Kuwait in Focus - January 2010
• Key investments of Ikarus include SIPCHEM and Tasnee. Mabanee The former was founded in 1998 in Saudi Arabia and produces butandiol, methanol, acetic acid, vinyl acetate • Mabanee, a pure rental play in the Kuwaiti retail segment, monomer, and carbon monoxide. Tasnee, on the other is currently the largest real estate company in Kuwait in hand, was established in Saudi Arabia in 1985 and terms of market capitalization. NIG currently owns 20% of produces various chemical and metallurgical products Mabanee. For more information, please refer to page 89. such as polypropylene, HDPE, LDPE, and lead. Ikarus owns an 8% and 5.3% stake in SIPCHEM and Tasnee, Financial Statements respectively. Income Statement (KD '000) 2007 2008 9M2008 9M2009
Sales 117,458 112,821 85,598 68,201 Noor Financial Investments (Noor) Cost of sales (90,102) (89,782) (67,370) (55,726) Gross Profit 27,356 23,039 18,228 12,475
Income from investments 250,129 37,088 121,184 61,984 • Noor Financial Investment Company is a Kuwaiti company, Profit from disposal of subsidiary - 1,653 Share of profits of associates 19,737 2,451 15,236 7,571 engaged in investment activities and financial services Income on disposal of associate - - - 5,753 primarily in Kuwait, the Middle East, Asia, and other Changes in fair value of investment properties - 5,697 7,689 3,996 Interest and other operating income 22,122 31,509 29,443 11,596 emerging markets. Noor provides a range of financial Distribution costs (7,979) (6,612) (4,202) (2,864) General, administrative and other expenses (24,127) (22,815) (17,071) (17,917) services, which include advisory services, underwriting, Operating Profit 287,238 70,357 170,507 84,247 syndications, and asset management. Noor follows a Finance costs (52,220) (67,609) (49,880) (40,771) Profit on disposal of PP&E 2,215 - - - diversified investment strategy with major investments in Impairment in value of AFS investments (2,000) (326,305) (10,681) (29,647) Impairment in value of wakala investments - (2,485) - (2,498) private equity and direct investments in the capital markets. Impairment in value of goodwill (2,608) - - - Impairment in value of associates (6,084) - - - Noor actively invests in the Kuwaiti capital markets and (Loss)/gain on foreign exchange 19,790 (11,514) 8,624 (13,068) diversifies its investments through the international capital Profit before taxes and directors remuneration 246,331 (337,556) 118,570 (1,737) Taxes and directors remuneration (7,670) (314) (3,781) (150) markets, which include other GCC countries, emerging Profit for the year 238,661 (337,870) 114,789 (1,887) markets such as Pakistan, China, and India, and limited Minority Interest 29,297 (55,907) 12,977 (2,316) Profit attributable to shareholders 209,364 (281,963) 101,812 429 exposure in the developed markets of the United States and Europe. In addition to serving independent clients, Balance Sheet (KD '000) 2006 2007 2008 Sep-09 Goodwill 13,586 10,697 8,231 8,267 Noor plays a vital role in advising NIG and its subsidiaries Property, plant and equipment 31,465 34,304 40,506 49,065 Investment in associates 125,912 286,301 303,079 257,506 on investment transactions. Investment properties 552 - 22,645 33,498 Available for sale investments 426,399 846,206 634,900 764,093 Deferred tax 151 132 108 133 Meezan Bank Total Non-current Assets 598,065 1,177,640 1,009,469 1,112,562 Inventories 23,960 23,323 22,992 21,571 Available for sale investments - - 178,114 126,045 • Meezan Bank is one of NIG’s international investments. Accounts receivables 56,330 129,232 89,635 80,847 Murabaha and wakala investments 57,608 33,883 29,800 15,178 Meezan is a Pakistan-based Islamic bank. The bank Investments at fair value 456,165 590,542 158,816 135,214 Short term deposits 248,758 187,079 214,999 135,572 currently has 166 branches across 40 cities in Pakistan, Bank balances and cash 16,258 17,894 29,325 49,504 making Meezan Bank the largest Islamic bank in Total Current Assets 859,079 981,953 723,681 563,931 Pakistan. In 2006, Noor Financial acquired a 16% stake Total Assets 1,457,144 2,159,593 1,733,150 1,676,493 Bonds issued and trust certificates 45,857 171,227 158,720 164,936 in Meezan Bank, whose shares are listed on the Karachi Long term borrowing 79,710 165,190 177,837 17,721 Leasing creditors 59 375 608 719 Stock Exchange. During the fourth quarter of 2007, Noor Provisions 11,638 9,558 8,369 8,957 acquired additional shares in Meezan, which increased Total Non-current Liabilities 137,264 346,350 345,534 192,333 Accounts payable 52,203 74,569 80,545 57,479 Noor’s shareholding to 45%. Bonds issued - - 14,431 - Short term borrowing 403,185 571,211 767,124 784,028 Kuwait Privatization Project Holding Co. (KPPHC) Due to banks 31,652 37,046 39,719 41,991 Total Current Liabilities 487,040 682,826 901,819 883,498
Total Equity 832,840 1,130,417 485,797 600,662 • Kuwait Privatization Project Holding Co. (KPPHC) was Total Equity and Liabilities 1,457,144 2,159,593 1,733,150 1,676,493 established in 1994 and is currently listed on the Kuwait Source: Company’s financial statements and NBK Capital Stock Exchange with a market cap of KD 54 million. The major shareholders are NIG and Kuwait Financial Center (which is 12% owned by NIG).
• The objective of KPPHC is to finance, evaluate, and provide consulting services to a selected group of Kuwaiti companies and regional projects, with a focus on controlling stakes in entities providing services in different sectors such as energy, infrastructure and real estate, as well as participating in BOT government projects.
nbkcapital.com | 100 Companies in Focus Kuwait in Focus - January 2010
National Investment Company (NIC)
Key Data Highlights
General Liquidity • National Investment Company (NIC) is one of the largest KSE Code NINV.KSE 52-week avg. volume 1,587,848 asset management companies in Kuwait, with a market Reuters Code NINV.KW 52- week avg. value (KD) 775,422 capitalization of around KD 262 million. Price (KD) Price Performance
Closing Price 0.325 YTD -7.1% • The hit on the investment portfolio in 2008 decreased 52-week High/Low 0.690/0.236 1-Year Period -33.3% fair value reserves, resulting in a decline in equity. The Market Capitalization Outstanding Shares company’s investment portfolio shrank by 93% in 2008, Million KD 280.39 Latest (million) 876.20 whereby cumulative changes in fair value dropped from KD Ownership Structure 51.8 million to KD 3.4 million. By 9M2009, cumulative Closely Held: 67.9% Public: 32.1% changes in fair value rallied slightly to KD 8.2 million. Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • A significant portion of the company’s investments are liquid. This allows NIC to convert investments into cash Stock Performance relatively quickly, making it easy to repay debt. • There has been a change in the company’s reporting 0.700 14.0 52-week High: KD 0.690 methods, whereby NIC has taken advantage of the 12.0 0.600 amendments to IAS 39, allowing the company to convert
10.0 “held for trading” (HFT) securities to the “available for 0.500 sale” (AFS) portfolio. 8.0 0.400 • Assets under management (AUM) grew from KD 1 billion
Price (KD) Price 6.0 Millions
0.300 in 2004 to KD 2.24 billion in 2008. 52-week Low: KD 0.236 4.0
0.200 2.0
0.100 0.0 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Wadie Khoury T. +965 2259 5118 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Net Income Growth 181.8% -27.7% 136.2% -135.6% -111.9% Management and Advisory Fees Growth 74.0% -84.0% 0.8% -4.6% -44.7% AUM Growth 114.0% 3.7% 65.4% -38.8% N/A
AFS-to-Assets 33.1% 35.7% 34.3% 61.6% 64.6% AFS-to-Equity 48.1% 60.5% 55.0% 82.4% 78.5%
ROAA* 30.6% 13.2% 15.4% -6.0% -20.1% ROAE* 42.8% 20.4% 22.9% -7.2% -25.2%
Debt-to-Equity 28.5% 69.8% 33.7% 27.9% 17.1%
* Annualized figures Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 101 National Investment Company (NIC) Kuwait in Focus - January 2010
Overview a weak performance as operating profit fell by 84% YoY due to a 44.7% drop in management fees and a complete NIC is involved in investment management. This includes equity wipeout of incentive fees. This slashed EBIT margins from trading, private equity investments, and asset management 65% in 9M2008 to 45% in 9M2009. services. The company is responsible for managing several • Between 2004 and 2008, management fees as a funds, including equity, alternative, and money market percentage of average assets under management (AAUM) funds. Some of the most notable equity funds include the were consistently below 1%. This figure declined from Al-Wataniya Fund (investing in Kuwaiti listed equities), the 0.94% in 2005 to 0.44% in 2008. Furthermore, incentive Al-Safwa Fund (Shari’ah-compliant equity investments), and fees as a percentage of AAUM also fell from 0.77% in 2005 the Al-Darji Fund (GCC Shari’ah-compliant equities). NIC has to 0.49% in 2008. This could be due to the effects of the a large proprietary book from which it tries to derive most of financial crisis, whereby fees related to the management of its profits. funds were affected in one way, and incentive fees were not paid due to the difficulty in outperforming the benchmark. Latest News
Assets Under Management • November 02, 2009: National Investments Company announced its request to buy back 10% of its shares 4.0 1.8% 1.71% 3.7
within a six-month period starting November 21, 2009. 3.5 1.51% 1.6%
1.39% 1.4% Financial Statement Analysis 3.0 1.10% 1.2% 2.5 2.2 2.2 2.1 1.0% Income Statement 2.0 0.94%
KD Billions KD 0.8%
1.5 • With the company’s business operations revolving around 0.6% 1.0 market investments, NIC’s earnings are volatile. Earnings 1.0 0.4% between 2004 and 2008 fluctuated significantly, from a 0.5 0.2% high of KD 59.1 million in 2005 to a loss of KD 20.7 million in 2008. Similarly, earnings dipped from KD 42.4 0.0 0.0% 2004 2005 2006 2007 2008
million in 9M2008 to a loss of KD 5.1 million in 9M2009. AUMs Management fees + Incentive fees as % of AAUMs
• A significant portion of the company’s reported income Sources: Company annual reports and NBK Capital derives from market investments (which include realized and unrealized gains, sales of available-for-sale • As of July 1, 2008, NIC adopted amendments to IAS 39 investments, and dividend income). Between 2005 and enabling the company to reclassify trading investments 2008, income from market investments averaged 30% of with a carrying value of KD 30.8 million from the “fair value total income. In 9M2009, market investments contributed through income statement” category to the “available for KD 9.4 million to total income, down from KD 25.2 million sale” category. The company recorded unrealized losses of in 9M2008. This was mainly due to KD 4.9 million in KD 7.8 million effective July 1, 2008, which contributed realized investment losses in 9M2009 compared to a gain to the loss incurred in FY2008. of KD 11.5 million in 9M2008. Unrealized gains made up the largest portion of investment income, contributing Balance Sheet 34% of the company’s income in 9M2009.
• We define an investment company’s profit from operations • Assets declined by 5.7% in the first nine months of as income generated from management and advisory fees 2009, due to a significant decline in unquoted equity less general and administrative costs. This gives a clearer investments. Quoted investments picked up by 35.2% picture as to how well the company has been able to between 2008 and September 2009, helping offset larger generate a stable income stream from investing clients’ declines in assets for the first nine months of the year. funds. Operating profit increased by a CAGR of 51.2% in • The most notable effect on the assets side of the balance the three years ending in 2007. In 2008, we could see the sheet in 2008 is the 78% decline in investments at fair effect of the financial crisis take a toll on the company’s value through the income statement (HFT), due to market operating profits as they dropped by 34.8% compared to performance and the implementation of the amendments 2007 results. The first nine months of 2009 displayed of IAS39. The largest contributor to this decline was
nbkcapital.com | 102 National Investment Company (NIC) Kuwait in Focus - January 2010
the local quoted security investments portfolio, which Financial Statements decreased significantly from KD 80.9 million in 2007 to KD 8.5 million in 2008. The reclassification resulted in a Income Statement (KD '000) 2007 2008 9M2008 9M2009 jump in the AFS portfolio from 39% of assets in 2007 to Realized/Unrealized gain on invest. 27,142 (10,426) 11,987 6,034 Investment Income 44,942 40,799 37,345 8,797 62% in 2008. Foreign Exchange Trading (2,471) 2,675 1,104 444 Share of Results from Associates 4,972 (496) 3,699 (150) Other Income - - 2,250 3,500 • The majority of NIC’s assets fall under private and public Income 74,585 32,552 56,385 18,625 investments in securities, both HFT and AFS. In 2007, Selling/General/Admin Expenses (6,571) (10,956) (8,753) (3,259) Operating Income 68,014 21,596 47,632 15,366 HFT made up 30% of the total shareholders’ equity but Finance Costs (8,116) (4,425) (3,485) (1,746) Other, Net 634 (37,904) 212 (18,677) declined to 9% of shareholders’ equity in 2008. Net Income before Taxes 60,532 (20,733) 44,359 (5,057) Share of Associate tax - - - - • Between 2007 and 2008, equity was severely affected Zakat (37) - (444) - Contribution to KFAS (509) - (379) - by the devaluation of investments. Shareholders’ equity NLST (1,513) - (1,109) - Directors' fees (235) - - - dropped by 30% due to changes in fair value and a Net Income 58,238 (20,733) 42,427 (5,057) drop in retained earnings. The company’s equity balance increased in the first nine months of 2009 as the value of Balance Sheet (KD '000) 2006 2007 2008 Sep-09 Cash and Cash Equivalents 35,340 53,769 11,673 12,700 investments more than doubled within this time period, Investments 174,306 251,434 190,459 185,863 Other Assets 103,138 112,727 75,351 63,215 leading to a 3.9% increase in shareholders’ equity. Total Assets 312,784 417,930 277,483 261,778 Short Term Debt 123,704 99,707 57,937 36,932 • NIC’s debt-to-equity ratio decreased from 28% in Accounts Payable and Accruals 11,777 22,752 12,123 9,352 Total Liabilities 135,481 122,459 70,060 46,284 December 2008 to 17% in September 2009. It is worth Total Equity 177,303 295,471 207,423 215,494 noting that NIC has taken on only short-term debt. With Total Liabilities and Equity 312,784 417,930 277,483 261,778
liquid assets totaling KD 94.2 million as of September Sources: Company’s financial statements and NBK Capital 2009, repaying short-term debt of KD 36.9 million should not be an issue for NIC.
