The graph above shows the weights of the different companies listed on the Kuwait Stock Exchange and their weights within the two indices and the difference in weights. (Click on the graph for a better view)

This table shows the top 10 companies that are under/over represented in the Price Index. We find that the biggest companies listed on the Kuwait Stock Exchange are under represented, including Zain, Agility, NBK, KFH, and other banks. The stocks that are over represented are ones that have a high price, but their size is not as big as other companies. Gulf Insurance has a stock price of 600 fils and a market cap of KD 101.8 million, which is substantially lower than Zain’s KD 5.8 billion market cap.

The following is a table of the weights of listed Kuwait companies in both the Price and Weighted Indicies:

Of the 227 listed companies in the Kuwait Stock Exchange, 94 are currently trading at/below their 100 fils PAR value! This translates into a whopping 40% of all companies. Something is deemed to be done. I believe the Central Bank of Kuwait should run stress-tests on all companies. Depending on the results, companies should either recapitalize or get “the boot.”

In addition to all this “fungus” (Al-Qabas articulately uses this term!) created by the ailing companies, we have not much to offer. The banks have no projects to finance and no real worthy private sector to extend credit to. Their exposure to prone-to-fail companies and a real-estate bubble are alarming. As far as operational companies, the ”beautiful world” of Zain was sold and so was the company’s future expansion. Doesn’t that remind you of another company? Does Wataniya Telecom ring a bell? Many investors were hoping Agility would be the light at the end of the tunnel, but the US government’s contract dispute crippled the company. What’s left? Nothing much. A bunch of derivative plays on the Kuwait Stock Exchange heavyweight companies. What happens to derivative plays when the underlying collapses? They explode.

Nevertheless, there is still hope that we, the next generation, will force change.

Agility has only one choice: settle the fraud case with the US government and move on. Take a one-time hit and standup and walk the line. As per Al-Qabas Kuwaiti newspaper (April 5th), the US government is asking for a $750 million settlement, while Agility is offering a $300-$500 million settlement. Latest reports conveyed through Al-Jarida Kuwaiti newspaper (April 8th)  suggest that a preliminary agreement has been reached and $600 million would be paid over three years. We still have nothing official yet.

Not reaching a settlement will result in an infected company being dragged from court to court for years fighting a neverending and costly legal battle. More inflicting, this would result in more uncertainty for shareholders and a dead-stock. However, a settelement creates a clear visibility. There is no doubt that Agility is undervalued at the current 600 fils level. The company is trading at an EV/EBITDA 2010 of 4.5x relative to peers trading at an average EV/EBITDA 2010 of 7.5x. This is partially a warranted discount for the reasons above and the following questions: How much will the settlement be? How big is the reputational damage and how fast can it recover? Announced staff cuts of 500-600 are cost improvements or reflect expectations of a plummeting Defense and General Services business? Will Agility deliver margin expansion and growth after the settlement? Most crucially, will it be restricted from bidding for new contacts or not?

There is unanimous agreement that there is no visibility as it pertains to Agility. In fact, an analyst at NBK Capital wrote a note stating the following: “We maintain our status on Agility as “Under Review” as there are several variables in play for which we have no means of predicting an outcome.” What do you think of this recommendation? Not good. The analyst should’ve stated the different scenarios and projected the expected effect of each.

I believe uncertainty creates opportunities. It may be unrelated, but the substantial write-downs taken by banks all over the world last year are history and financial stocks led the way towards recovery. Further, if Agility settles and is allowed to bid on new contracts, I beleive it would be a screaming buy. The problem is you wouldn’t be able to buy because it would be trading limit-up everyday. I guess it also depends how much they settle for. An analyst from Nomura has a price target of 740 fils if Agility settles for $750 million. If it settles for $300 million, the price target would be 860 fils. If the $600 million figure turns-out to be the right one, then I calculated the target price to be 780 fils. Maybe NBK could learn a thing or two from Nomura.

I would be a buyer of Agility at the current levels.

