Kuwait in Focus

November 2009 Contents

Kuwait Economic Brief...... 2

Oil Market and Budget Developments...... 3

Monetary Developments September 2009...... 6

Real Estate Activity...... 11

Kuwait Research Coverage ...... 15

Agility...... 16

Jazeera Airways...... 20

Sultan Center ...... 21

Wataniya Telecom...... 23

Companies in Focus...... 24

Al Ahli Bank of Kuwait (ABK) ...... 25

Bank of Kuwait and the Middle East (BKME)...... 28

Boubyan Petrochemical...... 32

Burgan Bank (Burgan)...... 35

Burgan Co. for Well Drilling, Trading & Maintenance (Burgan Well Drilling)...... 38

Commercial Real Estate Company...... 41

Gulf Cable and Electric Industries Company (Gulf Cable)...... 44

Haj & Umrah Services Consortium Co. (Mashaer) ...... 47

Kuwait Cement Company...... 51

Kuwait Financial Center (Markaz)...... 54

Kuwait Food Group (Americana)...... 58

Mabanee Company (Mabanee)...... 61

Mobile Telecommunications Company (Zain) ...... 64

National Industries Group Holding (NIG)...... 68

National Investment Company (NIC)...... 71

National Real Estate Company (NREC)...... 74

Tamdeen Investment Company (Tamdeen)...... 77

The Transport and Warehousing Group (TWG)...... 80

United Real Estate Company...... 83

YIACO Medical Company (YIACO)...... 86

Kuwait Market Statistics...... 89

nbkcapital.com | 1 Kuwait Economic Brief

• Oil Market and Budget Developments

• Monetary Developments September 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 - November 2009

Oil Market and Budget Developments

Crude prices surge on upbeat macro data, weak dollar... Kuwait budget surplus could reach KD 6 bn in FY2009/10…

Oil prices surged through October, breaking decisively through the $70 per barrel (pb) mark for the first time since the recovery in prices began at the beginning of the year. The price of Kuwait Export Crude (KEC) rose by $11.7 to $76.1 in October and is now higher than a year ago. Some of this rise has been attributed to further weakness in the US dollar, which fell by 0.5% through October. But crude prices surged by 18% in Euro terms, too, suggesting that there were other factors at play.

Amongst these were encouraging signs from various macro-level indicators, including September Chinese (+13.9% YoY) and Indian (+10.4%) industrial production, more upbeat purchasing manager indices from around the world, and stronger-than-expected corporate earnings in 3Q09, especially in the US. All of these seem to support the case for a reasonably strong rebound in global oil demand.

Kuwait Export Crude*

70 $ per barrelper $ 65

55 2Q09 3Q09 4Q09F 1Q10F 2Q10F

*Note: Future price projections correspond to NBK’s price scenarios. Source: NBK Economic Research Department

WTI touches above $80, The prices of other major global benchmark crude prices also appeared to move into a new despite a challenge to its range of $70-80 pb rather than the $60-70 seen since June. The prices of Brent and West benchmark status Texas Intermediate (WTI) ended October at $74.0 and $77.0, respectively, with the latter even rising above the $80 pb mark late in the month as dollar pessimism peaked. Despite this surge, the WTI benchmark received a blow in late October when Saudi oil major Aramco announced that it would no longer use this benchmark as a reference for pricing Saudi oil sales to the US, citing distortions that have left WTI prices unrepresentative of broader market conditions on occasion over the past few years. Starting in January 2010, a new blend of sour US Gulf Coast crudes will be used instead. The move appeared to have little immediate impact on WTI contract prices, however.

nbkcapital.com | 3 Kuwait Economic Brief Kuwait in Focus - November 2009

Divergences over outlook for As confidence in the short-term economic situation has solidified, analysts have continued to oil demand growth in 2010… revise upward their forecasts for global oil demand, albeit from very low levels. In October, for example, the International Energy Agency (IEA) revised upward its projections for growth in oil demand in 2010 by 0.15 million barrels per day (mbpd) to 1.4 mbpd (1.7%). The IEA also expects the fall in demand in 2009, at 1.7 mbpd (1.9%) to be 0.2 mbpd less severe than previously thought. These upgrades were driven by more optimistic forecasts for world economic growth by the International Monetary Fund (3%), from which the IEA takes its lead. While analysts’ disagreements over demand in 2009 have narrowed, the IEA’s forecast for 2010 is still strikingly bullish compared to others in the market. Both OPEC and the Centre for Global Energy Studies (CGES), for example, see oil demand rising by just 0.7–0.8 mbpd next year. The disagreement is over the strength of oil demand growth in emerging markets. Demand in the OECD is expected to be flat to falling.

OPEC production rises On the supply side, OPEC-11 (i.e., excluding Iraq) output increased for the sixth month in a again; now well above quota row between August and September, by 72,000 bpd, and is now 675,000 bpd higher than at targets… its trough in March. Compliance with OPEC’s target of reducing crude production by 4.2 mbpd from September 2008 levels has slipped to 63% from a peak of 79% in March. With crude prices rebounding towards $80 pb, there is little incentive for producers to restrict production any further at this stage. Indeed, recent speculation has focused upon whether the cartel will raise output quotas at its next meeting in December. But with output already above target, such a ‘cosmetic’ move might not affect market fundamentals very much. Moreover, even if the global economy continues to recover, a number of downside risks to oil prices remain, including a strengthening dollar, rising OPEC spare capacity, increasing non-OPEC output (particularly from Russia), and still high crude inventory levels. In such an environment, OPEC is likely to remain cautious in announcing any gear change in policy.

KEC Price Scenarios

Scenario $/barrel Low Base High 2008 90.4 90.4 90.4 1Q09 41.4 41.4 41.4 FY08/09 78.5 78.5 78.5 2Q09 58.5 58.5 58.5 3Q09 67.2 67.2 67.2 4Q09f 67.5 68.4 71.5 2009f 58.6 58.9 59.6 1Q10f 66.1 68.5 74.7 FY09/10f 64.8 65.7 68.0

Source: NBK Economic Research Department

Seasonal demand increase Assuming that OPEC leaves production close to its current levels over the next six months, the could be offset by rising non- short-term prospects for oil market fundamentals will rest upon the speed of improvement in OPEC supply… demand and/or changes in non-OPEC production. Going into the Northern Hemisphere winter, these two factors could be more or less offsetting with rising seasonal demand for oil (+0.7 mbpd between 3Q09 and 1Q10) met by higher non-OPEC supply. This scenario might keep crude prices more or less at 3Q09 levels into 1Q10 – close to $70 pb. The price of KEC averages $65.7 for FY2009/10 as a whole.

Stronger world growth could A faster than expected world economic recovery—perhaps of the sort envisaged by the IEA— see price rise, with impact felt would raise the demand for oil in 2010. But in practice, this is unlikely to be felt until the by mid-2010 … spring when the traditional winter boost to demand has faded, so the short-term impact on crude prices might be modest. Assuming that OPEC leaves its output unchanged, the price of KEC could climb up towards $75 pb in 1Q10, but strengthen even further into the next fiscal year.

nbkcapital.com | 4 Kuwait Economic Brief Kuwait in Focus - November 2009

Downside price risk from A downside risk to prices, on the other hand, could emerge if (as assumed by the IEA) non- faster than expected non- OPEC production were to turn out stronger than expected—perhaps ending up 0.3 mbpd higher OPEC production… than previously expected in 1Q10. But again, the impact would mostly be felt in the post-winter period. Under this scenario, the price of KEC slips slightly to $66 pb in 1Q10. In the absence of further production cuts from OPEC, prices could fall towards $40 pb by the end of 2010.

Another large budget surplus In all three of these scenarios, the price of KEC averages between $65 and $68 pb for FY2009/10 now almost guaranteed for as a whole, a much better outcome than the $35 pb assumed by the government in its budget. FY09/10… Indeed, the latest official data show that budget revenues in the first half of FY2009/10, at KD8.2 billion, have already exceeded what the government had originally projected for the entire year. If, as expected, public expenditures come in at 5-10% below budget, we estimate that the government will run a budget surplus of between KD 4.7 and 6.4 billion, before allocating 10% of revenues to the Reserve Fund for Future Generations (RFFG). On our own forecasts, this surplus—which could be the third largest ever in absolute terms—would equate to between 17% and 23% of 2009 GDP.

Budget Outcome/Forecast for Fiscal Years 2008/09 and 2009/10

Under Alternative Oil Price Scenarios FY 2008/09 FY 2009/10 Million KD, unless otherwise noted Official Closing Official Low Base High Budget Account Budget Case Case Case

Oil Price ($/barrel) 50.0 78.5 35.0 64.8 65.7 68.0 Total Revenues 12,680 21,006 8,075 16,199 16,728 17,290 Oil Revenues 11,650 19,711 6,925 15,049 15,578 16,140 Non-Oil Revenues 1,030 1,295 1,150 1,150 1,150 1,150

Expenditures (official) 18,966 18,262 12,116 12,116 12,116 12,116 Surplus (deficit) -6,286 2,744 -4,041 4,083 4,612 5,174 After RFFG -7,554 643 -4,849 2,463 2,939 3,445

Expenditures (NBK estimate) - 11,510 11,268 10,904 Surplus (deficit), NBK estimate - 4,689 5,460 6,386 After RFFG - 3,069 3,787 4,657

Source: NBK Economic Research Department

nbkcapital.com | 5 Kuwait Economic Brief Kuwait in Focus - November 2009

Monetary Developments September 2009

Credit growth improves in September… Resident deposits increase slightly while foreign deposits fall further

The month of September witnessed an improvement compared to previous months. Credit to residents saw its first strong rise following months of sluggishness. Private deposits from residents rose for the first time in four months. As a result, money supply (M2) expanded by KD 126 million month-on-month (MoM) while bank assets grew by KD 329 million (+0.8%) MoM.

Monetary Highlights – September 2009

Change Sept 2009 One Month Three Month Year-to- date* mn KD mn KD % mn KD % mn KD %

Local Bank Assets 39,379 329 0.8 330 0.8 137 0.3 of which: Claims on Gov't 1,872 13 0.7 -418 -18.3 -113 -5.7 Credit to Residents 24,778 256 1.0 465 1.9 1,118 4.7 Foreign Assets 6,793 -428 -5.9 -1,110 -14.0 -2,003 -22.8

Money Supply (M2) 24,578 126 0.5 -574 -2.3 2,628 12.0 Private Deposits 23,814 90 0.4 -577 -2.4 2,571 12.1 Sight Deposits 4,142 78 1.9 -100 -2.4 479 13.1 Savings Deposits 2,809 21 0.8 -51 -1.8 320 12.9 KD Time Deposits & CDs 14,198 63 0.4 1 0.0 1,006 7.6 FC Deposits 2,666 -71 -2.6 -427 -13.8 767 40.4

* As of September 2009 Source: NBK Economic Research Department

Unlike September's figures, the quarterly figures do not look bright. M2 is still down KD 574 million in 3Q09 while credit remains sluggish compared to previous years. Moreover, the bank deposit base continues to be eroded on both the domestic and foreign fronts. September figures have broken the downward trend, but the true test lies in whether this one-month blip could be sustained in the coming months.

Monetary Indicators – September 2009 – Year-on-year percent growth

25% 20%

15% 20%

10% 15%

10% 0%

5% -5%

0% -10% Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Wajih Boustani Assistant Economist M2 (left axis) M1 (right axis) Economics Department T. +965 2259 5356 E. [email protected] Source: NBK Economic Research Department

nbkcapital.com | 6 Kuwait Economic Brief Kuwait in Focus - November 2009

Credit growth picks up m/m Credit to residents rose 1.0% m/m (up KD 256 million) in September, up from 0.4% recorded in August. Loans to non-bank financial institutions led the increase in credit, rising 6.5% m/m (up KD 179 million). Loans to the real estate sector registered another strong expansion, rising KD 73 million. Remaining growth came from loans to the trade and industry sectors. Meanwhile, personal facilities fell KD 64 million following a large drop in loans for the purchase of securities.

Stable activity in the real estate sector and stronger lending to the productive sectors, namely industry and trade, boosted credit growth to KD 456 million in 3Q09 compared with KD 135 million the previous quarter. Despite this improvement, growth remains well below the levels seen in the past three years where credit expanded by KD 1 billion per quarter, which would explain the slowing in YoY growth. Slow growth in personal facilities, primarily loans to the purchase of securities, has been an important drag on September credit growth.

Credit Indicators – September 2009 – Year-on-year percent growth

25% 25%

20% 20%

15%

10%

10% 5%

5% 0% Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09

Private Deposits Credit Personal Facilities Loans to Real Estate

Source: NBK Economic Research Department

Deposits rise in September Private deposits from residents rose KD 90 million m/m in September. However, the slight increase in September did little to offset the large seasonal withdrawals in the previous two months, which resulted in a drop of KD 577 million in 3Q09. However, year-to-date growth is still positive at KD 2.6 billion, following the large deposits from semi-government institutions (which are reported under “private deposits”) earlier in the year.

Meanwhile, foreign private deposits fell KD 190 million m/m in September. Continued outflow of foreign deposits, which reached KD 2 billion ytd, is an added factor constricting credit growth.

Local banks’ net foreign assets fell KD 280 million in September due to the large drop in deposits with foreign banks. Deposits with foreign banks have fallen 52% (down KD 3.4 billion) since their peak in November 2008, and are now back to their end of 2006 levels. The drawdown of these funds have served to boost domestic liquidity and fund banks’ growth amid sluggish resident deposit growth and falling foreign deposits.

Banks’ liquidity remains Liquid assets at local banks (incl. net interbank deposits) rose KD 262 million in September, comfortable resulting in sizeable placements with the Central Bank of Kuwait (CBK). Time deposits with the CBK rose KD 212 million while CBK bills rose by KD 73 million. Due to comfortable liquidity levels, average KIBOR rates declined in September, ranging between 10 and 11 bps over the different maturities.

nbkcapital.com | 7 Kuwait Economic Brief Kuwait in Focus - November 2009

Liquidity Indicators – September 2009 – Year-on-year percent growth

Liquid assets to total assets Interbank rates

18% 6%

16% 5%

14% 4%

12% 3%

10% 2%

8% 1%

6% 0% Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Including net foreign interbank deposits Excluding net foreign interbank deposits 1-mnth KIBOR 1-mnth LIBOR

Source: NBK Economic Research Department

Dinar loses ground vis-à-vis Since the beginning of August, the CBK kept the dinar/dollar exchange rate within a narrow the Euro band. Consequently, the dinar has lost around 3% vis-à-vis the Euro and has reached a new all-time low.

Monetary Indicators – September 2009 – Exchange Rates

0.31 0.43

0.30 0.41

0.29 0.39

0.28 0.37

0.27 Stronger 0.35 Dinar

0.26 0.33 1-Aug-07 19-Nov-07 8-Mar-08 26-Jun-08 14-Oct-08 1-Feb-09 22-May-09 9-Sep-09

Dinar / Dollar (LHS axis) Dinar / Euro

Source: NBK Economic Research Department

nbkcapital.com | 8 Kuwait Economic Brief Kuwait in Focus - November 2009

Monetary Highlights – September 2009

One Month Change 3 Month Change 12 Month Change Year-to-Date * Sep Sep Aug Sep Aug Sep Aug Sep Aug Sep Aug Sep Aug Sep mn KD mn KD % mn KD % mn KD % mn KD %

Total Liquidity (M2) 24,578 126 -152 0.5 -0.6 -574 -731 -2.3 -2.9 3,163 3,857 14.8 18.7 2,628 12.0 1) Currency in Circulation 764 36 2 5.0 0.2 3 -47 0.4 -6.1 28 60 3.8 8.9 56 7.9 2) Private Sector Deposits 23,814 90 -154 0.4 -0.6 -577 -684 -2.4 -2.8 3,135 3,798 15.2 19.1 2,571 12.1 KD Deposits 21,148 162 110 0.8 0.5 -150 -260 -0.7 -1.2 2,261 2,932 12.0 16.2 1,805 9.3 Sight Deposits 4,142 78 175 1.9 4.5 -100 -39 -2.4 -0.9 141 81 3.5 2.0 479 13.1 Savings Desposits 2,809 21 -52 0.8 -1.8 -51 -38 -1.8 -1.3 405 320 16.9 12.9 320 12.9 Time Deposits & CDs 14,198 63 -13 0.4 -0.1 1 -184 0.0 -1.3 1,715 2,532 13.7 21.8 1,006 7.6 FC Deposits 2,666 -71 -264 -2.6 -8.8 -427 -423 -13.8 -13.4 874 866 48.8 46.3 767 40.4

Money (M1) 4,906 114 176 2.4 3.8 -97 -86 -1.9 -1.8 169 140 3.6 3.0 535 12.2

Quasi-Money 19,672 12 -329 0.1 -1.6 -476 -644 -2.4 -3.2 2,994 3,717 18.0 23.3 2,092 11.9

Net Foreign Assets 8,771 -47 -406 -0.5 -4.4 -723 -905 -7.6 -9.3 3,767 4,414 75.3 100.2 1,163 15.3 1) CBK (net) 4,878 233 36 5.0 0.8 376 -331 8.3 -6.6 1,515 1,598 45.0 52.5 368 8.2 Foreign Assets 4,950 235 35 5.0 0.8 376 -330 8.2 -6.5 1,453 1,536 41.5 48.3 337 7.3 Foreign Liabilities 73 2 -1 3.1 -1.4 1 1 0.8 1.2 -61 -62 -45.9 -47.0 -31 -29.7 2) Local Banks (net) 3,893 -279 -443 -6.7 -9.6 -1,099 -574 -22.0 -12.1 2,252 2,816 137.3 207.6 795 25.7 Foreign Assets 6,793 -428 -231 -5.9 -3.1 -1,110 -834 -14.0 -10.4 -2,460 -1,847 -26.6 -20.4 -2,003 -22.8 Foreign Liabilities 2,901 -149 212 -4.9 7.5 -11 -261 -0.4 -7.9 -4,712 -4,663 -61.9 -60.5 -2,798 -49.1

Domestic Assets 15,807 173 254 1.1 1.7 149 174 1.0 1.1 -603 -557 -3.7 -3.4 1,464 10.2 1) Claims on Gov't (net) -2,860 130 36 -4.4 -1.2 -784 -786 37.8 35.6 -1,551 -1,962 118.4 190.9 -185 6.9 CBK (net) -1,115 133 58 -10.6 -4.5 -6 204 0.5 -14.1 -21 -354 1.9 39.6 10 -0.9 Claims 0 0 0 0 0 … … 0 -58 … … 0 … Deposits 1,115 -133 -58 -10.6 -4.5 6 -204 0.5 -14.1 21 296 1.9 31.1 -10 -0.9 Local Banks (net) -1,745 -2 -23 0.1 1.3 -779 -990 80.6 131.3 -1,530 -1,608 711.6 1,195.8 -195 12.6 Claims 1,872 13 -30 0.7 -1.6 -418 -522 -18.3 -21.9 -140 -143 -6.9 -7.1 -113 -5.7 Deposits 3,617 15 -7 0.4 -0.2 361 468 11.1 14.9 1,390 1,466 62.4 68.6 82 2.3 2) Claims on Private Sector 26,791 329 76 1.2 0.3 563 504 2.1 1.9 1,920 1,900 7.7 7.7 1,335 5.2 Credit Facilities 24,778 256 97 1.0 0.4 465 347 1.9 1.4 1,724 1,906 7.5 8.4 1,118 4.7 Other Local Investments 2,013 73 -20 3.8 -1.0 97 158 5.1 8.8 196 -6 10.8 -0.3 216 12.0 3) Other (net) -8,124 -287 142 3.7 -1.8 371 455 -4.4 -5.5 -973 -495 13.6 6.7 315 -3.7

One Month Change 3 Month Change 12 Month Change Year-to-Date * Sep Sep Aug Sep Aug Sep Aug Sep Aug Sep Aug Sep Aug Sep mn KD mn KD % mn KD % mn KD % mn KD %

Total Bank Assets 39,379 329 185 0.8 0.5 330 -390 0.8 -1.0 213 288 0.5 0.7 137 0.3

Liquid Assets 4,849 507 177 11.7 4.3 763 6 18.7 0.1 843 211 21.0 5.1 1,180 32.2 Cash and CBK Balances 477 -69 54 -12.6 11.0 41 225 9.3 69.9 -84 53 -14.9 10.8 -55 -10.4 CBK Bonds 841 73 0 9.5 0.0 378 407 81.6 112.7 405 332 … … 467 … Public Debt Instruments 1,872 13 -30 0.7 -1.6 -418 -522 -18.2 -21.9 -140 -143 -6.9 -7.1 -113 -5.7 Inter-Local Bank Deposits 819 278 33 51.4 6.5 214 -145 35.4 -21.2 -133 -613 -13.9 -53.1 139 20.5 Time Deposits w/ CBK 839 212 120 33.8 23.7 548 41 188.2 7.0 794 582 1,761.0 1,287.4 742 762.6

Credit Facilities 24,778 256 97 1.0 0.4 465 347 1.9 1.4 1,724 1,906 7.5 8.4 1,118 4.7 Trade 2,212 45 -55 2.1 -2.5 -2 -84 -0.1 -3.7 32 77 1.5 3.7 -73 -3.2 Industry 1,461 45 27 3.2 1.9 59 -30 4.2 -2.0 129 132 9.6 10.2 -4 -0.3 Construction 1,620 -24 5 -1.5 0.3 -45 11 -2.7 0.7 -137 -73 -7.8 -4.3 -54 -3.2 Agriculture and Fishing 14 1 0 9.1 -2.9 1 0 9.1 1.5 1 1 9.1 10.0 2 16.1 Non-Bank Financial Institutions 2,919 179 -36 6.5 -1.3 174 26 6.3 1.0 88 -138 3.1 -4.8 164 6.0 Personal Facilities 8,194 -64 82 -0.8 1.0 63 238 0.8 3.0 421 846 5.4 11.4 328 4.2 Purchase of Securities 2,757 -77 42 -2.7 1.5 -50 73 -1.8 2.6 -37 399 -1.3 16.4 -37 -1.3 Other Pers. Facs. 5,437 13 41 0.2 0.8 113 165 2.1 3.1 458 448 9.2 9.0 365 7.2 Consumer Loans … 0 … 0.0 … -1 … -0.1 … 2 … 0.4 … … Installment Loans … 36 … 0.8 … 155 … 3.6 … 474 … 11.9 … … Other … 5 … 1.4 … 10 … 2.9 … -29 … -7.3 … … Real Estate 6,566 73 40 1.1 0.6 206 155 3.2 2.4 892 860 15.7 15.3 600 10.1 Crude Oil & Gas 194 -8 21 -4.1 11.5 14 20 8.0 11.0 105 102 116.8 100.8 83 74.8 Public Services … … … … … … … … … … … … … … Other 1,599 10 13 0.6 0.8 -6 11 -0.4 0.7 195 102 13.9 6.8 74 4.8

Foreign Assets 6,793 -428 -231 -5.9 -3.1 -1,110 -834 -14.0 -10.4 -2,460 -1,847 -26.6 -20.4 -2,003 -22.8

Other Assets 2,959 -6 141 -0.2 5.0 212 93 7.7 3.2 106 18 3.7 0.6 -158 -5.1

Total Deposit Liabilities 28,191 351 -150 1.3 -0.5 -43 -429 -0.2 -1.5 4,416 4,530 18.6 19.4 2,749 10.8 Private Sector Deps 23,814 90 -154 0.4 -0.6 -577 -684 -2.4 -2.8 3,135 3,798 15.2 19.1 2,571 12.1 Gov't Deposits 3,617 15 -7 0.4 -0.2 361 468 11.1 14.9 1,390 1,466 62.4 68.6 82 2.3 Interbank 760 246 11 47.7 2.1 173 -213 29.4 -29.3 -110 -734 -12.6 -58.8 96 14.4

Foreign Liabilities 2,901 -149 212 -4.9 7.5 -11 -261 -0.4 -7.9 -4,712 -4,663 -61.9 -60.5 -2,798 -49.1

Other Liabilities 3,394 113 116 3.4 3.7 332 244 10.8 8.0 172 234 5.3 7.7 -108 -3.1

Equity 4,894 14 7 0.3 0.1 52 56 1.1 1.2 337 188 7.4 4.0 294 6.4

nbkcapital.com | 9 Kuwait Economic Brief Kuwait in Focus - November 2009

Monetary Highlights – September 2009 (CONTINUED)

Sep Aug Jul Jun May Dec Sep 2009 2008 % Balance Sheet Structure: Liquid Assets/Total Assets * 10.4 9.8 9.4 9.0 9.1 7.7 8.0 Credit/Total Assets 62.9 62.8 62.8 62.3 61.3 60.3 58.9 DPBs/Total Assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Foreign Assets/Total Assets 17.3 18.5 19.2 20.2 20.4 22.4 23.6 Private Sector Deposits/Total As. 60.5 60.8 61.4 62.5 61.9 54.1 52.8 Loans to Deposits ** 91.8 90.6 90.2 88.7 87.5 89.6 89.0 Reserve Ratio 18.4 17.5 16.9 15.7 16.6 14.6 15.2

*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.

nbkcapital.com | 10 Kuwait Economic Brief Kuwait in Focus - November 2009

Real Estate Activity

Real estate sales drop sharply in September, likely affected by Ramadan

Sales overview

Following an apparent modest recovery in recent months, the number of real estate sales dropped sharply in September to 223, the lowest level in nearly nine years. This represents a fall of 40% from August. Much of this fall, however, probably reflects the timing of Ramadan, which lasted through most of September and which is often a weak month for sales. If so, activity could bounce back in October. (Although initial indications from the weekly sales data suggest that any bounce has been fairly modest.)

While the data are not enough to derail the broader recovery story, they do caution against expectations of a rapid improvement in the real estate sector soon. YoY growth in the number of sales, which can be volatile around Ramadan, dropped to -19% from +13% in August. Activity levels remain generally low.

Total Real Estate Sales

1200 150

1000 100

800 50

600

0 400

-50 200

0 -100 2007 2008 2009

Sales volumes (number, LHS) Sales values (%YoY, RHS)

Source: NBK Economic Research Department

In value terms, total sales also fell by 40% between August and September, reaching KD 58 million. This is the lowest level for nearly eight years. After turning positive in August, the annual growth rate plunged to -54% from +9% last month, again exacerbated by slow Ramadan activity.

Sales - residential

The residential segment was the chief cause behind the drop in overall sales in September. The number of residential sales fell by 40% from August, to 169. In value terms, sales dropped by slightly less (34%), implying a rise in the average value of properties sold. Nevertheless, this does not mark a return to a rising price environment; the monthly data are too volatile to be able to draw such conclusion. More likely, this simply reflects sales of properties of slightly higher value during September. Indeed, on a rolling 6-month average basis, residential housing prices are still dropping at a record rate of 8% per year—their fastest drop in nearly nine years.

nbkcapital.com | 11 Kuwait Economic Brief Kuwait in Focus - November 2009

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

Sales volumes (number, LHS) Sales values (%YoY, RHS)

Source: NBK Economic Research Department

Sales - apartments

The number of sales in the investment (i.e., apartment) sector fell by 40% to 54 in September, reaching their lowest level since February 2006. Averages sales prices have bounced back—at KD 394,000, they are up 44% on a year ago. But this is more a reflection of chronic weakness this time last year rather than a sign of strong recovery. (Average sales prices this time last year had already plunged 66% YoY.) Low transactions prices could signal that deals are tending to be struck at the relatively low end of the market, rather than at the higher end where financing might be required.

Apartment Sales

200 250

180 200 160

140 150

120 100 100 50 80

60 0

40 -50 20

0 -100 2007 2008 2009

Sales volumes (number, LHS) Sales values (%YoY, RHS)

Source: NBK Economic Research Department

nbkcapital.com | 12 Kuwait Economic Brief Kuwait in Focus - November 2009

Sales – commercial

There were no transactions of commercial property in September, the first zero month since November 2006. Although this can in part be attributed to the Ramadan effect, the lack of transactions also underscores continued weakness in what has traditionally been a slow segment of the Kuwaiti market. Indeed, sales have taken place during all other Ramadan periods in recent years. Including September, there has been an average of just six transactions of commercial property per month this year, down 44% on the average through 2008. These sales can be ‘lumpy’ of course; in previous years, average transactions values have been in excess of KD 2 million. As such, it is arguably the segment most likely to be hit by reduced access to external financing.