nbkcapital.com | 103 Companies in Focus Kuwait in Focus - January 2010
National Real Estate Company (NREC)
Key Data Highlights
General Liquidity • National Real Estate Company (NREC) is one of the KSE Code NRE.KSE 52-week avg. volume 3,871,270 largest real estate companies in Kuwait in terms of market Reuters Code NREK.KW 52-week avg. value (KD) 1,021,894 capitalization. The company is primarily a rental player, Price (KD) Price Performance and has its presence all across the region. Closing Price 0.206 YTD 4.0% 52-week High/Low 0.355 / 0.174 1-Year Period -3.7% • The company is part of the Sultan Group, and holds Market Capitalization Outstanding Shares a 22.4% stake in Agility, according to the 9M2009 Million KD 167.72 Latest (million) 814.20 financials. NREC’s stake in Agility appears at a cost of KD Ownership Structure 207.9 million on the balance sheet as of September 30, Closely Held: 40.52% Public: 59.48% 2009. The Agility stake, as of January 18, 2010, is valued Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital at KD 145.4 million, 30% lower than the value reported in the 9M2009 financials. The Agility stake accounts Stock Performance for almost 24.6% of the total assets and 59.6% of total shareholders’ equity. Therefore, any material change in the
0.400 25.0 value of Agility could have a significant impact on NREC’s shareholders’ equity. 52-week High: KD 0.355 0.350 20.0 • A back-of-the-envelope calculation shows Souq Sharq accounts for the majority of the company’s rental income. 0.300 15.0 NREC owns quite a few other income-generating properties in Kuwait, but our main concern is the old age of those 0.250
Millions properties. Price (KD) Price 10.0 0.200 • In 9M2009, NREC’s proportionate share of Agility’s net
5.0 profit was more than NREC’s net profit (KD 25.9 million 0.150 52-week Low: KD 0.174 vs. NREC’s reported net profit of KD 20.6 million), which means that the core real estate operations of the company 0.100 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 are reporting losses. This was the trend for 2006 and Volume Close 2008 as well. Sources: Reuters and NBK Capital Analyst
Mariam Al-Bahar T. +965 2259 5138 E. [email protected] Key Ratios
2005 2006 2007 2008 9M2009
Rental Income (% of Total Income) 23% 24% 13% 18% 13% Net Share in the Associate's Results (% of Total Income) 51% 56% 61% 70% 52% Net Share in the Associate's Results (% of Net Profit) 67% 113% 93% 172% 126%
EBITDA (KD million) 6.2 6.2 -4.4 -9.7 -4.6 EBITDA Interest Cover (x) 3.7 1.8 -0.8 -2.9 -2.1 Net Debt-to-Equity 0.3 0.1 0.4 0.7 0.7
ROAA (%) 25% 13% 12% 4% 4% Adjusted ROAA (%) 2% -12% -4% -6% -2% ROAE (%) 35% 17% 18% 8% 9%
Capital Work in Progress (% of Total Assets) 1% 6% 10% 44% 43% Investment in Associates (% of Total Assets) 56% 61% 47% 33% 36% Investment in Associates (% of Total Equity) 81% 80% 81% 85% 86% Investment Book (% of Total Assets) 7% 3% 5% 4% 4% Investment Book (% of Total Equity) 11% 4% 9% 9% 9%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 104 National Real Estate Company (NREC) Kuwait in Focus - January 2010
Overview in 2007. Thus, rental income as a percentage of total income decreased steadily, from 45% in 2003 to 22% in National Real Estate Company (NREC) is one of the largest 9M2009. Kuwaiti real estate companies in terms of market capitalization. • A back-of-the-envelope calculation shows Souq Sharq The company was established in 1973, and was listed on accounts for the majority of the company’s rental income. the Kuwait Stock Exchange in 1984. NREC specializes in NREC owns quite a few other income-generating properties developing, trading, and managing commercial and industrial in Kuwait, but our main concern is the old age of those real estate properties, including shopping centers, office properties. properties, resorts and hotels, and retail centers, both locally and internationally. The company is part of the Sultan Group, • A closer look at the financials shows that the company and holds a 22.4% stake in Agility, according to the 9M2009 reported losses at the EBITDA level of KD 4.38 million and financials. KD 9.67 million for 2007 and 2008, respectively. This was the trend in 9M2009 as well.
Completed Projects • The company’s net share in the associates’ results is
Country Project Location Use Year of completion Leasable Area (sq. m) entirely due to the share of Agility’s profit. According to Mishal Tower Sharq Commercial Offices, Retail 2008 - the 9M2009 financials, NREC’s share of Agility’s profit Sharq Marke Sharq Retail 1998 28,300
El Joan Resort Juliaa Resort - - accounted for 100% of the net share of the associates’
Watya Complex Qebla Commercial Complex 1979 11,186 Kuwait results. Souq Al Wataniya Mirqab Commercial Complex 1978 12,971 Al Wataniya Tower Kuwait City Commercial Complex 1989 3,332 Bobyan Complex Farwaniya (Dhajeej Area) Commercial Complex 1993 9,916 • The net share of associates’ results reached KD 25.9 Dasman Complex Dasman Commercial Complex 1979 16,081 million in 9M2009, which is flat compared to the same Sources: Company’s financial statements and NBK Capital period a year before. However, proportionate profits from associated companies (as a percentage of total income) Upcoming Projects increased steadily, from 26% in 2003 to 90% in 9M2009.
Country Project Location Use Najmat Abu Dhabi Reem Island, Abu Dhabi Mega Commercial Center • The net share of associates’ results as a percentage of net UAE TECOM Dubai Dubai Media City Hotel, Commercial Offices profit increased steadily, from 41% in 2003 to 126% in SHAMS Abu Dhabi Reem Island, Abu Dhabi Hotel, Commercial Offices, Residential Iraq Erbil Mega Erbil Shopping mall, Appartments, Hotel, Offices 9M2009. As of 9M2009, NREC’s proportionate share of Egypt TELAL 6th of October Residential Villas Agility’s net profit was more than the company’s net profit Aqaba AL-Aqaba city Offices, Warehouse Jordan Amman Zahran road, Amman Mix Use (KD 25.9 million vs. NREC’s reported net profit of KD Agricola Project Al Romail Residential Lebanon West End Project Pastor street, Gemmayze Commercial Offices 20.6 million), which means that NREC’s core real estate Libya Palm city residences Janzour Residential Appartments, Commercial Center operations reported losses. This was the trend for 2006 Pakistan Canal Residence Lahore Luxury Residential Villas and 2008 as well. Sources: Company’s financial statements and NBK Capital • Net profit remained flat in 9M2009, at KD 20.9 million, compared to the same period a year before.
Financial Statement Analysis • The apparent loss from the real estate operations can be further justified by comparing the return on average Income Statement assets (ROAA) for the whole company and specifically for the real estate operations. We observe that the ROAA for • The company’s rental income increased by 5% in 2008, the company decreased significantly from 25% in 2005 to KD 8 million, compared to 2007. Following the same to 4% in 9M2009. However, to calculate the return on trend, rental income increased by 7.9% in 9M2009, to KD core real estate assets, we adjusted the ROAA by excluding 6.5 million, compared to the same period a year before. investment gains/losses and share in the associates’ result • However, NREC’s rental income decreased by 52.8% from the net profit and excluded the available-for-sale in 2007, to KD 7.7 million, compared to the same investment portfolio and investments in associates from period a year before, due mainly to the cancellation of the total assets. The adjusted ROAA for the real estate a management contact for the Kuwait Free Trade Zone. operations decreased from a positive 2% in 2005 to a NREC has appealed against this outcome and is still negative 6% in 2008. waiting for a final court ruling on the matter.
• Rental income for the company decreased at a five-year CAGR of 13.5% for the period 2003 to 2008 mainly due to the same reasons that were instrumental in the decline
nbkcapital.com | 105 National Real Estate Company (NREC) Kuwait in Focus - January 2010
Balance Sheet Financial Statements
• The company is part of the Sultan Group, and holds Income Statement (KD '000) 2007 2008 9M2008 9M2009 a 22.4% stake in Agility, according to the 9M2009 Rental Income 7,677 8,030 4,192 6,460 Operating Expenses 11,611 12,961 9,471 7,600 financials. NREC’s stake in Agility appears at a cost of KD Net Share in the Associate's Results 36,201 31,465 16,832 25,934 207.9 million on the balance sheet as of September 30, Investment Income 9,304 3,454 81 84 Total Income 59,452 44,759 21,721 49,980 2009. The Agility stake, as of January 18, 2010, is valued Net Profit 39,021 18,292 13,366 20,562 at KD 145.4 million, 30% lower than the value reported Balance Sheet (KD '000) 2006 2007 2008 Sep-09 in the 9M2009 financials. The Agility stake accounts for almost 24.6% of the total assets and 59.6% of total Cash & Cash Equivelant 8,020 12,960 15,160 15,139 Investment in Associates 169,309 185,405 177,843 210,402 shareholders’ equity. Therefore, any material change in the Investment Properties 65,922 66,412 66,680 69,114 value of Agility could have a significant impact on NREC’s Capital Work in Progress 16,876 38,217 235,429 255,802 Total Assets 277,598 396,276 532,949 589,756 shareholders’ equity. Bank Facilities 34,517 114,807 156,556 181,700 Total Liabilities 65,373 167,904 322,832 345,819 • The company’s capital work in progress increased Shareholders' Equity 212,225 228,372 210,117 243,937 significantly from KD 38.2 million in 2007 to KD 255.8 Total Liabilities and Equity 277,598 396,276 532,949 589,756
million in 9M2009 mainly due to new projects undertaken Sources: Company’s financial statements and NBK Capital by the company. Capital work in progress accounted for 43% of the company’s total assets as of September 30, 2009.
• The company had a net debt-to-equity ratio of 0.68 at the end of 9M2009. Of that debt (KD 189 million as of September 2009 end), 33.8% is due within one year. With only KD 15.2 million in cash, the company will have to refinance that debt. However, refinancing KD 63.8 million of short-term debt may not be easy in the current situation.
• We would like to highlight that NREC is exposed in a limited way in terms of market investments compared to some of its Kuwaiti counterparts. The company’s investment book stood at KD 21.6 million as of 9M2009, which accounted for 9% of shareholders’ equity, in line with the last five years' average.
nbkcapital.com | 106 Companies in Focus Kuwait in Focus - January 2010
Oula Fuel Marketing Company (Oula)
Key Data Highlights
General Liquidity • Oula Fuel Marketing Company (Oula) is one of the two KSE Code OULAFUEL.KSE 52-week avg. volume 88,512 publicly listed operators of fuel stations in Kuwait. The Reuters Code OULA.KW 52-week avg. value (KD) 30,445 company’s operating assets consist of 40 gas stations Price (KD) Price Performance acquired from the government. Oula was listed on the Closing Price 0.420 YTD -2.0% Kuwait Stock Exchange (KSE) on December 18, 2006. 52-week High/Low 0.210 / 0.480 1-Year Period 81.0% • Oula has a major presence in the Kuwaiti retail petrol Market Capitalization Shares Outstanding Million KD 125.89 Latest (million) 300 market. The company along with its closest publicly listed competitor, Soor, dominate the retail petrol market with Ownership Structure Closely Held: 61.30% Public: 38.7% a combined market share north of 60%, in our estimate.
