A few days ago I found an interesting article in the newspaper. It ranked the earnings growth over the past three years of several of the biggest communication companies in the world. Telecom companies from developing countries (India, South Africa, Mexico) were ranked among the highest, with double-digit growth rates. While companies from developed nations (Japan, France, UK) registered a mere single digit growth rates, with some companies registering a negative growth rate.

Zain ranked third with an earnings growth rate that is close to 100%. Zain’s huge growth can be attributed to in-organic growth, as the growth was the result of them buying Celtel, the African operator. In-organic growth is not as sustainable as organic growth (resulting from growing one’s business). Zain’s ambitious plans and growing debt led the company to sell its assets when times become rough.

I guess in three years, this chart would be different. Zain would be at the bottom rather than the top, probably with a negative earnings growth.

Back in December 2009, Keynesian wrote an article titled Dubai’s W Hotel-Union Square Sold for $2M where Istithmar World PJSC was forced to accept $2M for its W Hotel in New York at a foreclosure auction, leaving it with a $283M loss. The move was not a surprise and as part of a restructuring program, the debt-laden emirate had to start offloading its portfolio of trophy assets. The highly leveraged portfolio was built during a huge global spending spree at the peak of the oil and property bubble. According to a report by Monitor Group, between 2003 and 2007 Istithmar invested $3.8 billion of its own capital, but took on a further $14 billion in debt. Today, Istithmar is going through a deleveraging process, one that some argue might mark the end of the once notorious investment arm.

On March 3^rd, Istithmar lost its second Manhattan property in three months as it defaulted on its $300 million mortgage on the former 300,000 square-foot Knickerbocker Hotel site in Times Square turning the property over to its lender Danske Bank A/S. It was planning to convert the site and an adjacent vacant lot it had purchased for $76 million into a high-end hotel. Moreover, its two properties W Washington D.C. and Mandarin Oriental New York are on credit rating watch lists for performance issues.

If Istithmar learned anything from past experience, it’s that expectations always fall short of reality.

It’s not the first time the stock reached this level, but from a purely technical point of view this time is different. The price is trading close to its 200 day moving average which means that if the stock breaks this level upwards it will create a new support level and may leave the “less than a 100 fils” levels for good. As you see in the chart below, last time the price met its 200 day moving average (the time they announced the rescheduling of their debts) it couldn’t break it and fell sharply afterwards. This time if those technical patterers were accompanied by some positive fundamentals, i.e positive earnings results, the stock will rally.

]]> http://www.alphadinar.com/2010/03/07/technical-trade-global-investment-house/feed/ 2 http://www.alphadinar.com/2010/03/03/securities-house-an-another-investment-dar/ http://www.alphadinar.com/2010/03/03/securities-house-an-another-investment-dar/#comments Wed, 03 Mar 2010 06:47:35 +0000 Naser http://www.alphadinar.com/?p=3319

Recently some news has surfaced regarding the Securities House and their will to sell any of their assets at the right price. There was news also that the company wanted to sell its Abraaj Water plant, but the buyer and seller did not agree on a price. Yesterday, it was reported that the Securities House was negotiating selling Al Aman Investment.

There is a question that raises itself, why would a company sell their assets in such a time, when prices are repressed and multiples are low? They can wait a few years when the economy further recovers and the market’s appetite for mergers and acquisitions grows; leading to higher multiples, and a higher price. The only logical explanation for Securities House’s actions is that they are in desperate need for cash.

 A look at the company’s financial statements tells us that they need KD 15 million annually for their Murabaha expense (interest expense). Their debt levels as of the end of 2008 are close to KD 190 million (65% of which is short-term). This amount declined by only KD 10 million in the first 9 months of 2009. So approximately KD 120 million needs to be refinanced every year. Such a sum might prove to be difficult to raise this year as financial institutions are still unwilling to lend.