Commercial Sales

25 600

500

20 400

300 15

200

10 100

0 5

-100

0 -200 2007 2008 2009

Sales volumes (number, LHS) Sales values (%YoY, RHS)

Source: NBK Economic Research Department

Savings and Credit Bank loans

The number of loans approved by the Savings and Credit Bank (SCB) fell by 35% between August and September, to 229. This was the lowest level since January 2006. Again, while no doubt influenced by the timing of Ramadan, SCB loan approvals have been trending lower for most of this year and are now 55% lower than they were in January. Loans for the construction of new homes were hardest hit, falling 47% to just 46. This compares to 364 a year ago. The continued decline is also probably linked to the ebbing of the government’s land plot distribution program from earlier this year. Loan approvals for other types of SCB loans—notably for the purchase of existing homes, plus additions and renovations—were also down in September, but less so.

While the short-term outlook for SCB loan approvals remains uncertain, the medium-term outlook may have been boosted by the recent announcement that the government plans to develop more than 70,000 new housing units by 2015.

nbkcapital.com | 13 Kuwait Economic Brief Kuwait in Focus - November 2009

SCB Loan Approvals

600 250

550 200

500 150

450 100 400 50 350

0 300

250 -50

200 -100 2007 2008 2009

Volume of loans (number, LHS) Value of loans (%YoY, RHS)

Source: NBK Economic Research Department

Real Estate Sales and SCB Housing Loans

Monthly Avg. 2009 % Real Estate Sales 2007 2008 July Aug Sept MoM YoY

Sales Values (mn KD) 233.5 156.2 99.9 96.6 57.7 -40.3 -53.5 Residential Property 128.6 74.8 55.1 55.4 36.4 -34.2 0.9 Apartments 83.6 56.7 39.6 35.9 21.3 -40.8 -19.8 Commercial 21.3 24.7 5.2 5.4 0.0 N/A N/A

Number of Transactions 773.6 513.8 415 374 223 -40.4 -19.2 Residential Property 648.3 381.4 307 280 169 -39.6 9.0 Apartments 117.3 121.3 97 90 54 -40.0 -44.3 Commercial 8.0 11.1 11 4 0 N/A N/A

Average Transaction Size (000 KD) 301.7 320.3 241 258 259 0.1 -42.4 Residential Property 201.6 203.3 179 198 216 9.0 -7.5 Apartments 703.8 477.2 408 399 394 -1.3 44.0 Commercial 2,360 2,563 473 1,338 - N/A N/A

Monthly Avg. 2009 % SCB Housing Loans 2007 2008 July Aug Sept MoM YoY

Value of Approved Loans (mn KD) 12.5 15.0 11.8 11.9 7.1 -34.6 -59.6 New Construction 5.7 10.2 4.0 5.2 2.8 -47.1 -87.4 Purchase of Existing Homes 5.3 3.2 6.1 5.1 3.2 -36.5 -26.5 Additions & Renovations 1.5 1.5 1.7 1.6 1.1 -26.9 1.7

Number of Approved Loans 378 412 380 350 229 -40.5 -72.7 New Construction 146 195 73 87 46 -45.5 -87.0 Purchase of Existing Homes 118 89 115 96 61 -37.1 12.7 Additions & Renovations 114 128 192 167 122 -35.0 -10.4

Volume of Disbursed Loans (mn KD) 15.1 12.1 13.2 13.1 9.3 -28.8 -20.6 New Construction 8.3 7.0 8.2 7.7 4.6 -40.0 -27.9 Purchase of Existing Homes 5.2 3.6 3.6 3.6 3.7 4.0 -10.6 Additions & Renovations 1.7 1.5 1.4 1.8 1.0 -45.9 -15.7

Source: NBK Economic Research Department

nbkcapital.com | 14 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]

nbkcapital.com | 15 Kuwait Research Coverage Kuwait in Focus - November 2009

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 11 November 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 | 16 Kuwait Research Coverage Kuwait in Focus - November 2009

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 US 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 | 17 Kuwait Research Coverage Kuwait in Focus - November 2009

Agility (aglt.kw) - Analyst Comment Issued on November 11, 2009

•• In continuation of the trend that Agility has 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 a 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. While 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 be issuing 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 | 18 Kuwait Research Coverage Kuwait in Focus - November 2009

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 1.080 KD 5.1 million Recommendation: Under Review-Risk Level**: 4 52-Week High Market Cap Reason for Report: 1Q2009 Update/Change of Forecast KD 1.300 KD 1.0 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 November 16, 2009. 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.

1.30 • Due to the lack of disclosure of operating profits by segments (Agility provides net revenues by segments only), 1.10 we were forced to make several critical assumptions (which we elaborate more on in the full report) to establish our 0.90 forecasts. Obviously, with such limited disclosure, the risk associated with those assumptions is significantly higher. 0.70 • Agility posted a strong operating performance in 1Q2009 0.50 despite an 8.1% decline in total revenue. Agility’s EBITDA margin improved to 13.1% in 1Q2009 (1Q2008 EBITDA 0.30 Nov-08 Feb-09 May-09 Aug-09 Nov-09 margin was 11.4%), which resulted in a 5.6% year-on-year AGLT MSCI KWT increase in EBITDA. This result is 4.5% higher than our

Sources: MSCI, Reuters, and NBK Capital EBITDA forecast of KD 51 million, even though we were expecting to see flat growth in revenues. Key Ratios • Global Integrated Logistics (GIL), the largest contributor 2008 a 2009 f 2010 f 2011 f 2012 f to revenue, saw a decline of 13.8% in revenue in 1Q2009 compared to 1Q2008, due to the negative effect the P/E 7.6 7.7 8.8 11.7 14.7 EPS Growth -8% 4% -12% -25% -20% global financial crisis is having on volumes in commercial logistics in general. As expected, DGS was immune to EV/ EBITDA 6.4 6.4 7.1 8.6 9.7 the financial crisis as DGS recorded a 3.4% increase in EBITDA Margin 11% 11% 10% 9% 8% EBITDA Growth -7% -1% -9% -18% -11% revenues in 1Q2009. Dividend Yield 0.0% 0.0% 5.7% 6.4% 5.1% ROAE 19% 17% 13% 9% 7%

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 92 for recommendations and risk ratings.

nbkcapital.com | 19 Kuwait Research Coverage Kuwait in Focus - November 2009

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 0.194 KD 0.1 million Recommendation: Buy-Risk Level**: 5 52-Week High Market Cap Reason for Report: 2Q2009 Update KD 0.359 KD 43 million • The unexpected closure of the hub in Dubai created an 52-Week Low Current Number of Shares operational disruption for Jazeera Airways in 1H2009. KD 0.187 220 million The hub in Dubai accounted for 20% to 25% of total Reuters Bloomberg capacity, which suddenly had to be transferred to Kuwait. JAZK.KW JAZEERA KK Accordingly, Jazeera Airways had to build traffic for this Ownership Structure unplanned increase in capacity for the hub in Kuwait. Privately Held: 30% Public: 70% • The performance of Jazeera Airways in 1H2009 has been * Price as of close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital 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 17%, due to a lower-than-expected decline in yield and 0.40 load factor and an unexpected drop in aircraft utilization 0.35 that led to a lower-than-expected growth in capacity (ASK).

0.30 • As of June 30, 2009, the net debt-to-equity ratio of Jazeera

0.25 Airways stands at a conservative 1.1x. This ratio increases to 3.1x if one views the operating leases as additional off- 0.20 balance-sheet debt.

0.15 • The management of Jazeera Airways is working diligently

0.10 to refinance the KD 29.7 million in short-term debt before Nov-08 Feb-09 May-09 Aug-09 Nov-09 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 9.6 nmf 6.9 5.2 2.7 cannot be met, we cannot analyze the potential liability, if Net Income Growth 94% nmf nmf 34% 94% any, that may arise from the guarantee given the limited EPS Growth 13% nmf nmf 34% 94% financial information we have on the related party (a non- EV/ EBITDAR 8.9 9.1 4.2 3.0 2.0 public entity). EBITDAR Margin 16% 15% 21% 21% 22% EBITDAR Growth 26% -2% 115% 40% 49% • According to Jazeera Airways’ aircraft delivery schedule,

Dividend Yield 0.0% 0.0% 5.8% 7.7% 18.8% 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 23% higher than the latest close. Our new recommendation for Jazeera a = actual, f = forecast. Sources: Reuters and NBK Capital Airways is “Buy.”

Analysts

Samir Murad, CFA Wadie Khoury

T. +965-2259 5145 T. +965 2259 5118 ** Please refer to page 92 for recommendations and risk ratings. E. [email protected] E. [email protected]

nbkcapital.com | 20 Kuwait Research Coverage Kuwait in Focus - November 2009

Sultan Center (SCFK.KW) - Analyst Comment Issued on September 07, 2009

• Sultan Center had a 22% increase in revenue in 2Q2009 compared to 2Q2008. This growth was buoyed by the operation in Lebanon which was acquired in 3Q2008. Excluding the effect of the Lebanese operation, Sultan Center’s revenue would have grown by around 9%. Kuwait,

• Sultan Center achieved an EBITDA of KD 4.2 million in 2Q2009, which represents a 19% drop from the same period last year. This result is 11% lower than our forecast of KD 4.7 million. The decline in EBITDA has been mostly due to a 41% increase in SG&A costs in 2Q2009, and which is behind most of the fall in the EBITDA margin from 8.6% in 2Q2008 to 5.7% in 2Q2009. As we mentioned in our initiation of coverage on Sultan Center, the assets acquired in Lebanon are impacting the operating margins of the company. However, we find comfort that on a quarter-on-quarter basis, Sultan Center’s EBITDA margin has been relatively stable.

• The group’s share of results from associates increased by 32% in 2Q2009 to KD 2.4 million, while finance charges declined by 7% to KD 1.8 million.

• Net income declined by 59% to KD 2.7 million in 2Q2009. Most of the drop in net income is related to the change in the method for accounting for investments. Sultan Center has re-classified all its investments as available-for-sale and thus the change in fair value of investments does not go through the income statement. Excluding the effect of investment income in 2Q2008, Sultan Center’s net income would decline by 26%.

• The fair value of investments classified as available-for-sale increased by KD 5.3 million in 2Q2009.

• We maintain our long term fair value for Sultan Center at KD 0.330 per share. This is 38% over Sultan Center’s closing price as of 16 November 2009; hence, our “Buy” recommendation.

Samir Murad, CFA T. +965 259 5145 E. [email protected]

Related Research

• Sultan Center Initiation of Coverage – 21 July 2009

nbkcapital.com | 21 Kuwait Research Coverage Kuwait in Focus - November 2009

The Sultan Center - A Homegrown Retailer Issued on July 21, 2009

Key Data Highlights

Current Price* Avg. Value Traded per Day 12-Month Fair Value: KD 0.330 KD 0.238 KD 0.4 million Recommendation: Buy-Risk Level**: 4 52-Week High Market Cap Reason for Report: Initiation of Coverage KD 0.295 KD 138 million 52-Week Low Current Number of Shares • Sultan Center is a grocery retail player with operations in four MENA countries. Sultan Center has successfully KD 0.124 578.8 million become a dominant player in each of its markets due to its Reuters Bloomberg high-quality service and ability to understand the needs of SCFK.KW SULTAN KK each market. Ownership Structure Privately Held: 44% Public: 56% • Kuwait, the largest grocery operation for Sultan Center (as Kuwait accounts for 55% of the company’s grocery sales), * Price as of close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital has several elements that favor retailing: a young population, Rebased Performance a high GDP per capita, and a zero personal income tax environment. In addition, Sultan Center has confirmed its

0.30 grip on the markets in which the company has expanded and is poised to reap the benefits of such acquisitions.

0.25 • Sultan Center’s total revenue increased at double-digit growth rates over the past two years, driven mostly by growth in grocery, while the company’s EBITDA has been declining. 0.20 This drop in EBITDA is a result of an escalation of SG&A costs, which were negatively affected by the integration

0.15 expenses of the new assets acquired in Lebanon in 2008. • We forecast that Sultan Center’s total revenue will increase

0.10 at a CAGR of 10%, with 2009 having the strongest showing Nov-08 Feb-09 May-09 Aug-09 Nov-09 with 23% growth. Our forecasts incorporate a drop in SCFK MSCI KWT trading revenue due to the anticipated withdrawal of U.S. Sources: MSCI, Reuters, and NBK Capital troops from Iraq. We expect Sultan Center’s EBITDA margin Key Ratios to improve from 5.3% in 2008 to an average of 6% over our forecast horizon because of cost-cutting initiatives. Our forecasts for Sultan Center’s net income exclude the group’s 2008 a 2009 f 2010 f 2011f 2012f share of results from associates and any other investment Adj. P/E* nmf 15.5 13.1 13.6 13.3 gains or losses. Adj. EV/ EBITDA* 12.3 8.4 7.4 7.2 7.4 • The fact that 42% of Sultan Center’s assets are locked into EBITDA Margin 5% 6% 6% 6% 6% non-core assets has led to a high volatility in net income. EBITDA Growth -3% 41% 14% 2% -2% This was felt in the performance in 2008 when Sultan Dividend Yield 0.0% 0.0% 0.7% 0.7% 0.9% Center posted a net loss of KD 5.4 million compared to a net income of KD 16.9 million in 2007. However, Sultan Center reported strong levels of cash flow from operations 4Q2008 EBITDA a 2Q2009 EBITDA f of KD 31 million and KD 34.1 million in 2007 and 2008, KD (0.6) mln KD 4.7 mln respectively. 1Q2009 EBITDA a 3Q2009 EBITDA f • From a valuation standpoint, using the discounted cash KD 4.3 mln KD 5.8 mln flow (DCF) method, we believe that the fair value of Sultan * Adjusted. a = actual, f = forecast. Sources: Reuters and NBK Capital Center’s share is KD 0.330, representing a 38% upside potential from the November 16, 2009, close. Hence, we recommend a “Buy” on the stock. From our subjective Analysts criteria for risk, we have assigned Sultan Center a risk rating of 4 on a scale of 1 to 5. Samir Murad, CFA Badder Al Ghanim T. +965-2259 5145 T. +965-2259 5330 E. [email protected] E. [email protected] ** Please refer to page 92 for recommendations and risk ratings.

nbkcapital.com | 22 Kuwait Research Coverage Kuwait in Focus - November 2009

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 1.460 KD 351,323 Recommendation: Buy – Risk Level**: 4 52-Week High Market Cap Reason for Report: 1H2009 Update KD 1.980 KD 732 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 of 2009 were in line with our expectations. NMTC.KW NMTC KK The company achieved revenues of KD 121.3 million, Ownership Structure compared to our forecast of KD 121.8 million. The slow Qatar Telecom: 52.5% KIA: 24% Public: 23.5% growth in revenue (1.2% YoY) is due mainly to increased competition in Kuwait. * Price as of close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • As we mentioned in our Initiation of Coverage, “Competition Rebased Performance Heats Up,” published on July 2, 2009, the increased competition as well as the cancellation of the called-party- 2.5 pays fee will have a negative impact on the profitability of mobile operators in Kuwait. The 2Q2009 results were a 2 good indicator of the effect of the cancellation; revenue from Wataniya’s operation in Kuwait dropped by 11% YoY, and revenue from Zain’s operation in Kuwait decreased 8% 1.5 YoY.

• At the end of 2Q2009, Wataniya’s consolidated EBITDA 1 declined by 5% YoY and totaled KD 48.8 million, compared to KD 51.6 million in 2Q2008. The EBITDA margin 0.5 declined from 43% in 2Q2008 to 40% in 2Q2009 mainly Nov-08 Mar-09 Jul-09 Nov-09 Wataniya MSCI Kuwait due to the slowdown in the Kuwaiti operation. The EBITDA of the Kuwaiti operation, which constitutes around 52% of Sources: MSCI, Reuters and NBK Capital the group EBITDA, dropped by 18% in 2Q2009 compared 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 8.9 10.8 11.0 10.9 10.3 Wataniya won a court ruling against the ministry in June Adj.EPS Growth 2% -18% -1% 1% 6% 2009. EV/ EBITDA 3.8 3.9 3.7 3.5 3.3 • Accordingly, the company also reversed the provision EBITDA Margin 42.3% 40.9% 40.6% 41.3% 41.7% Wataniya had been charging its income statement with EBITDA Growth 26.3% -2.3% 4.9% 7.4% 6.7% (for MOC license charges) that totaled KD 58.4 million in Dividend Yield 3.1% 7.8% 3.7% 4.6% 4.8% 2Q2009. Hence, Wataniya Telecom’s bottom line surged Adj.ROAE 24% 16% 14% 13% 13% to KD 63.5 million at the end of 2Q2009 compared to KD 26.5 million in 2Q2008. 2Q2009 EBITDA a 3Q2009 EBITDA f KD 49 mln KD 52 mln • Based on Wataniya’s latest performance in each country, 2Q2009 EBITDA f 4Q2009 EBITDA f we reviewed our previous forecast to incorporate these KD 52 mln KD 50 mln changes. Our new 12-month fair value estimate for a = actual, f = forecast. Sources: Reuters and NBK Capital Wataniya is KD 2.240 (8.7% higher than our previous fair value). With a 53% 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 ** Please refer to page 92 for recommendations and risk ratings. E. [email protected] E. [email protected]

nbkcapital.com | 23 Companies in Focus

• Al Ahli Bank of Kuwait (ABK)

• 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 Electric Industries Company (Gulf Cable)

• Haj & Umrah Services Consortium Co. (Mashaer)

• Kuwait Cement Company (Kuwait Cement)

• Kuwait Financial Center (Markaz)

• Kuwait Food Group (Americana)

• Mabanee Company (Mabanee)

• Mobile Telecommunications Company (Zain)

• National Industries Group Holding (NIG)

• National Investment Company (NIC)

• National Real Estate Company (NREC)

• Tamdeen Investment Company (Tamdeen)

• 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 6905v E. [email protected]

24 | nbkcapital.com Companies in Focus Kuwait in Focus - November 2009

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 168,445 The Behbehani family, currently ABK’s largest shareholder, Reuters Code ABKK.KW 52-week avg. value (KD) 93,019 holds approximately 35% of the bank’s total share capital. Price (KD) Price Performance Closing Price 0.485 YTD -30.2% • With an asset base of KD 3 billion, as of September 2009, 52-week High/Low 0.771 / 0.471 1-Year Period -34.7% ABK accounts for 8% of the total banking assets in Kuwait. Market Capitalization Shares Outstanding Million KD 555.03 Latest (million) 1,144 • For the 9M2009 period, ABK’s net profit stood at KD 24 Ownership Structure million, 66% lower than 9M2008, on the back of weak Closely Held: 50% Public: 50% non-interest income and large provisioning charges. Price as of Close on November 16, 2009. 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 Stock Performance performance, ABK has maintained good profitability and cost efficiency over the past few years. 0.900 2.5

0.800 • ABK’s asset quality indicators have been strong, as the 52-week High: KD 0.771 2 NPLs-to-gross loans ratio has declined from almost 8% in 0.700 2003 to 2.5% in 2008. On average, the NPL coverage was 0.600 173% over the past five years. As of December 2008, the 1.5 0.500 coverage ratio stood at 209%.

0.400 Millions Price (KD) Price 52-week Low: KD 0.471 1 • ABK has historically maintained adequate capital adequacy 0.300 ratios, above the minimum required by the Central Bank of

0.200 0.5 Kuwait (CBK). As of December 2008, the CAR stood at

0.100 14.72%.

0.000 0 • In September 2009, ABK sued Saudi conglomerate Al Saad Nov-08 Jan-09 Feb-09 Apr-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09

Volume Close Group owner Maan al-Sanea and Saad Trading, Contracting and Financial Services Co. for USD 125 million.

Sources: Reuters 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 | 25 Al Ahli Bank of Kuwait (ABK) Kuwait in Focus - November 2009

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 a 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%, which is still more than adequate. resulting in a market share of approximately 8% of the total NPLs-to-Gross Loans and NPL Coverage Ratio banking assets in Kuwait. ABK's loans and deposits market shares stood at approximately 8% and 7%, respectively. The bank provides commercial banking and asset management 9.0% 250% services, and investment banking services via its wholly owned 8.0% 7.8% subsidiary Ahli Capital Investment Company. 209% 200% 7.0%

187% 6.0% 5.5% 170% 169% Latest News 150% 5.0% 134% 4.2% • In September 2009, ABK sued Saudi conglomerate Al 4.0% 3.6% 112% 100% 3.0% Saad Group owner Maan al-Sanea and Saad Trading, 3.0% 2.5% Contracting and Financial Services Co. for USD 125 2.0% million, for an alleged breach of contract and fraud over a 50% credit agreement. ABK accused Saad of breaking a USD 60 1.0%

million credit facilities’ agreement in 2007. In July 2009, 0.0% 0% 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 • In the same month, Moody’s downgraded ABK’s bank financial strength rating from C- to D+. Consequently, NPL Analysis – Pre-invasion versus Post-liberation ABK’s long-term global local currency and long-term foreign currency deposit ratings were also downgraded to 2004 2005 2006 2007 2008 A2 from A1. Back in June 2009, Fitch affirmed ABK’s Pre-invasion long-term issuer default rating (IDR) at A- and short- NPLs 39,689 39,034 38,628 36,463 36,863 Specific Provisions 39,689 39,034 38,628 36,463 36,863 term IDR at F2. However, ABK’s individual rating was % of total NPLs 68% 71% 69% 61% 66%

downgraded from C to C/D with a Stable Outlook. Earlier Post-liberation

this year, in February 2009, S&P placed ABK, along with NPLs 18,700 15,867 17,093 23,191 18,757 four other Kuwaiti banks, on “credit watch negative” for Specific Provisions 14,315 13,374 16,675 12,588 8,446 % of total NPLs 32% 29% 31% 39% 34% a possible downgrade, after the institutions were exposed Post-Liberation to the distressed local investment sector. However, in NPL Grow th -15% 8% 36% -19% July 2009, S&P affirmed ABK’s BBB+/A-2 rating with a Provisions Grow th -7% 25% -25% -33% NPL Coverage 77% 84% 98% 54% 45% Negative Outlook. Total • In September 2009, ABK’s shareholders approved the NPLs 58,389 54,901 55,721 59,654 55,620 board of directors’ proposal to increase the bank’s share Specific Provisions 54,004 52,408 55,303 49,051 45,309 capital by 25% to KD 144 million via a rights issue. The increase is subject to approval by an Amiri decree. Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 26 Al Ahli Bank of Kuwait (ABK) Kuwait in Focus - November 2009

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 2009. 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 2005-2007. In 2008, lending growth stood at 14% with than 9M2008, on the back of weak non-interest income 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% YTD. profit for 9M2009 down to KD 24 million (66% YoY drop).

• 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 Interest Expense (108,610) (116,869) (87,821) (45,224) growth was hurt despite a surge in fee and commission 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 Net Investment Earnings 11,951 8,729 10,482 2,872 year. The bank was aggressive in terms of provisioning, 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) Depreciation (1,645) (1,238) (831) (1,280) ABK also recorded a one-time gain of KD 4.8 million from 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) Net Income 76,041 46,036 70,394 24,258 between 2005 and 2007, averaging around 22%. In Balance Sheet (KD '000) 2007 2008 Sep-08 Sep-09 2008, however, the ratio crept up each quarter, taking the Assets FY2008 ratio to 25.6%. The increase was due to weaker Cash and Cash Equivalents 842,748 679,916 720,895 809,050 operating income. In fact, costs were well controlled in Loans and Advances 1,870,012 2,129,103 2,133,595 2,002,497 Net Investments 205,095 159,273 208,433 120,100 2008, growing by only 7%, compared to the double-digit Net Fixed Assets 13,956 33,822 13,794 34,408 growth of more than 20% seen in each of the previous Others 29,346 34,845 39,495 28,978 Total Assets 2,961,157 3,036,959 3,116,212 2,995,033 three years. The cost-to-income ratio for 9M2009 Liabilities and Shareholders' Equity increased further to stand at 27.3%, once again due to Due to Banks and Oth.Fin.Inst. 335,401 648,567 473,735 723,637 weak operating income. A senior bank official stated earlier Customers' Deposits 2,207,998 1,991,676 2,218,493 1,886,481 Other Liabilities 98,664 84,304 89,073 63,560 in the year that ABK was aiming to control costs going Total Liabilities 2,642,063 2,724,547 2,781,301 2,673,678 forward, given the expected general slowdown in 2009 banking profits; this cost control strategy included curbing Total Shareholders' Equity 319,094 312,412 334,911 321,355 expansion plans in the coming years. Total Liabilities and Sh. Equity 2,961,157 3,036,959 3,116,212 2,995,033

Source: Company’s financial statements and NBK Capital

nbkcapital.com | 27 Companies in Focus Kuwait in Focus - November 2009

Bank of Kuwait and The Middle East (BKME)

Key Data Key Highlights

General Liquidity • The Bank of Kuwait and the Middle East (BKME) was KSE Code BKME.KSE 52-week avg. volume 452,071 established in 1941 as the first banking and financial Reuters Code BKME.KW 52-week avg. value (KD) 214,713 institution in Kuwait. The bank currently holds a 6% share Price (KD) Price Performance of total assets in the Kuwait banking sector. Closing Price 0.495 YTD 4.7% 52-week High/Low 0.56 / 0.327 1-Year Period 51.4% • Ahli United Bank (AUB) took control of 48% of the bank’s

Market Capitalization Shares Outstanding capital in 2002, and later increased this to 74.8% in Million KD 434.82 Latest (million) 878.43 August 2005. This association offers management and Ownership Structure product enrichment synergies and customer-sharing Closely Held: 87% Public: 13% opportunities.

Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • In June 2008, BKME received approval from the Central Bank of Kuwait (CBK) to convert to a fully Shari’ah- Stock Performance compliant bank. The bank is currently in the conversion process, which is expected to be completed during 2009. 0.600 6 52-week High: KD 0.560 • BKME has displayed strong profitability in the past, which 0.500 5 has been historically supported by both net interest income and non-interest income. Return on average assets (RoAA) 0.400 4 and return on average equity (RoAE) have been stable at

0.300 3 around 2.3% and 20%, respectively, over the past four Millions Price (KD) Price 52-week Low: KD 0.327 years. 0.200 2 • Strong competition has eroded BKME’s market share since

0.100 1 2005. BKME’s share of total sector deposits has fallen from 7% in 2005 to 4.9% at the end of September 2009. 0.000 0 Nov-08 Jan-09 Feb-09 Apr-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09 • BKME’s capital adequacy ratio (CAR), albeit lower than the Volume Close level in 2007, was strong at 14.8% as of December 2008.