Price as of close on January 18, 2010 Sources: Zawya and NBK Capital • Oula’s business model is simple and stable, if not especially lucrative. The company has no control over prices or direct costs of sales. The government of Kuwait sets the retail Stock Performance price of petrol. Oula procures petrol from the state and is allowed to market the petrol at a specified gross profit 0.500 6 52-week High: KD .480 margin, which thus far has been established at 12.8%. 0.450 In terms of fundamental drivers, Oula’s top-line growth
0.400 is largely predicated on the demand for petrol and the
4 company’s ability to open up new fuel stations. Given that 0.350 demand for petrol is relatively inelastic, the company’s 0.300 revenues grew by 3.9% in 9M2009 compared to 9M2008 Millions Price (KD) Price 0.250 despite the economic slowdown. Operating margins remain 52-week Low: KD 0.210 2 low, around the 3% to 4% mark. 0.200
0.150 • Oula remains debt-free given that the company has a limited scope of expansion beyond the company’s existing 0.100 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 footprint in Kuwait. As of September 30, 2009, Oula had Volume Close a cash balance (including term deposits with maturities Sources: Reuters and NBK Capital within one year) of KD 8.7 million. Oula has paid KD 0.010 per share in cash dividends for FY2007 and FY2008.
• Unlike many Kuwaiti companies, Oula does not have an Analyst overwhelmingly significant investment book. Investments May Zuaiter made up 20.2% of shareholders’ equity as of September 30, 2009, up from 15% at the end of 2008. T. +965 2224 5597 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Sales Growth N/A 76.2% -1.6% 6.3% 3.9% Operating Profit Growth N/A 54.6% 31.7% 24.2% -19.0% EBITDA Growth N/A 8.8% -23.1% 24.3% 13.8%
Gross Profit Margin 12.8% 12.8% 12.8% 12.8% 12.8% Operating Profit Margin 3.2% 2.8% 3.7% 4.4% 3.3% EBITDA Margin 8.4% 5.2% 4.0% 4.7% 5.0% Net Profit Margin 3.1% 4.6% 5.5% 4.1% 4.3%
ROA 2.5% 6.7% 7.9% 6.9% N/A ROE 4.2% 10.0% 10.4% 8.2% N/A
Current Ratio 1.25 1.56 1.83 1.64 1.34 Quick Ratio 1.24 1.54 1.81 1.60 1.30 Investment to Equity 0.0% 0.6% 7.0% 15.0% 20.2% Net Cash (KD Millions) 24.8 24.5 20.6 10.6 8.7
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 107 Oula Fuel Marketing Company (Oula) Kuwait in Focus - January 2010
Overview • Since Oula has no control over gross margins, the company’s operating profitability is predicated on management’s Oula is one of the only two publicly listed operators of fuel ability to streamline operating costs. Our analysis shows stations in Kuwait. Established in May 2004, the company that Oula’s 9M2009 profitability improved on an EBITDA derives the majority of its revenues from retail petrol sales basis, but operating profits fell because of significantly through 40 petrol stations in Kuwait. Oula also generates higher depreciation and amortization expenses. income from 1) customer service centers in fuel stations, 2) • The company was able to improve profitability on a cash automotive services (car wash, oil change, car maintenance, basis given that EBITDA increased by 13.8% and 24.3% etc.), 3) filling and storing fuel, and 4) shipping and trading in 9M2009 and 2008, respectively. Consequently, Oula’s in petroleum products. Historically, the company has been EBITDA margin increased to 5% in 9M2009 versus 4.6% involved in buying, leasing, and selling real estate assets and 4.7% in 9M2008 and 2008, respectively. related to its operating activities and has invested a portion of its financial surplus in various financial investments. Oula • However, Oula’s operating profit declined by 19.0% has a wholly owned subsidiary, Oula National Market Services, in 9M2009 after increasing by 24.2% in FY2008. The and owns 25% of Petronet Global Computer Services. The fall in 9M2009 operating profit was due to 1) a 14.5% government has a 24% stake in Oula through the Kuwait increase in general and administrative expenses and 2) Petroleum Corporation (KPC). more importantly, an increase in the company’s recorded depreciation and amortization expenses, which skyrocketed by almost 5.5x as the majority of Oula’s non-current assets Major Shareholders were reclassified as property, plant, and equipment (PP&E) Major Shareholders Type Country Holding instead of intangibles (mostly goodwill, in our view). While Alfa Energy Corporate United Kingdom 24.61% Kuwait Petroleum Corporation Government Kuwait 24.00% the total non-current assets eked out 5.8% growth versus Kharafi National Corporate Kuwait 12.00% September 2008, this significant rise in depreciation and Others 0.69% Public 38.70% amortization expenses was driven by the aforementioned reclassification. Essentially, Oula was able to get an Source: Zawya independent valuation of the company’s acquisition Latest News of the 40 fuel stations. This allowed the company to reallocate its total cost of acquiring these fuel stations to PP&E, leasehold rights (a three-year period from the • November 2009: Oula announced the appointment of a government and renewable), and the commercial license new chairman, Ahmed Abdulaziz Al-Ghannam, effective in 2009. Previously, Oula allocated a significant portion November 16, 2009. of the company’s acquisition costs to intangible assets • March 2009: The board of directors recommended a (goodwill), which does not require periodic depreciation distribution of 10% cash dividends representing KD and amortization charges. Operating profit increased in 0.010 per share, for the fiscal year ending December 31, 2008, primarily driven by a reduction in certain expenses, 2008. Oula paid a similar dividend for FY2007, while no including fuel station management fees, general and dividends were paid for FY2006. administrative expenses, lease rentals, and “other” operating expenses. Financial Statement Analysis • The 9M2009 decline in net income outpaced the decline in operating income given lower interest income on reduced Income Statement cash balances and lower income on investments. Cash and term deposits fell 28% relative to September 2008, • The relatively inelastic demand for petrol continues to while the effective yield on murabaha investments fell to drive steady growth in Oula’s top line. Despite the overall 4.25% in September 2009 from 7.75% in 3Q2008. The economic slowdown, the company’s revenues grew by company also suffered a realized loss of approximately KD 3.9% in 9M2009 following 6.3% annual growth in 2008. 40,000 on the sale of available-for-sale (AFS) investments • Gross margins have remained at 12.8% since inception in 9M2009 versus a gain of roughly KD 374,000 in given Oula’s business model. Simply stated, the retail 9M2008. All these factors contributed to lowering net price of petrol is set by the government. Oula procures income by 33.8% in 9M2009, implying a net margin of petrol from the state and is allowed to market the petrol 4.3% versus 6.8% in 9M2008. at a specified gross profit margin, which thus far has been established at 12.8%.
nbkcapital.com | 108 Oula Fuel Marketing Company (Oula) Kuwait in Focus - January 2010
Balance Sheet Financial Statements
• Oula remains debt-free given the limited scope of Income Statement (KD '000) 2007 2008 9M2008 9M2009 Revenue 73,949 78,634 58,137 60,390 expansion beyond the company’s existing footprint in Cost of Sales (64,484) (68,569) (50,695) (52,660) Kuwait. The company had a cash balance (including term Gross Profit 9,465 10,065 7,441 7,730 Operating Costs (4,810) (4,833) (3,472) (4,019) deposits with maturities within one year) of KD 8.7 million General & Admin. Expenses (1,884) (1,791) (1,481) (1,696) as of September 30, 2009. Operating Income 2,771 3,441 2,488 2,015 Depreciation & Amortization 216 272 187 1,029 • Unlike many Kuwaiti companies, Oula does not have an EBITDA 2,987 3,713 2,675 3,043 overwhelmingly significant investment book. As we have Loss in of FV of AFS - (1,400) - - Cash Dividend - 155 156 24 stated previously, the company invests a part of excess Loss on Sale of AFS (0) (220) 374 (40) Loss on Disposal of PP&E (62) - - - capital in financial investments. Oula’s investment book Interest income 1,242 918 818 347 Other Income 281 490 301 401 made up 20.2% of the company’s shareholders’ equity EBT 4,232 3,383 4,137 2,747
in September 30, 2009, up from 15% in December 31, KFAS (38) (30) (33) (25) NLST (106) (81) (100) (68) 2008. AFS investments, which include unquoted local Zakat (3) (32) (40) (28) investments more susceptible to impairment (as they are Board of Directors Remuneration (45) (45) - - Profit for year 4,040 3,195 3,964 2,626 recorded at cost since their fair values cannot be reliably determined), dropped to 58% of the overall investment Balance Sheet (KD '000) 2006 2007 2008 Sep-09 Property, plant, and equipment 953 2,127 3,957 27,141 book in September 30, 2009 versus 74% in 2008. This is Available for sale investments 210 2,740 4,347 4,570 because the company started investing in somewhat lower- Intangible assets 23,965 23,965 23,965 1,738 Murabaha investments - - 1,500 1,700 risk wakala investments, while increasing its exposure to Investment in associates - - 466 466 Total Non-Current Assets 25,127 28,831 34,235 35,616 murabaha investments. Inventory 386 321 324 375 Trade and other receivables 1,970 1,324 1,358 2,343 Time deposits 20,723 16,308 3,030 6,000 Breakdown of Available-for-Sale Investments Wakala investments - - - 1,545 Cash and cash equivalents 3,728 4,324 7,552 2,716 Financial Investments (KD '000) 2007 2008 9M2008 9M2009 Total Current Assets 26,807 22,278 12,264 12,979 Total Assets 51,934 51,109 46,499 48,594 Available for sale investments 2,740 4,347 4,628 4,570 Share Capital 29,973 29,973 29,973 29,973 Of which, held in unquoted investments 805 1,916 1,355 1,777 Statutory reserve 498 921 1,259 1,259 Murabaha investments - 1,500 1,500 1,700 Voluntary reserve 498 921 1,259 1,259 Wakala investments - - - 1,545 Fair value reserve - 94 (82) 118 Retained Earnings 3,803 6,997 6,517 6,145 Total Financial Investments 2,740 5,847 6,128 7,815 Total Equity 34,771 38,906 38,927 38,755 Investment to Equity 7.0% 15.0% 15.8% 20.2% Provision for staff indemnity 16 61 105 181 Source: Company’s financial statements Total Non-Current Liabilities 16 61 105 181 Trade payables 25 456 357 1,095 Notes payable 137 Accrued expenses &staff leave pay 89 74 136 115 KFAS 45 38 68 93 NLST 91 106 187 255 Zakat - 3 35 63 Dividends payable to shareholders - - 602 725 Board of Directors remuneration 45 45 45 - Advances received - 58 35 2 Other 12 10 25 49 Due to related parties 16,703 11,353 5,975 7,261 Total Current Liabilities 17,147 12,142 7,467 9,658
Total Liabilities 17,163 12,203 7,572 9,839
Total Liabilities and Equity 51,934 51,109 46,499 48,594
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 109 Companies in Focus Kuwait in Focus - January 2010
Tamdeen Investment Company (Tamdeen)
Key Data Highlights
General Liquidity • Tamdeen Real Estate Company is the majority shareholder KSE Code TAMI 52-week average volume 605,455 in Tamdeen Investment Company, with a 51.37% stake. Reuters Code TAMI.KW 52-week average value KD 94,945 Fatah Al Khair Holding Group, a Kuwaiti family-owned Price (KD) Price Performance business, owns 15% of the company, while Kuwait Portland Closing Price 0.138 YTD -1.4% 52-week High/Low 0.176 / 0.120 1-Year Period -8.0% Cement Company has a 10% stake. Market Capitalization Shares Outstanding • Of the company’s available-for-sale (AFS) investments, Million KD 43.04 Latest (million) 311.85 quoted investments in foreign securities account for roughly Ownership Structure Closely Held: 76.37% Public: 23.63% 86% as of September 30, 2009. These investments are in equities, which tend to be volatile. This increases the risk Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital associated with these securities.
• Although the company does not have any financial assets Stock Performance carrying interest rates, the company faces interest rate risk through floating interest rate loans from banks and bank 0.200 25 facilities. 0.190 • Tamdeen Investment has no long-term debt but has 0.180 20 52-week High: KD 0.176 increased its short-term debt via banking facilities. With 0.170 roughly KD 57.3 million in short-term debt (short-term 0.160 15 loans and bank facilities) and lackluster earnings from 0.150 core operations, the company may face a reduced ability Millions Price (KD) Price 0.140 10 to repay the debt.
0.130 • In 9M2009, the company reported a net profit of KD 2.43 0.120 5 52-week Low: KD 0.120 million, reflecting a decline of 41%. The third quarter 0.110 of 2009 resulted in a net profit of KD 262 thousand,
0.100 0 compared to a loss of KD 968 thousand in 3Q2008. Jan-09 Mar-09 Apr-09 May-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10
Volume Close
Sources: Zawya and NBK Capital
Analysts
Lisa Fernandes May Zuaiter T. +971 4 365 2856 T. +965 2259 5597 E. [email protected] E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Net Profit Margin (%) 64.5% 67.5% 59.2% 21.6% 23.8%
ROA 3.2% 2.9% 3.6% 1.2% N/A ROE 3.5% 3.7% 5.1% 2.2% N/A
Current Ratio (X) 0.25 0.12 0.03 0.08 0.45 Debt to Assets (X) 0.05 0.18 0.27 0.42 0.41 Debt to Equity (X) 0.06 0.24 0.39 0.78 0.71
AFS-to-Assets 92.8% 85.2% 80.4% 66.5% 57.2% AFS-to-Equity 100.2% 110.3% 114.0% 124.0% 100.4% Equity-to-Assets 92.6% 77.2% 70.6% 53.6% 57.0%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 110 Tamdeen Investment Company (Tamdeen) Kuwait in Focus - January 2010
Overview holding long-term strategic shares in Kuwaiti and foreign stockholding companies.)
