Kuwait's bull run turns bearish

Kuwait rode the emerging market wave for most of this year but now the mood is changing. Soren Billing reports.
Kuwait's bull run turns bearish
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By Soren Billing
Thu 02 Oct 2008 04:00 AM

Kuwait rode the emerging market wave for most of this year helping it become one of the world's top performing stock exchanges. But now the mood is changing. Soren Billing reports.

Like a star that emits light long after it has perished, the Kuwait Stock Exchange still appears in the list of the world's top 10 performing bourses. But the share growth that put it there has stopped.

The Kuwaiti stock index has lost nearly all of the value it gained in the first half of the year, when it rose by almost 25 percent. In a bid to shore up ailing stocks, the Kuwait Investment Authority (KIA), the sovereign wealth fund, is investing up to $1.12bn in local stock market funds.

KIA has come under fire from Kuwaiti parliamentarians over its $5bn investment into beleaguered US banks Citigroup and Merrill Lynch in January this year. The Citigroup stake is estimated to have lost the country $270m.

So will the grass really be greener on the Kuwait Stock Exchange?

Last month Kuwait Financial Centre (Markaz) revised its full year earnings forecast for Kuwait-listed companies, slashing its initial projection of a 42 percent rise in earnings.

Markaz now expects growth in 2008 to be flat, after consolidated earnings at Kuwaiti companies fell by 12 percent in the first half.

Investment companies have taken the biggest hit, posting a 29 percent drop in earnings in the first half, compared with the corresponding period last year.

"The nasty surprises are likely to come from the investment services segment," says Mandagolathur Raghu, head of research at Markaz.

"These companies depend on the stock market performance for their stock price performance. So if the stock market is not doing too well, you are going to see a significant slowdown in their earnings."

The decline in earnings comes amid tough comparatives and one off items that boosted earnings last year.

In the year to date, shares in Investment Dar Company are down 10.5 percent, Aayan Leasing and Investment Company shares have lost 6.6 percent of their value, and the International Financial Advisors stock is down 39.8 percent.

Investment services accounted for 48 percent of total earnings in Kuwait in 2007, when aggregate earnings growth in the sector reached 222 percent, mainly due to a stock market revival after the 2006 fall.

Markaz expects the sector to close the year with a 19 percent decline in earnings.

It is more positive on the banking sector, which saw earnings growth of 24 percent in the first half and which is expected to post 34 percent growth in full year earnings, up from 26 percent last year.

"We are bullish about the banking sector, but obviously due to the decline in the stock market the investment companies and insurance companies will take a hit," says Faisal Hasan, head of research at Global Investment House.

Despite strong earnings growth, Kuwaiti bank stocks have tumbled this year amid the global financial crisis.

Heavyweight banking companies National Bank of Kuwait, Commercial Bank of Kuwait and Gulf Bank of Kuwait are down by 3.9 percent, 11.8 percent and 14.4 percent respectively, in the year to date.

A weak performance from telecommunications has also dragged on the market, taking some observers by surprise.

Zain and National Mobile Telecom Company (Wataniya) posted a one percent and three percent decline in first half profits, respectively, in first half earnings.

"The telecommunications segment we believe will pose the biggest risk to our earnings forecast for 2008," the Markaz report states.

The company forecasts 9 percent full year earnings growth for Zain and 33 percent for Wataniya.

First half results in the telecom sector were hit by a decline in average revenue per user (ARPU), higher capital expenditure and rising competition.

With a third company entering the Kuwait mobile market, competition looks set to keep rising, but on the plus side, Zain should benefit from significant subscriber additions in Saudi Arabia.

"People thought that Zain could continue to report a fabulous performance. It was one of the best performing stocks of last year in Kuwait," Raghu of Markaz says.

"They've been making a lot of investments across Africa, and I'm sure there's going to be some sort of lag time before that starts kicking in, in terms of earnings."

As of June 30 this year, Zain has more than 33.3 million customers in Africa.

The company now has operations in Burkina Faso, Chad, Democratic Republic of the Congo, Republic of the Congo, Gabon, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia.

A business in Ghana will begin commercial service in the fourth quarter of this year.

"Not even the guidance from the company is that bright, at least not for this year," Raghu says.

"That's a large cap that will drag the performance of the stock market lower this year."

Kuwait's real estate companies have posted mixed performances this year, with stocks in Al-Mazaya Holding and Alargan International up by 40 percent and 45 percent in the year to date, while National Real Estate and Commercial Real Estate are down by nearly 30 percent.A strong performance in mid cap and small cap stocks drove earnings growth at Kuwaiti companies in the first half of the year.