Sources: Reuters and NBK Capital BKME benefits from comfortable asset quality indicators— the coverage ratio 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 (BSFR) 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 | 28 Bank of Kuwait and The Middle East (BKME) Kuwait in Focus - November 2009

Overview Asset Quality

The Bank of Kuwait and the Middle East (BKME) was • Asset quality indicators for BKME have generally improved established in 1941, making it the first banking and financial since 2003. However, there was a slight deterioration in institution in Kuwait. BKME was initially established as the 2008. Kuwaiti branch of a British bank (the Iranian Imperial Bank at • After dropping for two consecutive years (2006 and the time), and was later acquired by the HSBC Group in 1959. 2007), the non-performing loans (NPLs)-to-gross loans In 1971, the Kuwait Investment Authority (KIA) took over ratio increased to 3.05% in 2008, due to 35% growth in the bank, following local regulations that restricted foreign NPLs compared to 18% growth in total loans. ownership of banks. In 2002, AUB took control of 48% of the bank’s capital, which AUB increased to 74.8% in August • Total NPL coverage has exceeded 120% since 2004 2005. The bank offers a full range of services including retail, and stood at 127% as of December 2008. The specific corporate, treasury, and investment management services. At provisions-to-NPLs ratio for post-liberation impaired loans the end of 2007, the bank had a network of 23 branches has averaged between 58% and 62% for the past four and 56 ATMs across Kuwait. At the end of September 2009, years. BKME’s total assets stood at KD 2.2 billion, accounting for • BKME’s pre-liberation NPLs accounted for only 4% of the nearly 6% of total banking sector assets. In June 2008, total NPLs, much lower than most of its peers. BKME received approval from the CBK to convert into a fully Shari’ah-compliant bank. The bank is currently in the process Asset Quality Indicators of converting into a purely Islamic bank, which is expected to be completed during 2009. The bank’s principal subsidiary is NPLs-to-Gross Loans and NPL Coverage Ratio the Kuwait and Middle East Financial Investment Company (KMEFIC), which offers investment and portfolio management 4.00% 160% services. BKME currently owns a 50.2% stake in KMEFIC, one of the largest brokerage houses in Kuwait, with operations in 3.50% 140% Oman, UAE, Jordan, and Egypt. 3.00% 120%

Latest News

• Burgan announced a 91% YoY plunge in the 3Q2009 Sources: Company’s financial statements and NBK Capital net profit, which stood at KD 1.74 million, compared to KD 19.4 million in 3Q2008, due to higher provisioning charges. At the time of this publication, full financials had Financial Statement Analysis not been released. Income Statement • On August 26, 2009, Moody’s downgraded Burgan’s bank financial strength rating to D+ from C-. Consequently, • Burgan’s 1H2009 net profit stood at KD 12.5 million, Burgan’s long-term global currency and long-term foreign 73% lower than 1H2008. The bank recorded a net profit currency deposit ratings were also downgraded to A2 from of KD 11.3 million in 1Q2009, which compared favorably A1. to the net losses of KD 28.5 million, posted in 4Q2008. • In February 2009, S&P placed Burgan (along with four However, profits dropped to a mere KD 1.1 million in other Kuwaiti banks) on “credit watch negative” for a 2Q2009, due to a surge in provisioning charges. possible downgrade, given the exposure to the distressed • Net interest income growth in 1H2009 was robust, local investment sector. Previously, in October 2008, the increasing by 78%, due to lower interest expenses and agency had revised its outlook on the bank to “Stable” from “Positive” to factor in the lower likelihood of a near- higher interest income compared to 1H2008. Income from term upgrade, resulting primarily from a weaker operating fees and commissions grew by 46%, while net investment environment and the uncertainties surrounding Burgan’s income declined by 84%. expansion strategy. • A one-off gain amounting to KD 4.2 million pushed “other income” up during 1H2009. Total operating income witnessed an increase of 18%, supported primarily by the

nbkcapital.com | 36 Burgan Bank (Burgan) Kuwait in Focus - November 2009

growth in net interest income. Financial Statements

• A 58% increase in operating costs added further pressure Income Statement (KD '000) 2007 2008 1H2008 1H2009 on the bottom line. Burgan’s cost-to-income ratio crept Interest Income 167,713 208,744 93,852 107,401 up to 26.9% in 1H2009, compared to 20.1% during Interest Expense (116,600) (140,727) (66,608) (58,798) 1H2008. However, this was still in line with the average Net Interest Income 51,113 68,017 27,244 48,603 cost-to-income ratio of approximately 27% over the Fees and Commissions 17,089 22,416 10,369 15,170 previous four years. Foreign Exchange Income 4,363 (237) 2,854 3,029 Net Investment Earnings 32,256 26,435 24,114 3,898 Other Operating Income 868 4,474 1,852 7,709 • In 2008, the bank posted a 50% drop in earnings to Total Operating Income 105,689 121,105 66,433 78,409

KD 37.8 million. Operating income, however, grew by Staff Expenses (12,641) (17,985) (7,700) (10,919) 15% to KD 121.1 million supported by strong net interest Other Expenses (15,241) (14,100) (5,633) (10,198) income, which increased by 33%. Total Operating Expenses (27,882) (32,085) (13,333) (21,117) Loan Loss Provisions (264) (36,396) (4,096) (27,793) •• Income from fees and commissions grew by 31%, while Investment Provisions - (10,158) - (2,532) Other Income / (Exp.) (2,725) (5,331) (2,118) (4,669) foreign exchange income declined from KD 4.4 million in Minority Interest - 646 - (9,834) 2007 to a loss of KD 237 thousand in 2008. Net Income 74,818 37,781 46,886 12,464

• Net loan loss provisioning charges were KD 36.4 million in Balance Sheet (KD '000) 2007 2008 Jun-08 Jun-09 2008, compared to KD 264 thousand in the previous year. Assets The bank also took impairment charges on its investments Cash and Cash Equivalents 864,899 938,333 936,729 886,499 amounting to KD 10.2 million in 2008. Due From Banks 380,568 532,412 681,099 528,289 Loans and Advances 1,421,104 2,132,990 1,573,131 2,318,595 Net Investments 110,146 107,404 97,565 125,874 Investment in Associates - - - 14,904 Balance Sheet Net Fixed Assets 17,804 25,420 18,020 29,517 Others 53,026 176,918 64,497 200,441 Total Assets 2,847,547 3,913,477 3,371,041 4,104,119 • Burgan’s total assets recorded a CAGR of 22% between Liabilities and Shareholders' Equity 2004 and 2008. Growth in total assets in 2005 was Due to Banks and Oth.Fin.Inst. 732,112 795,486 813,582 969,918 moderate at 9%. However, in 2006, 2007, and 2008, Customers' Deposits 1,648,538 2,416,101 2,083,630 2,406,472 Borrowings 42,998 197,943 75,818 182,193 total assets grew by 17%, 29%, and 37%, respectively. Other Liabilities 72,759 147,668 63,883 154,914 Total Liabilities 2,496,407 3,557,198 3,036,913 3,713,497 • The growth in the balance sheet was supported by a rapid Minority Interest - 45,180 - 58,417 increase in the bank’s loan book, as well as by a surge in Total Shareholders' Equity 351,140 356,279 334,128 390,622 the funding base. Net loans and advances grew by a CAGR Total Liabilities and Sh. Equity 2,847,547 3,913,477 3,371,041 4,104,119 of 30% between 2004 and 2008, underpinned by a 4-year

CAGR of 23% in customer deposits. Sources: Company’s financial statements and NBK Capital • In 2008, loans advanced by 50%, while deposits grew by 47%. However, lending slowed down during 1H2009, with Burgan recording 9% growth between December 2008 and June 2009. Total deposits, which grew by 11% during 1Q2009, fell by an equivalent amount during 2Q2009, resulting in YTD deposit growth of negative 0.4%.

• Burgan adopted IAS 39 in October 2008, thereby reclassifying some of the bank’s “trading” securities as “available for sale.” As of June 2009, the bank had recorded unrealized losses of KD 1.13 million within its equity. Had the investments not been reclassified, an unrealized profit of KD 99 thousand would have been recorded in the interim income statement.

nbkcapital.com | 37 Companies in Focus Kuwait in Focus - November 2009

Burgan Co. for Well Drilling, Trading & Maintenance (Burgan wELL dRILLING)

Key Data Highlights

General Liquidity • Burgan Well Drilling offers a full range of services to the KSE Code ABAR.KSE 52-week avg. volume 428,217 oil sector, most notably equipment maintenance and Reuters Code ABAR.KW 52- week avg. value (KD) 251,320 manpower towards the operation of oil rigs. Price (KD) Price Performance

Closing Price 0.570 YTD 1.0% • Burgan Well Drilling is focused on its core operations, as it 52-week High/Low 0.670/0.460 1-Year Period 16.0% lacks any investments in equity markets.

Market Capitilization Outstanding Shares Million KD 119.5 Latest (million) 209.63 • 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 November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • Burgan Well Drilling recorded an 11% increase in revenue year on year for FY2008-2009, yet recorded a 28% drop Stock Performance in net profit.

0.80 6 • The company’s loan book and net debt-to-equity ratio are 52-week High: KD 0.670 growing as the company has recently taken on new debt. 5 We expect that the company is using the additional funds 0.60 to finance additions to property, plant and equipment. 4

0.40 3 Millions Price (KD) Price 52-week Low: KD 0.460 2

0.20

0.00 - Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Volume Close

Sources: Reuters and NBK Capital

Analyst

Badder Al Ghanim T. +965 2259 5330 E. [email protected]

Key Ratios

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 38 Burgan Co. For Well Drilling, Trading & Maintenance (Burgan Well Drilling) Kuwait in Focus - November 2009

Overview 1Q2009-2010 (April - June 2009)

Burgan Company for Well Drilling, Trading and Maintenance • In 1Q2009-2010 Burgan Well Drilling reported revenue (Burgan Well Drilling) is an oil service company that provides of KD 9.6 million. This represents considerable growth of manpower for well drilling and rig mobilization, as well as repair 31% over 1Q2008-2009. and maintenance services for Burgan Well Drilling-owned and • In turn, contract costs grew by 47% during 1Q2009-2010. non-owned wells and rigs. Burgan Well Drilling’s sole source of Due to the unparallel growth in revenue and contract costs, revenue are service contracts with various government-operated gross profit grew at a slower rate of 5% to KD 2.8 million oil companies. The company has operations principally in in 1Q2009-2010. Kuwait and Bahrain and has a longstanding relationship with Kuwait Oil Company (KOC) and its parent, Kuwait Petroleum • EBITDA increased by 17% in 1Q2009-2010 to KD 3.5 Corporation. Burgan Well Drilling was founded in 1970 and million when compared to the KD 3 million achieved was listed on the Kuwait Stock Exchange in 2005. in 1Q2008-2009. However, contrary to this increase, EBITDA margin dropped to 37% in 1Q2009-2010 from Latest News 41% year on year. • Finance costs grew considerably during the first quarter of September 7, 2009 – Burgan Well Drilling announced the 2009-2010, growing by 102% year on year. successful completion and signing of a three-year syndicated • The collective effect resulted in a 3% growth in net profit facility (worth USD 125 million) that will be used to finance in 1Q2009-2010 (year on year). Net profit margin on the the purchase of four oil rigs. other hand fell to 23% in 1Q2009-2010 from 29% in 1Q2008-2009. Financial Statement Analysis

Balance Sheet Income Statement

• With Burgan Well Drilling taking on new loans, of which • Burgan Well Drilling reported revenue of KD 30 million almost half were of a short-term nature, as well as advances in FY2008-2009, 11% higher than the previous year. from KOC for future projects, the company witnessed In addition, revenue has grown at a CAGR of 23% since drops in both current and quick ratio settling at 0.5 and 2004-2005. Burgan reports revenue using the percentage- 0.2, respectively. of-completion method. • The company currently has a net debt-to-equity ratio of • Offsetting growth in revenue is a 25% increase in contract 0.8, up from 0.3 from the previous year. costs—mainly due to a 28% rise in staff costs as well as an increase of 52% in repair and maintenance costs. • We notice that the company’s loan book has been growing gradually over the past several years; and as of the latest • Uneven growth in revenue and contract costs resulted in financials, Burgan Well Drilling’s loan book grew by 259% a 9% decline in gross profit for the year. Nonetheless, the year on year. Currently, Burgan Well Drilling’s total debt gross profit margin remains at a healthy level of 32%. amounts to KD 42.1 million, of which KD 19.4 million is • EBITDA dropped 10% in FY2008-2009, year on year, short term. though it has historically grown at a CAGR of 22%. This • We expect that this new debt has been used to finance drop is due to the combination of the aforementioned PP&E—defined as tools, equipment, and new machinery— decline in gross profit and the considerable growth in as it increased by 14% during the first quarter. 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.

nbkcapital.com | 39 Burgan Co. For Well Drilling, Trading & Maintenance (Burgan Well Drilling) Kuwait in Focus - November 2009

Financial Statements

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 40 Companies in Focus Kuwait in Focus - November 2009

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 2,621,116 (Altijaria) is a sharia compliant real estate investment, Reuters Code CRCK.KW 52- week avg. value (KD) 321,132 development, and management company. Its main focus Price (KD) Price Performance is residential and commercial property development; along Closing Price 0.122 YTD -4.0% 52-week High/Low 0.150/0.077 1-Year Period 21.0% with investment in Kuwait and the region.

Market Capitilization Outstanding Shares Million KD 209.2 Latest (million) 1,714.80 • Altijaria has major projects across various business segments and geographic locations. Ownership Structure Closely Held: 13.30% Public: 86.70% • Historically, both top line and bottom line growth has Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital been driven mainly by change in fair value of real estate properties (revaluation gains on real estate properties) and Stock Performance profit from sale of available-for-sale (AFS) investments. Change in fair value of real estate properties and profit 0.20 25 from AFS investments accounted for an average of 65%

52-week High: KD .150 52-week Low: KD 0.077 of net profit over the past 5 years (2004-2008), with the 20 percentage rising to almost 196% in 1H2009.

15 • The company’s investment book (both available-for-sale 0.10 and held-for-trading) stood at KD 48.6 million according to Millions Price (KD) Price 10 the 1H2009 financials, accounting for 21% of shareholder equity. Almost 76% of AFS investment is in the unquoted 5 category.

• The company announced the preliminary results for 0.00 - Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 9M2009, where net profit declined by 34.7% to KD 18.1 Volume Close million.

Sources: Reuters and NBK Capital

Analyst

Mariam Al-Bahar T. +965 2259 5138 E. mariam.albahar@nbkcapital

Key Ratios

2005 2006 2007 2008 1H2009 Rental Income (% of Real estate related rev.) 23% 34% 16% 30% 16% Profit from sale of real estate (% of real estate-related rev.) 33% 32% 34% 8% 1% Change in fair value (% of Real estate-related rev.) 19% 32% 49% 62% 83% Revaluation gains as a % of net profit 56% 43% 59% 86% 196% EBITDA (KD million) 16.2 14.2 37.4 19.5 20.6 EBITDA Interest Cover (x) 4.3 3.9 5.8 2.5 3.8 Net Debt-to-Equity (x) 0.3 0.2 0.4 0.7 0.7 Operating Profit Margin 76% 77% 89% 83% 92% Net Profit Margin 135% 191% 105% 61% 42% Adjusted Net Profit Margin 60% 58% 73% 50% 68% Investment Book (% of Total Assets) 17% 9% 12% 12% 12% Investment Book (% of Total Equity) 25% 14% 18% 22% 21%

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 41 Commercial Real Estate Company (Altijaria) Kuwait in Focus - November 2009

Overview development consists of 18 plots, each 400 sq. m. in size. The built-up area of each plot ranges from 460 sq. m. to 550 The Kuwait-based Commercial Real Estate Company (Altijaria) sq. m. is a sharia compliant real estate investment, development, Al Yarmouk Villas, Phase 2 – This project includes 14 plots, and management company. The main focus of the company each covering an area of around 386 sq. m. The built-up area is residential and commercial property development and is around 450 sq. m. per plot. investment in Kuwait and in the region. The company was established in 1968 and was listed on the Kuwait Stock Rester Beach Resort – Located on the Gulf beach in the Al- Exchange at the end of 2004. Egila area, the project consists of 31 townhouses, each of which has two floors, a garden, and private parking. The resort Altijaria aims to drive growth by seizing investment and real includes other facilities such as squash courts, a health club, estate opportunities and expanding abroad in order to diversify landscaped gardens, and a swimming pool. its revenue stream. It has adopted the following business Al-Shrooq Tower – Located on Jaber Al-Mubarak Street in model: the Sharq area, this tower consists of 21 floors and includes • Altijaria engages in business activities related to commercial shops in the basement, ground floor, and commercial and residential real estate. Within the real mezzanine. estate sphere, the company handles the sale, purchase Budoor Tower – Located in Sharq area on the Ahmed Al and lease of land and property. Jaber Street, this office tower consists of 17 floors and • Altijaria’s network expansion through alliances and includes commercial shops in the basement, ground floor and consortiums with various firms in the GCC drives its focus mezzanine. towards developing large scale projects rather than smaller residential and commercial projects. Major ongoing projects - Kuwait

The company’s latest ventures and acquisitions, like First Symphony – This is a mixed-use project located in Salmiya and Investment Bank (Islamic Bank), are radically strengthening is built on an area of 11,500 sq. m., consisting of commercial its business model in favor of greater diversification. shops (divided into a basement, ground floor, mezzanine, and first floor) with two towers on top. The office tower comprises Latest News 11 floors, and the other tower is a hotel with 20 floors,

• The company announced the preliminary results for Al Tijaria Tower – This is another mixed-use project and will 9M2009, wher net profit declined by 34.7% to KD 18.1 include malls and office space. The tower is located in the million. Sharq area and is built on an area of 4,295 sq. m. The top part of the tower is designated for office space and consists • Commercial Real Estate Company acquired 8.3% stake in of 40 floors. Bahrain First Investment Bank. The Dome – Located in Abu-Halifa on the coastal road, the • Commercial Real Estate is a part of a consortium consisting project is built on an area of 15,195 sq. m. and consists of of regional and international development companies, restaurants, coffee shops, and facilities for entertainment which has been entrusted with the development of the activities. Jeddah Central District Project. The endeavour is the first Juman Residential Complex – Built on an area of 7,950 sq. of its kind in terms of size and the partnership between the m., this residential project is located in Mahboula, facing the private and public sectors. The project will cover an area of Fahaheel Express Road. The project consists of two buildings 6 million sq. m. in Jeddah. of 12 floors each, which includes apartments, penthouses, and townhouses. The project also includes swimming pools, MAJOR PROJECTS a paradise island for children, a waterfall, and other facilities such as tennis courts, a gymnasium, and commercial shops. Major completed projects - Kuwait Major upcoming projects - Kuwait Al-Manar – Located in Bnaid Al Gar, this project consists of a 16-floor residential tower (two- and three-bedroom apartments) X-Zone Project – This will be an entertainment project on and six townhouses. One of the most important features of this an area of 5,940 sq. m. It will consist of restaurants, coffee super-deluxe residential complex is its sea view. shops, a games area, two movie theaters, and other advanced entertainment facilities. Al Yarmouk Villas, Phase 1 – Located in the Yarmouk area, the

nbkcapital.com | 42 Commercial Real Estate Company (Altijaria) Kuwait in Focus - November 2009

Ruba – The Ruba Project will be a residential building Operating profit increased by 10% to KD 20.7 million in located in Mahboula, and will be built on an area of 5,373 1H2009, compared to 18.8 million in 1H2008. This resulted sq. m. adjacent to the Fahaheel Expressway. It will consist from the increase in total real-estate-related revenue and a of 15 floors, and will contain a mix of dwelling units such decline in administrative expenses. as individual townhouses and penthouses. It will also include A closer look at the real estate recurring income (rental income provisions for outdoor and indoor recreational activities. and hotel income) shows that the company’s recurring income Salmiya Park – This is one of the most important tourism dropped significantly, from KD 12 million in 2005 to KD 7 projects launched in Kuwait and it is spread over an area of million in 2008, mainly due to the significant decrease in hotel 380,000 sq. m. The estimated cost of the project is KD 19 income. In 1H2009 the real estate recurring income increased million. slightly, by 2.2% to 3.5 million (year on year), entirely due to the rental income. Kuwait International Tennis Complex – Built over an area of 70,000 sq. m., this will be a one-of-a-kind project in the Net profit decreased by 63% to KD 9.5 million in 1H2009, region. It will include a hotel, a commercial complex, a major compared to KD 25.5 million in 1H2008. This was due mainly adapted and covered stadium, and tennis and squash courts, to the decrease in the group’s share of associate results, profit all for an estimated investment of KD 28 million. from available for sale (AFS) investments and foreign exchange losses. Major international projects Balance Sheet House Towers Project – Hajer and Al Mukam Towers are residential towers that will be located very close to Kaaba in • The company had a net debt-to-equity ratio of 0.7 as of Saudi Arabia. This project will cater mainly to the housing June 2009, with 75% of the company’s debt due within needs of pilgrims. The Hajer tower will be a mixed-use project a year. and will consist of 31 floors, 10 floors of which will be occupied • The company’s investment book (both AFS and held-for- by the Mövenpick Hotel. The remaining floors will consist of trading) stood at KD 48.6 million according to 1H2009 furnished hotel apartments. Al Mukam Tower, also a mixed-use financials. The company’s investment book accounts for tower, will consist of 45 floors and will include a hotel and 21% of shareholder equity, in line with the last 5-year hotel apartments. average of 21%. Almost 76% of the AFS investment is in Ain Athari – Bahrain Park – This is an international BOT the unquoted category. project and will be developed in participation with two other companies in the region. It is located in Bahrain and will be Financial Statements built over an area of 170,000 sq. m.

Balance Sheet - Key Figures (KD› 000) 2006 2007 2008 1H2009 Financial Statement Analysis Cash and Bank Balances 38.59 535.48 4,284.00 133.79 Investment Properties 84.17 123,248.00 128,825.00 182,118.81 Total Assets 311.08 337,493.47 398,696.91 414,911.72 Income statement Short Term Debt 23.15 29,726.92 102,565.12 118,802.89 Long Term Debt 50.02 55,489.34 46,512.06 40,281.59 Total Debt 73.17 85,216.26 149,077.17 159,084.49 Real-estate-related revenue increased by 5.5% to KD 22.5 Equity 198.52 225,454.89 218,738.10 227,616.59 million in 1H2009 compared to KD 21.3 million in 1H2008, entirely due to change in fair value of real estate properties.

Historically, change in fair value of real estate properties has been one of the main drivers of real estate revenue. Change in fair value of real estate properties accounted for 83% of total real-estate- related revenue during 1H2009, compared to an average of 38% of real estate revenues in the last 5 years (2004-2008), while rental income accounted for 24% of real- Source: Company’s financials, and NBK Capital estate-related revenue in the last 5 years.

The company’s rental income increased slightly, by 1.3%, to KD 3.5 million in 1H2009, compared to the same period last year. Historically, rental income grew at a five-year CAGR of 18% for the period from 2003 to 2008.

nbkcapital.com | 43 Companies in Focus Kuwait in Focus - November 2009

Gulf Cable and Electric Industries Company (GULF Cable)

Key Data Highlights

General Liquidity • Gulf Cable and Electric Industries Company (Gulf Cable) is KSE Code CABL.KSE 52-week avg. volume 171,086 the market leader in Kuwait, with a 95% market share in Reuters Code CABL.KW 52- week avg. value (KD) 256,161 the electric cable business. Price (KD) Price Performance

Closing Price 1.500 YTD 52.0% • Gulf Cable set up new plants in 2009 across the GCC. The 52-week High/Low 1.980/0.900 1-Year Period 15.0% company boosted production capacity to 75,000 tons/year Market Capitilization Outstanding Shares from the previous 50,830 tons/year. Million KD 314.90 Latest (million) 209.90

Ownership Structure • The company has large investments in the financial Closely Held: 39.9% Public: 60.1% markets. Investments represent 92% of shareholders’ Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital equity and 69% of total assets. Investment income accounts for 70% of total net income. Stock Performance • Gulf Cable has taken a foothold in the regional market

2.00 2.5 by acquiring a cable producer in Jordan (KD 8 million 52-week High: KD 1.980 investment) capable of producing an additional 20,000 1.80 2.0 tons of cable per year. 1.60 • Acting as a regional player allows Gulf Cable to take 1.5 1.40 advantage of the increased spending by governments

Price (KD) Price 1.20 1.0 Millions on major development projects (e.g., infrastructure).

1.00 Approximately 50k to 60k MW of electric generation 52-week Low: KD 0.900 0.5 capacity is likely to be added within the Middle East region 0.80 over the next four years.

0.60 0.0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 • The business is relatively immune to fluctuations in copper Volume Close prices, as sales prices are based on a mark-up scheme

Sources: Reuters and NBK Capital that includes the price of copper as well as operational expenses. This almost guarantees no losses on the Analyst operational level in the future. However, changes in copper prices will affect revenues. According to Bloomberg, Wadie Khoury copper prices increased from USD 143.95/lbs in 2008 to T. +965 2259 5118 USD 295.55/lbs in 1H2009. E. [email protected] • The company announced the preliminary results for 9M2009. Gulf Cable reported a net profit of KD 8.9 million, a 62% decline YoY.

Key Ratios

2005 2006 2007 2008 1H2009 Gross Margin 30.3% 32.5% 30.0% 20.1% 15.4% EBITDA Margin 29.6% 31.0% 27.2% 17.6% 12.0% EBIT Margins 27.9% 29.3% 26.1% 16.4% 10.0% Net Income Margin 31.0% 30.4% 32.0% 2.9% 20.8% Investment Book-to-Assets 79.5% 70.0% 75.6% 54.2% 68.8% Investment Book-to-Equity 93.7% 74.1% 87.2% 84.7% 91.9% Investment Income-to-Net Income 17.7% 17.2% 31.3% -404.2% 69.7% ROAA 11.8% 11.2% 10.1% 1.1% -2.0% ROAE 13.5% 12.4% 11.3% 1.5% -2.7% Adjusted ROAA 37.5% 27.2% 23.0% 14.9% 3.4% Debt-to-Equity 12.6% 2.2% 12.4% 50.9% 29.3%

* Annualized figures Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 44 Gulf Cable and Electric Industries Company (Gulf Cable) Kuwait in Focus - November 2009

Overview value reserve account rallied back up to KD 76.6 million in 1H2009.

With a production capacity of 75,000 tons/year, Gulf • Looking at Gulf Cable from an operational standpoint, Cable is one of the most dominant regional players in the 6.3% of the company’s balance sheet consists of property, manufacturing and supply of cables. Established in 1975, plant, and equipment. the company’s core operations revolve around the production of cables for the distribution of electricity. These cables • Inventory balances increased at a CAGR of 54% between are strictly low-and medium-voltage cables made of copper 2005 and 2008 to hit KD 48.8 million. In 1H2009, the inventory balance fell to KD 29.1 million. This was a result (approximately 70% of total produced cables) or aluminum of a decline in raw material costs, which dropped from (approximately 30%). Gulf Cable’s production facilities allow KD 20.6 million in 2008 to KD 9.3 million in 1H2009. it to produce other forms of cables such as data transmission It is worth noting that the company was able to improve cables, conductors, and telephone cables. Furthermore, Gulf its ability to convert inventory into cash in 2008, as the Cable has its own copper rod plants, enabling it to produce average dropped from 195 days in 2007 to 173 days in 12,000 tons of copper (the main raw material used in the 2008. In 1H2009, the days inventory outstanding further production of cables) per year. The group is composed of the declined to 165 days (ttm). parent company along with its subsidiary Gulf Cable and Multi Industries Company–JSC, located in Jordan. The company • The debt-to-equity ratio increased from 13% in 2005 to sells its products within the Middle East, including UAE 51% in 2008. However, by June 2009, the debt-to-equity (United Arab Emirates), Oman, Jordan, Qatar, Bahrain, and ratio had dropped to 29%, indicating that the company Saudi Arabia. Local sales contributed to 69% of total sales in has paid part of its debt back through cash generated from 2007, and exports contributed to the remaining 31%. a better management of working capital (i.e., decreases in accounts receivable and inventory). This is further Latest News explained in the cash flow analysis.

November 2009: The company announced the preliminary Income Statement results for 9M2009. Gulf Cable reported a net profit of KD 8.9 million, a 62% decline YoY. • Sales have shown an upward trend, growing at a CAGR of 32.8% between 2005 and 2008. There was a large October 2009: Gulf Cable signed a 10-month contract with the increase in credit sales during that time frame. Sales Ministry of Electricity and Water to supply welding materials declined by 34% in 1H2009 compared with 1H2008. for tension power cables. The contract is valued at KD 1.9 This affected gross profit margins as the cost of goods sold million. did not decline as fast as sales. Gross margins dropped April 2009: Gulf Cable signed a nine-month contract, valued from 21% in 1H2008 to 15% in 1H2009. at KD 1.4 million, to supply the Ministry of Electricity and • The company’s sales quality has been stable, as sales and Water with electric cables. accounts receivables have moved in tandem. However, in 2008, days receivable on hand increased from 100 Financial Statement Analysis days to 108 days. The company then improved receivable collection in the first half of 2009 as days receivable Balance Sheet outstanding decreased to 101 days.

• The company has a significant portion of assets allocated in market portfolios. As of 2008, the company had available-for-sale (AFS) investments (fair value of KD 128.45 million) accounting for 85% of total shareholders’ equity (54% of total assets). By 1H2009, AFS accounted for 92% of total equity (69% of total assets).