In 1997, Tamdeen Investment (formerly known as Gulf • The company did not report any gains from investment Investment Projects Company) was established and registered property sales in 2008. This is in contrast to 2007, as an investment company with the Central Bank of Kuwait. when Tamdeen Investment reported a gain on the sale of The company was listed on the Kuwait Stock Exchange (KSE) investment properties amounting to KD 2.5 million; this in May 2006. accounted for 17% of total revenue in 2007.
Tamdeen Real Estate Company is the majority shareholder in • Moreover, gains from AFS investments accounted for 92% the company, with 51.37% ownership. Fatah Al Khair Holding of total revenue in 2008, and actually declined by 30% Group, a Kuwaiti family-owned business, holds a 15% stake YoY. in Tamdeen Investment; Fatah Al Khair also owns a 25% stake • In 2008, Tamdeen Investment reported positive growth in Tamdeen Real Estate Company. Kuwait Portland Cement in only two revenue segments: subscription and portfolio owns 10% of the investment company, and the balance of the management fees (these grew by 363% and 32%, equity is publicly traded. respectively, and reached KD 1.3 million in total). The company’s main focus areas are the following: • Net-net, in FY2008, total revenue showed negative growth • Managing financial investment transactions related to of 43% compared to 2007. securities, including the acquisition and sale of private • During 9M2009, investment companies continued to sector shares and bonds. bear the brunt of the financial crisis. However, Tamdeen • Providing consultation services to clients on asset Investment witnessed a 13% YoY increase in revenues. utilization, as well as consultation and advisory services on • During 9M2009, the company recorded KD 5 million in mergers and acquisitions (M&A) and business succession gain from sales of investments in associate companies that to corporate clients. made up 49% of total revenue; Tamdeen Investment did • Delivering investment and portfolio management services. not record any such gains in 9M2008. During 3Q2009, The company holds many direct investments. Its primary the company sold its entire stake in Barwat Al Doha Real investments are in Ahli United Bank and Kuwait National Estate Company for a profit of roughly KD 4.6 million. Cinema Company. During 2Q2009, the company sold its entire stake in British Industries Printing and Packaging Company to an Tamdeen Investment had an asset base of around KD 141 associate company, which resulted in a net profit of KD million and shareholders’ equity amounting to around KD 80 383,171. million as of September 30, 2009. The company’s stock is relatively illiquid, with a 12-month average daily trading value • During 9M2009, Tamdeen Investment’s share of of KD 96,789. associates recorded a 21% increase to represent 10% of total revenues.
Financial Statement Analysis • Gains from AFS investments declined 42% YoY to make up 37% of total revenues in 9M2009. Income Statement • Subscription and portfolio management fees declined by 89% YoY in 9M2009. • The unimpressive 2008 financial results for Tamdeen Investment are a consequence of the current financial • Since Tamdeen Investment deals with financial instruments crisis and the resulting poor performance of the company’s in USD and Qatari Riyals, the company is exposed to portfolios. Since the company’s business operations foreign exchange risk. The company reported a foreign revolve around market investments, Tamdeen Investment’s exchange loss of KD 90,640 in 2008, versus a foreign earnings are expected to be volatile. exchange profit of KD 386,643 in 2007 (these figures were reported as part of other revenue in 2007 and 2008). • Revenue dropped by 83% year on year (YoY) in 3Q2008, In 9M2009, the company reported a foreign exchange loss and turned negative in 4Q2008 due to losses reported by of KD 79,711, versus a gain of KD 11,046 in 9M2008. the group’s associate companies. The share of profits from associates turned negative in 2008 due to the performance of Tamdeen Holding, which reported a loss of KD 6 million. (Tamdeen Holding is a 25%-owned subsidiary that deals with acquiring, establishing, managing, developing, and
nbkcapital.com | 111 Tamdeen Investment Company (Tamdeen) Kuwait in Focus - January 2010
• Total expenses and other charges recorded a 10% increase • The group manages portfolios for clients; the value of in 2008 and reached KD 6.6 million, with finance costs these portfolios amounted to around KD 134.5 million as being the major contributor (77%). In 9M2009, total of September 30, 2009. expenses and other charges increased by 59% and reached approximately KD 7.8 million. The rising expenses are Financial Statements attributable to the impairment of investment in 9M2009, which were roughly KD 4 million, accounting for 51% of Income Statement (KD '000) 2007 2008 9M2008 9M2009 total expenses. Of this impairment, KD 2.5 million was Gains from AFS investments 11,107 7,766 6,606 3,803 Gains from sale of inv. properties 2,499 - - attributable to a decrease in the value of investment in Gains from sale of inv. in ass. co. - - - 4,984 associates, while the remaining charge came from a Share from associates’ results 210 (986) 844 1,023 Subscription fees 239 1,107 1,050 43 decrease in the value of AFS investments. Loss/gain from FX 11 (80) Portfolio management fees 170 225 163 93 • On the back of negative growth in operating profit, Tamdeen Other revenue 500 300 320 336 Investment’s net profit declined by 79% during 2008, with Total revenue 14,726 8,411 8,994 10,202 losses incurred in the last two quarters of the year. For General and administrative costs (331) (632) (814) (903) Staff costs (555) (838) - - 9M2009, net income declined by 41% to KD 2.4 million. Finance costs (4,801) (5,080) (3,955) (2,811) The net profit margin declined from 46% in 9M2008 to Impairment of Investment - - - (3,972) Other Expenses (327) (43) (131) (85) 24% in 9M2009. Tot. expenses and other charges (6,014) (6,593) (4,899) (7,771) Net profit for the year 8,712 1,818 4,095 2,431
Balance Sheet Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Assets • The asset base of the company decreased by 10% in the Cash and cash equivalents 55 633 4,413 6,458 Receivables & other debit bal. 1,242 572 1,545 20,791 first nine months of 2009. As of September 30, 2009, Available for sale investments 146,782 192,817 103,960 80,552 AFS investments accounted for 57% of total group assets Investments in associates 1,528 44,828 45,421 31,947 Land & R/E under dev. 14,895 817 894 918 and 100% of total equity. Properties and equipment 19 30 205 181 Investment properties 7,053 • Of the AFS investments, quoted investments in foreign Projects under progress 750 Total Assets 172,323 239,695 156,438 140,848 securities account for roughly 86% as of September 30, Liabilities 2009. These investments are in equities, which tend to Payables and other credit bal. 7,536 5,075 7,120 3,265 be volatile. This increases the risk associated with these Loans and bank facilities 31,726 65,376 65,410 57,280 End of service indemnity 25 60 48 68 securities. Total Liabilities 39,287 70,511 72,578 60,613 - - • On the liabilities side, the company’s loan book declined Equity Share capital 28,350 28,350 31,185 31,185 by 14% by September 30, 2009, compared to September Share premium 10,000 10,000 10,000 10,000 30, 2008; this loan book currently accounts for 95% of Changes in fair value reserve 88,679 119,892 33,426 26,152 Retained earnings 5,159 9,592 8,388 10,819 Tamdeen Investment’s total liabilities. It is important to Other Liabilities 848 1,350 861 2,079 note that Tamdeen Investment had only short-term debt Total Equity 133,036 169,184 83,860 80,235 - (1) (short-term loans and banking facilities), representing Total Liabilities and Equity 172,323 239,695 156,438 140,848 41% of total assets as of September 30, 2009. (In 2007, Sources: Company’s financial statements and NBK Capital the company’s long-term debt accounted for 40% of total debt, but this debt was retired in 1Q2008.) Between September 30, 2008, and September 30, 2009, short- term loans were reduced by around 18%. However, the company increased its bank facilities by 8% during the same time period. These loans and bank facilities carry floating interest rates and are secured against AFS investments. With more than KD 57 million in short-term debt and lackluster earnings from core operations, the company may face a reduced ability to repay the debt.
• In 2008, equity fell by 50% as a result of a 72% decline in the fair value reserve. As of September 30, 2009, the shareholders'-equity-to-total-assets ratio was 57%.
nbkcapital.com | 112 Companies in Focus Kuwait in Focus - January 2010
TAMDEEN GROUP
Key Data Highlights
General Liquidity • Tamdeen Real Estate Company (Tamdeen Group) specializes KSE Code TAM.KSE 52-week avg. volume 439,404 in developing, trading, and managing commercial and Reuters Code TAMK.KW 52-week avg. value (KD) 126,224 industrial real estate properties, including retail centers, Price (KD) Price Performance office properties, and hotels―locally and internationally. Closing Price 0.280 YTD -6.7% 52-week High/Low 0.340 / 0.260 1-Year Period -5.1% • The company operates through several subsidiaries, Market Capitalization Outstanding Shares namely Tamdeen Shopping Centers Company, Tamdeen Million KD 104.47 Latest (million) 373.12 Holding Company, Tamdeen Investment Company, and Ownership Structure Tamdeen Entertainment. Closely Held: 73.76% Public: 26.24%
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital • Tamdeen Group has several major projects that are currently under construction. We feel that upcoming projects, in Kuwait and in other countries in the Gulf Corporation Stock Performance Council (GCC), will act as income boosters and provide the company with further diversification―region-wise and 0.350 7.0 project-wise. 52-week High: KD 0.340 6.0 • Total recurring income (which includes operational income, fees from managing real estate and investment portfolios, 5.0 0.300 and other operating income) for the company decreased
4.0 by 6% in 9M2009 to KD 9 million, compared to KD 9.6 million in 9M2008. This decrease is entirely due to the
3.0 Millions Price (KD) Price decrease in operational income. 0.250 52-week Low: KD 0.260 2.0
1.0
0.200 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Volume Close
Sources: Reuters and NBK Capital
Analyst
Mariam Al-Bahar T. +965 2259 5138 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Operating Income (% of Total Income) 34% 46% 31% 31% 50% Total Recurring Income (% of Total Income) 40% 54% 35% 32% 56% Investment Income (% of Total Income) 34% 34% 44% 24% 16%
EBITDA (KD million) 1.67 3.39 2.69 -1.28 2.19 EBITDA Interest Cover (x) 0.4 0.7 0.3 -0.1 0.3 Net Debt-to-Equity (x) 0.6 0.7 0.8 1.7 2.1
ROAA (%) 3% 1% 3% 3% 0% Adjusted ROAA (%) -3% -2% -4% 10% -1%
Investment Book (% of Total Assets) 41% 47% 46% 27% 21% Investment Book (% of Total Equity) 83% 106% 102% 103% 93%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 113 Tamdeen Group Kuwait in Focus - January 2010
Overview Al Kout
The shopping center offers a mix of international, regional, and Tamdeen Real Estate Company is one of Kuwait’s leading real local brands complemented by a food court and a yacht club. estate companies. Originally established in 1982, the company The shopping center is acclaimed due to its design and has was recently rebranded as Tamdeen Group. The company is won several accolades. engaged in real estate investment and development activities in and outside Kuwait. Tamdeen Group specializes in developing, Al Manshar Towers and Complex trading, and managing commercial and industrial real estate Just a short walk from Al Kout, Al Manshar Towers and Complex properties, including retail centers, office properties, and is a mixed-use commercial and residential real estate project. hotels. The company sold its flagship property Al-Fanar Mall in It features a shopping mall, food court, four residential towers, 2008 and recently completed the 360° mall. Tamdeen Group an office tower, and the five-star Al Manshar Rotana Hotel. also manages third-party properties, establishes and manages real estate investment funds, conducts real estate studies, Al Manshar Rotana Hotel provides consultancy services, and invests in companies with This five-star hotel with 200 rooms spread across 18 floors is similar activities. Tamdeen Group operates through several located to the west of the Al Manshar Complex and Towers. subsidiaries, namely Tamdeen Shopping Centers Company, The hotel was completed in April 2007. Tamdeen Holding Company, Tamdeen Investment Company, and Tamdeen Entertainment. 360° Mall
360° Mall is a shopping mall destination developed at the Shareholder Structure intersection of King Faisal Highway and 6th Ring Road. The Name Type Country Holding mall is strategically located in a busy and rapidly growing Fateh Al Khair Group Holding Company Corporate Kuwait 25% Al Salemiya United Real Estate Company Corporate Kuwait 20% residential area and has a unique circular design. The mall KIPCO Asset Management Company Corporate Kuwait 15% Mashaal Jassem Al Marzouk Private Kuwait 12% has a shopping area of more than 82,000 sq. m. and is the Public - - 28% second-largest mall in Kuwait after the Avenues. The mall was Foreign Ownership Structure completed in June 2009. Open to GCC Investors 100% Open to Foreign Investors 100% Major upcoming projects Sources: Company’s financial statements, Zawya, and NBK Capital
Mall Of Kuwait
Subsidiaries The Mall of Kuwait will be located between the two highways
Name Country Holding linking Kuwait City to the south in the Sabahiya area. The Tamdeen Housing Company [80% Directly, 20% via Tamdeen Holding Company Kuwait 100.00% mall will have a massive retail area of 150,000 sq. m., and Tamdeen Investment Company Kuwait 51.37% Manshar Real Estate Company Kuwait 50.00% will have a hypermarket, five anchor stores, and entertainment Tamdeen Entertainment Company Kuwait 45.00% facilities. However, sources have led us to believe that the Tamdeen Holding Company Kuwait 43.00% Fu-com Central Markets Company Kuwait 33.00% project may be delayed or even cancelled. Tamdeen Shopping Center Development Company Kuwait 30.00% Ajmal Holding Company Bahrain 29.00% Baraya Beyoo Leasing and Finance Company Kuwait 21.00%
Sources: Company’s financial statements, Zawya, and NBK Capital The Baraya project is a joint venture of Tamdeen Group, Imtiaz Investment Company, and Barwa Real Estate Company from Qatar. This mixed-use project, located in the heart of Doha, Major Projects is part of the renovation of the downtown. The project will incorporate a premium shopping mall with 70,000 sq. m. of Major completed projects leasable area, a five-star business hotel, and a 25-storey class A office tower with a leasable area of around 30,000 sq. m. Madinat Al Fahaheel Sarab Al Areen Madinat Al Fahaheel is a mixed-use development project Sarab Al Areen is located in the Al Areen development in the spread over 300,000 sq. m. in Fahaheel. The project has south of the Kingdom of Bahrain. Sarab Al Areen will offer the two main components: Al Kout and Al Manshar Towers and only retail component in this prestigious development, with an Complex. estimated gross leasable area of 175,000 sq. m.
nbkcapital.com | 114 Tamdeen Group Kuwait in Focus - January 2010
Financial Statement Analysis • The return on average asset (ROAA) for the company was 0.4% in 9M2009, compared to 3.1% in 9M2008.
