Markaz Research: Kuwait Price Index to Reach 13,595


Markaz, in its revision of its outlook on Kuwait markets has projected a decline in corporate earnings growth rate. M.R. Raghu Head of Research and Amrith Mukkamala Senior Analyst at Kuwait Financial Centre noted that, at the beginning of the year 2008, “Markaz” had expected the consolidated earnings of companies in the Kuwait market to grow by 42%, however, till the first half of 2008, the earnings have witnessed a decline of 12%. Going forward, it expects the earnings to witness a flat growth for 2008. The decline in growth has ensured a decline in fair value for the index which corresponds to an index value of 13595. On a consolidated market basis at the current market prices, Kuwait Stock market is discounting its earnings (2008) by 10x, which is 8% less than the average 5 year forward PE. Earnings – What has changed: Consolidated earnings of Kuwait companies declined by 12% during 1H08.

The aggregate earnings slow down can be mainly attributed to the steep fall in earnings of the investment services companies (Table: 1). In 2007, the aggregate earnings of the investment services sector witnessed a growth of 222%, mainly due to a revival in stock markets post the 2006 fall (Kuwait price index fell by 12% in 2006 and revived to post a 25% growth in 2007, the scenario was similar for most of the markets in the GCC). Table: 1 – Earnings Trend & Outlook USD Mn 2002 2003 2004 2005 2006 2007 2008E % Change 2008E Investment Services 552 1,800 1,977 5,502 2,559 8,238 6,633 -19% Banks 813 1,034 1,329 1,780 2,215 2,794 3,732 34% Real Estate 130 488 599 974 1,032 1,564 1,937 24% Telecom 315 448 526 743 1,245 1,505 1,709 14% Others 545 1,215 1,594 2,757 2,244 3,148 3,272 4% Total 2,354 4,984 6,026 11,757 9,295 17,249 17,284 0% Source: Thomson Reuters Knowledge, Zawya Investor, Markaz Research However, in the current year, due to a higher base effect and many one off positive items in 2007, the growth in earnings declined for 1H08.

The report expects the sector to close the year with a decline in earnings to an extent of 19%. Some of the notable large falls in H108 earnings for individual companies are: KIPCO which witnessed an 86% fall in YoY profits (mainly due to the large one-off item due to the sale stake in Wataniya in its 2007 earnings) and the 24% fall in profits of National Industries Group. Banks, however, have witnessed robust growth rates in earnings in 1H08 period and is expected to continue and close the year with a 34% growth in the bottom line.

National Bank of Kuwait, which provides to 35% of the total banking earnings in Kuwait, witnessed a growth of 21% in 1H08. The telecommunications segment was another let down in terms of growth. In KWD terms, the sector posted a 4% decline in 1H08 profits. Zain posted a 1% decline in earnings in 1H08 and NMTC posted a 3% decline in earnings. The report states “Telecommunications segment, we believe will pose the biggest risk to our earnings forecast for 2008. We are expecting a 9% full year growth for Zain and 33% growth for NMTC. The factors that impacted the 1H08 profits negatively include a decline in ARPU rates, higher capex and increasing competition. We expect these factors to continue thru the rest of the year as both the companies are expected to face an increase in competition due to the entry of the third mobile player in Kuwait. On the positive side, significant subscriber additions in Saudi Arabia for Zain should be a positive outcome”. The growth in the real estate segment, which provides to 11% of 2008E earnings (9% of 2007 Earnings) is expected to be robust at 24% for 2008. However, this rate of growth represents a marked decline from a 52% growth posted in 2007. The decline in growth rates can be mainly attributed to weakness in earnings growth in the smaller real estate companies. Large real estate companies such as Al Mazaya and Commercial Real Estate (combined 2007 earnings was 17% of the total real estate segments earnings) posted growth rates of 162% and 45%.

Smaller companies in terms of earnings witnessed a weakness in growth. National Real Estate Company (9% of earnings in 2007) witnessed a 26% decline in 1H08 earnings, similarly Salhia Real Estate Company witnessed a 18% decline. Market Cap Segmentation The earnings growth has been driven by strong performance in the Mid and Small cap stocks (Table: 2). The large cap earnings has been facing a consistent decline to the over all earnings from 65% in 2002 to 55% in 2008E. For 2008E, the report expects large cap earnings growth to witness a 4% decline. This can be mainly attributed to deceleration in earnings for KIPCO, NIG and Agility.

The mid caps, which currently contribute to 27% of Kuwait Inc earnings is expected to grow by 12%. Kuwait International Bank is expected to lead the mid cap earnings in 2008. For H108, the bank posted a five fold increase in earnings to USD 121 Mn as compared to USD 19 Mn in 1H07. The small caps are expected to lead the pack with an earnings growth of 17%, however, with a small earnings contribution of 15% to the overall earnings. Companies like MENA Holdings, Kuwait Commercial Markets and Ekkitab Holding company are expected to lead the small cap earnings growth in 2008. For 1H08, these companies have more than quadrupled their earnings as compared to the previous corresponding period. Table: 2 - Corporate Earnings Trend – Market Cap Segmentation Earnings (USD Mn) 2004 2005 2006 2007 2008E YoY Change 2008 Avg Market Cap (USD Mn) Number of Companies Large 2871 4997 6032 9936 9489 -4% 6688 15 Mid 1732 3252 2065 4084 4568 12% 1033 40 Small 812 2166 636 2131 2496 17% 376 44 Ultra Small 611 1342 562 1098 731 -33% 25 81 Total Earnings 6026 11757 9295 17249 17284 0% 180 Note: Segment classification: Large: Market Cap >USD 2.4 Bn, Mid: Market Cap >USD 543 Mn & Market Cap< USD 2.14 Bn Small: Market Cap> USD 266 Mn & Market Cap < 538 Mn Ultra Small: Market Cap> USD 146 Mn & Market Cap < USD 262 Mn Source: Thomson Reuters, Markaz Research Economy-2008 Kuwait is expected to post another year of strong growth in 2008 due to the expected 19% growth in the non-hydrocarbon segment of the economy. The IIF, which forecasted in August 2007, nominal GDP growth for 2008 of 7.4%, revised its estimates upwards in August this year to 13% at USD 131.3 bn. Kuwait is likely to witness another year of buoyant fiscal surplus (64% of government revenues), with revenues almost three times expenditure. In August, the IIF revised its 2008 revenue and expenditure growth forecasts upwards from 9% and 15% in August to 70% and 26%, respectively. A sharp increase in Kuwait’s current account surplus of about 78% is expected to take it close to 64% of GDP in 2008, significantly higher from 11% in 2002. The positive trade balance primarily due to oil exports, which surged 64%, is expected to drive the current account surplus upward apart from other income and transfers. While exports are expected to jump 56%, growth in imports may lag at 14%. Money supply has been growing at rising rates over the past few years in the Kuwait economy and fueling inflation. Money supply jumped 22% and 19% in 2006 and 2007, respectively. Central banks across the GCC have taken monetary measures to contain money supply.

These measures include issuing sovereign bonds to drain out excess liquidity from the markets and raising reserve requirements for banks. Last year saw the gradual pickup in inflation rates. By the beginning of 2008, the CPI index recorded 7.5% annual growth. Since then, the price rise scenario worsened and jumped to double digits by May, posting 11.1% growth. This amounts to a surge of 3.6% in inflation rate in a matter of just five months. For the full year, the price of the consumer goods basket is expected by IIF to register a significant 10.4% growth over last year’s levels (contrasting the 3.4% estimates at last year). Kuwait has traditionally had very low rates of inflation.

The average increase in the annual consumer price index from 2000 to 2007 was only 2.4%. Hence, the current level indicates more than a four-fold increase in the growth rate of prices.

This increase was primarily driven by the global rise in food prices. Strong domestic demand growth and shortage of certain goods also contributed to inflation. Inflation is forecasted to remain at high levels even in 2009. Kuwait Stock Market Performance– 2008 The Kuwait price index fell 2% this year in stark contrast to rising markets last year. This situation compares unfavorably to the long-term average of 20% returns. There were sharp differences among sectors, with the heavyweight banking companies like National Bank of Kuwait, Commercial Bank of Kuwait and Gulf Bank of Kuwait down by 10%, 8.5% and 30.5% respectively. Table 3: Performance Trends % Change (YoY) 2002 2003 2004 2005 2006 2007 Sep 2008 Banking Index 30% 43% 12% 62% 19% 44% -15% Investment Index 35% 102% 28% 128% -20% 28% -12% Insurance Index 36% 48% 4% 25% 10% 14% 4% Real Estate Index 55% 88% 16% 61% -25% 15% 7% Industrial Index 29% 57% 38% 46% -8% 25% 4% Services Index 65% 179% 43% 53% -4% 12% 6% Food Index 36% 74% 4% 60% -21% 60% -26% Kuwait Price Index 39% 102% 34% 79% -12% 25% -2% Volume 87% 138% -9% 89% -39% 119% -22% Value 71% 70% -34% 65% -27% 85% -6% Source: Markaz Research Major players in investment sector like Investment Dar Company (-17%), Aayan Leasing (-11%), IFA (-54%) have also tumbled in last one year.

However, the food sector has plummeted the most with companies like Kuwait Food and Kout Food Corp. falling by over 30% in last one year. Real estate has shown mixed trends with companies like Al-Mazaya Holding (+50%) and Alargan International (+61%) were up however companies like National Real Estate and Commercial Real Estate were down by nearly 30%. Service sector is the real winner in this down turn with companies like Aref Energy (486%) and National Ranges (21%) have shown good market return in last one year. The total volume traded for full year 2007 was 65.4 Bn shares. The total volume traded till September 2008 reached 61.2 Bn shares – this is 94% of total volume for last full year. Thus in 2008, the total volume traded is expected to surpass the 2007 level. Similar to the previous year, the investment sector led in terms of volume with a share of 36%. Value traded to date for the current year at USD 105 billion reached 78% of the total value traded last year. The investment sector led in terms of value traded with a share of 32%, followed by services (28%).

Turnover velocity in Kuwait is nearly at same levels as that of 2007 at 122%. The Kuwait stock market witnessed no activity in terms of new listings except the USD 98 mn IPO of Kuwait Telecommunications Company. Zain Group has commenced capital increase of $4.5 billion. Proceeds will be used for expansion plan and to meet financial commitments. Kuwaits National Industries Group Holding (NIG) has also launched right issue of $990 million with subscription opened on September 7 and close on September 28. Shareholders have approved right issue to sell 294.34 Mn shares at 900 fils each for a total of 264.9 Mn Kuwaiti dinars ($990.6 Mn). NIG is looking for several opportunities in Middle East. Last year, however, 10 companies were added to the market.

Major developments during the year included slashing the tax rate for foreign companies from 55% to 15%. In addition, foreign companies were also exempted from taxes on income earned from trading in stocks listed on Kuwait Stock Exchange (KSE). Kuwait is also in the midst of establishing Securities Market Regulatory Authority (SMRA) to regulate and develop its capital markets. Total money supply (M3) in the Kuwaiti economy at the beginning of the year amounted to USD 71.3 Bn, which has jumped 9% within seven months to nearly USD 78 Bn. With a view to curb growth in money supply, the CKB decreased the loan amount consumers can avail of as a percentage of their income this year. Consumer loans are now capped at 40% of salary compared to 50% earlier. Merger and acquisition (M&A) activity this year dropped to 33% of last year’s levels. More than 30 transactions took place in the previous year when Kuwaiti companies were actively pursuing acquisition opportunities both within Kuwait and outside. Most transactions this year appear to be small. Some of them include Aref Investment Group Co’s USD 32 Mn acquisition of Makamin Saudi Co, United Gulf Bank and Kipco Asset Management’s acquisition of a 19.5% stake in Al-Sharq Financial Brokerage for USD 22 Mn, and Kuwait Pipes Indus & Oil Service’s controlling acquisition of International Pipe Industry.

 About Markaz Kuwait Financial Centre S.A.K. 'Markaz', with total assets under management of over KD 1.4 (USD 5.32 billion) as of June 30, 2008, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region.

Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997; and has been awarded a BBB+ corporate rating by Capital Intelligence Ltd.