1. Agility Desperate to Settle with US Government

2. Agility’s “Long & Complex Case” Unsettled Yet Again

3. Agility Postpones Hearings as it Seeks Settlement

4. Agility Indicted with $8.5B Fraud by US Government

5. Agility Fraud Case Implications

Agility, once an undisputed star of the Kuwait SE, has been suffering from a vicious financial death spiral initiated by fraud accusations from its biggest customer: the US government. It all got started crumbling in mid-November 2009 when Kamal Mustafa Al-Sultan acted as a whistleblower and filed a lawsuit against Agility which was later charged with fraud and conspiracy alleging that it overcharged the U.S. Army on $8.5 billion worth of contracts to provide food to soldiers in Iraq, Kuwait and Jordan. The indictment is a big deal since it prevents Agility from bidding for US government contracts during the legal proceedings which constitute 75% of its EBIDTA (Cheuvreux estimates). Needless to say, Agility’s shares took a severe dive by more than 50% from the peak and failed to recover. Lacking further contracts and clear outlook, the company has been laying-off employees during the past few months. Shares of Agility currently trade at 600 fils and haven’t crossed the 700 fils barrier since the fraud accusations.

Agility is definitely desperate to settle with the US government. There were several attempts to postpone the court, but no settlement has been reached yet with the US government. Reports suggest that the U.S. authorities want Agility to pay up to $750 million for the settlement. This sum is far-fetched for Agility as the company’s current market capitalization stands at approximately $2 billion. Kuwaiti daily newspaper Al-Jarida suggests that Agility wants to pay between $300 million to $500 million in compensation. Pending reaching a settlement, Agility requested a trading halt on its shares and permission from the Kuwait SE to delay the release of its financial results until Tuesday. Further Al-Jarida elaborated that negotiations were around a schedule for repayment and circulated on whether Agility will get new contracts with the U.S. military.

There are fears Agility doesn’t reach settlement and it loses on 75% of its EBITDA for a while as court cases take long durations to finally unfold. T here is a desperate need for settlement, but how much is a good deal or a bad deal?

Previous Related Articles:

1. Agility’s “Long & Complex Case” Unsettled Yet Again

2. Agility Postpones Hearings as it Seeks Settlement

3. Agility Indicted with $8.5B Fraud by US Government

4. Agility Fraud Case Implications

]]> http://www.alphadinar.com/2010/04/06/agility-desperate-to-settle-with-us-government/feed/ 6 http://www.alphadinar.com/2010/02/18/negative-correlation-might-tell-us-some-thing/ http://www.alphadinar.com/2010/02/18/negative-correlation-might-tell-us-some-thing/#comments Wed, 17 Feb 2010 22:08:51 +0000 Saud http://www.alphadinar.com/?p=3243 If you are a daily trader in the KSE, a long term investor or just an average Kuwaiti who spends some time socializing in the “diwaniya”, you have probably came across or heard about KGL’s (Kuwait and Gulf Link Transportation Company) recent rally.

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 delaying its court hearing for a fifth time, Agility said that it has entered a not guilty plea and asked the court to set a briefing schedule  to keep the  Judge updated on the progress of settlement talks with the US government. “The request for a briefing schedule is intended to preserve PWC’s rights while the company and the Department of Justice conduct discussions aimed at a resolution of the case,” Agility said in a statement. The company is in active negotiations and we hope this can be resolved,” Agility lawyer Richard Deane said yesterday. Further, he pointed that discussions were “not conclusive.” An Agility company spokesperson elaborated that, “The court will set a schedule for both sides to file papers so the process can move forward, but no dates have been scheduled at this point. ”The company would like the court to determine if it has been served properly before entering a plea. The judge therefore entered a plea on the company’s behalf so it could set a schedule for future papers to be filed,” the spokesperson added.

The uncertainty is considered a significant overhang on the company’s shares which have plummeted by more than 50% to KD0.600 fils from last October levels of KD1.300. Prosecutor Barbara Nelan squashed hopes for a fast resolution as she expected “a long and complex case.” The stock is set to go no where until there is more clarity.