Income Statement • Adjusted net profit (excluding non-core real estate income and investment gains/losses) decreased significantly from • Total recurring income (which includes operational income, a profit of KD 27.1 million in 9M2008 to a loss ofKD fees from managing real estate and investment portfolios, 2.9 million in 9M2009. However, as mentioned earlier, the and other operating income) for the company decreased impressive adjusted net profit in 2008 is entirely due to by 6% in 9M2009 to KD 9 million, compared to KD 9.6 the profit recorded from the sale of the Al-Fanar complex. million in 9M2008. This decrease is entirely due to the decrease in operational income (mainly rental income). Balance Sheet • Operational income for the company decreased by 10% in 9M2009 to KD 8.1 million, compared to KD 9 million • The company had a net debt-to-equity ratio of 2.0x at the in 9M2008. In 2008, operational income reached KD end of 9M2009, compared to a five-year average of 0.9x 11.7 million, which was flat compared to 2007. However, for the period 2004–2008. The significant increase in operational income increased by a significant 40.9% to total debt and sale proceeds from the Al-Fanar complex KD 11.63 million in 2007, compared to the same period sale was used to fund the 360° mall and other projects a year before, due mainly to the completion of the Madinat that are currently in progress. Al Fahaheel project. • The company’s equity and total debt stand at KD 104 • Operational income accounted for 50% of the total income million and KD 221 million, respectively, as of September in 9M2009, compared to the five-year average of 35% for 30, 2009. We would like to highlight that this debt was the period 2004–2008. raised against the mortgaging of investment properties, available-for-sale (AFS) investments, and projects in • Operational expenses decreased by 38% in 9M2009 to KD progress. 2.4 million, compared to KD 3.8 million in 9M2008. • Tamdeen Group holds a 51.34% stake in Tamdeen • A closer look at the real estate–related income shows that Investment Company. Hence, all reported financials for the the company reported losses at the EBITDA level in 2008. Tamdeen Group are consolidated. The total debt of KD 221 The company reported negative EBITDA of KD 1.3 million million is not entirely due to the parent company. Tamdeen for 2008, mainly due to the increase in operating expenses. Investment Company, which had KD 57.3 million of debt However, Tamdeen Group reported positive EBITDA of KD outstanding as of September 30, 2009, accounted for 2.2 million in 9M2009. 13% of the total debt for Tamdeen Group. • Net profit decreased significantly from KD 35.4 million in • The company’s investment book (both AFS and held for 9M2008 to KD 2 million in 9M2009. We would like to trading) stood at KD 97 million at the end of September highlight that the 9M2008 net profit was influenced by the 2009, accounting for 93% of the shareholders’ equity and gain from the sale of the Al-Fanar complex. The company 21% of the total assets. Of the KD 97 million, 43% is sold the Al-Fanar complex for KD 55 million, resulting in a due to the consolidation of Tamdeen Investment Company gain of KD 36.2 million in 2008. (investment portfolio of KD 80.55 million as of September • Though boosted by the Al-Fanar sale, the net profit for 2009). 2008 was significantly offset by impairment in the value of investment properties (the waterfront in Fahaheel) worth KD 18.7 million. As a result, the net profit for 2008 increased by 18% in 2008 to KD 13.6 million, compared to KD 11.6 million in 2007. This impairment was was due to the significant increase in the rental charges of the project that was officially claimed by the Ministry of Finance.
• Investment income decreased by 67% to KD 2.5 million in 9M2009, compared to KD 7.7 million in 9M2008. As a result, investment income as a percentage of total income decreased to 16% in 9M2009 compared to the five-year average of 37% for the period 2004–2008.
nbkcapital.com | 115 Tamdeen Group Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Operational Income 11,625 11,676 8,990 8,119 Operational Expenses 4,511 5,655 3,827 2,382 Net Operating Income 7,114 6,021 5,163 5,737
Other Operating Income 1,302 422 433 784 Fees from Management of RE & Inv. Portfolios 136 225 163 93 Profit from Sale of Share in a Subsidiary 753 0 0 383 Profit form Sale of Investment Properties 3,726 36,227 36,227 0 Impairment in Value of Investment Properties 0 -18,741 0 0 Profit from Sale of Inv. in Lands & RE HFT 0 39 39 0 Sale of Land included in Projects in Progress 1,850 0 0 0 Net Investments Income 16,207 8,951 7,665 2,535 Share of (loss)/Profit in associated companies 482 -3,508 581 1,920 Impairment in Value of Inv.in an associated Co. 0 0 0 -2,489 Other Income 729 2,748 2,062 2,445 Foreign Currency Exchange (loss)/Profit 351 -90 1 -70 Expenses and other Charges Staff Costs 3,057 3,794 2,785 1,988 General and Administrative Expenses 2,805 4,157 2,937 2,438 Finance Costs 10,026 10,028 8,172 6,458 Profit for the year before KFAS, NLST & Zakat 16,762 14,315 38,440 454
Contribution to KFAS -139 -143 -359 -33 Contribution to Zakat -9 -135 -432 -93 Provision for NLST -405 -328 -1,061 -137 Board of Directors' remuneration -170 -243 0 0 Profit for the year Shareholders of the Parent Company 11,562 13,593 35,427 2,018 Minority interest 4,477 -127 1,161 -1,827 Net Profit 16,039 13,466 36,588 191
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Assets Non-current assets Available-for-sale investments 163,461 197,463 119,065 95,898 Investments in associated companies 7,073 51,113 52,668 59,579 Investments in unconsolidated subsidairy Co. 0 0 9,125 9,125 Investment properties 90,088 86,759 48,333 47,606 Projects in progress 69,523 68,450 179,671 210,201 Machines and equipment 215 696 802 1,413 Total non-current assets 330,360 404,481 409,664 423,822
Current Assets Cash and bank balances 1,272 1,595 8,535 6,409 Short-term deposits 6,604 4,347 11,776 10,726 Inv. at fair value through statement of income 17 18 204 994 Accounts receivable and other debit balances 4,092 7,120 10,352 8,238 Inv. in lands and real estate held for trading 8,600 14,522 4,813 12,031 Total current assets 20,585 27,602 35,680 38,398 Total assets 350,945 432,083 445,344 462,220
Liabilities and Shareholders' Equity Total equity - Parent company 154,523 193,157 116,049 104,053 Minority interest 57,911 63,908 102,956 101,487 Total equity 212,434 257,065 219,005 205,540
Liabilities non-current laiabilities Term loans 83,807 85,600 119,250 158,150 Bonds Issued 19,792 19,848 0 0 Refundable rental deposits 2,051 2,077 3,697 4,049 Provision for end of service indemnity 445 402 470 522 Total non-current liabilities 106,095 107,927 123,417 162,721
Current liabilities Bank facilities 4,928 4,172 14,221 15,280 Accounts payable and other credit balances 21,338 18,029 20,526 31,164 Current portion of term loans 6,150 44,890 68,175 47,515 Total current liabilities 32,416 67,091 102,922 93,959 Total liabilities 138,511 175,018 226,339 256,680 Total equity and liabilities 350,945 432,083 445,344 462,220
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 116 Companies in Focus Kuwait in Focus - January 2010
The Transport and Warehousing Group (TWG)
Key Data Highlights
General Liquidity • In 9M2009, both the travel and tourism business line and KSE Code TRANSPORT 52-week avg. volume 20,392 the transportation business line witnessed a decline in Reuters Code TTGC.KW 52-week avg. value KD 13,004 revenue; the revenue of the travel and tourism business Price (KD) Price Performance line decreased by 12%, and that of the transport business Closing Price 0.700 YTD 0.0% 52-week High/Low 0.730 / 0.570 1-Year Period 0.0% declined by 5%. Total revenues, however, grew 8% year on year (YoY) to KD 9.6 million, given the top-line contribution Market Capitalization Outstanding Shares Million KD 68.79 Latest (million) 98.27 of KD 1.2 million from the warehousing and real estate
Ownership Structure segment (details below). Closely Held: 90.52% Public: 9.48% • The 9M2009 EBITDA increased by 5% and reached KD 3 Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital million, compared to KD 2.9 million in 9M2008. On the positive side, the increase in the cost of sales did not keep Stock Performance pace with revenue growth, increasing 3% YoY. However, general and administrative (G&A) expenses increased 32%
0.800 0.08 in 9M2009, depressing margins. Depreciation charges
52-week High: KD 0.730 0.750 increased 25% from 9M2008. Net-net, EBITDA margins 0.07 declined from 32.4% in 9M2008 to 31.6% in 9M2009. 0.700 0.06 0.650 • The 9M2009 results witnessed a sharp incline of 75% in 0.05 0.600 net income, mainly due to the gain on the acquisition of
52-week Low: KD 0.570 0.550 0.04 the warehousing business, which resulted in a one-off gain
Millions in 1Q2009 amounting to KD 2.7 million. If we exclude Price (KD) Price 0.500 0.03 this one-off event, the company’s net profit declined by 0.450 0.02 34% in 9M2009. 0.400
0.01 • TWG had a total debt-to-equity ratio of 0.15x as of 0.350 September 30, 2009. The company is well positioned to 0.300 0 Jan-09 Mar-09 May-09 Jun-09 Aug-09 service its debt through its high liquidity and strong cash- Volume Close generating capabilities.
Sources: Zawya and NBK Capital
Analysts
Lisa Fernandes May Zuaiter T. +971 4 365 2856 T. +965 2259 5597 E. [email protected] E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Gross Profit Margin (%) 60.4% 48.8% 47.7% 45.9% 47.9% Operating Profit Margin (%) 37.8% 23.2% 17.4% 16.3% 17.2% Net Profit Margin (%) 36.9% 42.6% 30.0% 24.6% 16.8%
ROA 66.1% 11.3% 8.5% 9.7% N/A ROE 74.2% 14.3% 10.2% 11.5% N/A
Current Ratio (X) 9.42 3.80 5.70 4.76 1.80 Debt to Assets (X) 0.05 0.14 0.10 0.05 0.12 Debt to Equity (X) 0.06 0.18 0.12 0.06 0.15
Receivables Turnover Ratio 2.08 1.90 1.58 2.00 N/A Inventory Turnover Ratio 26.93 20.56 18.44 15.01 N/A Payables Turnover ratio 0.59 2.29 2.49 2.55 N/A
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 117 The Transport and Warehousing Group (TWG) Kuwait in Focus - January 2010
Overview and administrative (G&A) expenses increased by 32% in 9M2009, depressing margins. Depreciation charges The Transport and Warehousing Group Co KSC (TWG) is a increased by 25% from 9M2008. Net-net, the EBITDA public limited company listed on the Kuwait Stock Exchange margin declined from 32.4% in 9M2008 to 31.6% in (KSE) with a paid-up capital of KD 9.83 million. TWG is 9M2009. In 2008, EBITDA declined by 4% to stand at KD engaged in a variety of activities related to land, sea, and air 3.4 million; the EBITDA margin dropped from 29.9% in transport through the company’s four fully owned subsidiaries: 2007 to around 28.6% in 2008. These 2008 results can be attributed to the fact that the growth of the company’s • Transport and Warehousing Real Estate Group Company cost of sales has outpaced the growth in revenues. • Boodai Aviation Company • The 9M2009 results witnessed a sharp increase of 75% • Boodai Aviation Agencies Company in net income, mainly due to the gain on the acquisition of the warehousing business, which resulted in a one- • Abar Oilfield Services Company off gain in 1Q2009 amounting to KD 2.7 million. This “unusual” accounting gain arose as the purchase price of Latest News the warehousing business was determined to be lower than the provisional fair value of the net assets acquired. If we • January 2009: TWG’s wholly owned subsidiary, Transport exclude this one-off event, the company’s net profit would and Warehousing Real Estate Group, acquired 100% of have declined by 34% in 9M2009. In 2008, net profit the net assets of the real estate division of Al Masar United declined by 18% to reach KD 2.9 million; this was mainly Company for a cash consideration of KD 9.5 million. due to the decline in other income by 32%. Other income is mainly composed of interest income, which declined by Financial Statement Analysis 40% in 2008.