• Since the AFS portfolio is counted at fair value, any mark- to-market gains or losses are reflected in the revaluation reserve account. Per the 2008 results, the fair value reserve account dropped to KD 35.1 million, from KD 163.9 in 2007, knocking off KD 128.8 million of shareholders’ equity due to the effects of the financial crisis. The fair

nbkcapital.com | 45 Gulf Cable and Electric Industries Company (Gulf Cable) Kuwait in Focus - November 2009

Days Sales Outstanding and A/R as a Percentage leaving the company with KD 50.3 million. Gulf Cable paid of Sales 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 40% 120 purchased in 2008) and payment of dividends (KD 8.1 34.0% 35% 32.8% million in 2008), adding up to just over KD 38.7 million. 100 30% 28.1% • In 1H2009, things changed. Cash flow from operations 24.3% 80 25% increased to KD 42.1 million in 1H2009 from KD 6.1 million in 1H2008 due to an improvement in the managing 20% 60 108 of working capital (details of what exactly occurred have 100 101 A/R % of Salesof % A/R 15% Days of Number not been provided). The company continued to purchase 77 40 10% investments from the additional cash. However, debt was 20 also paid down, and additional dividends were paid out. 5%

0% 0 2006 2007 2008 1H2009 Financial Statements

Days Sales Outstanding (DSO) A/R as % of Sales

Income Statement (KD '000) 2007 2008 1H2008 1H2009 Total Revenue 83,983 109,858 55,072 36,395 • The company’s bottom line is highly dependent on income Cost of Revenue (58,765) (87,817) (43,433) (30,786) Gross Profit 25,217 22,041 11,639 5,609 from investments. In 2008, the loss from investments Selling/General/Admin Expenses (3,328) (4,027) (1,807) (1,964) Operating Income 21,889 18,014 9,832 3,645 stood at KD 12.9 million, compared to a net profit of KD Investment Income (Exp), Net Non-Operating 6,308 (15,360) 7,578 3,067 Other, Net (98) 919 (53) 1,173 3.23 million in 2007. In previous years, income from Net Income before Taxes 28,099 3,573 17,357 7,885 investments increased from KD 2.6 million in 2005 to KD Contributions to KFAS (281) (36) (173) (79) NLST (624) - (303) (66) 8.4 million in 2007. In 2008, the loss incurred wiped out Zakat (15) - (106) (18) Directors Remuneration (310) (310) (155) (155) any profits made from investments in 2006 and 2007. Net Income 26,868 3,227 16,619 7,567 Furthermore, net income declined from KD 8.17 million in 1H2008 to KD 5.28 million in 1H2009. Balance Sheet (KD '000) 2007 2008 1H2008 1H2009 Property, plant and equipment 11,627.11 14,975.26 13,564 15,644 Available for sale investment 248,450.49 128,445.77 246,772.92 171,328.40 • The main contributor to the 54% decline in net income in Non-Current Assets 260,077.61 143,421.03 260,336.60 186,972.35 Inventories 34,712.80 48,755.95 39,046.55 29,108.88 1H2009 was the drop in sales. The drop in income from Trade Account Receivable 27,518.81 37,351.03 28,541.74 22,146.84 investments was the second largest contributor—primarily Other Reveivable and prepayments 3,063.90 4,912.78 1,302.43 2,303.61 Fixed deposit 200.61 186.43 - - due to the 9% fall in dividend income. Cash and bank balances 2,982.54 2,402.87 5,651.29 8,545.35 Current Assets 68,478.65 93,609.05 74,542.02 62,104.68 Total Assets 328,556.26 237,030.08 334,878.61 249,077.02 • Looking at net profit strictly from an operational point Long term provisions 1,376.20 1,229.47 1,498.02 1,328.14 of view (i.e., excluding any profit from investments), we Long term loans 2,573.91 12,925.22 2,219.58 13,141.61 Non Current Liabilities 3,950.11 14,154.69 3,717.60 14,469.74 find that adjusted net income was more stable. Looking Trade A/P 1,018.83 1,089.26 1,349.91 1,200.28 Other Payables and accruals 5,634.75 5,770.73 34,187.79 5,701.06 at the company’s return on average assets (ROAA) and the Current Portion of LT loans 571.98 4,938.84 554.90 5,136.39 company’s adjusted return on assets (excluding investment Short term loans 27,398.66 56,411.54 27,362.86 36,000.00 Due to banks 4,683.14 2,936.20 4,156.30 241.00 income), we find that the company would produce better Current Liabilities 39,307.36 71,146.56 67,611.75 48,278.73 Total Liabilities 43,257.47 85,301.25 71,329.35 62,748.47 returns as seen in the figure below. Fair Value reserve 163,861.33 35,075.55 133,751.21 76,590.68 Other Equity 121,437.46 116,653.28 129,798.06 109,737.87 Total Equity 285,298.79 151,728.83 263,549.26 186,328.55

Total Liabilities and Equity 328,556.26 237,030.08 334,878.61 249,077.02 2006 2007 2008 ROAA 11.2% 10.1% 1.1% Sources: Company’s financial statements and NBK Capital Adjusted ROAA 27.2% 23.0% 14.9%

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,

nbkcapital.com | 46 Companies in Focus Kuwait in Focus - November 2009

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 982,078 of services (such as accommodation and transportation Reuters Code MASK.KW 52- week avg. value (KD) 201,698 packages) for Haj and Umrah pilgrims. Price (KD) Price Performance

Closing Price 0.268 YTD 35.0% • Mashaer acts as a “middle man” by providing Haj and 52-week High/Low 0.300/0.118 1-Year Period 70.0% Umrah services. As a result, gross margins are extremely Market Capitilization Outstanding Shares Million KD 42.45 Latest (million) 160.20 low.

Ownership Structure • People will continue to attend Haj and Umrah, thus Closely Held: 35.8% Public: 64.2% ensuring a sustainable revenue stream going forward. Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital However, the current swine flu epidemic is likely to have a negative impact on the Hajj and Umrah attendance as it is Stock Performance expected to decline by 25% in 2009.

0.40 9 • The company is increasing its investments in associates.

52-week High: KD 0.300 8 These investments perform similar functions as the

7 company, whereby they tailor services to the Hajj and 0.30

6 Umrah demographic. As a result, investments in associates

5 are increasingly contributing to operating profits and net 0.20 4 income. Price (KD) Price Millions 52-week Low: KD 0.118 3 • There was a large discrepancy in sales between 2007 and 0.10 2 2008. The difference arose as a result of a sale of property 1 in 2008 to repay debt to one of the company's subsidiaries.

0.00 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 • The company managed to pay back a significant portion of Volume Close its debt in 1H2009 due to the significant collateral pledged

Sources: Reuters and NBK Capital against the debt. Total debt dropped by 46% from 2008 to 1H2009. This is expected to decrease finance charges Analyst (one of the largest portion of expenses) going forward. • The company announced the preliminary results for Wadie Khoury 9M2009. Mashaer reported a net profit of KD 3.9 million T. +965 2259 5118 compared to a loss of KD 2.8 million in 9M2008. E. [email protected]

Key Ratios

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 47 Haj & Umrah Services Consortium Co. (Mashaer) Kuwait in Focus - November 2009

Overview was a large decline in margins, which dropped from 14% in 2007 to 6% in 2008. Tickets and transport margins Haj & Umrah Services Consortium Company (Mashaer) is a both increased YoY. In 1H2009, gross margins stayed at Kuwait-based company that provides a range of services for the 6% mark. Haj and Umrah to the Holy Land of Mecca and Medina in Saudi Arabia. The services include providing hotel reservations Gross Margin Breakdown and transportation packages; trading and leasing of real estate, warehouses, and means of transportation; importing and exporting of foodstuff and consumable items; organizing conferences, seminars, and exhibitions; and providing medical services arrangements.

Latest News Sources: Company’s financial statements and NBK Capital

November 2009: The company announced the preliminary • Investment income contributed KD 2.6 million, the single results for 9M2009. Mashaer reported a net profit of KD 3.9 largest contributor to net income in 1H2009. Investment million compared to a loss of KD 2.8 million in 9M2008. income consisted of unrealized gain on revaluation of June 2009: Mashaer announced that its board of directors has investment property, valued at KD 2.5 million. The value of appointed Jassem Mohammed Al Awadi as the company’s new these properties is subjective, yet was included as a portion CEO as of May 10, 2009. of net income.

March 2009: Mashaer announced that its board of directors • While investment income made up the largest portion of has decided not to pay any dividend for the fiscal year ending the company’s net profit, operationally, share of profits from December 31, 2008. In the previous year, the cash dividend associates provided a larger contribution to net income was KD 0.030 per share. than Mashaer’s operations. In 1H2009, Mashaer reported EBITDA of KD 0.4 million; however, excluding profits from Financial Statement Analysis associates, the company would have reported a negative EBITDA of KD 0.8 million. Profits from associates grew by Income Statement 5.3% in 1H2009 from 1H2008. Going forward, we can expect this to continue to provide a recurring source of • Sale of properties under development has been included income for Mashaer. as part of sales in 2008. This is the sole reason for • In 1H2009, finance costs made up the largest portion of the jump in sales, and a blow to gross margins, which expenses as a result of the company’s significant debt. dropped from 14.6% in 2007 to 8.3% in 2008. The We would like to highlight that finance costs dropped by reason Mashaer included this line item as part of sales 34.4% in 1H2009 compared to 1H2008. Going forward, is unclear; however, we do know why the company sold finance expenses are expected to drop further. properties under development in 2008. Mashaer sold these properties, valued at KD 10.5 million, to Hajer Tower • If we were to adjust unrealized gains on property values, net (one of Mashaer’s associates) to settle a portion of the income in 1H2009 would have dropped to KD 0.7 million, company's debt. The company recognized a profit of KD a 70.4% decline YoY. 0.13 million, thus generating a gross margin of 1.4%. This dragged down the overall gross margins for the remainder Balance Sheet of the year. • Mashaer's total debts as of December 31, 2008 was KD • Without the sale of the properties, revenues would have 41.6 million. The majority of which (78.1%) was short actually decreased from 2007 to 2008, dropping from term debt (STD). The company’s current ratio stood at KD 5.7 million to KD 4.5 million. The breakdown of sales 0.64x at the end of 2008. As a matter of fact, in 2008, for 1H2009 has not been provided in the financials. Mashaer’s total current assets were insufficient to pay off • Normally, gross margins from properties under development short-term debt. have the highest margins (in 2007, margins hit 36%, compared to 7% in 2008). The settlement clearly brought margins down in 2008. Under hotel reservations, there

nbkcapital.com | 48 Haj & Umrah Services Consortium Co. (Mashaer) Kuwait in Focus - November 2009

Short-term Debt vs. Current Assets Investments in Associates

Sources: Company’s financial statements and NBK Capital Sources: Company’s financial statements and NBK Capital

• In 1H2009, the company’s total debt balance fell to KD • The company’s holdings in available for sale (AFS) 22.6 million, while STD decreased to KD 13.3 million. investments grew at a CAGR of 18% over the past three The company was able to repay its debt mainly from the years. The breakdown of these investments includes local liquidation of the pledged collateral. During 2Q2009, the quoted share, local unquoted shares, and foreign unquoted company settled a tawarruq finance facility of KD 7.5 shares. Local unquoted shares made up 64% of AFS in million from pledged murabaha collateral, and transferred 2008. All companies that fall under the local unquoted investment property rights valued at KD 8.1 million. Over shares category are recorded at cost less impairments and above, the company settled KD 2.1 million of debt in (if any). Increases or decreases in the value of these cash. assets have no bearing on equity due to the difficulty in determining the fair value of the unquoted securities; • The majority of the debt was used to invest in properties however, according to management, no impairment under development and contribution to entities under charges were recorded for the year ending 2008. establishment. The investments in properties under development include a commercial complex used as a • Another large contributor to assets is properties under housing facility for pilgrims in Saudi Arabia that is expected development. In 2007, properties under development to be completed by the end of 2009. The contribution to were the largest portion of assets, making up 23.5% of entities under establishment includes capital contributed total assets. In 2008, the number of properties under by Mashaer in companies that will eventually become development dropped significantly (43% decline between an associate or a subsidiary. The entities are expected 2007 and 2008) because several of the properties under to provide services tailored to the same demographic as development were sold to settle a debt account with one Mashaer, and will be treated as an operating activity. of Mashaer’s associates—Hajer Tower. This explains the significant increase in the absolute value of the company’s • The largest portion of assets is in investments in associates, revenue and the decrease in its margins. which make up 22.4% of the company’s total assets as of 1H2009. Going forward, we can expect this block on the balance sheet to rise because of the increased investments in contributions to entities under establishment amounting to KD 17.7 million in 1H2009.

• Mashaer’s investments in associates have grown by more than six times over the past three years. Investments in associates in 1H2009 grew by 6.5% compared to 2008. Due to increased investments in these associates, their contribution to net profit has increased over the years.

nbkcapital.com | 49 Haj & Umrah Services Consortium Co. (Mashaer) Kuwait in Focus - November 2009

Financial Statements

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 50 Companies in Focus Kuwait in Focus - November 2009

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 122,454 cement market, with a production capacity of 3.8 million Reuters Code KCEM.KW 52- week avg. value (KD) 67,345 tons. Price (KD) Price Performance • Kuwait Cement has a large investment book on the Closing Price 0.530 YTD -6.0% 52-week High/Low 0.686/0.357 1-Year Period -16.0% company’s balance sheet. The company has an 8.92%

Market Capitilization Outstanding Shares share in National Industries Group (NIG). NIG is one of the Million KD 306.54 Latest (million) 578.40 largest companies in terms of market capitalization on the Ownership Structure Kuwait Stock Exchange (KSE). Closely Held: 63.4% Public: 36.6% • Major development projects are delayed due to a decline in Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital the price of oil. Since oil is the main source of revenue in Stock Performance Kuwait, government spending on large projects may be put on hold or cancelled. The demand for cement will decrease

0.80 3 and, thus, affect revenues for cement companies.

0.70 2.5 • Saudi Arabia’s excess cement production may cause a 52-week High: KD 0.686 commotion in the Kuwaiti market due to the competitive 0.60 2 advantage of Saudi cement producers. This is the result

0.50 1.5 of subsidies provided by the Saudi government on energy Millions Price (KD) Price

52-week Low: KD 0.357 costs. 0.40 1 • Kuwaiti companies enjoy a geographic advantage in terms 0.30 0.5 of access to the Iraqi market. Kuwait Cement’s planned 0.20 0 capacity addition is likely to play an important role in Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Volume Close exporting cement for the reconstruction activity in Iraq.

Sources: Reuters and NBK Capital • Kuwait Cement issued its 9M2009 financial results. Net income declined by 26% to KD14.9 million from KD 20.2 Analyst million in 9M2009.

Wadie Khoury T. +965 2259 5118 E. [email protected]

Key Ratios

2005 2006 2007 2008 9M2009 Sales (KD million) 63.5 72.3 82.4 86.4 46.8 EBITDA (KD million) 22.4 26.9 38.6 24.7 11.6 Net Income (KD million) 37.8 40.3 54.8 4.3 14.9 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 | 51 Kuwait Cement Company Kuwait in Focus - November 2009

Overview (in spite of the still large investment books); however, a reversal on impaired PP&E valued at KD 24 million helped Kuwait Cement Company is one of the three cement players boost net income to KD 14.9 million in 9M2009. in Kuwait. Kuwait Cement is the largest local cement player • Kuwait Cement operates better as a cement company than involved in the production and distribution of ordinary cement, as an asset management firm. Looking at the adjusted sulphate resistant Portland cement, Portland cement for return on assets (adj. ROAA) vs. the actual return on assets industrial purposes as well as other types of cement. The (ROAA), we notice a more stable set of returns. Between company has the capacity to produce up to 3.8 million tons 2005 and 2008, operational ROAA fell from 17% to 13%; of cement, and a clinker grinding capacity of 4 million tons whereas actual ROAA (including investments) fell from per year, with the majority of Kuwait Cement’s core operations 19% to 1%. In 9M2009, ROAA and ROAE were -0.3% driven by the housing market. The company strictly caters to and -0.5%, respectively, while the adjusted operational the Kuwaiti market, which consumes approximately 5.5 to 6 ROAA reached 10%. million tons 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 SG&A costs.

January 28, 2009: Kuwait Cement signed a deal worth USD • EBIT margins dropped due to a significant decline in 53.5 million with Descon Engineering, a Pakistan-based spite of a decline in depreciation charges. The reason company, to expand their cement plant in Shuaiba. This will for the drop in depreciation is unclear; however, it could increase clinker capacity from 2.5 million tons to 5 million be a result of the halt of the depreciation of some of the tons. 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 EBIT and a Income Statement 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 by 28% in 9M2009 compared to 9M2008; taking gross market, whereby the investment book made up 81% of profit margin down from 32.5% to 30.6% within the same share holders’ equity as of September 2009. time frame. This comes despite a 29% drop in cost of • Amendments to IAS 39 allowed Kuwait Cement to prevent goods sold (COGS). showing any losses on the income statement associated • The drop in COGS is mainly due to the 32% drop in raw with marked to market changes in available-for-sale (AFS) material costs, as well as the 39.7% decline in maintenance investments going forward. The amendments were made and spare parts (the second largest contributor to COGS). in the third quarter 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 of • Shareholders’ equity fell by 56% between 2007 (KD Kuwait Cement’s profits were 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 non- as fair value reserves and retained earnings improved. The operating income (i.e. investment income). Between 2004 retained earnings value would have been far lower had and 2007, non-operating income contributed an average the company not reversed the impairment on its PP&E of 59.4% of net income throughout that period. In 2008, (extraordinary item). investment income actually accounted for a loss of KD 15.6 million (not including any adjustments to AFS). In • AFS contributes the largest portion of assets, taking 9M2009, investment income contributed a loss to income up 46.1% of total assets as of 9M2009. From 2008

nbkcapital.com | 52 Kuwait Cement Company Kuwait in Focus - November 2009

to 9M2009, AFS increased by 7.5%, mainly due to an Financial Statements increase in the fair value of the assets. Kuwait Cement’s largest position held in AFS is an 8.92% stake in a cross Income Statement (KD '000) 2007 2008 9M2008 9M2009 holding with NIG. This investment alone constitutes 29.7% Total Revenue 82,432 86,399 64,904 46,764 Cost of Revenue (54,004) (63,572) (47,003) (33,173) of the total assets. The value of this investment increased Gross Profit 28,429 22,827 17,901 13,591 Selling/General/Admin Expenses (2,635) (2,991) (2,147) (2,650) from KD 46.8 million in 2008 to KD 52.3 million in 9M Other Operating income 2,366 (610) 1,016 (808) 2009. Provisions & Impairment (13,204) - 33 16,799 Operating Income 14,955 19,226 16,802 26,931 Inv. Income (Exp), Net Non-Op 39,599 (15,564) 3,521 (10,920) • PP&E increased significantly from KD 12.8 million in Associate Results 2,153 833 480 (344) Net Income before Taxes 56,707 4,495 20,803 15,666 2008 to KD 45.9 million in 9M2009. This is a result of a Contributions to KFAS (569) (43) (208) (153) reversal on impairment of KD 24.1 million. PP&E actually NLST (1,146) - (244) (360) Zakat (27) - (90) (218) increased to KD 21.8 million in 9M2009 (only a 70% Directors Remuneration (161) (140) (105) - Net Income 54,803 4,312 20,156 14,936 increase from 2008) if the reversal on impairment is not

taken into account. Balance Sheet (KD '000) 2007 2008 9M2008 9M2009 AFS Investments 197,555 107,616 193,481 115,676 • The company has increased its production capacity to PP&E 8,430 12,807 11,562 45,887 Other Non Current Assets 11,944 16,189 16,246 15,687 3.8 million tons of cement per year, with expectations of Total Non Current Assets 217,929 136,612 221,290 177,251 HFT Investments 106,090 17,727 110,876 14,987 reaching 5 million tons. The clinker capacity expansion C&CE 17,143 41,516 14,856 26,555 would require approximately an additional KD 15 million Other Current Assets 23,963 43,529 30,100 32,034 Total Current Assets 147,195 102,771 155,832 73,577 capex going forward. How will this be financed? The KD Total Assets 365,125 239,384 377,122 250,828 Total Equity 302,711 133,339 298,065 162,516 26.6 million in cash will come in handy to help finance Loans 11,200 38,798 7,200 21,072 Other Non Current Liabilites 1,291 1,498 1,436 1,515 the project. Total Non Current Liabilities 12,491 40,296 8,636 22,587 Loans 40,750 58,356 61,214 53,641 • Kuwait Cement has raised plenty of debt over the years. Other Current Liabilities 9,174 7,392 9,206 12,084 Total Current Liabilities 49,923 65,748 70,420 65,725 Total debt has grown from KD 40.7 million in 2005 to KD Total Liabilities 62,414 106,044 79,056 88,312 97.2 million in 2008. Despite the increase in debt over Total Liabilities and Equity 365,125 239,384 377,122 250,828 the years, the company’s debt dropped to KD 74.7 million in 9M2009. Kuwait Cement took the initiative to pay back Sources: Company’s financial statements and NBK Capital KD 22.4 million of debt in 9M2009.

• 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 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 9M2009, whereby debt was being repaid, more AFS was 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 | 53 Companies in Focus Kuwait in Focus - November 2009

Kuwait Financial Center (Markaz)

Key Data Key Highlights

General Liquidity • Kuwait Financial Center (Markaz) was established in 1974 KSE Code MARKAZ.KSE 52-week avg. volume 1,654,915 and has become one of the leading asset management and Reuters Code MARKZ.KW 52-week avg. value (KD) 187,652 investment banking institutions in the MENA region. Price (KD) Price Performance

Closing Price 0.122 YTD 32.6% • Since the invasion in 1990, Markaz has gone through a 52-week High/Low 0.15 / 0.05 1-Year Period 47.0% major restructuring process, divested non-core assets, Market Capitalization Shares Outstanding increased its paid-up capital, and listed on the Kuwait Million KD 55.86 Latest (million) 457.91 Stock Exchange (KSE). Ownership Structure Closely Held: 28% Public: 72% • Markaz was the first to offer a derivatives trading platform in 2005, and is currently the only options market maker Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital for KSE-listed stocks.

Stock Performance • Markaz recorded a net profit of KD 1.9 million during 3Q2009, taking 9M2009 net profit to KD 4.2 million, 0.160 16 compared to net losses of KD 973 thousand logged 52-week High: KD 0.150

0.140 14 during 9M2008, supported primarily by an improvement in investment income. Almost all the other income 0.120 12 components dropped compared to 9M2008; however,

0.100 10 operating expenses declined by 31% YoY.

52-week Low: KD 0.050 0.080 8 • Markaz’s operating income breakdown has not been Millions

Price (KD) Price consistent over the years. Since 2004, management fees 0.060 6 and investment income have continually changed roles as 0.040 4 the largest contributor to operating income.

0.020 2 • Furthermore, Markaz’s cost-to-income ratio has been

0.000 0 equally volatile, primarily due to the nature of the operating Nov-08 Jan-09 Feb-09 Apr-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09 income. As of September 2009, Markaz’s cost-to-income Volume Close ratio stood at 52%.

Sources: Reuters and NBK Capital • Markaz’s AUMs grew by a CAGR of 24% between 2003 and 2007 to reach KD 1.2 billion, with most of the growth Analyst achieved in the first two years of the period in question. In 2008, the AUMs declined by 34% to KD 820 million, as Munira Mukadam liquidity tightened and investors became more cautious. T. +971 4 365 2858 Between December 2008 and September 2009, the AUMs E. [email protected] increased slightly 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 | 54 Kuwait Financial Center (Markaz) Kuwait in Focus - November 2009

Overview looking for investment opportunities in the region.

• In the US, Mar-Gulf Management Incorporated (Mar-Gulf) Kuwait Financial Center (Markaz) was established in 1974 has acted as Markaz’s asset management arm since 1988. and has become one of the leading asset management The fully owned subsidiary is involved in the ownership and investment banking institutions in the MENA region. and development of industrial, retail, and commercial The primary services of the company include investment properties in the Los Angeles area in California. Other management, corporate financing, investment and financial major subsidiaries include an asset management firm in advisory services, private equity, mutual funds and real estate Syria, real estate development and investment companies fund management, money market, and foreign exchange. in Jordan and Saudi Arabia, and some consultancies in Following the invasion in 1990, Markaz went through a Kuwait. major restructuring process as the company began divesting a substantial portion of non-core assets, affiliates, and Major Subsidiaries subsidiaries abroad. Markaz then increased its paid-up capital

Proportion and listed on the Kuwait Stock Exchange (KSE) by April 1997. Subsidiary Country Principal Activity of Ownership Markaz has since expanded its operations via subsidiaries Mar-Gulf Management Inc. USA 100% Asset Management KFC Lone Star, Inc USA 100% Asset Management in the United States (US), Syria, Jordan, and Saudi Arabia KFC Lone Star 1, Inc USA 100% Asset Management and representative offices in Algeria and Lebanon. Markaz Kuwait Financial Center - Syria Syria 100% Asset Management Markaz Real Estate Development Company Jordan 100% Real Estate has brought several innovative products to the markets, Markaz Real Estate Investment Company Saudi Arabia 100% Real Estate First Management and Economic Consultancy Co. Kuwait 100% Economic Consultancy including Kuwait’s first domestic mutual fund, the first Marsoft for Computer Programming, Operations and Consultancy Services Co. Kuwait 67% Computer Consultancy Real Estate Investment Trust (REIT), and the first derivative products trading platform. In fact, Markaz is the only options Sources: Company’s financial statements and NBK Capital 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 • In October 2009, Markaz revealed its plans to raise its 3Q2009, taking 9M2009 net profit to KD 4.2 million, real estate exposure in Syria, Saudi Arabia, and Egypt. The compared to net losses of KD 973 thousand logged company’s real estate assets in the Middle East and the US during 9M2008, supported primarily by an improvement stood close to USD 800 million. in investment income. Almost all the other income • In July 2009, Markaz announced that it had received components dropped compared to 9M2008; however, approval from the Central Bank of Kuwait (CBK) to buy operating expenses declined by 31% YoY. back up to 10% of its 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 • In March 2009, the board of directors decided that no KD 17.8 million recorded in 3Q2008 and 4Q2008, dividends would be paid for the year-end December 2008. respectively. In 2Q2009 and 3Q2009, however, there was an improvement as Markaz recorded net profits, supported Strategy by higher management fees and commissions, improved income on the trading portfolio, and lower operating costs.

• Markaz embarked on a rapid expansion strategy across the • Management fees and commissions were up 22% globe soon after the company’s incorporation in 1974. In QoQ during 3Q2009, but dropped by 29% YoY during 1976, Markaz established its first merchant bank in Korea 9M2009. The trading portfolio posted positive results of in partnership with Hyundai Engineering and Construction KD 3 million during 9M2009, supported by a KD 5.4 net Company. In 1978, Markaz began its real estate activity gain in 2Q2009 (the highest in the past seven quarters). in Los Angeles, US. A year later, the company acquired a The income from the available-for-sale (AFS) portfolio, majority stake in the Bank of Lebanon and Kuwait. Although however, continued to weaken, posting losses of KD 2.4 the 1990 invasion resulted in a halt of major operating million during 9M2009. Total operating income reached activities, Markaz maintained its ground, focusing on the KD 9 million, down 54% compared to 9M2008. management of existing investments. As the restructuring • Markaz’s costs improved during 9M2009, as general and process was completed in 1999, Markaz once again began

nbkcapital.com | 55 Kuwait Financial Center (Markaz) Kuwait in Focus - November 2009

administrative expenses fell by 24% and finance costs Balance Sheet dropped by 51%, compared to 9M2008.

• During 2008, Markaz reported a net loss of KD 18.8 • As of September 30, 2009, total assets had dropped by 8% to KD 122 million, compared to the end of 2008. million. Management fees were down 31% compared On the asset side, the trading investments portfolio grew to 2007, at KD 10.9 million, due to a steep decline in by 14% to KD 42 million. The AFS investment portfolio AUMs. However, losses in both the trading and AFS and the loans to customers, however, fell by 3% and 14%, portfolios weighed heavily on the operating income. The respectively. Short-term financing has been declining total operating loss at the end of 2008 stood at KD 10.6 continuously since December 2008, down 51% at the end million. of September 2009. • Operating costs decreased by 17% last year, while finance • In terms of financing, Markaz’s short-term borrowings rose costs increased by 19%. to KD 4 million in September 2009, after falling to KD • Markaz’s operating income breakdown has not been 861 thousand in June 2009, from KD 20.8 million at the consistent over the years. Since 2004, management fees end of December 2008. Shareholders’ equity increased to and investment income have continually changed roles as KD 85 million during 3Q2009. the largest contributor to operating income. • During 2008, total assets fell by 30% to KD 132 million, • Furthermore, Markaz’s cost-to-income ratio has been due to a steep decline in the investment portfolio. equally volatile, primarily due to the nature of the operating • As the stock markets plunged in 2008, Markaz’s trading income. As of September 2009, Markaz’s cost-to-income portfolio bore the brunt of the crisis as the investments’ ratio stood at 52%. value halved during the year to KD 37 million.