The company has a cash balance of only KD 17 million as of Sept. 2009, and only 4% of their KD 250 million investments are liquid (quoted stocks, etc.). Their investments declined to KD 228 million as of Sept. 2009. Their treasury stock is only worth KD 10 million. In 2008, most of their cash was generated from the selling of their investment assets.

My question is: are we seeing another Investment Dar or Global scenario? Or are these indicators only false alarms and the company’s timing is just unfortunate? Time will tell.

Refer to the list below for the major achievements:

Today Kuwait is starting to move. There is hope. The government hadn’t formally presented to the Parliament a 5-year since 1986, but it did this year. There is a massive infrastructure budget that seems to be going the right way. A Capital Markets Authority law will be enacted. The government rejected appeals for loan forgiveness and was prudent enough not to splurge money at paper investment companies. I hope someone will be posting a 10 year reform chart as solid as Saudi’s for Kuwait in the near future.

The Financial Times published an article a few days ago about investment companies in Kuwait. In that article Mr. Jassim Al Sadoun of Al Shall Research and Consulting was quoted saying that in 2011 we won’t see half of the more than 100 investment firms in Kuwait. He basis his conclusion on the fact that most of the investment firms are highly leveraged and lack sufficient assets.

In my opinion, the crisis sent a wake-up call to us here in Kuwait, and it revealed some “dirty laundry”. It separated the men from the boys. What will happen is a healthy dose of survival of the fittest, and apparently according to Mr. Al Sadoun, the fittest are a lowly bunch of less than 50% of investment firms in Kuwait. I hope that what has happened will teach people that there is no such thing as easy money, and leverage is coupled with high risks. People should learn to always manage their risk, and never get too overly exposed.

For your reference, the link of the article discussed:

http://www.ft.com/cms/s/0/87f5a690-1f19-11df-9584-00144feab49a.html

]]> http://www.alphadinar.com/2010/02/24/kuwaiti-investment-companies-survival-of-the-fittest/feed/ 12 http://www.alphadinar.com/2010/02/22/the-unanswered-question/ http://www.alphadinar.com/2010/02/22/the-unanswered-question/#comments Mon, 22 Feb 2010 09:15:13 +0000 Sal http://www.alphadinar.com/?p=3268

The adage “a picture is worth a thousand words”, widely attributed to Frederick R. Barnard, refers to the idea that complex stories can be described with just a single image, or that an image may be more influential than a substantial amount of descriptive text.

In the case of Zain, a picture is worth a thousand suspicious questions, of which none is willing to ask nor answer. All I can offer is hope that the much-delayed Capital Market Authority will help us find answers to questions that have baffled us, and enforce tough punishment for insider trading in a stock market battered by a string of irregularities.

I’ll leave you with the picture which is a chart of the daily trading volume on Zain in the week prior to the announcement of the deal.

Why would Bharti Airtel pay USD10.7 billion to acquire a loss making entity?

Bharti Airtel (BHARTI IN), plans to add 45 million to its 120 million subscribers by their recent acquisition plans. Bharti believes that they can successfully run a company with small ARPUs (Average Revenue Per User) in a low margin industry by using the same strategy they use in India, the “Indian Model”. This model is applied by outsourcing most of the operating activities, including IT, network operations and more. They see that this model can be applied in Africa as well, hence turning the losses into profits.

Bharti sees itself as a “minute factory”; where they can extract high revenues, even though the ARPUs are low, by producing more minutes. To better understand this model, imagine telecom networks as factories producing minutes, whereby they try to maximize network utilization by maximizing the minute of usage per subscriber (MOUs). MOUs are a function of tariffs, so by gradually reducing the tariffs the consumption of minutes increase.

The USD10.7 billion offer disappointed Bharti’s shareholders and the share price fell after the announcement. Bharti defended their decision by stating that they are seeking less competitive markets than India, higher ARPUs and lower penetrations.

Although the penetration rate in India is 45% and the penetration in Africa is 36%, there is more room for growth in India as 650 million Indians are non-mobile users, as compares to 300 million in Africa only.