As a background, Agility was accused on November 17 in an $8.5Bn fraud and conspiracy case by the US government. The indictment was initiated by a whistle-blower suit filed by Kamal Mustafa Al-Sultan, the owner of a company that partnered with PWC to submit a proposal for the contracts, according to Justice Department officials. It will prevent Agility from bidding for contracts during the legal proceedings but the suspension doesn’t preclude it from completing current contracts. This is considered a severe blow for the company as it derives 75% of its EBIDTA from US government contracts (Cheuvreux estimates). Litigation risk is high as Agility stands to loss a minimum of approximately $136 million.Kuwaiti press reports have said Agility could be paying anything from a few hundred million dollars to $3 billion in an out-of-court settlement.

Previous Related Articles:

1. Agility Postpones Hearings as it Seeks Settlement

2. Agility Indicted with $8.5B Fraud by US Government

3. Agility Fraud Case Implications

]]> http://www.alphadinar.com/2010/02/09/agilitys-long-complex-case-unsettled-yet-again/feed/ 5 http://www.alphadinar.com/2010/01/29/agility-postpones-hearings-as-it-seeks-settlement/ http://www.alphadinar.com/2010/01/29/agility-postpones-hearings-as-it-seeks-settlement/#comments Fri, 29 Jan 2010 20:52:30 +0000 Keynesian http://www.alphadinar.com/?p=3068

According to reports, Agility asked U.S. Magistrate Christopher Hagy to reschedule today’s hearing. It has been the  fifth time Agility requests the hearing to be rescheduled and it was postponed until February 8. However, judge Hagy wasn’t too happy as he reflected, “There’s a point at which this stops.” “It is our hope that it goes forward,” Assistant U.S. Attorney Barbara Nelan replied.

The reason Agility asked for the rescheduling is because of “ongoing negotiations” for a settlement. However, don’t completely bet on a settlement as Agility’s spokesman Dal Leibach revealed today that, “No agreement has been reached and there is no guarantee the discussions will result in an agreement.”

As a background, Agility was accused on November 17 in an $8.5Bn fraud and conspiracy case by the US government. The indictment will prevent Agility from bidding for contracts during the legal proceedings but the suspension doesn’t preclude it from completing current contracts. This is considered a severe blow for the company as it derives 75% of its EBIDTA from US government contracts (Cheuvreux estimates). Litigation risk is high as Agility stands to loss a minimum of approximately $136 million. In reaction, the share price has plummeted by more than 50% to KD0.600 fils from its last October levels of KD1.300.

Previous Related Articles:

1. Agility Indicted with $8.5B Fraud by US Government

http://www.alphadinar.com/2009/11/17/agility-indicted-with-8-5b-fraud-by-us/

2. Agility Fraud Case Implications

http://www.alphadinar.com/2009/11/18/agility-fraud-case-examined/

After the recent negative publicity for Agility, the stock has dived down making it the worst performing stock in the Kuwait Stock Exchange for both Q3 and in December. In Q3, the stock fell 50% versus the KSE index which shed 10% only. After the lawsuit filed against Agility in mid-November (Details), the stock tumbled 37.5%, then it took a breather in mid-December. The breather was short-lived as Agility was hit by yet another shock and shed 24.7% from its December highs as DynCorp International Inc. terminated one of the company’s units as a subcontractor of a logistics program.

Despite that it has been a while since I looked at Agility’s numbers, I do think that much of the bad news is already priced in. Looking at the chart below, the stock has broken its 15, 50, 100 and 200 day moving averages. However, it is approaching strong resistance levels around KD0.600. I recommend taking a position in Agility during the next few trading sessions  and exiting that position once the stock rebounds.

Related Posts:

Agility Fraud Case Implications

Agility Incited with $8.5B Fraud by US Government

Agility Touches 950 Fils!

Agility’s 2008 Results: No Surprise and No Dividends

I know I misquoted Clinton’s famous election phrase, “It’s the economy, stupid.” For the US in 1992, it was the economy. In Kuwait, people wonder what is our problem. Some say it is political, others say social, and the financially savvy like to point to the economic side as the culprit. The best answer to that question is, “It’s everything, stupid.” Everything: we are dysfunctional from a political, social, and economic perspective.