Income Statement Balance Sheet
• In 9M2009, both the travel and tourism business line and • Liquidity concerns are not a source of worry for this the transportation business line witnessed a decline in company; TWG’s debt-to-equity ratio stood at 0.15x revenue; the revenue of the travel and tourism business at the end of September 30, 2009 with cash and cash line decreased by 12%, and that of the transport business equivalents amounting to roughly KD 2.3 million. This was declined by 5%. Total revenues, however, grew by 8% to a considerable drop since December 31, 2008, when cash reach KD 9.6 million, due to the top-line contribution and cash equivalents stood at KD 15.4 million. This drop in of KD 1.2 million from the warehousing and real estate cash occurred because the company spent a considerable segment. In January 2009, TWG’s wholly owned subsidiary, portion of this cash to pay for acquiring the warehousing Transport and Warehousing Real Estate Group, acquired business. 100% of the net assets of the real estate division of Al • A study was conducted in our monthly publication, MENA Masar United. As a result, TWG has an additional source in Focus, dated December 4, 2008, that examined the of revenue generated from the warehousing and real estate degree of exposure that companies in Kuwait have to segment in 2009. In 9M2009, this new revenue stream investments. The study also examined the solvency of these accounted for 12% of the total revenue. In 2008, TWG’s companies in the short-term and their ability to meet the revenue grew by just 0.4%, compared to the increase of debt obligations from their operations. Per the December almost 7% seen in 2007. This was mainly due to the 2008 study, TWG fell under the category of companies slowdown in the travel and tourism business line, which with good solvency and low investment exposure; as of decreased by 40% in 2008. With the global financial crisis, September 30, 2009, the company had no investment this business line has faced difficulties. A closer look at exposure and a favorable quick ratio of 1.7. the total revenues reveals that the transport business is still the main contributor to total revenues (88% during 2008); this line item grew by roughly 11% in 2008.
• The 9M2009 EBITDA increased by 5% and reached KD 3 million compared to KD 2.9 million in 9M2008. On the positive side, the increase in cost of sales (+3%) was lower than revenue growth (+8%). However, general
nbkcapital.com | 118 The Transport and Warehousing Group (TWG) Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Revenue 11,861 11,903 8,942 9,617 Cost of Goods sold 6,203 6,443 4,858 5,011 Gross Profit 5,658 5,460 4,084 4,605 G & A expenses 2,115 2,056 1,191 1,571 EBITDA 3,542 3,404 2,893 3,034 Depreciation 1,481 1,462 1,104 1,376 Operating Income 2,062 1,942 1,789 1,658 Others 1,637 1,136 793 235 Profit before Tax 3,699 3,078 2,582 1,893 Taxes 143 150 125 274 Profit from Ordinary Activities 3,556 2,928 2,457 1,620 Gain on purchase of warehousing bus. 2,676 Profit for the Year 3,556 2,928 2,457 4,295
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Cash and cash equivalents 1,890 13,525 15,382 2,271 Trade and other receivables 2,999 3,935 3,215 4,048 Due to related parties 11,906 12,185 730 1,095 Inventories 276 336 429 518 Current Assets 17,071 29,982 19,756 7,931
Fixed-assets-PP&E 13,870 11,886 10,305 25,923 Due from related party 10,995 Total Non Current Assets 24,865 11,886 10,305 25,923 Investment in associate 45 Total Assets 41,936 41,868 30,061 33,899
Current portion of loan 2,006 2,767 1,625 1,680 Trade and other payables 2,487 2,493 2,526 2,724 Current Liabilities 4,492 5,260 4,151 4,404
Non current portion of loan 4,066 1,387 - 2,220 Post employment benefits 425 499 543 561 Non Current Liabilities 4,490 1,886 543 2,781 Total Liabilities 8,983 7,146 4,694 7,185
Share Capital 8,933 9,827 9,827 9,827 Legal reserve 4,467 4,837 5,144 5,144 General Reserve 4,467 4,837 5,144 5,144 Retained Earnings 15,087 15,223 5,251 6,598 Total Equity 32,953 34,722 25,367 26,714
Total Liabilities and Equity 41,936 41,868 30,061 33,899
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 119 Companies in Focus Kuwait in Focus - January 2010
United Real Estate Company
Key Data Highlights
General Liquidity • United Real Estate Company (United Real Estate) is KSE Code URC.KSE 52-week avg. volume 1,153,021 one of the premier real estate companies in Kuwait. The Reuters Code UREK.KW 52-week avg. value (KD) 103,726 company is a real estate developer in Kuwait with a major Price (KD) Price Performance focus on hospitality, commercial, and retail properties. Closing Price 0.081 YTD 1.3% 52-week High/Low 0.106 / 0.057 1-Year Period 14.1% The company’s real estate portfolio includes commercial complexes, hotels, resorts, residential buildings, shopping Market Capitalization Outstanding Shares Million KD 63.83 Latest (million) 787.97 malls, high-rise office buildings as well as mixed-use
Ownership Structure projects. Closely Held: 40.20% Public: 59.80% • United Real Estate has major projects across business Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital segments and geographic locations. We feel this diversification not only lends strength to the business Stock Performance model but also insulates the company from downturns in any particular region or country.
0.120 14.0 • The company’s land bank is worth highlighting as it has
52-week High: KD 0.106 12.0 a book cost of KD 77.6 million and accounts for 24% of 0.100 total assets according to the 9M2009 financials. We feel 10.0 this is significant when compared to the current market
0.080 8.0 capitalization of the company, which stood at KD 63.8 million as of December 21, 2009.
6.0 Millions Price (KD) Price 0.060 • The company’s net profit decreased significantly from a 52-week Low: KD 0.057 4.0 profit of KD 7.4 million in 9M2008 to KD 1.9 million in 0.040 9M2009. This decrease was mainly due to the decline in 2.0 non-operating income and the increase in total expenses.
0.020 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 • We feel it is worth highlighting that the company’s Volume Close investment book stood at KD 27.8 million as of 9M2009, Sources: Reuters and NBK Capital accounting for 18% of the shareholders’ equity and 9% of the total assets. The investment book as a percentage of Analyst equity is an area of concern.
Mariam Al-Bahar T. +965 2259 5138 E. [email protected]
Key Ratios
2005 2006 2007 2008 9M2009
Rental Income (% of Total Income) 56.2% 39.6% 43.4% 57.1% 59.9% Non–Operating Income (% of Total Income) 33.6% 42.1% 31.7% 17.3% -13.0% Non–Operating Income (% of Net Profit) 59.8% 91.7% 84.3% 66.3% -120.0%
EBITDA (KD million) 9.7 12.1 10.6 9.8 8.7 EBITDA Interest Cover (x) 4.1 2.2 1.8 2.0 2.7 Net Debt-to-Equity (x) 25.0% 35.1% 71.4% 51.3% 53.3%
ROAA 7.0% 7.0% 4.7% 2.2% 0.2% Adjusted ROAA (%) 9.7% 14.6% 11.4% 7.5% 7.1% ROAE (%) 13.0% 13.6% 9.5% 4.8% 0.4%
Investment in Associates (% of Total Assets) 13% 30% 27% 21% 22% Lands for Development (% of Total Assets) 8% 0% 6% 24% 24% Investment Book (% of Total Assets) 1.8% 6.0% 8.1% 9.1% 8.6% Investment Book (% of Total Equity) 3.6% 11.3% 17.5% 20.4% 19.4%
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 120 United Real Estate Company Kuwait in Focus - January 2010
Overview Latest News
Originally founded in 1973, United Real Estate Company • October 14, 2009: Abdali Investment and Development is one of the premier real estate companies in Kuwait, and reported that the Abdali Urban Regeneration Project is part of KIPCO Group. A real estate developer in Kuwait, will open in 2010. The entire project will consist of 12 the company focuses on hospitality, commercial, and retail buildings, including hotels, retail outlets, restaurants, properties. The company develops properties and rents and apartments, and offices. United Real Estate is a part of manages third-party properties. The company studies the the joint venture responsible for the development of the location and economic activity of the targeted property, and project. then outsources the construction. The company has major projects across various business segments and geographic Financial Statement Analysis locations. Income Statement Shareholder Structure
Name Type Country Holding • United Real Estate reported total real-estate-related United Gulf Bank Corporate Bahrain 28.91% income of KD 19.9 million in 9M2009, up 42% compared Kuwait Projects Company (via Kuwait United Consultancy Company) Corporate Kuwait 11.29% Public - 59.80% with the same period a year before. The growth was mainly Foreign Ownership Structure due to the sale of properties held for trading (growing by Open to GCC Investors 100.00% Open to Foreign Investors 100.00% more than five times) to KD 5.1 million during 9M2009 compared to the same period last year. Sources: Zawya and NBK Capital • Growth in rental income increased by 7% YoY, amounting to KD 10.6 million in 9M2009 compared to KD 9.9 million Company Projects in 9M2008. This growth is almost double compared to that of the historical growth rates; whereby, the company’s rental income increased at a five-year CAGR of 3.9% for Existing Projects the period from 2003 to 2008. As a result, rental income as a percentage of total revenue increased slightly, from Project Location Use Major completed projects - Kuwait 53% in 2003 to 57% in 2008. Al-Shaheed Tower Sharq, Kuwait City Office Building
City Tower Sharq, Kuwait City Office Building • Non-operating income decreased significantly from a Al Mutahida Complex Kuwait City Offices and Shopping Mall surplus of KD 6 million in 9M2008 to a loss of KD 2.3 Al Maseel Complex Kuwait City Offices and Shopping Mall million in 9M2009. This decline was mainly due to foreign Saleh Shehab Resort Al Jela'aa Chalet Resort
Marina World Salmiya Shopping Mall and Hotel exchange losses that amounted to KD 3.5 million.
Major completed international projects
Sheraton Helioplis Egypt Five-star Hotel • Total expenses increased by 26% to KD 15.8 million in Bhamdoun Hotel and Commercial Center Bhamdoun, Lebanon Four-star Hotel and Commercial Center 9M2009 compared to KD 12.5 million in 9M2008 due to Rawcheh Hotel Rawcheh in Beirut, Lebanon Five-star Hotel the inclusion of the carrying value of the sold properties. Sources: Company’s annual report and NBK Capital If we are to exclude this value, total expenses dropped by 9.5% in 9M2009 from 9M2008.
Major Upcoming Projects • The company’s net profit decreased significantly from KD 7.4 million in 9M2008 to KD 1.9 million in 9M2009. This • United Tower decrease was mainly due to the decline in non-operating This office tower is located close to the Al-Shaheed and income as well as the inclusion of the carrying value of Madina buildings in the Sharq area of Kuwait City. The tower properties sold. is designed on a land space of 4,852 square meters, and construction is expected to be completed in 2010.