Operating Income Breakdown • The AFS portfolio also declined by 34% during the year, to KD 51 million. Shareholder’s equity fell by 42% compared to the end of 2007, not only due to negative earnings but 50 also because of a massive drop in the fair value reserve, 40 which fell from KD 23 million in 2007 to KD 1.7 million

30 in 2008. 25.6 12.2 20 • Markaz’s AUMs grew by a CAGR of 24% between 2003 and 2007 to reach KD 1.2 billion, with most of the growth 10 7.5 14.1 15.7 3.0 11.4 10.9 achieved in the first two years of the period in question. KD Million KD 7.2 6.0 0 In 2008, however, the AUMs declined by 34% to KD 820 -8.9 million, as liquidity tightened and investors became more (10) -23.8 cautious. Between December 2008 and September 2009, (20) the AUMs increased slightly to around KD 900 million.

(30) 2004 2005 2006 2007 2008 9M2009 Assets Under Management Management Fees and Commissions FVIS Portfolio AFS Portfolio Others

1.40 Sources: Company’s financial statements and NBK Capital 1.23 1.24 1.20 1.18

1.00 0.89 0.82 0.80 0.71

KWD Billion KWD 0.60

0.40

0.20

0.00 2004 2005 2006 2007 2008 Sep-09

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 56 Kuwait Financial Center (Markaz) Kuwait in Focus - November 2009

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. 0 428 609 0 Provision for credit losses (145) (131) 9 143 Foreign Exchange gain/ (loss) (824) (302) (984) 749 Other Income 0 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) 0 0 (193) Minority Interest (12) (14) (12) 20 Net Income 27,017 (18,784) (973) 4,155

Balance Sheet (KD '000) 2007 2008 Sep-08 Sep-09

Assets Cash and Cash Equivalents 2,430 11,416 1,710 5,768 Trading Investments 66,978 37,153 54,575 42,241 AFS Investments 76,829 50,954 69,489 49,581 Acc. Receivables and Oth. Assets 12,211 9,206 13,012 4,650 Short-term financing 5,207 3,972 0 1,955 Loans to customers 20,388 17,472 24,919 15,078 Invest. Prop and Prop. Under Development 3,101 1,321 1,590 1,931 Fixed Assets 574 738 636 608 Total Assets 187,718 132,232 165,931 121,812

Liabilities and Shareholders' Equity Due to banks and fin. Inst. 432 2,774 1,643 19 Acc. Payables and Oth. Liabilities 5,336 3,900 5,268 3,758 Dividends Payable 424 416 426 379 Short term borrowings 22,990 20,820 29,255 4,009 Bonds 27,300 27,595 26,630 28,660 Total Liabilities 56,482 55,505 63,222 36,825

Minority Interest 66 80 78 60

Total Shareholders' Equity 131,170 76,647 102,631 84,927

Total Liabilities and Sh. Equity 187,718 132,232 165,931 121,812

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 57 Companies in Focus Kuwait in Focus - November 2009

Kuwait Food Group (Americana)

Key Data Highlights

General Liquidity • Historically, Americana has been a solid operational

KSE Code FOOD.KSE 52-week avg. volume 134,639 company with healthy operating margins. Americana Reuters Code FOOD.KW 52- week avg. value (KD) 190,440 posted an 11% increase in revenue in 1H2009, year on Price (KD) Price Performance year, and a 15% EBITDA margin.

Closing Price 1.380 YTD 11.0% 52-week High/Low 1.840/0.740 1-Year Period -14.0% • Americana breaks down its revenues into three different

Market Capitilization Outstanding Shares segments: restaurants (49% of total revenue), industries Million KD 554.8 Latest (million) 402.00 (46% of total revenue), and commercial and retail (5% of Ownership Structure total revenue). Closely Held: 66.33% Public: 33.67% • The company has a sizable investment portfolio with Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital investments accounting for 26% of total assets and 58% Stock Performance of total equity. • Investment income/losses have increased the volatility of 2.00 52-week High: KD 1.840 3 Americana’s net profit figure. Recently, a sharp drop in 1.80 investment income led Americana to a 63% decline in net 1.60 2 profit for 1H2009 year on year. 1.40 • Americana has consistently paid dividends over the last 1.20 2 five years with an average payout ratio of 41%. 1.00 52-week Low: KD 0.740 Millions Price (KD) Price 0.80 1

0.60

0.40 1

0.20

0.00 - Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Volume Close

Sources: Reuters and NBK Capital

Analyst

Badder Al Ghanim T. +965-2259 5330 E. [email protected]

Key Ratios

FY2005 FY2006 FY2007 FY2008 1H2009 EBITDA 28,768 52,680 61,210 103,821 45,715 EBITDA Margin 12% 16% 14% 19% 15% Gross Profit Margin 17.7% 21.6% 18.5% 21.8% 18.0% Net Profit Margin 22.1% 10.4% 12.6% 6.3% 4.1% Operating Margin 17.7% 21.6% 18.5% 21.8% 18.2% ROE 25.7% 14.4% 17.2% 14.3% 4.7% ROA 17.0% 8.1% 9.4% 6.4% 2.1% Net Debt to Equity 1.5% 20.3% 26.7% 58.3% 61.0% Current Ratio 1.96 1.24 1.25 0.95 0.92 Quick Ratio 0.62 0.42 0.40 0.31 0.33 Day Sales Outstanding (DSO) 24 31 30 27 - Interest Coverage 9.8 11.1 8.1 10.0 5.8 Investment/Equity 74.1% 75.2% 74.5% 50.6% 57.7%

* Annualized figures Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 58 Kuwait Food Group (Americana) Kuwait in Focus - November 2009

Company Overview • Over the years, Americana has had a fairly consistent gross profit margin trend with the margin fluctuating between a • Kuwait Food Group (Americana) is a franchising and high of 22% and a low of 18% during the previous four restaurant management company established in 1964. years. In 1H2009, gross profit margin has remained flat Americana’s most notable assets across the MENA region from 1H2008 at 18%. Although the company has yet to include franchise rights to KFC, Hardees, Pizza Hut and witness any expansion in gross profit margin for the year, TGI Fridays. Americana seems to show a trend of stronger gross profit margins during the second half of the year, as was the case • Since 1988, when Americana had 166 stores distributed in 2H2007 and 2H2008. across seven outlets, the company’s store portfolio has grown exponentially. As of FY2008, Americana boasted • Historically, Americana has posted impressive EBITDA 1,064 outlets, under 18 different chains, across 17 growth. Over a four year period, EBITDA has grown at a countries. In 2008 alone, Americana managed to open CAGR of 53%. Although impressive, it must be noted that 179 new outlets, which translates into a new outlet EBITDA growth hasn’t been stable, with it fluctuating from opening every two days. 83% growth in 2006 to 16% in 2007. Americana has maintained EBITDA growth in 1H2009 as it grew by 17% • Additionally, Americana’s portfolio includes a range of to KD 46 million compared to KD 39 million in 1H2008. consumer food products that are manufactured in 18 Additionally, EBITDA margins saw a small increase to 15% company owned plants, such as Americana Meat and in 1H2009 from 14% in 1H2008. Heinz Ketchup. The company opened the first factory for meat products in the Middle East in 1973 in Kuwait. Since Americana Top Line Breakdown then, the number of commercial and industrial affiliated

companies reached 22 by the end of FY2008. 2005 2006 2007 2008 CAGR 1H08 1H09 Y on Y Growth Revenue 243,059 323,852 434,873 557,449 32% 273,087 302,181 11% Cost of sales (199,998) (254,006) (354,208) (435,934) 30% (223,728) (247,114) 10% Gross Profit 43,061 69,846 80,665 121,515 41% 49,359 55,067 12% SG&A (27,288) (30,600) (37,102) (43,682) 17% (22,788) (26,426) 16% Financial Statement Analysis EBITDA 28,768 52,680 61,210 103,821 53% 39,217 45,715 17%

Sources: Company’s financial statements and NBK Capital Income Statement

• Operationally, Americana appears to be a sound company, • When we consider Americana on an operational basis, we but the exposure it has to non-core investments has see a stable company with healthy operational numbers a substantial impact on the company's net profit. and solid operational margins. The company’s operational Americana’s income from AFS and investments at fair value strength is evident historically as Americana has posted dropped by 130% in 1H2009 over 1H2008. This resulted strong revenue growth, with revenue growing at a CAGR of in a 63% decline in net profit year on year from KD 33 32% over the past four years. This trend of strong top line million in 1H2008 to KD 12 million in 1H2009. Due to growth did not subside in 1H2009 as Americana posted an the company’s dependence on investments, Americana’s 11% increase in revenue to KD 302 million versus KD 273 bottom line has been rather volatile. According to FY2008 million in 1H2008. financials, Americana moved KD 53 million worth of • Americana breaks down revenue into three segments: investments at fair value to AFS and currently shows no restaurants, industries, and commercial and retail. The investments at fair value on their balance sheet. restaurants’ segment, which consists of Americana’s endeavors into fast food and quality service restaurants, Balance Sheet generated 49% of the company’s total revenue in 1H2009. Americana’s manufacturing activities, such as • Following the trend of Al-Kharafi owned companies, Americana Meat and Americana Cake, are represented Americana has a sizable investment book with an array of through the industries sector, which contributed to 46% cross investments with other Al-Kharafi counterparts. As of of total revenue in 1H2009. Finally, commercial and retail June 2009, Americana’s investment book represents 26% contributed to 5% of total revenue in 1H2009. of total assets. As of 1H2009, Americana’s investment to equity ratio lies at 58%, though this ratio has declined • With respect to gross profit, Americana has been able to over the years from 75% in FY2006. Americana’s most consistently grow this figure in line with revenue. On a four notable investments are in National Investments Company, year basis, gross profit actually out paced revenue with a Gulf Cable and Gulf Franchising. Following is a table that CAGR of 41%. As for 1H2009, gross profit grew to KD 55 illustrates the change in value of Americana’s three main million, an increase of 12% year on year. investments at three different time periods.

nbkcapital.com | 59 Kuwait Food Group (Americana) Kuwait in Focus - November 2009

Americana Investments Financial Statements

As of Company % ownership MCAP (millions) Value (millions) National Investments Company 6.61% 613 40.5 Dec. 30 Gulf Cable 9.09% 281 25.6 2008 Gulf Franchising Company 7.33% 12 0.9

National Investments Company 6.61% 324 21.4 June 1 Gulf Cable 9.09% 269 24.4 2009 Gulf Franchising Company 7.33% 9 0.6

National Investments Company 6.61% 359 23.7 Nov. 1 Gulf Cable 9.09% 390 35.5 2009 Gulf Franchising Company 7.33% 5 0.4

Sources: Company’s financial statements and NBK Capital

• Examining Americana’s day sales outstanding (DOS), we notice that the number declined from 30 days in FY2007 to 27 days in FY2008, which indicates more efficient collection of outstanding receivables.

• Americana has a net debt-to-equity ratio of 0.61x as of June 2009, with total debt amounting to KD 160 million. Short-term debt accounts for 64% of the total debt. Americana has a solid interest coverage ratio of 6x based on 1H2009 financials, which indicates that the company is well positioned to service its debt.

• Finally on the dividend front, the company has paid dividends in each of the last five years, but with a very inconsistent payout ratio ranging between 15% and 83%.

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 60 Companies in Focus Kuwait in Focus - November 2009

Mabanee Company

Key Data Highlights

General Liquidity • Mabanee owns the Avenues project, which is a landmark KSE Code MABANEE.KSE 52-week avg. volume 751,258 development in Kuwait’s retail industry and the largest Reuters Code MABK.KW 52- week avg. value (KD) 484,569 shopping mall of its kind in the country. Price (KD) Price Performance

Closing Price 0.690 YTD 29.0% • The company is currently the largest Kuwaiti real estate 52-week High/Low 0.790/0.377 1-Year Period 41.0% company in terms of market capitalization. Mabanee is a Market Capitilization Outstanding Shares pure rental play in the retail segment. Though Mabanee Million KD 316.8 Latest (million) 459.20 is a Kuwaiti story now, the company has plans to expand Ownership Structure Closely Held: 63.06% Public: 36.94% regionally

Price as of Close on November 16, 2009. 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 Stock Performance in a unique mix of a mass market and luxury/concept mall under the same umbrella 1.00 6 52-week High: KD .790 • We would like to highlight that the Avenues boasts high 5 0.80 occupancy rates backed by tenants that are well-known all

4 across the GCC. 0.60 • The company has grown significantly in terms of rental 3

Millions income since completing Phase Il of the Avenues project. Price (KD) Price 0.40 2 Rental revenue increased appreciably, by 38.6%, to KD 52-week Low: KD 0.377 22.9 million in 9M2009, compared to KD 16.5 million 0.20 1 in 9M2008.

0.00 - • The company owns investment properties (Phases l and Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 ll of the Avenues Mall) that are worth around KD 340 Volume Close million (December 2008) as per an independent valuation, Sources: Reuters and NBK Capital compared to a book cost of KD 164 million as of September 30, 2009, resulting in a mark-to-market gain (MTM) of Analyst around KD 176 million.

Mariam Al-Bahar T. +965 2259 5138 E. mariam.albahar@nbkcapital

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 | 61 Mabanee Company Kuwait in Focus - November 2009

Overview The Avenues Project

Mabanee, a pure rental play in the Kuwaiti retail segment, Shareholder Structure is currently the largest real estate company in terms of Name Type Country Holding market capitalization. The company owns the Avenues mega- Alshaya Group [via Alshaya United Commercial Company] Corporate Kuwait 36.45% mall,which is a landmark development in Kuwait’s retail National Industries Group Holding Corporate Kuwait 20.01% industry and the largest shopping mall of its kind in the Orient Investment Company Corporate Kuwait 6.59% Public - - 36.95% country. Mabanee plans to embark on a strategy to consolidate Foreign Ownership Structure its position by executing Phase lll of the Avenues, resulting Open to GCC Investors 100.00% in a unique mix of a mass market and luxury/concept mall Open to Foreign Investors 100.00% under the same umbrella. Though Mabanee is a Kuwaiti story now,the company has plans to expand regionally. Shareholder Structure

The Avenues Project The Avenues - Key Statistics Phase l Phase ll Phase lll

Segment Mass Market Upmarket Luxury/Concept April 2007 April 2008 4Q2011 The Avenues is the first-of-its-kind mega-mall in Kuwait, with Completion Occupancy Rate* (%) 97% 86% - no other comparable retail mall in terms of leasable area Net Leasable Area (sq.m.) 124,608 42,089 99,000 (166,697 sq. m – Phases I and II only). The mall is divided No. of stores 426 445 KD 164 million KD 99 million into three phases built over 425,000 sq. m of land located in Development Cost the Al Rai area. Phases I and II of the project were completed in April 2007 and April 2008, respectively. Meanwhile, the Financial Statement Analysis development of Phase III is currently in progress and should be completed in 4Q2011. Upon the completion of Phase lll, Income Statement the Avenues will have a net leasable area (NLA) of 265,697 sq. m and a parking lot that can accommodate more than • Real-estate-related revenue (mainly rental income and 14,000 cars. Phase lll of the Avenues will include an Old placement fees) for the company reached KD 26 million Souk, Gold Souk,Bazaar, Luxury Mall, SOKU, Grand Avenue in 9M2009, 3% higher than KD 25.3 million in the same Mall, and three underground parking lots. period a year before, driven entirely by the increase in • Old Souk: will deliver a traditional Kuwaiti Souk rental income. Placement fees dropped to KD 1.5 million atmosphere, and will consist of many smaller stores with in 9M2009 from KD 7.5 million in 9M2008. Placement local sellers. fees were higher last year due to the opening of phase II.

• The Bazaar will be a vivid and vibrant section, similar to • The company reported significant growth in rental income the Istanbul Bazaar, featuring large household items and as a result of the completion of Phase ll. Rental revenue goods. increased significantly, by 38.6%, to KD 22.8 million in • The Luxury Mall will include designer boutiques and high- 9M2009, compared to KD 16.5 million in 1H2008. end stores. • Operating expenses increased by 32%, to KD 6.41 million, • The SOKU area is inspired by New York’s SoHo, and will in 9M2009, compared to KD 4.9 million in 9M2008. evoke a youthful experience. Increase in both leasable area and repairs & maintenance expenses led to the overall increase in operating expenses • The Grand Avenue will be an indoor avenue with an outdoor feeling; it will be flanked by flagship stores on each side. • As a result of increase in operating expense, EBITDA dropped by 4%, to KD 19.6 million from KD 20.4 million, The 37% ownership stake by the regional retail giant Alshaya in 9M2008. Accordingly, EBITDA margins decreased to group gives the company a strategic advantage over its 75% in 9M2009 compared to 81% in 9M2008. competitors. Alshaya-run stores comprise a sizeable area of the Avenues, which lends a degree of stability to the tenant • The company’s investment income decreased significantly, profile. The company has pulled in major retail groups, and from KD 7.1 million in 9M2008 to KD 1.4 million in these groups constitute 86% of all of tenants in Phase l and 9M2009, due to large hits taken on its investment book, 54% in Phase ll. Also worth highlighting is the long waiting as well as a reclassification of certain investments (as per list for tenants, which is likely to be advantageous in times of IAS 39 in 2008). This affected net profit for 9M2009. adversity. • The company’s net profit decreased by 28% to KD

nbkcapital.com | 62 Mabanee Company Kuwait in Focus - November 2009

15.2 million in 9M2009, compared to KD 21.1 million Financial Statements in 9M2008. This decrease resulted mainly from the significant decline in investment income. Income Statement (KD '000) 2007 2008 9M2008 9M2009 Rental Income 13,326 23,556 16,482 22,848 Placement fees 4,688 11,007 7,511 1,464 Balance Sheet Other Investment properties revenue 855 1,750 1,272 1,694 Total Investment properties revenue 18,868 36,312 25,266 26,005 Investment properties expenses 3,905 5,588 3,733 5,103 • The company owns investment properties (Phases l and Gross Profit 14,963 30,724 21,533 20,902 ll of the Avenues Mall) that are worth around KD 340 General and administrative expenses 2,201 2,296 1,127 1,307 EBITDA 12,762 28,427 20,406 19,595 million (December 2008) as per an independent valuation, Depreciation 1,572 2,528 1,792 2,237 EBIT 11,189 25,899 18,614 17,358 compared to a book cost of KD 164 million as of September Finance costs 2,659 6,068 3,797 4,026 30, 2009, resulting in a mark-to-market gain (MTM) of EBT 8,530 19,831 14,817 13,332 Net (loss) gain from investments 14,205 (13,485) 7,081 1,419 around KD 176 million. Other Income (130) 225 113 1,090 Net Profit 21,751 6,225 21,078 15,170 • Mabanee owns 9,516 sq. m of a plot in Salmiya. According

to the company sources, this Salmiya land is worth KD Balance Sheet (KD '000) 2007 2008 9M2008 9M2009

39 million, 10 times higher than its book cost of KD 3.9 Cash & Cash Equivelant 3,916 24,017 2,510 8,944 million. Investment properties 100,653 157,122 153,003 164,427 Investment Book 41,726 26,267 35,332 20,107 • The company owns an 186,692 sq. m piece of land Total Assets 195,239 230,819 230,713 217,970 adjacent to the Avenues Mall in Al Rai. Of this land, 99,327 Short-term loans 32,903 66,184 80,122 60,925 Long-term loans 37,857 40,779 18,571 22,857 sq. m is set aside for the construction of Phase lll of the Total liabilities 102,242 133,211 125,734 105,223 Avenues. The remaining portion of the land is worth KD Shareholders' Equity 92,997 97,608 104,980 112,747 Total liabilities and SHE 195,239 230,819 230,713 217,970 59.2 million (per the valuation performed by independent property assessors). Mabanee also owns a 40% stake in a Sources: Company’s financials 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 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 | 63 Companies in Focus Kuwait in Focus - November 2009

Mobile Telecommunications Company (ZAIN)

Key Data Key Highlights

• In September 2009, the Kuwait Stock Exchange (KSE) announced that National Investments Co. (NIC), owned by the Kharafi Group, reported that one of its portfolio clients, Al Khair National for Stocks & Real Estate Co., is set to sell up to 46% of Zain. This 46% stake is a combination of various shareholders’ stakes in Zain.

• At the end of June 2009, the company’s total debt stood at a little over KD 2 billion. Zain’s growth and expansion through various mergers and acquisitions came at the Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital expense of increased leverage. The debt-to-equity ratio Stock Performance stood at 0.76x at the end of June 2009, up from 0.36x at the end of 2005. 1.800 160 • Zain announced their 9M2009 results; however, at the 1.600 52-week High: KD 1.560 140 time of this publication, the detailed financials were not 1.400 120 available. The company reported a 24% increase in total 1.200 revenue to KD 1.78 billion for the nine months of 2009. 100

1.000 As for EBITDA, it reached KD 757.3 million, with the 80 EBITDA margin inching up to 43%, compared to 39%

0.800 Millions Price (KD) Price 60 at the end of 9M2008. The company’s net profit was hit 0.600 by currency fluctuations of KD 36 million, as well as an 52-week Low: KD 0.640 40 0.400 increased financing and depreciation costs due to Zain’s 0.200 20 network expansion. As a result, at the end of 9M2009,

0.000 0 the company reported a 17% decline in net profit to KD Nov-08 Dec-08 Feb-09 Mar-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09 195.7 million. Volume Close

Sources: Reuters and NBK Capital

Analyst

Lisa Fernandes T. +971 4 365 2856 E. [email protected]

Key Ratios

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 64 Mobile Telecommunications Company (ZAIN) Kuwait in Focus - November 2009

Overview encourage the relatively large Palestinian community living in Jordan to use Zain’s network and enjoy the low tariffs. Mobile Telecommunications Company KSC was established in This acquisition in turn will be an added benefit for Zain Kuwait in 1983. The company operates under the brand name in Jordan. “Zain.” The company’s shares are listed on the Kuwait Stock • March 2009: Through a joint venture with Al Ajial Exchange; the largest shareholder is the Kuwait Investment Investment Fund Holding, Zain invested USD 324 million Authority with a 24.6% stake. to acquire 31% of Wana Telecom, the third mobile operator Zain provides voice and data services in two distinct geographic in Morocco. clusters, namely the Middle East and Africa, that include 24 countries. The Middle Eastern markets are characterized by Financial Statement Analysis high GDP per capita, high ARPU, a high penetration rate, and lower growth while the African markets have low GDP per Income Statement capita, low ARPU, a low penetration rate, and higher growth. The African cluster covers a population of 516 million while • Over the past four years, Zain’s top line witnessed an the Middle Eastern cluster covers a population of 73 million. impressive CAGR of 51.5%, due to solid organic growth At the end of June 2009, the number of active subscribers as well as numerous mergers and acquisitions during the reached around 69.5 million. same period. In 2008, Zain’s consolidated revenue grew During 3Q2009, a group of shareholders led by the Khorafi by 19% to exceed KD 2 billion. The Nigerian operation Group stated that they were committed to selling a 46% was the highest contributor to the group’s top line (22%); controlling stake in the Zain Group to a Malaysian-Indian the Nigerian operation witnessed a steep growth of 40% in consortium. The consortium consists of Malaysia’s al-Bukhari 2008. The reason behind this increase is the 55% growth Group and India’s Bharat Sanchar Nigam Ltd. (BSNL), in the mobile subscriber base. Kuwait was the second Mahanagar Telephone Nigam Ltd. (BSNL), and Vavasi Group. highest contributor (19%), and this operation witnessed a 12% growth during the same period. The other two high contributors to the group’s consolidated revenue are Iraq Latest News (17%) and Sudan (12%).

• September 2009: The Kuwait Stock Exchange (KSE) • In December 2007, Orascom Telecom withdrew from the announced that National Investments Co. (NIC) reported Iraqi market, selling the subsidiary Iraqna and all assets to that one of its clients, Al Khair National for Stocks & Real MTC Atheer for USD 1.2 billion. As a result, in 2008, Zain Estate Co., is set to sell up to 46% of Zain. increased its ownership stake from 30% to 71.67% and achieved full integration between MTC Atheer and Iraqna. • August 2009: Zain’s board of directors voted to remove Thus, the Iraqi operation witnessed an increase of 17% in limits on the company’s share ownership. Shareholders in 2008. Zain agreed to amend company regulations that included removing caps that restrict a shareholder to own up to 2% • In 1H2009, the company’s total revenues grew by 24% of the company’s capital or subscribe to no more than to KD 1.16 billion compared to the same period last year. 1,000 shares. The cancellation of called-party pays in Kuwait had an impact on Kuwait’s mobile operators in the beginning of • May 2009: Given the impact of the financial crisis, Zain 2009. Revenue from the Kuwaiti operations declined by announced a new strategy, “Drive2011.” The new strategy 15% YoY, and its contribution to the total group revenue will focus on the operating model: (a) consolidation and declined from 20% in 1H2008 to 15% in 1H2009. reduction of advertising and marketing expenses and (b) enhancing the company’s control over company functions • As for Nigeria, it continued to be the main contributor by either centralizing them or outsourcing them to strategic (17%) to the group’s total revenues, while Iraq contributed partners. 16% and Sudan contributed to 12% in 1H2009.

• May 2009: Zain acquired 56.53% of the equity shares and • Group EBITDA grew by 9% in 2008. The EBITDA margin voting rights of Paltel, in exchange for Zain’s 96.156% for the company dropped from 41% in 2007 to 37% in equity shares and voting rights in Pella Investment 2008, on the back of an increase in operating expenses. Company in Jordan. Pella is still a subsidiary of Zain as • In 1H2009, group EBITDA grew by 47% YoY; the four the group retains 56.53% of the equity shares and voting main markets, Iraq, Kuwait, Sudan, and Nigeria, together rights in Pella through Paltel. The Palestinian operation accounted for 64% of the consolidated group EBITDA. is expected to join Zain’s “One Network,” which will Kuwait and Iraq are the highest contributors to group

nbkcapital.com | 65 Mobile Telecommunications Company (ZAIN) Kuwait in Focus - November 2009

EBITDA, with each contributing around 18% to the total This loan is subordinate to the associate’s borrowing from group EBITDA. With the cancellation of called-party pays, banks. Kuwait’s contribution to the total group EBITDA declined • At the end of June 2009, the company’s total debt stood from 28% in 1H2008 to 18% in 1H2009. The group at a little over KD 2 billion. Zain’s growth and expansion EBITDA margin inched up from 38% in 1H2008 to 44% through various mergers and acquisitions came at the in 1H2009. expense of increased leverage. The debt-to-equity ratio • As for the bottom line, although the company still displays stood at 0.76x at the end of June 2009, up from 0.36x at solid financial results, its profitability has been decreasing; the end of 2005. the net profit margin dropped to 16% in FY2008 compared • Zain increased its capital by 50% to KD 427.52 million to 31% in FY2005. In 2008, the bottom line witnessed as a result of the rights issue of KD 142.17 million. At flat growth and reached around KD 322 million. This was the end of June 2009, the company‘s retained earnings mainly because of a loss of KD 37 million due to currency increased by 57.6% YoY to KD 721.15 million. revaluation. Four key markets saw major currency weakness against the USD in 2008: Zambia, Nigeria, Tanzania, and Democratic Republic of Congo (DRC), with currency depreciation of 24%, 18%, 14%, and 9% respectively.

• In 1H2009, Zain’s net profits increased 4.4% to reach KD 154.50 million from KD 147.97 million in 1H2008 due to an increase in the subscriber base. Zain’s net profit was affected by a 29% increase in finance costs and a loss of KD 31.30 million on the currency revaluation. Furthermore, the bottom line was hurt by a loss of KD 4.53 million from investment income. In addition, in 1H2009, the share of loss of associates reached KD 33.81 million, compared to KD 0.76 million in 1H2008.

• Zain announced their 9M2009 results; however, at the time of this publication, the detailed financials were not available. The company reported a 24% increase in total revenue to KD 1.78 billion for the nine months of 2009. As for EBITDA, it reached KD 757.3 million, with the EBITDA margin inching up to 43%, compared to 39% at the end of 9M2008. The company’s net profit was hit by currency fluctuations of KD 36 million, as well as an increased financing and depreciation costs due to Zain’s network expansion. As a result, at the end of 9M2009, the company reported a 17% decline in net profit to KD 195.7 million.