Political:

The country is daily riding a roller-coaster of politics orchestrated by a  cynical populist parliament and a fragile inefficient government. The political roller-coaster is circulating in a never-ending fashion from impeachment to dissolution. When is it going to end? I don’t want to elaborate on the political side. For more, refer to my previous post titled, “Parliamentary plays derail reform.”

Social:

Why it it that everyone in Kuwait regardless of their wealth live the most lavish lifestyle? The answer is simple: why not? Charge it on a credit card and expect the government to forgive loans. It is sad that a graduating senior from a Kuwaiti high-school’s dream is not to get into Harvard, but to drive a Maserati and upgrade to a Ferrari after college graduation. I remember a time when I was a kid and I used to enjoy going to my family’s weekly gathering to go to the supermarket and buy candy. You know what is a Kuwaiti kid’s dream nowadays? A Blackberry phone and an Abercrombie & Fitch t-shirt. This consumer mentality has to come to an end. More importantly, the parenthood relationship between the government and its citizens has to be abolished. There is severe moral hazard in our nation and its a vicious downward spiral cycle. Our government acts as a free collection agency for businesses. Our parliament sponsors morally hazardous acts such as sending families for tourism in the name of sickness and proposals such as debt forgiveness and “attractive” laid-off employee benefits. Our citizens enlist in unheard of universities in the likes of Zimbabwe and the Philippines to get a high-paying government job doing, well, nothing.

Economic:

We were the first to establish a stock market in the GCC, but today we are the only country without a governing Capital Markets Authority. It hurts, so I don’t want to talk about where we were, coulda, shoulda, and woulda. I wish I could say it in a different way, but what is happening in Kuwait’s stock market is a disaster. The domino effect is unstoppable without government intervention, regulation, and a complete overhaul of the economic system. We desperately need to instill confidence in our stock market. We want to send a message to everyone that what happened during Souq Al-Manakh crisis was a one-time event that isn’t currently in the making.

The government has to take the initiative and push for a new era of economic transparency and development. We need a Capital Markets Authority that acts as a watchdog that punishes all malpractices in the industry. Isn’t it humiliating to see the United States question manipulations by Kuwaiti individuals and companies while no one in Kuwait addresses these issues? Isn’t it ironic that market leaders are currently on the verge of bankruptcy? With added transparency, investors would have enhanced clarity and can potentially make an informed decision as opposed to gamble or leverage on an insider tip. Rest assured that the wounds of burnt foreign investors will take time to heal and it will be challenging to win them back. The establishment of a Capital Markets Authority is pivotal to the critical process of confidence restoration in our financial system. What we lack in Kuwait is priorities. Why don’t we organize and push for passing the Capital Markets Authority in the parliament? Let us prioritize our problems and address them in a one-by-one basis instead of being overwhelmed by their magnitude.

After the Agility controversy last week, people are left wondering what could stop the free-fall of our stock market? As with any solution, there is a short-term and long-term approach that need to be addressed in tandem. Establishing a Capital Markets Authority helps in the long-term, but shorter-term we have to focus on addressing the issue at hand. The reality is that our stock market is made-up of a few Chaebols*. These few Chaebols have numerous companies attached to them. These numerous companies ultimately depend on the success of the few and the few are all in trouble. The biggest four companies by market capitalization in the Kuwait Stock Exchange are Zain, NBK, KFH, and Agility. There used to be Dar and Global, but there are gone.  Zain is operationally challenged and its owners want to bail-out (but seemingly can’t), NBK will be hit hard if Zain owners can’t sell their stake, KFH depends heavily on real-estate and with the wealth destruction in Kuwait there is no hope there, and Agility’s sheer existence is being challenged by a complex fraud case.

