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.

Boubyan Bank, the second Islamic bank in Kuwait, has been trading heavily this year. It has been an acquisition prey for quite a while, which resulted in a huge shift in ownership and management. Although I am optimistic about the bank’s new owners and management, I think the stock is overbought. Looking at the current P/B multiples, the bank is currently trading at a P/B multiple of 6.6x. This is relatively higher than the Kuwaiti and GCC multiples of 2.3x and 1.8x respectively. Moreover, below is Boubyan’s P/B band, which shows that the bank’s P/B multiple average for the past two years was 4.02x. I would recommend to sell the stock at the current levels of 540 fils.

]]> http://www.alphadinar.com/2010/04/25/boubyan-bank-sell-and-book-profit/feed/ 2 http://www.alphadinar.com/2010/03/15/what-happened-to-kuwaits-billionaires/ http://www.alphadinar.com/2010/03/15/what-happened-to-kuwaits-billionaires/#comments Sun, 14 Mar 2010 21:00:06 +0000 Naser http://www.alphadinar.com/?p=3350

Forbes pulibshed their latest World’s Billionaires Ranking. What stroke me the most was the dropping out of most of Kuwait’s billionaires. In 2010, there is only one Kuwaiti (family) ranked, Al-Khorafi. But in the previous three years (2007-2009), Kuwait had three more people in the list, which are Qutaiba and Bassam Al Ghanim, and Mohammed Al Bahar.

My question is were these people that much affected by the financial crisis? And why did their wealth suffer in the year of the recovery (2009) rather than the year when the markets and the global economy were hit the most (2008)? I guess the Al Ghanim brothers were seriously hit by the Gulf Bank losses. But what about Mr. Al-Bahar? Why did the NBK’s Chairman’s wealth fall in 2009, a year when most markets witnessed substantial returns? NBK’s stock appreciated by more than 4% for the year. Were his other holdings hit that bad?

NBK, Kuwait’s biggest bank by market value, announced today a bottom line growth of 4% in FY09. Profits recorded were KD265.3 million compared to 255.3 in FY08. Q4 earnings surged from KD11.7 million in Q4 2008 to KD63.7 million in Q4 2009. This growth was mainly attributed to the bank’s expanded operations. Operating income increase by 2% to KD518 million and total assets rose by 7.8% to 12.9 billion. There were no details given on the level of provisions taken by the bank.

“Our regional expansion strategy proved successful as confirmed by the resilience of our profits and the diversity of our income sources. Our operations outside Kuwait continued to provide a stronger foundation for the stability of our profits with growing contributions from Egypt, Qatar and Turkey.” CEO Ibrahim Dabdoub said.

“National Bank of Kuwait’s results are in line with our expectations, and if you compare to last year it’s an improvement for sure. Kuwaiti banks have been more resilient to the global financial crisis than others” Naveed Ahmed, a financial analyst at Global Investment House.

The stock reacted positively to the announcement and closed at KD1.100, up 40 fils (3.7%). Results were kind of preannounced as CEO Ibrahim Dabdoub said at the World Economic Forum’s annual meeting in Davos, Switzerland a couple of days ago that NBK expects to post a “small growth” in 2009 profit.

UPDATE:

NBK is currently trading at a P/B multiple of 2x, whereas the Kuwaiti and the GCC banking sector trade at a multiple of 1.8x and 1.4x respectively.

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.

Recently, Adel and I  have stressed our bullish stance on GCC banks which specific emphasis on Kuwaiti and UAE banks (Click here for more details: “M2 Bottomed: LONG GCC BANKS” and “Banks for Sale!“). After Zain’s sale, the sector that will benefit the most is the banking sector, especially banks that are directly affiliated with Al Kharafi group of firms such as NBK. Selling a 46% stake will pump around USD 15 billion in cash that will most probably be used to repay outstanding debt. This will decrease NPLs and spark a downward revision of provisions. With Q3 results around the corner, I’m reiterating our bullish view on Kuwaiti banks.

