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.

NBK’s FY09 earnings announcement in yesterday’s trading session helped lift market sentiment towards large caps,. Many big names including KFH rose after the news as it gave a positive indication of overall earnings. KFH followed NBK and announced their earnings today, only to disappoint with a 24% decrease to KD 118.741 million (52 fils) in 2009 compared to KD 156.959 million (68.1 fils) in 2008. Fourth quarter net profit was KD 12.4 million compared with a loss of KD 63.6 million a year earlier. The result fell short of the KD 19 million profit EFG-Hermes had expected.  However, total assets and liabilities increased by approxmatly 7%, while equity didnt increase by much.

Kuwait Finance House (KFH) posted Book value per share is KD0.540 and the stock is trading at Price/Book of 2x, same as NBK. Kuwait and the GCC P/B average is 1.8x and 1.4x respectivly. KFH will distribute 25fils and bonus shares of 8%, which gives the stock a yield of 2.3%. NBK announced yesterday a 45fils distribution which yields 4.1%.

In 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 KD0.5 and gave a price target to the stock of KD1.000.

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.

National Bank of Kuwait (NBK) finally found middle ground and struck a deal with Commercial Bank of Kuwait (CBK) to buy 19.1% of Boubyan Bank (Islamic). The total consideration is around KD 120M; valuing Boubyan Bank shares at 550 fils/share . CBK made KD 27M in the deal. NBK has an authorization until June 21 from the Central Bank to buy up to 40% of Boubyan Bank’s shares.

Investment Dar used to own the Boubyan Bank stake which it used as collateral for loans from CBK. The financial tsunami (god how much I hate this word!) caused highly leveraged Investment Dar to default on various loans. Consequently, they lost their buyback option on the Boubyan Bank stake and the title transferred to CBK.

According to Bloomberg.com, Investment Dar said in a statement today that it has filed three lawsuits with the Kuwaiti judiciary against Commercial Bank of Kuwait. The first accuses CBK of “fraud and dishonesty,” the second is to prevent CBK dealing with the shares and the third lawsuit demands the return of the shares to Investment Dar.“Investment Dar warns the National Bank of Kuwait, or any other party, against getting involved in this dispute so as not to subject its reputation and the interests of its clients and shareholders to risk,” Investment Dar said in the statement.

Enough with Investment Dar’s whining! With the conclusion of this deal, NBK officially grew a little but potentially prolific beard. I believe that NBK will not only add to their never-ending stream of winning products, but also transform the Kuwaiti Islamic market into a more competitive field. It is no hidden secret that Kuwait Financial House (KFH) has dominated the Islamic area for a very long time and I am glad they now have substantial competition because this will definitely enhance product quality/prices.