Kuwait Finance House is the 2nd largest Islamic bank in terms of assets and market capitalization in the MENA region. KFH doesn’t operate only in Islamic banking operations it also has the license for the purchase/sale of properties, leasing and project constructions for its own account and other parties. Those operations what gave KFH an edge against the others and also those operations have put the bank in a difficult spot at these times.
KFH has a large exposure to direct equities and real estate on its balance sheet. Looking at their book value at year end 2008 they reported KD1,240mn and BVPS of 0.6; I was trying to forecast the ’09 book value by adding the recurring income less any investment income and impairment (KD 175.695mn) and subtracting the net NPLs (KD 343.061mn) thus reaching E’09 book value of KD 1,046 mn and BVPS of 0.5. I am being conservative here as I’m assuming only 15% decline in their recurring income and no erosion from investments.
KFH is trading at a multiple of 2.35x P/BV (using ‘08 BV) as opposed to 2.03x for the Kuwaiti banking sector and 1.66x for both GCC and MENA banking sector. KFH has always been trading at a premium to the mean but that premium is not justified anymore in such recessionary environment and fall in asset prices.
With such high valuations and high exposure to direct equity investments and real estate, the risk is exceeding the reward. Using our base assumption of E’09 BVPS of 0.5 and taking a P/BV multiple 2.03x (mean of Kuwaiti banking sector) KFH should trade at KD1.00.
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God forebids.
I don’t want to hear such horrible news, in a such lovely Viennese spring weather!
Change the subject please
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If Clinton was to trash KFH, I guess he’ll simply say: “Its the REAL ESTATE dumb!”
Very nice piece Okonomia!
I wish the Kuwaiti market works on the fundamentals u just outlined!
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Ra’ad believe me i wish i can, even though i don’t hold any KFH stock but if it goes down it will pull the market down with it.
thanks Keynesian
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nice analysis
but i think it is not fear that we focus on book value for analysis , because there is many study that shows the p/e is more accurate than any method for determine the fair value or the expected price for stocks .
thanks
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this is a study done by financial analyst journal (FAJ) comparing Cash flow and multiple .
http://www.som.yale.edu/Faculty/jkt7/papers/global%20multiples.pdf
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abdulateef- true P/E is a more popular ratio for relative valuations, but P/E at these times of turbulence is not as as accurate as many people might think for number of reasons:
1- Earnings are not easily projected
2- P/E is irrelevant if earnings are negative
Moreover, even in good times I choose to value banks using P/BV as it is the most preferred way to capture the true value of equity
Thanks for the comment!
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Abdulateef and Oikonomia:
There is no ultimate method for anaylzing equities. Financial analysis is not a science were 1+1=2. Some times 1+1=0 and at other times it can equial 100. There is a significant part based on art.
One of my early mentors used to say, “Financial analysis is like solving a puzzle. You try to put together as many pieces as possible and available until u can make an educated guess of what is the picture.”
Oikonomia:
Even using BV is not accurate. It may be the most, but remember these BV could be inflated and not marked down as they are supposed to. As for KFH, I believe they have an over-inflated BV full of highly priced Real Estate that has to be marked down. For example, if they mark down half of their BV this would make the ratio double what it is currently sitting at.
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yes thats correct keynesian thats why i prefer using the tangible book value or the justified book value.. P/TBV i posted about it earlier
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[...] probably awaiting the results of the companies that have yet to announce their Q4 results and KFH Q1 [...]
I think its time to buy KFH
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[...] my post KFH a Bit Overvalued a year ago, I tried to forecast FY09’s BVPS. After doing the math I calculated the BVPS to be [...]
from what I know, KFH carries lots of its RE assets @ their book value. even assets such as Al Muthana complex, which was developed back in the 80’s…
what has brought KFH down was the exposure to equities, and especially local equities.
One can aruge that 80% of Kuwait is a play on RE, since there aren’t really industries to really talk about.
additionally, I think it is not very wise to use the average for the banking sector to get a fair value….like or not, KFH has a strong brand (just look at the deposit volume versus other banks) and that will always make it stand out…..unless of course the management makes a somehow really screws up…..which I think is pretty doubtfull…. additionally, the chairman comes across as well balanaced and trust worthy…..from what i read for him at least
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Saud Reply:
March 1st, 2010 at 6:13 pm
you are absolutely right thats why KFH always traded at a premium to other banks. I mentioned that KFH has always traded at a premium but in such recessionary environment i don’t think its justified.
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real estate’s not their only weakness. it looks like they may have bungled more investment than they care to admit. case in hand: i just heard that KFH Bahrain lost more than 90% of capital on its 2005 New Zealand Australia Private Equity Fund.
i’d heard that KFH Bahrain was a mess but this takes the cake. i haven’t seen anything yet in the news about it though.
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haha..we must all remember..the market is only as good as its patcipants..99.9% of investors on KSE dont trade on fundamentals..they are event driven..implying that the entire market is just an event driven (sometimes on the basis of facts but mostly on the basis on sentiments)equity fund.
When will the mass investors learn ? hmmm..my guess is..keeping in mind the last 15 years of persoanl experience..until these guys go back to camel riding days nothing better can be expected !! I hope n pray i’m wrong..but the evidence till-date points otherwise
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