• Regional expansion in Egypt, Jordan, and Qatar
nbkcapital.com | 121 United Real Estate Company Kuwait in Focus - January 2010
• We observe that the return on average assets (ROAA) Financial Statements for the company decreased significantly from 8.5% in 2004 to 2.2% in 2008. To calculate the return on core Income Statement (KD' 000) 2007 2008 9M2008 9M2009 real estate assets, we adjusted the ROAA by excluding Rental Income 11,811 13,380 9,908 10,599 Net Hotel Opearting Income 1,426 1,670 1,227 981 investment gains/losses and change in fair value from the Sale of properties held for trading 1,400 895 872 5,432 net profit and excluding the available-for-sale investment Other Operating Income 1,907 2,785 1,817 2,897 portfolio from the total assets. The adjusted ROAA for the Share of results of associates 2,040 646 178 29 Real estate related income 18,583 19,376 14,002 19,938 real estate operations decreased from 11.4% in 2007 to Change in fair value of inv.properties 846 468 0 0 7.5% in 2008. Investment income 3,200 3,894 3,634 1,259 Other non-operating income 1,006 782 782 0 Foreign exchange (loss) gain 3,555 -1,092 1,550 -3,489 Balance Sheet Total Non-operating Income 8,607 4,052 5,966 -2,230 Total Income 27,190 23,428 19,967 17,708 Total Expenses 16,617 16,949 12,522 15,776 • The company’s total assets stood at KD 316.8 million in Net Profit 10,215 6,114 7,369 1,855
2008, growing by 30% compared to 2007 (9M2009 KD Balance Sheet (KD' 000) 2006 2007 2008 Sep-09
323.3 million). This was mainly due to the increase in Cash and cash equivalents 7,633 13,490 12,336 7,570 properties held for sale, land for development, investment Account receivable and prepayments 11,310 16,461 7,293 12,905 available for sale, and the increase in projects under Properties held for trading 127 10,904 10,413 5,291 Available for sale investments 11,547 19,628 28,925 27,845 development. Investment in associates 58,520 64,604 67,984 72,582 Lands for development 350 14,035 75,831 0 • Development land worth KD 61.27 million was acquired Projects under construction 0 498 9,559 0 in Syria, Qatar, Dubai, and Egypt for various projects in Investment properties 90,880 92,926 94,232 187,543 Property and equipment 12,377 10,911 10,237 9,534 2008, while an increase in unquoted securities was mainly Total assets 192,744 243,458 316,810 323,270 responsible for the increase in investments available for Accounts payable and accruals 16,236 14,544 66,024 71,613 43,586 93,429 85,174 83,910 sale. Interest bearing loans and borrowing Bonds 30,250 10,250 10,250 10,250 90,072 118,223 161,449 165,773 • The company holds land that appears at a value of KD 77.6 Total liabilities Share capital 54,191 59,610 78,797 78,797 million on the balance sheet according to the 9M2009 Share premium 3,770 3,770 14,351 14,351 financials. The land for development accounts for almost Treasury shares -4,096 -4,096 -4,630 -4,506 Statutary reserve 10,293 11,356 11,998 11,998 24% of the total assets and 49% of total shareholders’ Voluntary reserve 2,583 2,583 2,583 2,583 equity in 9M2009. Since the current market cap of United Treasury shares reserve 980 980 980 810 Cumulative changes in fair value 536 599 791 224 Real Estate Company is KD 63.8 million as of December Foreign currency translation reserve -478 -1,198 -664 -662 21, 2009, we feel it is worth highlighting. Employees' share option reserve 26 48 57 57 Retained earnings 34,533 38,266 37,776 39,631 • Investment in associates increased significantly from Equity attributable to equity holders 102,338 111,917 142,039 143,283 KD 24.8 million in 2005 to KD 68 million in 2008 Minority interests 334 13,318 13,322 14,214 Equity 102,672 125,235 155,361 157,497 (9M2009, KD 72.6 million). As a result, the investment Total Liabilities and equity 192,744 243,458 316,810 323,270 in associates as a percentage of total assets increased Sources: Company’s financial statements and NBK Capital significantly from 13% in 2005 to 22% in 2008. We would like to highlight that, despite the increase, the contribution of the investment in associates to net profit is minimal.
• The company’s net debt-to-equity ratio stood at 0.53x in 9M2009, compared to the last four years' average of 0.69x from 2005 to 2008. United real estate's equity and total debt stood at KD 143.3 million and KD 83.9 million as of September 2009, respectively. A closer look at the debt serviceability shows that the EBITDA-interest cover increased from 2x in 2008 to 2.7x in 9M2009.
• The company’s investment book stood at KD 27.8 million as of 9M2009, accounting for 19% of shareholders’ equity and 9% of total assets. We feel the investment book as a percentage of equity is quite high.
nbkcapital.com | 122 Companies in Focus Kuwait in Focus - January 2010
YIACO Medical Company
Key Data Highlights
General Liquidity • YIACO Medical Company’s principal activities are focused KSE Code YIACO 52-week avg. volume 1,093,876 on the import and sale of medical, chemical, and dental Reuters Code YIAC.KW 52-week avg. value KD 184,937 products and equipment. Price (KD) Price Performance
Closing Price 0.156 YTD -3.7% • Kuwait Finance House owns 9.89% of YIACO, and Al 52-week High/Low 0.206 / 0.112 1-Year Period 20.0% Nakhil United Real Estate Company owns 5.54%, with the Market Capitalization Outstanding Shares balance held by the general public. Million KD 23.40 Latest (million) 150.00
Ownership Structure • The company has witnessed consistent growth in its revenue Closely Held: 15.43% Public: 84.57% stream; revenue grew at a CAGR of 13% between 2005
Price as of close on January 18, 2010 Sources: Reuters, Zawya, and NBK Capital and 2008. In 9M2009, the company’s pharmaceutical supply business accounted for 64% of total revenue.
Stock Performance • In 2008, the company recorded impairment charges of around KD 1.66 million due to impairments of accounts
0.220 16 receivables, an impairment of goodwill, and an impairment of investments in associates. 52-week High: KD 0.206 14 0.200 • YIACO’S board of directors did not pay any dividends for 12 FY2008. 0.180 10 • Given the nature of YIACO’s business, accounts receivable
0.160 8 52-week Low: KD 0.112 and inventories totaled approximately KD 35.6 million as Millions Price (KD) Price of September 30, 2009, and accounted for the majority 6 0.140 (66%) of total assets. 4 • As of September 30, 2009, the company continues to 0.120 2 have a low debt-to-shareholders’-equity ratio of 0.26x. The
0.100 0 net debt-to-shareholders'-equity ratio also remains low at Jan-09 Mar-09 Apr-09 Jun-09 Jul-09 Aug-09 Oct-09 Nov-09 Jan-10 0.18x. Volume Close
Sources: Zawya and NBK Capital
Analysts
Lisa Fernandes May Zuaiter T. +971 4 365 2856 T. +965 2259 5597 E. [email protected] E. [email protected] Key Ratios
2005 2006 2007 2008 9M2009
Gross Profit Margin (%) 20.5% 25.1% 24.9% 27.2% 23.9% Operating Profit Margin (%) 2.6% 5.1% 4.8% 5.6% 5.1% Net Profit Margin (%) 3.8% 5.3% 4.7% 1.4% 4.4%
ROA 3.1% 5.4% 5.0% 1.6% N/A ROE 7.5% 11.4% 10.3% 3.4% N/A
Current Ratio (X) 1.12 1.35 1.35 1.32 1.38 Debt to Assets (X) 0.08 0.05 0.01 0.05 0.12 Debt to Equity (X) 0.20 0.10 0.02 0.10 0.26 Investment to Equity 49.3% 35.7% 34.6% 31.3% 29.2%
Receivables Turnover Ratio 2.82 2.04 2.33 2.46 N/A Inventory Turnover Ratio 2.85 4.13 3.10 2.42 N/A Payables Turnover Ratio 2.36 2.32 2.55 2.61 N/A
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 123 YIACO Medical Company Kuwait in Focus - January 2010
Overview • Administrative expenses constitute the largest component of total operating expenses; in 9M2009, administrative YIACO Medical was incorporated in Kuwait in 1952 as the expenses accounted for 77% of operating expenditures sole marketing agent for numerous multinational, research- (OPEX); as for FY2008, it accounted for 76% of OPEX. focused pharmaceutical manufacturers. The company was • Weakened performance of operating income and improved known as Yusuf Ibrahim Alghanim and Company until March results from associates, as well as lower finance charges, 2002. The company’s principal activities are focused on the were seen in 9M2009. Operating income decreased by import and sale of medical, chemical, and dental products and 3%, from KD 2.75 million in 9M2008 to KD 2.67 million equipment. in 9M2009. The share of results from associates increased The company has two key divisions: from KD 145,092 in 9M2008 to 174,631 in 9M2009, reflecting a 20% increase. Finance charges decreased • Pharmaceutical business encompassing four areas: by 7% from KD 566,888 in 9M2008 to KD 529,134 Pharmacies, Skin Care, Animal Health, and Crop Protection in 9M2009. Consequently, net profit attributable to Retail Pharmacies. shareholders increased by 8% and reached KD 2.3 million • A medical, scientific, and dental division encompassing from KD 2.13 million in 9M2008. Medical Projects Division, Scientific Division, Dental • During 2008, finance costs grew by 63% from KD Division, Imaging Division, Physiotherapy Division, 470,955 in 2007 to KD 766,998 in 2008, fueled by high Rehabilitation and Home Health Care Division, Key growth in bank overdraft interest (348%) and term loan Accounts Division, and Medical Furniture Division. interest (369%). At the end of 2008, due to the various YIACO currently acts as an envoy for diversified, multinational investment losses and impairments, net profit attributable research-based companies such as Abbott, Bayer GSK, to shareholders declined by 66% YoY, and reached KD Intervet, Schering, Pfizer, Merck, Roche, Phillips, and Johnson 778,786, down from KD 2.3 million in 2007. & Johnson. The company owns and provides health care • The company carries its investments at fair value through services through the largest chain of pharmacies in Kuwait; the income statement, and these include an “Equity YIACO also owns the Apollo Medical Center, the Canadian Securities Fund”; the first nine months of 2009 saw an Medical Center, and the Adan Diagnostic Center. improvement in the Equity Securities Fund, with the YIACO was listed on the Kuwait Stock Exchange in November company reporting a profit of KD 34,877, versus a loss 2007. In 2007, the company acquired Al Raya Health Care of KD 342,050 in 9M208. For FY2008, these equity Company and City Medical, as part of YIACO’s expansion plans. investments yielded a loss of KD 735,718, compared to a YIACO operates mainly in Kuwait and Egypt. During 2008, profit of KD 24,000 in 2007. YIACO had a significant increase in board representation at Al Salam hospital and, as a result, transferred the investment in Balance Sheet Al Salam hospital from available for sale (AFS) to investment in associate. • Given the nature of YIACO’s business, accounts receivable Kuwait Finance House owns 9.89% of YIACO’s shares; Al and inventories combined stood at around KD 35.6 million Nakhil United Real Estate Company owns 5.54%, and the as of September 30, 2009, and accounted for the majority remaining balance of shares is held by the general public. (66%) of total assets. • Investments in associates and investments carried at fair Financial Statement Analysis value through the income statement together stood at around KD 7.2 million as of September 30, 2009, and Income Statement accounted for around 13% of total assets and for the majority of YIACO’s investments.
• In 9M2009, YIACO Medical Company’s revenue increased • The company continues to have a low debt-to-shareholders’- by 25% to reach KD 52.65 million, with pharmaceutical equity ratio of 0.26x. The net debt-to-shareholders'-equity supplies the largest contributor (64%) to total revenue. ratio also remains low at 0.18x as of September 30, 2009. As for FY2008, YIACO’s revenue grew by 12% YoY and reached KD 54 million.