Balance Sheet

• At the end of June 2009, Zain’s cash balance reached KD 361.5 million.

• Zain’s total assets stood at KD 6.2 billion as of June 2009, reflecting a 35.7% growth rate with respect to June 2008, driven by a 32.8% increase in property and equipment while the total shareholders’ equity increased by 54.2% to reach KD 2.4 billion.

• During the first six months of 2009, the shareholder loan of SAR 1.1 billion to Zain Saudi Arabia (SMTC) was reclassified as a long-term loan, payable by July 2011.

nbkcapital.com | 66 Mobile Telecommunications Company (ZAIN) Kuwait in Focus - November 2009

Financial Statements

Income Statement (KD '000) 2007 2008 1H2008 1H2009

Revenue 1,677 2,003 936 1,163 Cost of Goods sold -381 -461 -267 -315 Gross Profit 1,296 1,542 669 848 Distribution, Marketing and OPEX -462 -577 -222 -234 G&A -143 -211 -96 -98 Depriciation & Amortization -236 -303 -140 -190 Impairment losses-Goodwill 0 -63 0 0 Prov. For doubtful debt -4 -7 -1 -4 Operating Income 452 381 210 322 Interest Income 26 31 13 6 Investment Income 22 -1 9 -5 Inc. from sale of shares in subsidary 0 0 27 0 Share of loss of associates -3 -21 -1 -34 Fair value gain on the prev. held equity interest 0 152 0 0 Other income 6 21 8 8 Finance Costs -124 -128 -61 -79 Loss of currency revaluation 13 -37 -10 -31 Board of directurs renumeration 0 0 0 0 Contributioon to KFAS -3 -3 -2 -2 Nat. Labour Support Tax & Zakat -5 -6 -3 -4 Profit before Tax 384 391 190 182 Taxes -41 -54 -35 -14 Profit for the year 343 337 155 169 Minority interest 22 15 7 14 Shareholders of the company 320 322 148 154

Balance Sheet (KD '000) 2007 2008 1H2008 1H2009

Cash and bank balances 261 368 255 362 Trade and other receivables 246 294 316 427 Loan to an associate 0 80 77 0 Inventories 22 30 26 38 Investments - at fair value through profit or loss 23 17 23 14 Current Assets 553 789 697 840

Deferred tax assets 65 89 71 107 Investments - available-for-sale 179 97 174 102 Investment in associates 260 216 249 263 Loan to associates 171 0 166 83 Property and equipment 1,496 2,027 1,648 2,187 Intangible assets 1,637 2,234 1,566 2,619 Other financial assets 7 2 0 3 Total Non Current Assets 3,814 4,666 3,874 5,365 Total Assets 4,367 5,454 4,571 6,205

Trade and other payables 558 909 573 1,065 Due to banks 454 231 580 448 Due to non controlling interest holders 19 0 0 0 Current Liabilities 1,030 1,140 1,154 1,513

Due to banks 1,532 1,671 1,649 1,715 Deferred tax liabilities 32 30 37 30 Other non current Iiabi Iities 25 212 28 100 Due to minority interest holders 0 0 0 0 Non Current Liabilities 1,589 1,913 1,714 1,846 Total Liabilities 2,619 3,053 2,867 3,359

Share capital 189 427 284 428 Share premium 624 1,691 624 1,691 Treasury shares -16 -568 -16 -568 Legal reserve 95 128 95 128 Voluntary reserve 63 63 63 63 Foreign currency translation reserve -26 -98 -48 -67 Treasury shares reserve 0 2 0 2 Equity issue transaction cost of associate 0 -2 -2 -2 Investment fair valuation reserve 68 -9 57 -2 Share based compensation reserve 12 20 16 23 Hedge reserve 0 -60 0 -54 Retained earnings 572 625 458 721 Non- controlling interests 166 182 172 484 Total equity 1,748 2,401 1,704 2,846

Total Liabilities and Equity 4,367 5,454 4,571 6,205

Source: Company’s financial statements and NBK Capital

nbkcapital.com | 67 Companies in Focus Kuwait in Focus - November 2009

National Industries Group Holding (NIG)

Key Data Key Highlights

General Liquidity • National Industries Group Holding (NIG) is one of the KSE Code NIND.KSE 52-week avg. volume 10,441,852 largest listed investment holding company’s in Kuwait. Reuters Code NIND.KW 52- week avg. value (KD) 4,075,109 Established in 1961, NIG was listed on the Kuwait Stock Price (KD) Price Performance Exchange in 1984. Closing Price 0.355 YTD -14.0% 52-week High/Low 0.610/0.210 1-Year Period -8.0% • Due to lack of financial information available to us, as

Market Capitilization Outstanding Shares well as the size of NIG’s investment book, typical financial Million KD 459.8 Latest (million) 1,295.10 analysis is rendered meaningless. Ownership Structure Closely Held: 25.10% Public: 74.90% • NIG’s net profit figure is highly dependent on investment income. For 1H2009, income from investments dropped Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital by 74% to KD 35 million, down from KD 133 million in Stock Performance 1H2008. • NIG has investments spread across several regions in the 0.70 70 52-week High: KD .610 world and spans an array of industries. As of 1H2009,

0.60 60 NIG’s investments account for almost 80% of total assets.

0.50 50 • NIG recently announced preliminary 9M2009 numbers. 52-week Low: KD 0.210 Net profit for the first nine months of 2009 fell toKD 0.40 40 0.43 million from KD 102 million in 9M2008, a decline Millions

Price (KD) Price 0.30 30 of 97%.

0.20 20

0.10 10

0.00 - Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Volume Close

Sources: Reuters and NBK Capital

Analyst

Badder Al Ghanim T. +965-2259 5330 E. [email protected]

Key Ratios

2007 2008 1H2008 1H2009 Net debt to equity 99% 324% 116% 243% Investments/Total Assets 81% 77% 79% 80% Investments/Equity 188% 382% 205% 327% ROA 10% -16% 5% -1% ROE 22% -81% 13% -3%

* Annualized figures Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 68 National Industries Group Holding (NIG) Kuwait in Focus - November 2009

Overview • The sharp drop in income from investment is a result of a 47% drop in dividend income and a 91% drop in gains on National Industries Group Holding (NIG) is one of the largest investment at fair value. listed investment holding companies on the Kuwait Stock • This resulted in a net loss of KD 11 million in 1H2009 Exchange since its initial public offering in 1984. Incorporated compared to a net profit of KD 120 million in 1H2008. in 1961, NIG was established with the sole purpose of participating in the advancement of Kuwait’s infrastructure Balance Sheet and promote its progression through the development of Kuwait’s building materials industry. In the early stages of • As a holding company, NIG’s balance sheet is naturally the company, NIG was instrumental in the development of dominated by a sizable investment book. The company’s Kuwait’s industrial base through the company's establishment latest financials show that investments account for almost of companies such as Kuwait Cement Company; Kuwait 80% of total assets. Metal Pipes Industries and Gulf Cables. As the company grew throughout the years it embarked on a policy of product • The KD 1.3 billion that NIG has in investments is diversification and international expansion during the latter dominated by available for sale investments (KD 882 decade, with the GCC serving as its first target market outside million), followed by investments in associates (KD 256 Kuwait. As a result of this, NIG has a web of operations across million). The remaining KD 225 million is distributed the GCC, Pakistan, Europe and the Americas that spans between held for trading and property investments. several industries, including petrochemicals, infrastructure • NIG has investments are spread in different regions of the and financial services. world. Below is a list of subsidiaries and associates that fall within NIG’s investment book based on the company’s Latest News latest financials.

• November 15, 2009 – NIG announced a 9M2009 net NIG Subsidiaries and Associates profit of KD 0.43 million, a decline of nearly 100% from

KD 102 million during the same period last year. National Industries Group Holding (NIG) Local Subsidiaries % Ownership Associates % Ownership Foreign Subsidiaries % Ownership National Industries Co. 51% Kuwait Privatization 28% Proclad Companies 100% • June 23, 2009 – NIG subsidiary, Ikarus Petroleum Proclad International 100% Kuwait Cement 25% NIG Bahrain 100% Eagle Propriety 100% Kuwait National Real Estate 16% NIC Holding Guernsey 100% Industries Company, recently announced the acquisition Ikarus Petroleum 72% Marsa Alam Holding 20% NIG Guernsey LTD 100% Noor Financial 51% Al Rayah 23% Gw/Gas Division 100% Lulua National Industries 100% Eastern United Petroleum 20% NIC Holding UK 100% of 11% of shares in Saudi based International Acetyl Gas & Oil Field Services 100% Kuwait Rocks 38% NIC for Combined Energy 100% Karachi Electric 40% Company and International Vinyl Company. The shares National Land Transport 100% Meezan Bank 45% National Combined Health 100% Noor Telecom 39% were valued at SR 240 million. Al Durra Real Estate 100% Denham Investment 100%

Financial Statement Analysis Sources: Company’s financial statements and NBK Capital

Income Statement National Industries Company

• NIG reported a 21% drop in sales during 1H2009 when • NIG’s 51% owned subsidiary, National Industries Company compared to 1H2008. NIG’s revenue is broken down (NIC), is one of the largest building materials manufacturers into three major segments: Investments, Specialist in the region. Listed on the Kuwait Stock Exchange with Engineering, and Building Materials. As of 1H2009, a market cap of KD 136.6 million, NIC is principally Investments contributed 60% of total sales, followed by engaged in the provision of complementary products to 24% contributed by Specialist Engineering and finally meet the demands of housing and infrastructure projects. 16% from Building Materials. The company has production facilities in both Kuwait and Saudi Arabia, with a product portfolio that includes • In 1H2009, NIG recorded a gross profit figure of KD 8.7 aerated concrete blocks, sand lime bricks, ready mix and million, a 31% drop from 1H2008. Additionally, gross concrete pipes. profit margin declined from 22% in 1H2008 to 19% in 1H2009. Ikarus Industrial Petroleum (Ikarus), Saudi • NIG’s bottom line is highly affected by investment income International Petroleum (SIPCHEM) and National as is evident in 1H2008 when this line item accounted Industrialization Company (Tasnee) for 111% of net income. As for 1H2009, income from investments dropped by 74% year on year. • Ikarus is an investment vehicle with a range of investments

nbkcapital.com | 69 National Industries Group Holding (NIG) Kuwait in Focus - November 2009

in petrochemicals and the oil and gas sector within the • The objective of KPPHC is to finance, evaluate and MENA region. Incorporated in Kuwait, Ikarus was listed provide consulting services to a selected group of Kuwaiti on the Kuwait Stock Exchange in 2008. The company’s companies and regional projects, with a focus on controlling current business strategy entails concentration on investing stakes in entities providing services in the different sectors in start-ups or acquisition of at least a 20% stake in large such as energy, infrastructure and real-estate. As well as and mature operations with stable cash flows. participating in BOT government projects.

• Key investments of Ikarus include SIPCHEM and Tasnee. The former was founded in 1998 in Saudi Arabia and Mabanee produces butandiol, methanol, acetic acid, vinyl acetate monomer and carbon monoxide. Tasnee, on the other hand, • Mabanee, a pure rental play in the Kuwait retail segment, was established in Saudi Arabia in 1985 and produces is currently the largest real estate company in Kuwait in various chemical and metallurgical products such as terms of market capitalization. NIG currently owns 20% polypropylene, HDPE, LDPE and lead. Ikarus owns an 8% of Mabanee. For more information please refer to page 61. and 5.3% stake in SIPCHEM and Tasnee, respectively. Financial Statements Noor Financial Investments (Noor) Income Statement (KD '000) 2007 2008 1H2008 1H2009 Sales 117,458 112,821 59,633 47,145 • Noor Financial Investment Company is a Kuwaiti company, Cost of sales (90,102) (89,782) (46,828) (38,364) Gross Profit 27,356 23,039 12,805 8,781 engaged in investment activities and financial services Income from investments 250,129 37,088 132,903 34,736 Share of profits of associates 19,737 2,451 8,377 6,750 primarily in Kuwait, the Middle East, Asia, and other Income on disposal of associate - - - 5,753 emerging markets. Noor provides a range of financial Changes in fair value of investment properties - 5,697 1,740 3,996 Interest and other operating income 22,122 31,509 20,180 10,210 services, which include advisory services, underwriting, Distribution costs (7,979) (6,612) (2,993) (2,124) General, administrative and other expenses (24,127) (22,815) (14,205) (10,263) syndications and asset management. Noor follows a Operating Profit 287,238 70,357 158,807 57,839 diversified investment strategy with major investments in Finance costs (52,220) (67,609) (33,180) (29,973) Profit on disposal of PP&E 2,215 - - - private equity and direct investments in the capital markets. Impairment in value of AFS investments (2,000) (326,305) - (29,542) Impairment in value of wakala investments - (2,485) - (500) Noor actively invests in the Kuwaiti capital markets and Impairment in value of goodwill (2,608) - - - diversifies its investments through the international capital Impairment in value of associates (6,084) - - - (Loss)/gain on foreign exchange 19,790 (11,514) 13,137 (12,985) markets, which include other GCC countries, emerging Profit before Taxes 246,331 (337,556) 138,764 (15,161) Taxation (616) (314) (203) (114) markets such as Pakistan, China and India, and limited KFAS (1,993) - (1,165) - NLST (4,746) - (2,383) - exposure in the developed markets of the United States Zakat (115) - (971) - and Europe. In addition to serving independent clients, Directors remuneration (200) - (100) - Profit for the year 238,661 (337,870) 133,942 (15,275) Noor plays a vital role in advising NIG and its subsidiaries Minority Interest 29,297 (55,907) 14,138 (4,036) on their transactions. Profit attributable to shareholders 209,364 (281,963) 119,804 (11,239) Balance Sheet (KD '000) 2007 2008 1H2008 1H2009 Goodwill 10,697 8,231 10,392 9,774 Meezan Bank Property, plant and equipment 34,304 40,506 36,151 48,417 Investment in associates 286,301 303,079 299,288 256,299 Investment properties - 22,645 12,000 33,498 Available for sale investments 846,206 634,900 879,794 749,883 Deferred tax 132 108 167 139 • Meezan Bank represents one of NIG’s international Total non-current assets 1,177,640 1,009,469 1,237,792 1,098,010 Inventories 23,323 22,992 23,250 23,358 investments. Meezan is a Pakistan-based Islamic bank. Available for sale investments - 178,114 - 132,555 Accounts receivables and other assets 129,232 89,635 200,500 78,919 The bank currently has 166 branches across 40 cities in Murabaha and wakala investments 33,883 29,800 23,000 19,671 Pakistan making Meezan Bank the largest Islamic bank in Investments at fair value through statement of income 590,542 158,816 674,997 135,903 Short term deposits 187,079 214,999 189,455 138,101 Pakistan. In 2006, Noor Financial acquired a 16% stake Bank balances and cash 17,894 29,325 43,745 28,280 Total current assets 981,953 723,681 1,154,947 556,787 in Meezan Bank whose shares are listed on the Karachi Total assets 2,159,593 1,733,150 2,392,739 1,654,797 Share Capital 117,736 129,510 129,510 129,510 Stock Exchange. During the fourth quarter of 2007, Noor Share Premium - - 152,691 152,691 Treasury shares (27,156) (31,998) (26,809) (33,415) acquired additional shares in Meezan, which increased Reserves 303,723 304,142 150,216 58,102 Cumuative changes in fair value 215,451 43,968 209,941 110,767 Noor's shareholding to 45%. Retained earnings 323,664 (97,752) 304,020 (11,239) Equity attributable to parent company 933,418 347,870 919,569 406,416 Minority interest 196,999 137,927 242,443 149,803 Total equity 1,130,417 485,797 1,162,012 556,219 Kuwait Privatization Project Holding Co. (KPPHC) Bonds issued and trust certificates 171,227 158,720 166,096 165,164 Long term borrowing 165,190 177,837 165,859 140,055 Leasing creditors 375 608 377 703 Provisions 9,558 8,369 9,220 9,174 Total non-current liabilities 346,350 345,534 341,552 315,096 • Kuwait Privatization Project Holding Co. (KPPHC) was Accounts payable and other liabilites 74,569 80,545 113,022 71,266 Bonds issued - 14,431 - - established in 1994 and is currently listed on the Kuwait Short term borrowing 571,211 767,124 740,312 671,119 Due to banks 37,046 39,719 35,841 41,097 Stock Exchange with a market cap of KD 381 million. The Total current liabilities 682,826 901,819 889,175 783,482 major shareholders are NIG and Kuwait Financial Center – Total equity and liabilities 2,159,593 1,733,150 2,392,739 1,654,797 of which is 12% owned by NIG. Source: Company’s financial statements and NBK Capital

nbkcapital.com | 70 Companies in Focus Kuwait in Focus - November 2009

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 1,433,727 asset management companies in Kuwait, with a market Reuters Code NINV.KW 52- week avg. value (KD) 737,786 capitalization of around KD 262 million. Price (KD) Price Performance

Closing Price 0.385 YTD -25.0% • Market conditions have put a damper on the company’s 52-week High/Low 0.730/0.236 1-Year Period -37.0% total shareholders’ equity. As a result, the hit on the Market Capitilization Outstanding Shares Million KD 337.34 Latest (million) 876.20 investment portfolio dropped fair value reserves, resulting in a decline in equity. The company’s investment portfolio Ownership Structure Closely Held: 67.9% Public: 32.1% shrunk by 93% in 2008.

Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • A significant portion of the company’s investments is liquid. This allows NIC to convert investments into cash Stock Performance relatively quickly, making it easy to repay debt.

0.90 14 • There has been a change in the company’s reporting

0.80 methods, whereby NIC has taken advantage of the 12 52-week High: KD 0.730 0.70 amendments to IAS 39, allowing the company to convert 10 0.60 “held for trading” (HFT) securities to the “available for

0.50 8 sale” (AFS) portfolio.

0.40

Price (KD) Price 6

Millions • Assets under management (AUMs) grew from KD 1 billion 0.30 4 in 2004 to KD 2.24 billion in 2008. 0.20 52-week Low: KD 0.236 2 • NIC announced the preliminary results for 9M2009. The 0.10 company reported a loss of KD 5.1 million compared to a 0.00 0 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 profit of KD 42.4 million in 9M2008. Volume Close

Sources: Reuters and NBK Capital

Analyst

Wadie Khoury T. +965 2259 5118 E. [email protected]

Key Ratios

2005 2006 2007 2008 1H2009 Net Income Growth 181.8% -27.7% 136.2% -135.6% -95.9% Management and Advisory Fees Growth 74.0% -84.0% 0.8% -4.6% -51.2% AUM Growth 114.0% 3.7% 65.4% -38.8% na AFS-to-Assets 33.1% 35.7% 34.3% 61.6% 61.2% AFS-to-Equity 48.1% 60.5% 55.0% 82.4% 75.1% ROAA* 30.6% 13.2% 15.4% -6.0% -16.0% ROAE* 42.8% 20.4% 22.9% -7.2% -20.1% Debt-to-Equity 28.5% 69.8% 33.7% 27.9% 18.3%

* Annualized figures Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 71 National Investment Company (NIC) Kuwait in Focus - November 2009

Overview very weak as operating profit fell by 91% YoY due to a 51% drop in management fees and a complete wipeout of NIC is involved in investment management. This includes equity incentive fees. This slashed EBIT margins by 43% in the trading, private equity investments, and asset management same time period. 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 (AAUMs) funds. Some of the most notable equity funds include the Al- were consistently below 1%. This figure declined from Wataniya Fund (investing in Kuwaiti listed equities), Al-Safwa 0.94% in 2005 to 0.44% in 2008. Furthermore, incentive Fund (Sharia-compliant equity investments), and Al-Darji fees as a percentage of AAUMs also fell from 0.77% in Fund (GCC Shari'ah-compliant equities). The company has a 2005 to 0.49% in 2008. This can be due to the effects of large proprietary book from which NIC tries to derive most of the financial crisis, where fees related to the management its profits. of funds were decreased, and incentive fees were not paid due to the inability to outperform the benchmark. Latest News

Assets Under Management November 10, 2009: NIC announced the preliminary results for 9M2009. The company reported a loss of KD 5.1 million 4.0 1.8% compared to a profit of KD 42.4 million in 9M2008. 1.71% 3.7 3.5 1.51% 1.6%

November 2, 2009: National Investments Company announced 1.39% 1.4% 3.0 its request to buy back 10% of its shares within a six month 1.10% 1.2% period as of November 21, 2009. 2.5 2.2 2.2 2.1 1.0% 2.0 0.94% 0.8% Financial Statement Analysis Billions KD 1.5 0.6% 1.0 Income Statement 1.0 0.4%

0.5 0.2% • With the company’s business operations revolving around market investments, NIC’s earnings are volatile. Earnings 0.0 0.0% 2004 2005 2006 2007 2008

between 2004 and 2008 fluctuated significantly, from a AUMs Management fees + Incentive fees as % of AAUMs high of KD 59.1 million in 2005 to a loss of KD 20.7 million in 2008. Similarly, earnings dipped from KD 35.6 Sources: Company annual reports and NBK Capital million in 1H2008 to KD 1.5 million in 1H2009. • As of July 1, 2008, NIC adopted amendments to IAS 39 • A significant portion of the company’s reported income enabling the company to reclassify trading investments comes from market investments (which includes realized with a carrying value of KD 30.8 million from the “fair value and unrealized gains, sales of available for sale investments, through income statement” category to the “available for and dividend income). Between 2005 and 2008, income sale” category. The company recorded unrealized losses of from market investments averaged 34% of total income. In KD 7.8 million effective July 1, 2008, which contributed 1H2009, market investments contributed KD 6.7 million to the loss incurred in FY2008. (44% of income), down from KD 17.6 million in 1H2008. This was due to a significant impairment loss in the AFS portfolio (KD 11 million) recorded in 1H2009. Unrealized Balance Sheet gains made up 34% of the company’s income in 1H2009. • Assets declined by 3% in the first half of 2009, with the • We define an investment company’s profit from operations largest drop coming from unquoted equity investments. as income generated from management and advisory fees Quoted investments picked up by 16% between 2008 less general and administrative costs. This gives a clearer and 1H2009, helping offset larger declines in the first six picture as to how well the company is able to generate months of the year. a stable income stream from investing clients’ funds. Operating profit increased by a CAGR of 23% in the four • The most notable effect on the assets side of the balance years ending in 2008. In 2008, we could see the effect of sheet in 2008 is the 78% decline in investments at the financial crisis take a toll on the company’s operating fair value through the income statement (HFT), after profits as it dropped by 35%. The first half of 2009 was a devaluation of its investment book and IAS39 was

nbkcapital.com | 72 National Investment Company (NIC) Kuwait in Focus - November 2009

implemented. The largest contributor to this decline was the local quoted security investments portfolio, which decreased significantly from KD 80.9 million in 2007 to KD 8.5 million in 2008. The revaluation resulted in a jump in the AFS portfolio from 39% of assets in 2007 to 62% in 2008.

• The majority of NIC’s assets fall under private and public investments in securities, both HFT and AFS. In 2007, HFT made up 30% of the total shareholders’ equity but declined to 9% of shareholders’ equity in 2008.

• Between 2007 and 2008, equity was severely affected by the devaluation of investments. Shareholders’ equity dropped by 30% due to changes in fair value and a drop in retained earnings. The company’s equity balance increased in the first nine months of 2009 as the value of investments tripled within this time period, leading to a 6% increase in shareholders’ equity.

• NIC’s net debt-to-equity ratio decreased from 22% in December 2008 to 13% in June 2009. It is worth noting that NIC has taken on only short-term debt. With liquid assets totaling KD 67 million as of June 2009, repaying short-term debt of KD 40 million should not be an issue for NIC.

Financial Statements

Income Statement (KD '000) 2007 2008 1H2008 1H2009 Realized/Unrealized gain on investment 27,142 (10,426) 9,309 5,182 Investment Income 44,942 40,799 31,895 5,861 Foreign Exchange Trading (2,471) 2,675 (1,367) 1,069 Share of Results from Associates 4,972 (496) 2,523 (253) Other Income - - 2,250 3,500 Income 74,585 32,552 44,610 15,359 Selling/General/Admin Expenses (6,571) (10,956) (7,339) (2,234) Operating Income 68,014 21,596 37,271 13,125 Finance Costs (8,116) (4,425) (2,479) (1,222) Other, Net 634 (37,904) 80 (10,378) Net Income before Taxes 60,532 (20,733) 34,872 1,525 Share of Associate tax - - - - Zakat (37) - (349) (15) Contribution to KFAS (509) - (301) (12) NLST (1,513) - (872) (38) Directors' fees (235) - - - Net Income 58,238 (20,733) 33,350 1,460

Balance Sheet (KD '000) 2007 2008 1H2008 1H2009 Cash and Cash Equivalents 53,769 11,673 33,124 11,219 Investments 251,434 190,459 256,503 184,281 Other Assets 112,727 75,351 128,004 74,309 Total Assets 417,930 277,483 417,631 269,809 Short Term Debt 99,707 57,937 74,452 40,298 Accounts Payable and Accruals 22,752 12,123 16,395 9,808 Total Liabilities 122,459 70,060 90,847 50,106 Total Equity 295,471 207,423 326,784 219,703 Total Liabilities and Equity 417,930 277,483 417,631 269,809

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 73 Companies in Focus Kuwait in Focus - November 2009

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 3,653,776 largest real estate companies in Kuwait in terms of market Reuters Code NREK.KW 52- week avg. value (KD) 987,390 capitalization. The company is primarily a rental player, Price (KD) Price Performance and has its presence all across the region. Closing Price 0.285 YTD 21.0% 52-week High/Low 0.355/0.174 1-Year Period 34.0% • The company is part of the Sultan Group, and holds Market Capitilization Outstanding Shares Million KD 232.1 Latest (million) 814.20 a 22.4% stake in Agility, according to the 9M2009

Ownership Structure financials. NREC’s stake in Agility appears at a cost of Closely Held: 40.52% Public: 59.48% KD 207.9 million on the balance sheet as of September

Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital 30, 2009. The Agility stake, as of November 16, 2009, is valued at KD 232 million, 33.1% higher than the value Stock Performance reported in the 9M2009 financials. The Agility stake accounts for almost 35.3% of the total assets and 78% of

0.40 52-week High: KD .355 18 total shareholders’ equity. Therefore, any material change

16 in the value of Agility could have a significant impact on

52-week Low: KD 0.174 14 NREC’s shareholders’ equity. 0.30 12 • A back-of-the-envelope calculation shows Souq Sharq 10 accounts for the majority of the company’s rental income. 0.20

8 Millions

Price (KD) Price NREC owns quite a few other income-generating properties 6 in Kuwait, but our main concern is the old age of those 0.10 4 properties.

2 • In 9M2009, NREC’s proportionate share of Agility’s net 0.00 - Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 profit was more than NREC’s net profit (KD 25.9 million Volume Close vs. NREC’s reported net profit of KD 20.6 million), which means that the core real estate operations of the company Sources: Reuters and NBK Capital are reporting losses. This was the trend for 2006 and 2008 as well Analyst

Mariam Al-Bahar T. +965 2259 5138 E. mariam.albahar@nbkcapital

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 | 74 National Real Estate Company (NREC) Kuwait in Focus - November 2009

Overview • Rental income for the company decreased at a five-year CAGR of 13.5% for the period 2003 to 2008 mainly due National Real Estate Company (NREC) is one of the largest to the same reasons that were instrumental in the decline Kuwaiti real estate companies in terms of market capitalization. in 2007. Thus, rental income as a percentage of total The company was established in 1973, and was listed on income decreased steadily, from 45% in 2003 to 22% in the Kuwait Stock Exchange in 1984. NREC is specialized in 9M2009. developing, trading, and managing commercial and industrial • A back-of-the-envelope calculation shows Souq Sharq real estate properties, including shopping centers, office accounts for the majority of the company’s rental income. properties, resorts and hotels, and retail centers, both locally NREC owns quite a few other income-generating properties and internationally. The company is part of the Sultan Group, in Kuwait, but our main concern is the old age of those and holds a 22.4% stake in Agility, according to the 9M2009 properties. financials. • A closer look at the financials shows that the company reported losses at the EBITDA level of KD 4.38 million and Completed Projects KD 9.67 million for 2007 and 2008, respectively. This was the trend in 9M2009 as well. Country Project Location Use Year of completion Leasable Area (sq. m)

Mishal Tower Sharq Commercial Offices, Retail 2008 -

Sharq Marke Sharq Retail 1998 28,300 • The company’s net share in the associates’ results is El Joan Resort Juliaa Resort - - entirely due to the share of Agility’s profit. According to Watya Complex Qebla Commercial Complex 1979 11,186 Kuwait Souq Al Wataniya Mirqab Commercial Complex 1978 12,971 the 9M2009 financials, NREC’s share of Agility’s profit Al Wataniya Tower Kuwait City Commercial Complex 1989 3,332 Bobyan Complex Farwaniya (Dhajeej Area) Commercial Complex 1993 9,916 accounted for 100% of the net share of the associates’ Dasman Complex Dasman Commercial Complex 1979 16,081 results.