Image source: Al-Qabas Newspaper

By Naser:

The purpose of this article is to determine which bidder for KIA’s Boubyan Bank stake (National Bank of Kuwait, Securities Group, and Althemar Holdings) makes the most sense. To do that we look at the following issues:

Current Holdings in the Bank:

The Securities Group does not own a stake in Boubyan, while Althemar owns 4.7%, according to Alqabas Newspaper. NBK owns 14.33% of Boubyan’s equity, and they are going to buy the Commercial Bank of Kuwait 19.2% stake once legal matters are settled. With the addition of the KIA stake, NBK’s ownership will equate to 52.53%. NBK is the only bidder that will own a majority of the bank’s stock if it outbids the other parties. A majority is needed to turnaround the ailing bank and to instate new management.

Synergies:

The Securities group is an investment firm, while Althemar is listed as a real estate company in the Kuwait Stock Exchange. NBK is the only bank bidding for the Boubyan stake, thus, more synergies exist between NBK and Boubyan as opposed to the other bidders. NBK has an extensive knowledge of the Kuwaiti banking industry that it can share with Boubyan. Boubyan can also make use of NBK’s employees and management.

Buying Power:

231 million shares of Boubyan Bank are up for grabs. The minimum price that KIA designated is KD 0.550, yielding an overall price of KD 127.5 million. As of March 31, 2009, NBK had KD 3.2 billion in cash, Securities Group had KD 8.645 million in cash, and Althemar had KD 2.137 million in cash. In fact, the value of Securities Group and Althemar’s total assets equal to KD 128.6 million and KD 166.5 million, respectively. The two companies seriously need leverage in order for them to acquire the Boubyan stake. Also, NBK’s financial strength may allow it to have more flexibility in choosing the bid price.

According to my short analysis, I believe that the National Bank of Kuwait seems to be the most appropriate buyer of KIA’s Boubyan Bank stake.

—-

NBK bought a 13.2% stake for KD 0.550, while Securities Group bought the remaining 6.6% for KD 0.560. Our analysis is supported by the outcome of the auction that NBK is the most relevant buyer.

Vivendi’s USD 12B rumored proposal to acquire Zain’s African operations has stolen headlines for the past few weeks, sparked large volumes, and resulted in a huge spike in Zain’s stock price. Vivendi SA, which owns SFR and Moroc Telecom, has never hidden its interest in untapped high-growth markets.

In 2005, Zain Group purchased Celtel International for USD 3.4B. The acquisition gave it access to 13 African countries and 40M subscribers. In CY’08, the African operations comprised nearly half of the group’s sales.

*Equity is the target market cap

In order to understand the dynamics of the deal and how it really affects the valuation, first, we have to separate Zain’s African operations from the rest of Zain Group. In CY’08 Zain Group recorded an EBITDA of KD871mn; the African operation making up 46% (KD401M). Vivendi’s USD12B (KD3,428mn) offer is relatively expensive as it values the African operations at an EV/EBITDA multiple of 8.5x against an industry average of 5x (this explains the surge in stock price).

Now that we have the EV of the African operations (KD3,428mn), all we need is the EV of the rest of the group. Using the industry average EV/EBITDA of 5x, we apply it to the group’s EBITDA ex Africa of KD 469mn and get KD 2,346mn. We add the two EVs to get the Total EV, then we subtract the debt, and add the cash and minority interest to get an equity value of KD 4,289mn. When we divided this by the shares outstanding, we get a fair value of KD 1.115/share.

Most of you already know either by experience or education that valuation is very much subjective and many inputs that affect results are based on assumptions that are either too optimistic or too pessimistic. According to Santander analysts, “Aside from the difficulties involved in raising a significant amount of debt in the current climate, we do not see how it would be possible for Vivendi to take full control of Zain’s African operations without endangering its rating.” Personally, I believe a USD 12B deal is unrealistic. I would be a seller of Zain at the current price level because it had an impressive run and its current price fully discounts the most optimistic outcome ($12B deal).

Below are charts showing Zain’s stock price movement and capital structure:

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.