Given the profile and track record of Bharti, they me be able to do a better job than Zain; but is it worth USD10.7 billion? We just have to wait and see…

As per Zawya’s description:

KGL invests in transportation companies; involved in warehousing and distribution; freight forwarding; cargo handling; public transportation; land transportation of cargo; seaport operations and management; charter airline for passengers and cargo; chartered maritime transportation services for passengers and cargo; car rental; distribution of trucks; automotive repair and maintenance services; travel agents; insurance services; landlords and developers; software and network solutions.

After looking at the company’s financials, I didn’t find anything exciting that might lead to the surge of the stock; in fact I found the opposite. Historically the company operated at low margins and made huge losses in their operating income for FY08 and 9M09, however their income from associates decreased the amount of loss they booked. My main concern with KGL’s financials is their debt. Their D/E ratio is 1.7 and their interest coverage ratio is 0.8, which means that their financing cost are higher than their operating income, hence the need of liquidating some assets to service the debt might be needed.

But after Agility’s issue with the US Government in mid November (click for details) KGL has been traded heavily. Since Agility’s case is not over yet and there is still no news regarding KGL, people are speculating that all Agility’s contracts will be awarded to KGL. Looking at the graph below, it shows a rebased graph of both Agility and KGL since November, it seems like they are mirror images, whenever Agility decreases in price KGL increase.

The market is always right; do you think speculation was the only reason that made agility’s share lose 60% and made KGL gain 130% or is the market telling us something?

Agility:

KGL:

After almost a year-long effort to sell the company as a whole or in parts comes the determined Sunil Mittal of Bharti Airtel Ltd with his deep pockets and ambitious plans to finally capture Africa. It’s a nice story that all we beaten down investors want to believe, for sure there’s the unquestionable interest, but what assurance do we have that it will go through? Sadly none.

Kuwait’s Mobile Telecommunications Co., or Zain, and India’s Bharti are set to hold exclusive negotiations until March 25^th and by then the final decision will be made. There’s no guarantee the transaction will be consummated, as it remains subject to due diligence and regulatory approval.

It’s worth mentioning that the unsuccessful fate of the Bharti-MTN deal was a result of regulatory hurdles set by the South African government’s treasury. According to sources, the South African government’s pension fund, Public Investment Corp, holds a 21% stake in MTN, where the government was under intense pressure to not give a go-ahead to the deal on concerns that MTN’s South African identity, post the deal, would be lost. The treasury insisted that for the deal to go through, the potential merged company should remain domiciled in South Africa and should be listed in both companies, something that was not a possibility under existing Indian laws.

While there seems to be no regulatory threats in Kuwait, shareholder concerns at both Bharti and Zain create obstacles and could yet stop the deal. In India, there is  the concern of overpaying as Bharti’s stock price plunged in the last trading sessions breaking support levels. In Kuwait, there is the notion of strategic divergence and the threat of unattractive growth going forward. Not to mention the Zain-Nigeria controversy following the announcement of Econet’s CEO Strive Masiyiwa that Bharti Airtel’s acquisition of Zain’s African assets must exclude the Nigerian unit until an ownership dispute with Econet Wireless Holdings Ltd. is resolved. Zain-Nigeria is an important part of the deal, as it accounted for 16% of group revenues in the nine months to 31 September 2010.

The promising and attractively low penetration levels across Africa (30-50%) might make the deal for Bharti a value trap as Zain has been struggling to deliver value to its shareholders with a 65 million subscriber base that only contributed 15% to the groups net profit. Africa still needs a lot of capital investment as competition intensifies and the average revenue per user (ARPU) has been falling. For example, Nigeria saw ARPU fall by one-third, while revenue and EBITDA drop 17% on a year-on-year basis. Similarly, DRCongo saw ARPU fall from $11 to $8 as a result of higher usage tax and a local recession, with revenues and EBITDA falling 13% and 14% respectively.