• The net share of associates’ results reached KD 25.9 Sources: Company’s financial statements and NBK Capital million in 9M2009, which is flat compared to the same Upcoming Projects period a year before. However, proportionate profits from associated companies (as a percentage of total income)

Country Project Location Use increased steadily, from 26% in 2003 to 90% in 9M2009. Najmat Abu Dhabi Reem Island, Abu Dhabi Mega Commercial Center UAE TECOM Dubai Dubai Media City Hotel, Commercial Offices • The net share of associates’ results as a percentage of SHAMS Abu Dhabi Reem Island, Abu Dhabi Hotel, Commercial Offices, Residential Iraq Erbil Mega Erbil Shopping mall, Appartments, Hotel, Offices net profit increased steadily, from 41% in 2003 to 126% Egypt TELAL 6th of October Residential Villas in 9M2009. As of 9M2009, NREC’s proportionate share Aqaba AL-Aqaba city Offices, Warehouse Jordan Amman Zahran road, Amman Mix Use Agility’s net profit was more than the company’s net profit Agricola Project Al Romail Residential Lebanon (KD 25.9 million vs. NREC’s reported net profit of KD West End Project Pastor street, Gemmayze Commercial Offices Libya Palm city residences Janzour Residential Appartments, Commercial Center 20.6 million), which means that NREC’s core real estate Pakistan Canal Residence Lahore Luxury Residential Villas operations reported losses. This was the trend for 2006 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 Income Statement be further justified by comparing the return on average 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.

nbkcapital.com | 75 National Real Estate Company (NREC) Kuwait in Focus - November 2009

Balance Sheet Financial Statements

• The company is part of the Sultan Group, and holds Income Statement (KD '000) 2006 2007 2008 9M2009

a 22.4% stake in Agility, according to the 9M2009 Rental Income 16,290 7,677 8,030 6,460 Operating Expenses 10,475 11,611 12,961 7,600 financials. NREC’s stake in Agility appears at a cost of Net Share in the Associate's Results 38,806 36,201 31,465 25,934 KD 207.9 million on the balance sheet as of September Investment Income 6,849 9,304 3,454 84 Total Income 68,860 59,452 44,759 49,980 30, 2009. The Agility stake, as of November 11, 2009, Net Profit 34,251 39,021 18,292 20,562 is valued at KD 276.7 million, 33.1% higher than the Balance Sheet (KD '000) 2006 2007 2008 9M2009 value reported in the 9M2009 financials. The Agility stake Cash & Cash Equivelant 8,020 12,960 16,678 15,139 accounts for almost 35.3% of the total assets and 78% of Investment in Associates 169,309 185,405 177,843 210,402 Investment Properties 65,922 66,412 66,680 69,114 total shareholders’ equity. Therefore, any material change Capital Work in Progress 16,876 38,217 235,429 255,802 Total Assets 277,598 396,276 532,949 589,756 in the value of Agility could have a significant impact on Bank Facilities 34,517 114,807 156,556 181,700 NREC’s shareholders’ equity. Total Liabilities 65,373 167,904 322,832 345,819 Shareholders' Equity 212,225 228,372 210,117 243,937 • The company’s capital work in progress increased Sources: Company’s financials and NBK Capital significantly from KD 38.2 million in 2007 to KD 255.8 million in 9M2009 mainly due to new projects undertaken 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 year average.

nbkcapital.com | 76 Companies in Focus Kuwait in Focus - November 2009

Tamdeen Investment Company (Tamdeen)

Key Data Highlights

General Liquidity • Tamdeen Real Estate Company is the majority shareholder KSE Code TAMI 52-week average volume 629,399 in Tamdeen Investment Company, with a 51.37% stake. Reuters Code TAMI.KW 52-week average value KD 101,373 Fatah Al Khair Holding Group, a Kuwaiti family-owned Price (KD) Price Performance business, owns 15% of the company. Closing Price 0.124 YTD -34.7% 52-week High/Low 0.204 / 0.120 1-Year Period -27.1% • The company has exposure to financial instruments in Market Capitalization Outstanding Shares USD and QAR. Tamdeen’s FX Income turned negative in Million KD 3.87 Latest (million) 31.19 2008 because of the depreciation in the USD and QAR. Ownership Structure Closely Held: 76.37% Public: 23.63% We believe a further loss in this segment could affect the company’s bottom line. Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • Of the AFS investments, quoted investments in foreign Stock Performance securities account for 84%. Although the company does not indicate if these AFS securities are equity or fixed- 0.250 25 income securities, looking at the historical performance of this line item, and the high volatility in the fair value 52-week High: KD 0.204 0.200 20 reserve, we believe that these investments are mostly related to equities; this increases the risk associated with these securities. 0.150 15 • Although the company does not have any financial assets Millions Price (KD) Price 0.100 10 carrying interest rates, the company faces interest rate risk through floating interest rate loans.

52-week Low: KD 0.120 0.050 5 • Tamdeen Investment Company has no long-term debt, but has increased its short-term debt via a banking facility. With more than KD 57 million in short-term debt and weak 0.000 0 Nov-08 Jan-09 Feb-09 Apr-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09 earnings from core operations, the company’s ability to Volume Close repay its debt may be at risk.

Sources: Reuters and NBK Capital • Tamdeen Investment announced their 9M2009 results; however, at the time of this publication, the detailed financial statements were not available. At the endof 9M2009, the company reported a net profit to KD 2.4 Analyst million, a decline of 41%. The third quarter of 2009 reported a net profit of KD 262 thousand, compared to a Lisa Fernandes loss of KD 968 thousand compared to the same period of T. +971 4 365 2856 2008. E. [email protected]

Key Ratios

2005 2006 2007 2008 1H2009

Net Profit Margin (%) 64.5% 67.5% 59.2% 21.6% 0.45 ROA 1.2% 2.9% 3.6% 1.2% 0.02 ROE 1.3% 3.7% 5.1% 2.2% 0.03 Current Ratio (X) 0.25 0.12 0.03 0.08 0.13 Debt to Assets (X) 0.05 0.18 0.27 0.42 0.40 Debt to Equity (X) 0.06 0.24 0.39 0.78 0.70 AFS-to-Assets 92.8% 85.2% 80.4% 66.5% 58.9% AFS-to-Equity 100.2% 110.3% 114.0% 124.0% 102.8% Equity-to-Assets 92.6% 77.2% 70.6% 53.6% 57.3%

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 77 Tamdeen Investment Company (Tamdeen) Kuwait in Focus - November 2009

Overview Financial Statement Analysis

• In 1997, Tamdeen Investment Company (formerly known Income Statement as Gulf Investment Projects Company) was established and registered as an investment company with the Central • The unimpressive 2008 financial results for Tamdeen Bank of Kuwait. The company was listed on the Kuwait Investment Company are a consequence of the current Stock Exchange (KSE) in May 2006. financial crisis and the resulting poor performance of • Tamdeen Real Estate Company is the majority shareholder the company’s portfolios. Since the company’s business in the company, with 51.37% ownership. Fatah Al Khair operations revolve around market investments, Tamdeen Holding Group, a Kuwaiti family-owned business, holds a Investment Company’s earnings are expected to be volatile. 15% stake in Tamdeen Investment Company; this local Revenue dropped by 83% YoY in 3Q2008, and turned Kuwaiti business also owns a 25% stake in Tamdeen Real negative in 4Q2008 due to losses reported by the group’s Estate Company. Kuwait Portland Cement owns 10% of associate companies. the investment company, and the balance of the equity is • In 2008, gains from AFS investments accounted for 92% publically traded. of total revenue, and actually declined by 30% YoY.

• The company’s main focus areas are the following: • As a result, at the end of 2008, total revenue showed • Managing financial investment transactions related to negative growth of 43% compared to 2007. securities, including the acquisition and sale of private • During 1H2009, investment companies continued to bear sector shares and bonds. the brunt of the financial crisis. Tamdeen Investment • Providing consultation services to clients on asset Company witnessed a 43% decline in the company's utilization, as well as consultation and advisory services revenue stream, fueled by a decline in market investments; on mergers and acquisitions (M&A) and business gains from AFS investments accounted for 75% of total succession to corporate clients. revenue, and declined by 45% YoY.

• Delivering investment and portfolio management • In 2007, the company reported a gain on the sale of services. The company holds many direct investments. investment properties amounting to KD 2.5 million; this Its primary investments are in Ahli United Bank, Kuwait accounted for 17% of total revenue. However, in 2008, the National Cinema Company, and British Industries for company did not report any gains from investment property Printing and Packaging. sales.

• Tamdeen Investment Company had an asset base of around • At the end of 1H2009, Tamdeen’s share of associates, KD 142 million and shareholders’ equity amounting to which is the second highest contributor to Tamdeen’s top around KD 81 million, as of June 2009. line (12% of total revenue), recorded a 29% increase. During 2Q2009, the company sold its entire stake in • The company’s stock is relatively illiquid, with a 12-month British Industries Printing and Packaging Company to average daily trading value of KD 190,142. an associate company, which resulted in a net profit of KD 383,171. Latest News • The share of profits from associates turned negative in 2008 due to the performance of Tamdeen Holding, November 2009: Tamdeen Investment announced their reporting a loss of KD 6 million. (Tamdeen Holding is a 25% 9M2009 results; however, at the time of this publication, the owned subsidiary that deals with acquiring, establishing, detailed financial statements were not available. At the end of managing, developing, and holding long-term strategic 9M2009, the company reported a net profit to KD 2.4 million, shares in Kuwaiti and foreign stockholding companies.) a decline of 41%. The third quarter of 2009 reported a net profit of KD 262 thousand, compared to a loss of KD968 • At the end of 2008, Tamdeen Investment Company reported thousand compared to the same period of 2008. positive growth in only two revenue segments: subscription and portfolio management fees (these grew by 225% and reached KD 1.3 million). In 1H2009, subscription and portfolio management fees declined by 91% YoY.

• Since Tamdeen Investment Company deals with financial instruments in USD and Qatari Riyal, the company is exposed to foreign exchange risk; the company reported

nbkcapital.com | 78 Tamdeen Investment Company (Tamdeen) Kuwait in Focus - November 2009

a loss of around KD 90,640 in 2008, versus a profit • During 2008, equity fell by 50% during the year as a result of KD 386,643 in 2007. In 1H2009, the company of a 72% decline in the fair value reserve. The company’s reported a foreign exchange loss of KD 82,385, versus a foreign currency translation reserve turned positive at the gain of KD 38,293 at the end of 1H2008. end of March 2009 in the amount of KD 109.4 thousand, implying an improvement in the exchange rate versus that • Total expenses and other charges recorded a 10% YoY in December 2008. However, at the end of June 2009, increase in 2008 and reached KD 6.6 million, with finance this foreign currency translation reserve was negative. At costs being the major contributor (77%). In 1H2009, the end of June 2009, shareholder’s equity to total assets total expenses and other charges declined by 21% YoY was 57%. and reached KD 2.56 million. The falling expenses are attributable to the 27% decline in finance costs in 1H2009 • The group manages portfolios for clients; these amounted YoY, which account for 73% of total expenses. to around KD 145 million as of June 30, 2009.

• On the back of negative growth in operating profit, Tamdeen Investment Company’s net profit declined by 79% during Financial Statements 2008, with the last two quarters, 3Q2008 and 4Q2008, Income Statement (KD '000) 2007 2008 1H2008 1H2009 reporting losses. For 1H2009, net income declined by Gains from AFS investments 11,107 7,766 6,603 3,611 57% to KD 2.2 million. The net profit margin declined Gains from sale of investment properties 2,499 - 0 383 Group’s share from the associates’ results 210 (986) 459 590 from 60% in 1H2008 to 45% in 1H2009. Subscription fees 239 1,107 1,004 30 Loss/ Gain from FX 38 -82 Portfolio management fees 170 225 107 75 Balance Sheet Other revenue 500 300 194 218 Total revenue 14,726 8,411 8,405 4,825

General and administrative expenses (331) (632) 501 634 • The asset base of the company declined by 10% in June Staff costs (555) (838) 0 0 Finance costs (4,801) (5,080) 2,658 1,928 2009 compared to December 2008. As of June 2009, Other Expenses (327) (43) 183 94 Total expenses and other charges -6,014 -6,593 3,343 2,656 AFS investments accounted for 59% of total group assets Net profit for the year 8,712 1,818 5,063 2,169 and 103% of total equity.

• Of the AFS investments, quoted investments in foreign Balance Sheet (KD '000) 2007 2008 1H2008 1H2009 Assets securities account for 84%. Although the company does Cash and cash equivalents 633 4,413 95 7,089 not indicate if these AFS securities are equity or fixed- Receivables and other debit balances 572 1,545 1,221 778 Available for sale investments 192,817 103,960 190,813 83,360 income securities, looking at the historical performance Investments in associates 44,828 45,421 44,839 49,226 Land and real estate under development 817 894 849 918 of this line item, and the high volatility in the fair value Properties and equipment 30 205 107 199 reserve, we believe that these investments are mostly Total assets 239,695 156,438 237,924 141,569 Liabilities related to equities; this increases the risk associated with Payables and other credit balances 5,075 7,120 4,817 3,204 Loans and Bank Facilities 65,376 65,410 63,831 57,180 these securities. End of service indemnity 60 48 44 61 Total liabilities 70,511 72,578 68,692 60,445 • On the liabilities side, the company’s loan book declined 0 0 Equity by 13% in June 2009, compared to December 2008; Share capital 28,350 31,185 31,185 31,185 Share premium 10,000 10,000 10,000 10,000 this loan book accounts for 95% of the total liabilities of Changes in fair value reserve 119,892 33,426 115,462 27,480 Retained earnings 9,592 8,388 11,819 10,557 Tamdeen Investment Company. It is important to note that Other Liabilities 1,350 861 766 1,901 Tamdeen Investment Co. only had short-term debt (short- Total equity 169,184 83,860 169,232 81,123 0 -0.504328 term loan and banking facility), representing 32% of total Total Liabilities and Equity 239,695 156,438 237,924 141,569

assets as of June 2009. (In 2007, the company’s long- Sources: Company’s financial statements and NBK Capital term debt accounted for 40% of total debt; but since then the company has had no long-term debt.) The company reduced short-term loans by 18% in June 2009, compared to December 2008. However, the company increased its bank facility by 17% to KD 12.18 million in June 2009, compared to December 2008. These loans and bank facilities carry floating interest rates. Some of the loans and bank facilities are secured against AFS investments. With more than KD 57 million in short-term debt and weak earnings from core operations, the ability to repay debt may be reduced.

nbkcapital.com | 79 Companies in Focus Kuwait in Focus - November 2009

The Transport and Warehousing Group (twg)

Key Data Key Highlights

General Liquidity • In 2008, the Transport and Warehousing Group (TWG) KSE Code TRANSPORT 52-week avg. volume 21,583 revenue grew by just 0.4%, compared to an increase of Reuters Code TTGC.KW 52-week avg. value KD 13,952 7% in 2007. This was mainly due to the slowdown in the Price (KD) Price Performance travel and tourism business line, which decreased by 40% Closing Price 0.700 YTD 0.0% in 2008. 52-week High/Low 0.730 / 0.570 1-Year Period -1.4%

Market Capitalization Outstanding Shares • In 1H2009, both the travel and tourism business line and Million KD 68.79 Latest (million) 98.27 the transportation business line witnessed a decline in Ownership Structure revenue; the revenue of the travel and tourism business Closely Held: 90.52% Public: 9.48% line declined by 19% and that of the transport business declined by 5%. Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • In January 2009, TWG’s wholly owned subsidiary, Transport Stock Performance and Warehousing Real Estate Group, acquired 100% of the real estate division of Al Masar United Company for a 0.800 0.08 cash consideration of KD 9.5 million. 52-week High: KD 0.730

0.700 0.07 • In 2008, EBITDA declined by 4% to KD 3.4 million compared to FY2007 results, with the EBITDA margin 0.600 0.06 declining from 29.9% to 28.6%. These results can be

0.500 52-week Low: KD 0.570 0.05 attributed to the fact that the growth of the company’s operating expenses has outpaced the growth in revenues. 0.400 0.04

Millions As for 1H2009, EBITDA increased by 12% and reached Price (KD) Price 0.300 0.03 KD 2.4 million.

0.200 0.02 • In 2008, net profit declined by 18% to reach KD 2.9 million; this was mainly due to the 32% decline in other 0.100 0.01 income.

0.000 0.00 Nov-08 Dec-08 Feb-09 Mar-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09 • TWG had a total debt-to-equity ratio of 0.09x as of June Volume Close 2009. The company is well positioned to service its debt through its high liquidity and strong cash-generating Sources: Reuters and NBK Capital capabilities. • TWG announced their 9M2009 results; however, at the Analyst time of this publication, the detailed financial statements were not available. The 9M2009 results witnessed a sharp Lisa Fernandes incline of 75%, mainly due to the gain on acquisition of T. +971 4 365 2856 the warehousing business, which resulted in a one-off gain E. [email protected] in 1Q2009 amounting to KD 2.7 million. If we exclude this on-off event, the company’s net profit declined by Key Ratios 34% in 9M2009.

2005 2006 2007 2008 1H2009

Gross Profit Margin (%) 60.4% 48.8% 47.7% 45.9% 49.9% Operating Profit Margin (%) 37.8% 23.2% 17.4% 16.3% 23.3% Net Profit Margin (%) 36.9% 42.6% 30.0% 24.6% 23.3% ROA 66.1% 11.3% 8.5% 9.7% 4.6% ROE 74.2% 14.3% 10.2% 11.5% 5.6% Current Ratio (X) 9.42 3.80 5.70 4.76 2.61 Debt to Assets (X) 0.05 0.14 0.10 0.05 0.08 Debt to Equity (X) 0.06 0.18 0.12 0.06 0.09 Receivables Turnover Ratio 2.08 1.90 1.58 2.00 0.80 Inventory Turnover Ratio 26.93 20.56 18.44 15.01 6.70 Payables Turnover ratio 0.59 2.29 2.49 2.55 1.08

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 80 The Transport and Warehousing Group (TWG) Kuwait in Focus - November 2009

Overview source of revenue generated from the warehousing and real estate segment. In 1H2009, this new revenue stream The Transport and Warehousing Group Co KSC (TWG) is a accounted for 12% of the total revenue and boosted the public limited company listed on the Kuwait Stock Exchange total revenue by 5%. (KSE) with paid-up capital of KD 98.3 million. TWG is engaged • In 2008, EBITDA declined by 4% to stand at KD 3.4 in a variety of activities related to land, sea, and air transport million; the EBITDA margin dropped from around 30% through the company’s five fully owned subsidiaries: in 2007 to around 29% in 2008. These results can be • Transport and Warehousing Real Estate Group Company attributed to the fact that the growth of the company’s operating expenses has outpaced the growth in revenues. • Boodai Aviation Company In 1H2009, EBITDA increased by 12% to reach KD 2.4 • Boodai Aviation Agencies Company million; the EBITDA margin increased slightly from around 35% in 1H2008 to around 36% in 1H2009. • Abar Oilfield Services Company • Net profit declined by 18% in 2008 to reach KD 2.9 • Al Masar United Company million; this was mainly due to the decline in other income by 32%. Other income is mainly composed of Latest News interest income, which declined by 40% in 2008. As for 1H2009, the company reported a net profit growth of • November 2009: TWG announced their 9M2009 results; 129%; this was mainly due to the gain on acquisition of however, at the time of this publication, the detailed the warehousing business, which resulted in a one-off gain financial statements were not available. At the endof in 1Q2009 amounting to KD 2.7 million. If we exclude 3Q2009, the company witnessed a steep decline in net this one-off event, the company's net profit declined by profit of 79% compared to the same period last. The 18% in 1H2009. 9M2009 results witnessed a sharp incline of 75%, mainly due to the gain on acquisition of the warehousing business, Balance Sheet which resulted in a one-off gain in 1Q2009 amounting to KD 2.7 million. If we exclude this one-off event, the Liquidity concerns are not a source of worry for this company; company’s net profit declined by 34% in 9M2009. TWG’s debt-to-equity ratio stood at 0.09x at the end of June • January 2009: TWG’s wholly owned subsidiary, Transport 2009 with cash and cash equivalents amounting to KD 2.4 and Warehousing Real Estate Group, acquired 100% of million. This was a considerable drop since December 2008, the net assets of the real estate division of Al Masar United when the cash and cash equivalent stood at KD 15.4 million. Company for a cash consideration of KD 9.5 million. This drop in cash occurred because the company spent a considerable portion of this cash to pay for acquiring the Financial Statement Analysis warehousing business.

Income Statement At the end of June 2009, the company had around KD 850,000 in a time deposit account with an effective yield of • In 2008, TWG’s revenue grew by just 0.4%, compared 3.5% per annum. to the increase of 6.9% seen in 2007. This was mainly A study was conducted in our monthly publication, MENA in due to the slowdown in the travel and tourism business Focus, dated December 4, 2008, that examined the degree of line, which decreased by 40% in 2008. With the global exposure that companies in Kuwait have to investments. The financial crisis, this business line has faced difficulties. A study also examined the solvency of these companies in the closer look at the total revenues reveals that the transport short-term and their ability to meet the debt obligations from business is still the main contributor to the total revenues their operations. TWG fell under the category of companies (88% during 2008); this line item grew by 10% in 2008. with good solvency and low investment exposure; the company • Both the travel and tourism business line and the had no investment exposure and a favorable quick ratio of 2.3 transportation business line witnessed a decline in revenue (as of June 2009). in 1H2009. In January 2009, TWG’s wholly owned subsidiary, Transport and Warehousing Real Estate Group, acquired 100% of the net assets of the real estate division of Al Masar United. As a result, TWG has an additional

nbkcapital.com | 81 The Transport and Warehousing Group (TWG) Kuwait in Focus - November 2009

Financial Statements

Income Statement (KD '000) 2007 2008 1H2008 1H2009

Revenue 11,861 11,903 6,076 6,379 Cost of Goods sold 6,203 6,443 3,210 3,196 Gross Profit 5,658 5,460 2,866 3,183 G & A expenses 2,115 2,056 752 810 EBITDA 3,542 3,404 2,114 2,372 Depriciation 1,481 1,462 739 887 Operating Income 2,062 1,942 1,375 1,485 Others 1,637 1,136 537 258 Profit before Tax 3,699 3,078 1,912 1,743 Taxes 143 150 92 254 Profit for the Year 3,556 2,928 1,820 1,488

Balance Sheet (KD '000) 2007 2008 1H2008 1H2009

Cash and cash equivalents 13,525 15,382 15,290 2,368 Trade and other receivables 0 0 0 850 Due to related parties 3,935 3,215 3,688 3,995 Inventories 12,185 730 638 3,253 Current Assets 29,646 19,327 19,616 10,466

Fixed-assets-PP&E 11,886 10,305 11,206 21,628 Total Non Current Assets 11,886 10,305 11,206 21,628 Total Assets 41,532 29,631 30,822 32,094

Current portion of loan 2,767 1,625 2,313 1,230 Trade and other payables 2,493 2,526 3,425 2,965 Current Liabilities 5,260 4,151 5,738 4,195

Non current portion of loan 1,387 0 675 1,295 Post emplyment benefits 499 543 512 544 Non Current Liabilities 1,886 543 1,187 1,839 Total Liabilities 7,146 4,694 6,925 6,033

Share Capital 9,827 9,827 9,827 9,827 Legal reserve 4,837 5,144 4,837 5,144 General Reserve 4,837 5,144 4,837 5,144 Retained Earnings 15,223 5,251 4,759 6,467 Total Equity 34,722 25,367 24,259 26,583

Total Liabilities and Equity 41,868 30,061 31,184 32,616

Source: Company’s financial statements and NBK Capital

nbkcapital.com | 82 Companies in Focus Kuwait in Focus - November 2009

United Real Estate Company

Key Data Highlights

General Liquidity • United Real Estate Company (United Real Estate) is one KSE Code URC.KSE 52-week avg. volume 1,250,345 of the premiere real estate companies in Kuwait. The Reuters Code UREK.KW 52- week avg. value (KD) 113,296 company is a real estate developer in Kuwait with a major Price (KD) Price Performance focus on hospitality, commercial, and retail properties. Closing Price 0.080 YTD -5.0% 52-week High/Low 0.106/0.057 1-Year Period 3.0% The company’s real estate portfolio includes commercial

Market Capitilization Outstanding Shares complexes, hotels, resorts, residential buildings, shopping Million KD 63.1 Latest (million) 787.97 malls, high-rise office buildings as well as mixed-use Ownership Structure projects. Closely Held: 40.20% Public: 59.80%

Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital • United Real Estate has major projects across business segments and geographic locations. We feel this Stock Performance diversification not only lends strength to the business model but also insulates the company from downturns in 0.15 14 any particular region or country.

12 • The company’s land bank is worth highlighting as it has 52-week High: KD .106 a book cost of KD 77.6 million and accounts for 24% of 10 0.10 total assets according to the 9M2009 financials. We feel 8 this is significant when compared to the current market

Millions capitalization of the company, which stood at KD 63.1

Price (KD) Price 6

0.05 million as of November 16, 2009. 52-week Low: KD 0.057 4 • The company’s net profit decreased significantly from a 2 profit of KD 7.4 million in 9M2008 to KD 1.9 million in

0.00 - 9M2009. This decrease was mainly due to the decline in Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 non-operating income and the increase in total expenses. Volume Close

Sources: Reuters and NBK Capital • We feel it is worth highlighting that the company’s investment book stood at KD 27.8 million as of 9M2009, Analyst accounting for 18% of the shareholders’ equity and 9% of the total assets. The investment book as a percentage of Mariam Al-Bahar equity is an area of concern. T. +965 2259 5138 E. mariam.albahar@nbkcapital

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% 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 | 83 United Real Estate Company Kuwait in Focus - November 2009

Overview Latest News

Originally founded in 1973, United Real Estate Company is 14 October 2009: Abdali Investment and Development one of the premiere real estate companies in Kuwait, and reported that the Abdali Urban Regeneration Project will is part of KIPCO Group. A real estate developer in Kuwait, open in 2010. The entire project will consist of 12 buildings the company focuses on hospitality, commercial, and retail including hotels, retail outlets, restaurants, apartments and properties. The company develops properties and rents and offices. United Real estate is a part of the joint venture manages third-party properties. The company studies the responsible for the development of the project. location and economic activity of the targeted property, and then outsources the construction. The company has major Financial Statement Analysis projects across various business segments and geographic locations. Income Statement

Shareholder Structure • United Real Estate reported total real-estate-related income of KD 19.9 million in 9M2009, up 42% compared with

Name Type Country Holding the same period a year before. The growth was mainly due United Gulf Bank Corporate Bahrain 28.91% Kuwait Projects Company (via Kuwait United Consultancy Company) Corporate Kuwait 11.29% to the sale of properties held for trading (growing by over Public - 59.80% five times) to KD 5.1 million during 9M2009 compared to Foreign Ownership Structure Open to GCC Investors 100.00% the same period last year. Open to Foreign Investors 100.00% • Growth in rental income increased by 7% YoY, amounting Sources: Zawya and NBK Capital to KD 10.6 million in 9M2009 compared to KD 9.9 million in 9M2008. This growth is almost double compared to that of the historical growth rates; whereby, the company’s Company’s Projects rental income increased at a five-year CAGR of 3.9% for the period from 2003 to 2008. As a result, rental income United Real Estate Company’s existing projects as a percentage of total revenue increased slightly, from 53% in 2003 to 57% in 2008.

Project Location Use

Major completed projects - Kuwait • Non-operating income decreased significantly from a Al-Shaheed Tower Sharq, Kuwait City Office Building surplus of KD 6 million in 9M2008 to a loss of KD 2.3 City Tower Sharq, Kuwait City Office Building million in 9M2009. This decline was mainly due to foreign Al Mutahida Complex Kuwait City Offices and Shopping Mall

Al Maseel Complex Kuwait City Offices and Shopping Mall exchange losses which amounted to KD 3.5 million.