nbkcapital.com | 124 YIACO Medical Company Kuwait in Focus - January 2010
Financial Statements
Income Statement (KD '000) 2007 2008 9M2008 9M2009
Revenue 48,251 54,080 42,283 52,648 Cost of Sales (36,219) (39,348) 31,097 (40,057) Gross Profit 12,032 14,732 11,186 12,591 Selling/Distribution/Admin. Exp. (9,712) (11,711) (8,441) (9,921) Operating Income 2,320 3,020 2,746 2,670 Other Income 692 867 462 314 Share of results of associates - 236 145 175 Unrealized loss/gain on inv. 24 (736) (342) 35 Finance Cost (471) (767) (567) (529) Management Fees (133) (44) (110) (150) Profit before Tax 2,432 913 2,334 2,515 Income Taxes (103) (83) (81) (76) Other Expenses (38) (38) (111) (119) Profit for the Year 2,291 792 2,142 2,320 Minority Interest (13) (13) (13) (15) Shareholders of the parent co. 2,277 779 2,129 2,305
Balance Sheet (KD '000) 2006 2007 2008 Sep-09
Bank balances and cash 1,731 1,442 1,562 1,934 Accounts receivable and others 16,871 15,568 15,970 22,209 Inventories 8,362 11,701 16,264 13,393 Current Assets 26,964 28,711 33,796 37,537 Fixed-assets-PP&E 8,547 7,933 8,486 8,512 Intangible Assets 533 87 - 113 Other Non Current Assets 1,199 823 431 317 Goodwill - 135 - - Investment in associates 13 13 5,374 5,549 Investments carried at fair value 2,331 2,355 1,619 1,654 AFS 5,256 5,256 118 118 Total Non Current Assets 17,878 16,601 16,027 16,263 Total Assets 44,842 45,313 49,823 53,800 Share Capital 15,000 15,000 16,500 16,500 Statutory reserve 1,722 1,954 2,035 2,035 Voluntary reserve 121 121 121 121 General Reserve 637 637 637 637 F/X Translation Reserve 150 109 80 96 Retained Earnings 3,538 4,083 3,280 5,585 Shareholders Equity 21,167 21,904 22,654 24,975 Non-Controlling Interest 92 104 89 108 Total Equity 21,260 22,008 22,743 25,083 Borrowing 1,300 550 2,255 6,550 Accounts payable and accruals 14,852 14,225 15,068 16,112 Murabaha payable 3,307 5,706 2,516 2,813 Bank overdraft 489 865 5,695 1,689 Current Liabilities 19,948 21,346 25,534 27,164
Employees end-of-serv. benefits 926 932 510 1,185 Murabaha payable 1,808 1,027 1,036 368 Non Current Liabilities 3,634 1,959 1,546 1,553 Total Liabilities 23,583 23,305 27,080 28,716 Total Liabilities and Equity 44,842 45,313 49,823 53,800
Sources: Company’s financial statements and NBK Capital
nbkcapital.com | 125 Kuwait Market Statistics
• December Market Statistics
NBK Capital MENA Research T. +965 2224 6663 F. +965 2224 6905 E. [email protected]
126 | nbkcapital.com `Kuwait Market Statistics Kuwait in Focus - January 2010
Rebased Performance Summar y Best Performers Close % Ch g. 115 MSCI Kuwait (% Chg.) 548 (-1.5%) IFAH.KW IFA Hotels & Resorts 0.620 24.0% % of stocks trading above 1yr avg. price* 29% AAYA.K W A'ayan Leasing & Inv. Co. 0.081 17.4% 110 Advance/Decline Ratio* 1.19 CABL.K W Gulf Cable 1.620 15.7% 52 week High / Low 715 / 430 FACI.KW Commercial Facilities Co. 0.335 13.6% 105 KSE General Index (% Chg.) 7,005 (0.3%) DEER.K WAl Deera Hldg. Co. 0.096 10.3% KSE General Index 52 week High / Low 8,371 / 6,392 100 Market Cap. (KWD '000) 27,647,719
95 94 90 Highest Turnover Turnover (KWD) Worst Performers Close % Ch g. 89 A Agility 4,836,545 AGLT.K W Agility 0.570 -33.7% 85 ZAZain Kuwait 4,569,195 NREK.K WNational Real Estate Co. 0.198 -18.2% N National Bank of Kuwait 3,301,786 KREK.K WKuwait Real Estate Co. 0.068 -15.0% 80Sep-09 Oct-09 Nov-09 Dec-09 K Kuwait Finance House 3,203,059 BAYK.K WBayan Investment Co. 0.069 -14.8% IFIntl. Financial Advisors 2,874,777 MAZA.K WAl Mazaya Hldg. Co. 0.120 -14.3% MSCI GCC Mkts MSCI Kuwait
Quotes Monthly 52-Week % Change Trailing Market Cap. Company Name Close* Avg. Turnover Avg. volume % Chg. High Low High Low on high YTD 12 mths (KWD '000) PE* PB* ('000) ('000) A A'ayan Leasing & Inv. Co. 0.081 17.4% 0.094 0.059 109,681 1,370 0.170 0.059 -52.4% -52.4% -52.4% 51,744 nmf 0.7 A Abyaar Real Estate Dev. Co. 0.049 -10.9% 0.055 0.045 544,336 10,964 0.128 0.045 -61.7% -61.7% -61.7% 51,740 nmf 0.4 A Agility 0.570 -33.7% 0.860 0.570 4,836,545 6,921 1.300 0.475 -56.2% -9.5% -9.5% 596,697 4.0 0.7 A Al Ahli Bank of Kuwait 0.520 7.2% 0.520 0.480 33,920 68 0.695 0.470 -25.2% -25.2% -25.2% 599,531 nmf 1.9 A Al Ahlia Hldg. Co. 0.043 -3.4% 0.057 0.038 223,195 4,604 0.076 0.038 -43.4% -34.8% -34.8% 35,611 nmf 0.4 A Al Deera Hldg. Co. 0.096 10.3% 0.108 0.073 2,530,168 28,228 0.280 0.073 -65.7% -62.4% -62.4% 71,468 nmf 0.6 A Al Madina for Finance & Inv. Co. 0.075 -1.3% 0.082 0.064 716,495 9,993 0.128 0.040 -41.4% -10.7% -10.7% 31,796 nmf 0.4 M Al Mazaya Hldg. Co. 0.120 -14.3% 0.140 0.120 27,988 213 0.291 0.120 -58.8% -58.0% -58.0% 59,937 nmf 0.5 A Al Safat Inv. Co. 0.110 -1.8% 0.122 0.100 654,773 5,808 0.198 0.046 -44.4% 10.0% 10.0% 85,028 nmf 0.7 A Al Safwa Grp. Co. 0.050 -2.0% 0.057 0.046 569,836 11,144 0.094 0.021 -46.8% 2.0% 2.0% 65,000 nmf 1.1 T Al Themar Intl. Hldg. 0.130 0.130 0.110 21,557 174 0.130 0.100 0.0% 0.0% 0.0% 131,625 nmf 1.3 A Alafco Aviation Lease 0.198 4.8% 0.198 0.187 67,614 356 0.213 0.082 -7.0% 81.7% 81.7% 147,043 21.0 1.6 A Aref Energy Hldg. 0.234 8.3% 0.255 0.216 122,444 507 0.315 0.124 -25.7% -6.4% -6.4% 175,500 nmf 2.5 A AREF Investment Grp. 0.110 1.9% 0.130 0.097 139,209 1,171 0.242 0.095 -54.5% -51.8% -51.8% 116,742 nmf 0.5 B Bank of Kuwait & the Middle East 0.510 2.0% 0.510 0.490 46,006 92 0.560 0.355 -8.9% 7.8% 7.8% 497,586 30.9 2.3 B Bayan Investment Co. 0.069 -14.8% 0.082 0.068 126,709 1,731 0.166 0.068 -58.4% -49.3% -49.3% 27,094 nmf 0.4 B Boubyan Bank 0.500 2.0% 0.520 0.475 177,732 356 0.630 0.244 -20.6% 26.6% 26.6% 582,656 nmf 4.8 B Boubyan Petrochemical Co. 0.410 2.5% 0.435 0.380 482,205 1,191 0.560 0.320 -26.8% 12.3% 12.3% 198,891 19.6 0.9 B Burgan Bank 0.340 -4.2% 0.360 0.335 344,423 981 0.700 0.285 -51.4% -51.4% -51.4% 354,052 nmf 1.1 C Coast Investment & Dev. Co. 0.116 -1.7% 0.130 0.102 322,759 2,783 0.194 0.061 -40.2% 23.4% 23.4% 72,534 nmf 1.1 C Commercial Bank of Kuwait 0.930 -4.1% 0.990 0.930 342,200 358 1.180 0.930 -21.2% -21.2% -21.2% 1,182,981 nmf 2.7
* Price as of close on December 31, 2009, Sources: Reuters, Zawya, and NBK Capital
nbkcapital.com | 127 Kuwait Market Statistics Kuwait in Focus - January 2010
Monthly 52-Week % Change Trailing Market Cap. Company Name Close* Avg. Turnover Avg. volume % Chg. High Low High Low on high YTD 12 mths (KWD '000) PE* PB* ('000) ('000)
F Commercial Facilities Co. 0.335 13.6% 0.335 0.295 49,025 153 0.375 0.250 -10.7% -10.7% -10.7% 179,816 23.9 1.2 F First Dubai Real Estate Dev. Co. 0.050 9.9% 0.052 0.038 43,731 895 0.138 0.038 -63.8% -63.8% -63.8% 50,000 nmf 0.6 A First Investment Co. 0.108 0.0% 0.122 0.096 122,045 1,105 0.250 0.096 -56.8% -56.8% -56.8% 70,316 nmf 0.6 G Global Investment House 0.099 8.8% 0.106 0.081 833,064 8,252 0.192 0.063 -48.4% -48.4% -48.4% 129,930 nmf 0.6 G Gulf Bank 0.300 1.7% 0.305 0.270 294,991 1,028 0.490 0.270 -38.8% -52.0% -52.0% 752,311 nmf 1.8 C Gulf Cable 1.620 15.7% 1.680 1.260 70,758 48 1.980 0.900 -18.2% 63.6% 63.6% 340,089 nmf 1.6 IF IFA Hotels & Resorts 0.620 24.0% 0.620 0.475 160,658 284 0.770 0.430 -19.5% 8.2% 8.2% 281,407 9.1 2.8 IK Ikarus Petroleum Industries Co. 0.118 0.0% 0.124 0.106 148,372 1,191 0.140 0.080 -15.7% -11.9% -11.9% 88,500 nmf 0.9 INInjazzat Real Estate Dev. Co. 0.176 4.8% 0.178 0.150 66,195 397 0.265 0.150 -33.6% -28.5% -28.5% 60,834 16.6 0.8 IF Intl. Finance Co. 0.265 0.265 0.242 9,475 38 0.300 0.230 -11.7% 6.9% 6.9% 123,415 nmf 1.4 IF Intl. Financial Advisors 0.091 0.0% 0.102 0.081 2,874,777 30,278 0.182 0.065 -50.0% -27.8% -27.8% 65,520 nmf 0.4 JAJazeera Airways 0.190 0.0% 0.202 0.172 43,324 243 0.327 0.172 -41.9% -44.3% -44.3% 41,800 15.4 1.6 K Kipco Asset Management Co. 0.405 0.480 0.405 1,227,727 2,769 0.560 0.405 -27.7% -26.4% -26.4% 106,637 nmf 1.1 K Kuwait Cement Co. 0.560 3.7% 0.560 0.500 48,100 92 0.600 0.357 -6.7% -0.4% -0.4% 323,889 nmf 2.0 K Kuwait Finance House 1.100 0.0% 1.180 1.020 3,203,059 2,928 1.400 0.786 -21.4% -9.4% -9.4% 2,535,961 nmf 2.1 F Kuwait Food Co. 1.460 0.0% 1.500 1.260 53,205 38 1.840 0.740 -20.7% 17.7% 17.7% 586,923 42.0 1.9 K Kuwait Intl. Bank 0.182 -4.2% 0.192 0.170 364,768 1,998 0.310 0.164 -41.3% -18.8% -18.8% 188,793 9.5 1.2 K Kuwait Invest Hldg. Co. 0.246 0.8% 0.250 0.240 31,169 129 0.295 0.178 -16.6% 7.0% 7.0% 80,481 nmf 1.5 K Kuwait Investment Co. 0.124 0.0% 0.134 0.116 20,041 159 0.216 0.106 -42.6% -42.6% -42.6% 65,100 nmf 0.5 K Kuwait Projects Co. Hldg. 0.485 0.0% 0.510 0.455 324,636 678 0.580 0.280 -16.4% -1.0% -1.0% 559,973 nmf 1.0 K Kuwait Privatization Project Hldg. 0.070 -13.6% 0.081 0.069 25,738 350 0.118 0.052 -40.7% -12.5% -12.5% 55,566 nmf 0.5 K Kuwait Real Estate Co. 0.068 -15.0% 0.082 0.068 1,589,109 20,820 0.118 0.049 -42.4% 17.2% 17.2% 61,656 nmf 0.4 M Mabanee Co. 0.700 0.0% 0.720 0.660 1,184,909 1,689 0.790 0.377 -11.4% 30.6% 30.6% 321,437 nmf 2.9 M Mayadeen 0.039 -4.9% 0.042 0.035 210,495 5,200 0.071 0.035 -45.1% -30.4% -30.4% 39,000 nmf 0.6 N National Bank of Kuwait 1.120 1.8% 1.120 1.040 3,301,786 3,075 1.360 0.745 -17.6% 4.4% 4.4% 3,213,443 15.6 2.0 N National Industries Co. 0.420 0.420 0.325 51,754 133 0.420 0.244 0.0% 10.5% 10.5% 145,336 nmf 2.0 N National Industries Grp. Hldg. 0.305 -12.9% 0.350 0.300 1,650,082 5,173 0.510 0.210 -40.2% -26.5% -26.5% 395,005 nmf 0.9 N National Investments Co. 0.365 5.8% 0.385 0.285 423,423 1,257 0.690 0.236 -47.1% -28.4% -28.4% 319,818 nmf 1.5 N National Real Estate Co. 0.198 -18.2% 0.242 0.198 924,059 4,209 0.355 0.174 -44.2% -16.1% -16.1% 161,211 8.8 0.7 N Noor Financial Inv. Co. 0.090 -7.2% 0.097 0.082 129,862 1,484 0.138 0.060 -34.8% -6.3% -6.3% 67,500 nmf 0.6 A Qurain Petrochem. 0.184 5.7% 0.188 0.162 66,205 371 0.218 0.102 -15.6% 12.2% 12.2% 202,400 nmf 1.4 S Salhia Real Estate Co. 0.220 0.0% 0.224 0.218 45,860 207 0.234 0.142 -6.0% -1.8% -1.8% 87,829 nmf 0.7 S Sultan Center Food Products 0.212 -10.9% 0.242 0.208 116,691 526 0.295 0.124 -28.1% 6.0% 6.0% 122,712 nmf 1.0 T Tamdeen Investment Co. 0.140 6.1% 0.140 0.122 75,013 558 0.176 0.120 -20.5% -26.3% -26.3% 43,659 nmf 0.5 T Tamdeen Real Estate Co. 0.300 5.3% 0.310 0.270 106,309 376 0.340 0.260 -11.8% -6.3% -6.3% 111,936 nmf 1.1 A The Commercial Real Estate Co. 0.120 -1.6% 0.126 0.110 142,327 1,205 0.150 0.077 -20.0% -5.5% -5.5% 205,774 42.6 0.9 T The Investment Dar Co. 0.074 - - 0.102 0.036 -27.5% -27.5% -27.5% 70,607 0.5 0.2 N Wataniya 1.540 0.0% 1.560 1.480 258,190 171 1.880 1.200 -18.1% -18.1% -18.1% 776,210 7.0 1.8 Z Zain Kuwait 1.020 2.0% 1.060 0.970 4,569,195 4,551 1.560 0.640 -34.6% 21.4% 21.4% 4,357,853 15.4 1.8
* Price as of close on December 31, 2009, Sources: Reuters, Zawya, and NBK Capital
nbkcapital.com | 128 Kuwait in Focus - January 2010
RISK AND RECOMMENDATION GUIDE
Recommendation Upside (Downside) Potential Buy more than 20% Accumulate between 10% and 20% Hold between -5% and 10% Reduce between -10% and -5% Sell less than -10% RISK LEVEL Low Risk High Risk 1 2 3 4 5
Disclaimer
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