In 2008, large cap earnings growth is expected to fall by 4 percent, mainly due to a deceleration in earnings for KIPCO, National Industries and Agility.

Mid caps, which currently contribute to 27 percent of earnings, are expected to grow by 12 percent.

Kuwait International Bank is expected to lead mid cap earnings this year after posting a five-fold increase in earnings to $121m in the first half.

Small caps are likely to be the strongest performers with an earnings growth of 17 percent, but with a contribution of only 15 percent to overall earnings.

Companies like MENA Holdings, Kuwait Commercial Markets and Ekkitab Holding Company are expected to underpin small cap earnings growth, Markaz believes.

"In terms of valuation, the market still looks attractive because price to earnings is still in the range of 10.5 to 11, which is attractive compared to the UAE or Saudi counterparts," Hasan of Global Investment House says.

Looking ahead, he sees potential upside on the back of improved valuations and news that sovereign wealth funds will enter the market.

"Once the third quarter results start trickling in we might see upside to the volumes of trading, which have been down due to the holy month of Ramadan and due to investors who've stayed away from the market because it has been so volatile in the past weeks."

He expects companies to recover in the second half and to record profit growth of between 15 and 20 percent.

The Kuwaiti market has a reputation for being less volatile than other GCC bourses.

The number of listed companies is greater than in neighbouring Saudi Arabia. It is also less retail driven.

"If you look at the performance of the Kuwait Stock Exchange over a long period of time, it has always produced the best returns for the lowest risk," Raghu says.

"It is never a very high octane market, like Saudi or Dubai."

"By Kuwaiti standards, it has been more volatile this year, and in the last two months it has been really volatile," agrees Global's Hasan. "But if you compare Kuwait with Saudi, Qatar or the UAE, it has been less volatile."

Despite recent falls, Raghu at Markaz believes KIA, the sovereign wealth fund, is making the right decision in investing in local stocks.

"Once the market comes back to its normal valuation, that will have a positive impact," he says. Will it be a better investment than buying into Citigroup?

"Absolutely."

Kuwait’s 2008 market milestonesJanuary

Zambia awards a $1.2bn two-year oil supply contract to Kuwait's International Petroleum Group.

The Kuwaiti government approves a privatisation bill to facilitate a 40 percent sale of national carrier Kuwait Airways Corp to the public and 35 percent to KSE listed companies and specialised foreign firms.

Kuwait cuts its benchmark dinar discount rate and repurchase rate by 50 basis points. The central bank reduces the discount rate to 5.75 percent from 6.25 percent.

February

Kuwait announces plans for a $11.4bn rail and metro project. The project is intended to link a proposed 2000-km Gulf railway line with Iraq, Iran, and beyond.

Kuwait signs a memorandum of understanding for the development of its northern oil fields.

March

Kuwait awards the construction of part of its planned 615,000 barrel per day refinery to US engineering firm Fluor. The refinery is slated to come on stream by the end of the first quarter of 2012.

April

New Kuwaiti firm Noortel announces plans to invest in Middle Eastern, Asian, and African telecom markets.

Kuwait Investment Authority (KIA), which manages the oil producer's surplus wealth, buys nearly $800m of shares in the initial public offering of credit card firm Visa.

Kuwait starts production of free or non-associated gas. Production begins with 50 million cu ft per day of non-associated gas.

Kuwait announces plans to float tenders for power expansion worth more than $2.5bn to meet rapid growth in housing projects.

Kuwait's 2008-09 budget plans for a record spending of $71.4bn.

June

KNPC plans to invest $30bn to boost Kuwait's refining sector.

United Arab Shipping Company SAG signs a new building contract for nine 13,100 TEU ships (A13) with Samsung Heavy Industries.

Kuwait approves the privatisation plans of loss-making KAC and awards a third mobile license.

Kuwait's parliament passes a law that will cut taxes on foreign firms to 15 percent from a variable tax rate that reached up to 55 percent.

July

The central bank withdraws a temporary facility to guarantee the availability of dinars at a fixed rate on the interbank lending market to discourage speculation on the dinar.

Kuwait signs more than $27bn of investment agreements with nine Asian countries, including Brunei and the Philippines.

August

Kuwait Energy Company buys Oil Search Limited's MENA assets for $200mn.

September

Kuwait posts a $27.18bn surplus in the first five months of the 2008/09 fiscal year on higher than expected oil revenues.

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