Saleh Shehab Resort Al Jela'aa Chalet Resort • Total expenses increased by 26% to KD 15.8 million in Marina World Salmiya Shopping Mall and Hotel

Major completed international projects 9M2009 compared to KD 12.5 million in 9M2008 due to Sheraton Helioplis Egypt Five-star Hotel the inclusion of the carrying value of sold properties. If we Bhamdoun Hotel and Commercial Center Bhamdoun, Lebanon Four-star Hotel and Commercial Center are to exclude this value, total expenses dropped by 9.5% Rawcheh Hotel Rawcheh in Beirut, Lebanon Five-star Hotel in 9M2009 from 9M2008. Sources: Company’s annual report and NBK Capital • The company’s net profit decreased significantly from KD 7.4 million in 9M2008 to KD 1.9 million in 9M2009. This Major Upcoming Projects decrease was mainly due to the decline in non-operating income as well as an inclusion of the carrying value of properties sold. • United Tower • We observe that the return on average assets (ROAA) This office tower is located close to the Al-Shaheed and for the company decreased significantly from 8.5% in Madina buildings in the Sharq area of Kuwait City. The tower 2004 to 2.2% in 2008. To calculate the return on core is designed on a land space of 4,852 square meters, and real estate assets, we adjusted the ROAA by excluding construction is expected to be completed in 2010. investment gains/losses and change in fair value from the • Regional expansion in Egypt, Jordan, and Qatar net profit, and excluding the available-for-sale investment portfolio from the total assets. The adjusted ROAA for the real estate operations decreased from 11.4% in 2007 to 7.5% in 2008.

nbkcapital.com | 84 United Real Estate Company Kuwait in Focus - November 2009

Balance Sheet Financial Statements

Income Statement (KD' 000) 2007 2008 9M2008 9M2009 • The company’s total assets stood at KD 316.8 million in Rental Income 11,811 13,380 9,908 10,599 Net Hotel Opearting Income 1,426 1,670 1,227 981 2008, growing by 30% compared to 2007 (9M2009 KD Sale of properties held for trading 1,400 895 872 5,432 323.3 million). This was mainly due to the increase in Other Operating Income 1,907 2,785 1,817 2,897 Share of results of associates 2,040 646 178 29 properties held for sale, land for development, investment Real estate related income 18,583 19,376 14,002 19,938 Change in fair value of investment properties 846 468 0 0 available for sale, and the increase in projects under Investment income 3,200 3,894 3,634 1,259 Other non-operating income 1,006 782 782 0 development. Foreign exchange (loss) gain 3,555 -1,092 1,550 -3,489 Total Non-operating Income 8,607 4,052 5,966 -2,230 • Development land worth KD 61.27 million was acquired Total Income 27,190 23,428 19,967 17,708 Total Expenses 16,617 16,949 12,522 15,776 in Syria, Qatar, Dubai, and Egypt for various projects in Net Profit attributable to equity shareholders' 10,215 6,114 7,369 1,855 2008, while an increase in unquoted securities was mainly responsible for the rise in investments available for sale. Balance Sheet (KD' 000) 2007 2008 9M2008 9M2009 Cash and cash equivalents 13,490 12,336 7,914 7,570 Account receivable and prepayments 16,461 7,293 26,612 12,905 • The company holds land that appears at a value of KD 77.6 Properties held for trading 10,904 10,413 10,413 5,291 million on the balance sheet according to the 9M2009 Available for sale investments 19,628 28,925 22,001 27,845 Investment in associates 64,604 67,984 66,136 72,582 financials. The land for development accounts for almost Lands for development 14,035 75,831 25,239 0 Projects under construction 498 9,559 2,754 0 24% of the total assets and 49% of total shareholders’ Investment properties 92,926 94,232 92,926 187,543 Property and equipment 10,911 10,237 10,575 9,534 equity in 9M2009. Considering the fact that the current Total assets 243,458 316,810 264,571 323,270 market cap of united is KD 63.1 million as of November Accounts payable and accruals 14,544 66,024 14,723 71,613 Interest bearing loans and borrowings 93,429 85,174 83,978 83,910 16, 2009, we feel it is worth highlighting. Bonds 10,250 10,250 10,250 10,250 Total liabilities 118,223 161,449 108,951 165,773 Share capital 59,610 78,797 78,797 78,797 • Investment in associates increased significantly from KD Share premium 3,770 14,351 14,351 14,351 24.8 million in 2005 to KD 68 million in 2008 (9M2009 Treasury shares -4,096 -4,630 -4,269 -4,506 Statutary reserve 11,356 11,998 11,356 11,998 KD 72.6 million). As a result, the investment in associates Voluntary reserve 2,583 2,583 2,583 2,583 Treasury shares reserve 980 980 980 810 as a percentage of total assets increased significantly from Cumulative changes in fair value 599 791 941 224 13% in 2005 to 22% in 2008. We would like to highlight Foreign currency translation reserve -1,198 -664 -1,795 -662 Employees' share option reserve 48 57 55 57 that, despite the increase; the contribution of investment Retained earnings 38,266 37,776 39,674 39,631 Equity attributable to equity holders of the parent 111,917 142,039 142,672 143,283 in associates to net profit is minimal. Minority interests 13,318 13,322 12,948 14,214 Equity 125,235 155,361 155,620 157,497 Total Liabilities and equity 243,458 316,810 264,571 323,270 Investment in Associates Sources: Company’s financials and NBK Capital

2005 2006 2007 2008 Name of Company Country Value Equity Value Equity Value Equity Value Equity KD (million) Interest (%) KD (million) Interest (%) KD (million) Interest (%) KD (million) Interest (%) Al-Fujeira Real Estate Limited UAE 3.63 50% 4.41 50% 4.98 50% 5.88 50% Gulf Egypt for Hotels and Tourism Egypt 7.81 46% 2.62 14% 3.44 14% 3.28 14% United Warehousing and Refigeration Kuwait 1.89 40% 1.60 40% 0.84 40% - - Kuwait Syrian Holding Company Kuwait 1.63 15% ------Verdun 1544 SAL Holding Lebanon 9.58 45% 9.48 45% 8.95 45% 9.05 45% Dhiyafa Holding Kuwait 0.30 30% 21.35 49% 21.55 49% 20.17 49% United Universal Real Estate Kuwait - - 0.03 28% 0.43 43% 0.43 43% United Tower Holding Company Kuwait - - 19.03 43% 20.61 43% 21.59 44% Abdali Boulevard Company Jordan - - - - 3.67 21% 7.57 21% United Real Estate Syria Syria - - - - 0.15 50% 0.01 50% Total 24.84 58.52 64.60 67.98

Sources: Company’s financials and NBK Capital

• The company’s net debt-to-equity ratio stood at 0.53x in 9M2009, compare to the last four years' average of 0.69x from 2005 to 2008. United’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 | 85 Companies in Focus Kuwait in Focus - November 2009

YIACO Medical Company

Key Data Highlights

General Liquidity • YIACO Medical Company’s principal activities are focused

KSE Code YIACO 52-week avg. volume 1,099,714 on the import and sale of medical, chemical, and dental Reuters Code YIAC.KW 52-week avg. value KD 184,794 products and equipment. Price (KD) Price Performance • Kuwait Finance House owns 9.89% of YIACO, and Al Closing Price 0.158 YTD 17.9% 52-week High/Low 0.206 / 0.112 1-Year Period 25.4% Nakhil United Real Estate Company owns 5.54% with the

Market Capitalization Outstanding Shares balance held by the general public. Million KD 23.70 Latest (million) 150.00 • The company has witnessed consistent growth in its Ownership Structure Closely Held: 15.43% Public: 84.57% revenue stream; revenue grew at a CAGR of 13% between 2005 and 2008. At the end of 1H2009, the company's Price as of Close on November 16, 2009. Sources: Reuters, Zawya, and NBK Capital pharmaceutical supply business accounted for 64% of Stock Performance total revenue. • At the end of 2008, the company suffered a loss of 0.250 20 around KD 1.7 million due to impairments of accounts receivables, an impairment of goodwill, and an impairment 52-week High: KD 0.206 0.200 of investments in associates.

15 • The investments carried at fair value through the income 0.150 statement include an “Equity Securities Fund”; at the end

10 of 2008, these equity investments reported a loss of KD Millions Price (KD) Price 0.100 735,718. 52-week Low: KD 0.112 • Given the nature of YIACO’s business, accounts receivables 5 0.050 and inventories totaled KD 37 million at the end of June 2009, and accounted for the majority (67%) of total

0.000 0 assets. Nov-08 Dec-08 Feb-09 Mar-09 May-09 Jun-09 Aug-09 Sep-09 Nov-09

Volume Close • The company has a low debt-to-equity ratio of 0.26x.

Sources: Reuters and NBK Capital • YIACO announced their 9M2009 results; however, at the time of this publication, the detailed financial statements were not available. At the end of 9M2009, the company Analyst reported an increase of 8% in net profit to KD 2.3 million;

Lisa Fernandes however, the third quarter of 2009 reported losses of KD T. +971 4 365 2856 23,398 compared to a profit it KD 236,699 during the E. [email protected] same period in 2008.

Key Ratios

2005 2006 2007 2008 1H2009

Gross Profit Margin (%) 20.5% 25.1% 24.9% 27.2% 25.3% Operating Profit Margin (%) 2.6% 5.1% 4.8% 5.6% 6.8% Net Profit Margin (%) 3.8% 5.3% 4.7% 1.4% 6.4% ROA 3.1% 5.4% 5.0% 1.6% 4.3% ROE 7.5% 11.4% 10.3% 3.4% 9.3% Current Ratio (X) 1.12 1.35 1.35 1.32 1.36 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 Receivables Turnover Ratio 2.82 2.04 2.33 2.46 1.23 Inventory Turnover Ratio 2.85 4.13 3.10 2.42 1.86 Payables Turnover ratio 2.36 2.32 2.55 2.61 1.68 Investment/Equity 49% 36% 35% 31% 29%

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 86 YIACO Medical Company Kuwait in Focus - November 2009

Overview Financial Statement Analysis

YIACO Medical was incorporated in Kuwait in 1952 as the Income Statement sole marketing agent for numerous multinational, research- focused pharmaceutical manufacturers. The company was • In 2008, YIACO’s revenue grew by 12% YoY and reached known as Yusuf Ibrahim Alghanim and Company until March KD 54 million. As for 1H2009, YIACO Medical Company’s 2002. The company’s principal activities are focused on the revenue increased by 30% YoY and reached KD 36.4 import and sale of medical, chemical, and dental products and million, with pharmaceutical supplies being the largest equipment. contributor (64%) to total revenue.

The company has two key divisions: • Administrative expenses constitute the largest component • Pharmaceutical business encompassing four areas: of total operating expenses; over the past few years, Pharmacies, SkinCare, Animal Health, and Crop administrative expenses have accounted for an average of Protection Retail Pharmacies. 77% of operating expenditure (OPEX).

• Medical, scientific, and dental division encompassing • At the end of 2008, the company suffered a loss of Medical Projects Division, Scientific Division, Dental around KD 1.7 million due to impairments to accounts Division, Imaging Division, Physiotherapy Division, receivables, an impairment of goodwill, and an impairment Rehabilitation and Home Health Care Division, Key of investments in associates. Accounts Division, and Medical Furniture Division. • The company carries its investments at fair value through YIACO currently acts as an envoy for diversified, multinational the income statement, and these include an “Equity research-based companies such as Abott, Bayer GSK, Intervet, Securities Fund”; for 2008, these equity investments Schering, Pfizer, Merck, Roche, Phillips, and Johnson & reported a loss of KD 735,718, compared to a profit Johnson. The company owns and provides health care services of KD 24,000 in 2007. The first half of 2009 saw an through the largest chain of pharmacies in the Kuwait; YIACO improvement in the Equity Securities Fund, with the also owns the Apollo Medical Center, Canadian Medical Center, company reporting a profit of KD 55,198 in 1H2009, and Adan Diagnostic Center. versus a loss of KD 34,600 in 1H2008.

YIACO was listed on the Kuwait Stock Exchange in November • During 2008, finance costs grew by 63% from KD 470,955 2007. In 2007, the company acquired Al Raya Health Care in 2007 to KD 766,998 in 2008, fueled by high growth Company and City Medical, as a part of its expansion plans. in bank overdraft interest (348%) and term loan interest YIACO operates mainly in Kuwait and Egypt. During 2008, (369%). YIACO had a significant increase in board representation at • At the end of 2008, due to the various investment losses Al Salam hospital and, as a result, decided to transfer the and impairments, net profit attributable to shareholders investment in Al Salam hospital from AFS to investment in declined by 66% YoY, and reached KD 778,786, down associate. from KD 2.3 million in 2007.

Kuwait Finance House owns 9.89% of YIACO’s shares; Al • The first half of 2009 saw improved performance on Nakhil United Real Estate Company owns 5.54%, and the the back of growth in operating income and improved remaining balance of shares is held by the general public. results from associates, as well as lower finance charges. Consequently, the bottom line increased by 23% YoY and Latest News reached KD 2.3 million.

• YIACO’S board of directors did not pay any dividends in the November 2009: YIACO announced their 9M2009 results; year ending December 31, 2008. however, at the time of this publication, the detailed financial statements were not available. At the end of 9M2009, the Balance Sheet company reported an increase of 8% in net profit to KD 2.3 million; however, the third quarter of 2009 reported losses of • Given the nature of YIACO’s business, accounts receivable KD 23,398 compared to a profit it KD 236,699 during the and inventories combined stood at around KD 37 million same period in 2008. at the end of June 2009, and accounted for the majority (67%) of total assets.

• Investments in associates and investments carried at fair value together stood at around KD 7 million, and

nbkcapital.com | 87 YIACO Medical Company Kuwait in Focus - November 2009

accounted for around 13% of total assets. Investments in Financial Statements associates and investments carried at fair value through the income statement account for the major parts of Income Statement (KD '000) 2007 2008 1H2008 1H2009 Revenue 48,251 54,080 28,072 36,364 YIACO’s investments. Cost of Sales -36,219 -39,348 -20,592 -27,152 Gross Profit 12,032 14,732 7,480 9,212 • At the end of 2007, available-for-sale (AFS) investments Selling/Distribution/Admin. Exp. -9,712 -11,711 -5,309 -6,730 Operating Income 2,320 3,020 2,171 2,482 stood at KD 5.26 million; during 2008, YIACO had a Other Income 692 867 269 300 Share of results of associates 0 236 108 156 significant increase in the board representation atAl Unrealized loss/gain on inv. at fair val. through inc.stmt. 24 -736 -35 55 Finance Cost -471 -767 -367 -342 Salam hospital and, as a result, decided to transfer the Management Fees -133 -44 -98 -129 Profit before Tax 2,432 913 2,049 2,523 investment in Al Salam hospital from AFS to investment Income Taxes -103 -83 -54 -70 Other Expenses -38 -38 -93 -114 in associate. Profit for the Year 2,291 792 1,901 2,339 Minority Interest -13 -13 -9 -11 • Investments carried at fair value through the income Shareholders of the parent company 2,277 779 1,892 2,328 statement are composed of an “Equity Securities Balance Sheet (KD '000) 2007 2008 1H2008 1H2009

Fund,” whereby the underlying securities of the fund are Bank balances and cash 1,442 1,562 1,231 1,431 Accounts receivable and others 15,568 15,970 21,540 22,122 unquoted investments. At the end of June 2009, this Inventories 11,701 16,264 13,517 14,600 stood at KD 1.6 million, and accounted for around 3% Current Assets 28,711 33,796 36,288 38,153 Fixed-assets-PP&E 7,933 8,486 8,078 8,832 of total assets. Intangible Assets 87 0 43 0 Other Non Current Assets 823 431 552 354 Goodwill 135 0 135 0 • YIACO has only short-term debt, and during 1H2009, the Investment in associates 13 5,374 5,259 5,531 Invest. carried at fair value 2,355 1,619 2,320 1,674 company increased its short-term loan to KD 6.6 billion. AFS 5,256 118 118 118 Total Non Current Assets 16,601 16,027 16,506 16,508 These loans are unsecured and are payable within one year; Total Assets 45,313 49,823 52,793 54,661 they are payable to local banks and carry an interest rate Share Capital 15,000 16,500 16,500 16,500 Statutory reserve 1,954 2,035 1,954 2,035 at an average of 6.25% per annum on the utilized portion. Voluntary reserve 121 121 121 121 General Reserve 637 637 637 637 The company has a low debt-to-equity ratio of 0.26x. Foreign Currency Translation Reserve 109 80 95 124 Retained Earnings 4,083 3,280 4,475 5,609 Equity attributable to owners of the parent 21,904 22,654 23,781 25,027 Non-Controlling Interest 104 89 112 95 Total Equity 22,008 22,743 23,894 25,122

Borrowings 550 2,255 2,250 6,553 Accounts payable and accruals 14,225 15,068 17,349 16,162 Murabaha payable 5,706 2,516 6,555 3,298 Bank overdraft 865 5,695 1,001 1,996 Current Liabilities 21,346 25,534 27,154 28,009

Employees end-of-service benefits 932 510 1,006 400 Murabaha payable 1,027 1,036 740 1,130 Non Current Liabilities 1,959 1,546 1,746 1,531 Total Liabilities 23,305 27,080 28,900 29,540 Total Liabilities and Equity 45,313 49,823 52,793 54,661

Sources: Company’s financial statements and NBK Capital

nbkcapital.com | 88 Kuwait Market Statistics

• November Market Statistics

NBK Capital MENA Research T. +965 2224 6663 F. +965 2224 6905 E. [email protected]

nbkcapital.com | 89 Kuwait{ Market Statistics Kuwait in Focus - November 2009

2EBASED0ERFORMANCE 3UMMAR Y "EST0ERFORMERS #LOSE #HG -3#)+UWAIT#HG .)"-+ 7.ATIONAL)NDUSTRIES#O OFSTOCKSTRADINGABOVEYRAVGPRICE 4!-)+7 4AMDEEN)NVESTMENT#O !DVANCE$ECLINE2ATIO &!#)+7 #OMMERCIAL&ACILITIES#O WEEK(IGH,OW Ï.! Ï.! Ï.! Ï.! +3%'ENERAL)NDEX#HG Ï.! Ï.! Ï.! Ï.! +3%'ENERAL)NDEXWEEK(IGH,OW -ARKET#AP+7$g

(IGHEST4URNOVER !VG4URNOVER+$ 7ORST0ERFORMERS #LOSE #HG :!:AIN+UWAIT #/!3+ 7#OAST)NVESTMENT$EV#O ! !GILITY $%%2+ 7!L$EERA(LDG#O + +UWAIT&INANCE(OUSE )&).+7 )NTL&INANCIAL!DVISORS . .ATIONAL"ANKOF+UWAIT !)'++7 !2%&)NVESTMENT'RP !UG 3EP /CT .OV . .ATIONAL)NDUSTRIES'RP(LDG .).6+7 .ATIONAL)NVESTMENTS#O

-3#)'##-KTS -3#)+UWAIT

1UOTES -ONTHLY 7EEK #HANGE 4RAILING -ARKET#AP #OMPANY.AME #LOSE !VG4URNOVER !VGVOLUME #HG (IGH ,OW (IGH ,OW ONHIGH 94$ MTHS +7$g 0% 0" g g ! !gAYAN,EASING)NV#O NMF ! !BYAAR2EAL%STATE$EV#O NMF ! !GILITY ! !L!HLI"ANKOF+UWAIT NMF ! !L!HLIA(LDG#O NMF ! !L$EERA(LDG#O NMF ! !L-ADINAFOR&INANCE)NV#O NMF - !L-AZAYA(LDG#O NMF ! !L3AFAT)NV#O NMF ! !L3AFWA'RP#O NMF 4 !L4HEMAR)NTL(LDG NMF ! !LAFCO!VIATION,EASE ! !REF%NERGY(LDG NMF ! !2%&)NVESTMENT'RP NMF " "ANKOF+UWAITTHE-IDDLE%AST " "AYAN)NVESTMENT#O NMF " "OUBYAN"ANK NMF " "OUBYAN0ETROCHEMICAL#O " "URGAN"ANK NMF # #OAST)NVESTMENT$EV#O NMF # #OMMERCIAL"ANKOF+UWAIT

* Price as of close on November 16, 2009. Sources: Zawya and NBK Capital

nbkcapital.com | 90 Kuwait Market Statistics Kuwait in Focus - November 2009

-ONTHLY 7EEK #HANGE 4RAILING -ARKET#AP #OMPANY.AME #LOSE !VG4URNOVER !VGVOLUME #HG (IGH ,OW (IGH ,OW ONHIGH 94$ MTHS +7$g 0% 0" g g & #OMMERCIAL&ACILITIES#O & &IRST$UBAI2EAL%STATE$EV#O NMF ! &IRST)NVESTMENT#O NMF ' 'LOBAL)NVESTMENT(OUSE NMF ' 'ULF"ANK NMF # 'ULF#ABLE NMF )& )&!(OTELS2ESORTS )+ )KARUS0ETROLEUM)NDUSTRIES#O NMF ).)NJAZZAT2EAL%STATE$EV#O )& )NTL&INANCE#O NMF )& )NTL&INANCIAL!DVISORS NMF *!*AZEERA!IRWAYS + +IPCO!SSET-ANAGEMENT#O NMF + +UWAIT#EMENT#O NMF + +UWAIT&INANCE(OUSE NMF & +UWAIT&OOD#O + +UWAIT)NTL"ANK + +UWAIT)NVEST(LDG#O NMF + +UWAIT)NVESTMENT#O NMF + +UWAIT0ROJECTS#O(LDG NMF + +UWAIT0RIVATIZATION0ROJECT(LDG NMF + +UWAIT2EAL%STATE#O NMF - -ABANEE#O NMF - -AYADEEN NMF . .ATIONAL"ANKOF+UWAIT . .ATIONAL)NDUSTRIES#O NMF . .ATIONAL)NDUSTRIES'RP(LDG NMF . .ATIONAL)NVESTMENTS#O NMF . .ATIONAL2EAL%STATE#O . .OOR&INANCIAL)NV#O NMF ! 1URAIN0ETROCHEM NMF 3 3ALHIA2EAL%STATE#O NMF 3 3ULTAN#ENTER&OOD0RODUCTS NMF 4 4AMDEEN)NVESTMENT#O NMF 4 4AMDEEN2EAL%STATE#O NMF ! 4HE#OMMERCIAL2EAL%STATE#O NMF 4 4HE)NVESTMENT$AR#O . 7ATANIYA : :AIN+UWAIT

* Price as of close on November 16, 2009. Sources: Zawya and NBK Capital

nbkcapital.com | 91 Kuwait in Focus - November 2009

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

This document and its contents are prepared for your personal information purposes only and do not constitute an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. The information and any views expressed are given as of the date of writing and are subject to change. While the information has been obtained from sources believed to be reliable, we do not represent that it is accurate or complete and it should not be relied on as such. Watani Investment Company (NBK Capital), its affiliates and subsidiaries accept no liability for any direct, indirect or consequential loss arising from use of this document or its contents. At any time, the employees of NBK Capital and its affiliates and subsidiaries may, at their discretion, hold a position, subject to change, in any securities or instruments referred to, or provide services to the issuer of those securities or instruments.

This is a publication of NBK Capital. No part of this publication may be reproduced or duplicated without the prior consent of NBK Capital.

92 | nbkcapital.com Kuwait in Focus - November 2009

NBK CAPITAL

Kuwait Head Office MENA Research Brokerage 38th Floor, Arraya II 35th Floor, Arraya II 37th Floor, Arraya II Al Shuhada Street, Block 6, Sharq Al Shuhada Street, Block 6, Sharq Al Shuhada Street, Block 6, Sharq P.O.Box 4950, Safat 13050 P.O.Box 4950, Safat 13050, Kuwait P.O.Box 4950, Safat 13050, Kuwait Kuwait T. +965 2224 6663 T. +965 2224 6964 T. +965 2224 6900 F. +965 2224 6905 F. +965 2224 6978 F. +965 2224 6905 E. [email protected] E. [email protected]

United Arab Emirates Turkey NBK Capital Limited NBK Capital Precinct Building 3, Office 404 Arastima ve Musavirlik AS, Dubai International Financial Center Sun Plaza, 30th Floor, P.O.Box 506506,Dubai Dereboyu Sk. No.24 United Arab Emirates Maslak 34398, Istanbul, Turkey T. +971 4 365 2800 T. +90 212 276 5400 F. +971 4 365 2805 F. +90 212 276 5401

National Bank of Kuwait

Kuwait Jordan United States of America Vietnam National Bank of Kuwait SAK National Bank of Kuwait SAK National Bank of Kuwait SAK National Bank of Kuwait SAK Abdullah Al-Ahmed Street Head Office New York Branch Vietnam Representative Office P.O. Box 95, Safat 13001 Al Hajj Mohd Abdul Rahim Street 299 Park Avenue, 17th Floor Room 2006, Sun Wah Tower Kuwait City, Kuwait Hijazi Plaza, Building # 70 New York, NY 10171, USA 115 Nguyen Hue Blvd, District 1 T. +965 2242 2011 P.O.Box 941297, T. +1 212 303 9800 Ho Chi Minh City, Vietnam F. +965 2243 1888 Amman -11194, Jordan F. +1 212 319 8269 T. +84 8 3827 8008 Telex: 22043-22451 NATBANK T. +962 6 580 0400 F. +84 8 3827 8009 United Kingdom F. +962 6 580 0441 INTERNATIONAL NETWORK National Bank of Kuwait (Intl.) Plc China Lebanon Head Office National Bank of Kuwait SAK Bahrain National Bank of Kuwait 13 George Street, Shanghai Representative Office National Bank of Kuwait SAK (Lebanon) SAL London W1U 3QJ, UK Suite 1003, 10th Floor, Bahrain Branch Sanayeh Head Office T. +44 20 7224 2277 Azia Center, 1233 Lujiazui Ring Rd. Seef Tower, Al-Seef District BAC Building, Justinian Street F. +44 20 7224 2101 Shanghai 200120, China P.O. Box 5290, Manama, Bahrain P.O. Box 11-5727, Riyad El Solh T. +86 21 6888 1092 T. +973 17 583 333 1107 2200 Beirut, Lebanon NBK Investment F. +86 21 5047 1011 F. +973 17 587 111 T. +961 1 759 700 Management Limited F. +961 1 747 866 13 George Street ASSOCIATES Saudi Arabia London W1U 3QJ, UK National Bank of Kuwait SAK Iraq T. +44 20 7224 2288 Qatar Jeddah Branch Credit Bank of Iraq F. +44 20 7224 2102 International Bank of Qatar (QSC) Al-Andalus Street, Red Sea Plaza Street 9, Building 187 Suhaim bin Hamad Street France P.O. Box 15385 Sadoon Street, District 102 P.O.Box 2001 Jeddah 21444, Saudi Arabia P.O.Box 3420, Baghdad, Iraq National Bank of Kuwait (Intl.) Plc Doha, Qatar T. +966 2 653 8600 T. +964 1 7182198/7191944 Paris Branch T. +974 447 3700 F. +966 2 653 8653 +964 1 7188406/7171673 90 Avenue des Champs-Elysees F. +974 447 3710 F. +964 1 7170156 75008 Paris, France Turkey United Arab Emirates T. +33 1 5659 8600 Egypt F. +33 1 5659 8623 Turkish Bank National Bank of Kuwait SAK Al Watany Bank of Egypt Head Office Dubai Branch Singapore 13 Al Themar Street Valikonagl Avenue No. 1 Sheikh Rashed Road, Port Saeed Gameat Al Dowal AlArabia National Bank of Kuwait SAK P.O.Box 34371 Nisantasi, Area, ACICO Business Park Fouad Mohie El Din Square Singapore Branch Istanbul, Turkey P.O. Box 88867, Dubai Mohandessin, Giza, Egypt 9 Raffles Place #51-01/02 T. +90 212 373 6373 United Arab Emirates T. +202 333 888 16/17 Republic Plaza, Singapore 048619 F. +90 212 225 0353 T. +971 4 2929 222 F. +202 333 79302 T. +65 6222 5348 F. +971 4 2943 337 F. +65 6224 5438

nbkcapital.com | 93 KUWAIT DUBAI ISTANBUL