I believe government intervention should be through recapitalizing banks. The government should simply buy a 5-10% stake through new share issuance by all banks. This will provide banks with much needed cushion for taking write-downs. Instead of the never-ending provisions drama, let us mark down these assets, take the hit, and move on. The US is a perfect example of such successful approach. Establishing a portfolio that buys into stocks and tries to lift the market is a very limited solution. The government is only addressing a symptom when it does that and should do that simultaneously with other solutions proposed.

*Chaebols: large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies.

Bloodshed. The KSE weighted index closed down -4.74% yesterday and is down another 2.2% as of Wednesday 10:15 AM. Agility was accused yesterday in an $8.5Bn fraud and conspiracy case by the US government. The indictment will prevent Agility from bidding for contracts during the legal proceedings but the suspension doesn’t preclude it from completing current contracts. This is a severe blow for the company as it derives 75% of its EBIDTA from US government contracts (Cheuvreux estimates). Moreover, this is a calamity for an already weak Kuwait SE sickened by the potential collapse of the Zain sale deal and constant political unrest. Needless to say, Agility closed limit-down yesterday and is currently also trading limit-down. It also dragged the top 3 Kuwait Stock Exchange index heavyweights Zain, NBK, and KFH limit-down with it.

As acting U.S. Attorney for the Northern District of Georgia Mr. Shelnutt elaborates, “The indictment alleges PWC submitted false information and manipulated prices to overcharge for food. This indictment is only the first step. Our investigation of entities and persons who have defrauded the United States and our military is ongoing.” According to reports, an initial appearance and arraignment for the company is set for Nov. 20 in Atlanta. Prosecutors said they were unsure who would be representing the company in that proceeding. It will be peculiar to see what Agility has to say at the initial appearance.

The Agility crisis is significant for several reasons:

1. 1. As stated earlier, Agility derives 75% of its EBITDA from the US government. With no more contracts, the company is simplistically speaking worth 75% less.

1. 2. According to Mr.Shelnutt, if convicted of violations of the False Claims Act, Agility faces probation and a fine of up to twice the gain it realized or twice the loss to the United States. The contact is worth 8.5Bn. Assistant U.S. Attorney Barbara Nelan stated that the government’s six-count federal indictment claims the company manipulated a complex funding formula to defraud the U.S. government of at least $68 million while supplying soldiers in Kuwait, Iraq and Jordan . This translates into a minimum loss of of approximately $136 million which is significant.

1. 3. Agility is the 4th largest company in the Kuwait SE by market cap ranking only behind Zain, NBK, and KFH respectively. This means that its fall materially affects the index and confidence levels in the market. The Kuwait SE is already down YTD trailing the Saudi and Dubai indices by nearly 50% YTD. The Zain deal doubts and political unrest were enough strains on the market and banks. It can be assumed that banks will make less money financing to a thought-to-be US government backed defensive company. Some banks could potentially increase provisions and start taking write-downs. (Figure 1)

1. 4. During 2009, Agility has been the undisputed star of the Kuwait SE. Before the adverse news came out, Agility was outperforming the Kuwait SE index by > 80%. Agility was the hope of the Kuwaiti stock market and was thought of as one of the only remaining truly operational companies besides banks. It’s demise will be tragic. (Figure 2)

1. 5. As with other Kuwaiti blue-chips, Agility have numerous companies that depend on its success. These companies are considered derivative plays on Agility and part of the Qena’at family group. An example would be the National Real Estate Co. (NRE KK) which owns 22.44% of Agility. Another would be Sultan Center (SULTAN KK) which partners/supports Agility in fulfilling contracts and could be indicted too. Obviously, both firms traded limit down yesterday and are doing the same today. Before the news, both firms were significantly outperforming the market YTD. (Figure 3)

1. 6. The sudden nature of the news will only add to concerns about transparency in the Kuwait SE and the unacceptable absence of a Capital Markets Authority. In its latest 3Q filing, Agility didn’t see it necessary to take provisions on the US government investigation. Volume traded on Monday was uncharacteristically high and points to potential insider knowledge. Investors will understandably desert the Kuwait SE for more regulated GCC markets which will adversely affect the index.

Figure #1:

Figure #2:

Figure #3: