Call us on +973 17549499 or email us at [email protected]Global Investment House (GLOB.KW) CMP KWD 0.110 Target KWD 0.100 Potential Downside 8.8% MSCI GCC Index 412.42 Kuwait Stock Exchange 7,896.90 Key Stock Data Sector Investments Reuters Code GLOB.KW Bloomberg Code GLOBAL KK Equity Net Out. Shares (bn) 1.223 Market Cap (KWD bn) 0.135 Market Cap (USD bn) 0.472 Avg. 12m Vol. (mn) 4.204 Volatility (30 day) 48.671 Volatility (180 day) NA Stock Performance (%) 52 week high / low (KWD) 1.000 / 0.063 1M 3M 12M Absolute (%) -12.7 -14.1 -89.0 Relative (%) -15.2 -14.2 -79.7 Shareholding Pattern (%) The Bank of New York International Nominees 11.43 Tarek Khaled Al Humaidhi and others 8.94 Public Institution for Social Security 8.85 Corporate 22.28 Public 48.50 Global and Kuwait Stock Exchange Executive Summary Incorporated in 1998, Global Investment House (Global) primarily is an investment company. It is one of the leading managers of private placements and public offerings and acts as a strategic advisor to corporations, governments, institutions and individuals in the GCC. Global has a presence in 16 countries spread across the GCC, the broader MENA region and the emerging markets. Global reported a net loss of KWD 98.57 million in 1H09 During 1H09, Global reported a net operating loss of KWD 45.60 million compared to an operating income of KWD 115.67 million in 1H08 negatively impacted the economic crisis. While, fees & commission income was down 53.2%, interest & similar income plunged 81.3% in 1H09. The company also incurred net losses of KWD 5.02 million and KWD 4.33 million on financial assets held for trading and designated at fair value, respectively. Further, on account of associates, the company registered losses of KWD 29.41 million in 1H09, while net loss on investment properties accumulated to KWD 15.54 million and foreign exchange losses were at KWD 9.71 million. Despite a 1.8% reduction in total expenses, Global reported an operating loss of KWD 59.72 million as against an operating income of KWD 101.29 million in 1H08. Also, interest expenses rose 35.8%, while impairment charges stood at KWD 19.52 million during 1H09. Consequently, Global registered a net loss of KWD 98.57 million compared to a profit of KWD 82.24 million in 1H08. Adjusted annualised LPS stood at KWD 0.072 compared to an EPS of KWD 0.060 in 1H08. Outlook and valuation The Kuwaiti investment sector has been under the pressure of investment losses and impairment charges as a result of the economic crisis. Going forward, as Kuwait’s real GDP is expected to contract 1.1% in 2009, the expansion prospects for the sector looks less promising. Further, the investment companies have also been negatively impacted due to their exposure to the real estate sector, which has suffered from declining prices and weak demand. Moreover, Global with exposure to distressed assets and huge losses and impairments has been struggling to post profits after it registered losses for the first time in 2008. The company has even exhausted its reserves and defaulted on payments. Even though it has pitched in a debt restructuring plan and initiated efforts to lower its operating expenses, an exit strategy is recommended under the current market conditions. To determine the fair value of the company, we have used GGM and comparative P/BV valuation methods. Currently, Global’s stock is trading at negative P/E multiples of 1.75x and 5.99x on 2009E and 2010E losses, and at a P/B multiple of 0.98x and 1.18x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has declined 42.7% since the beginning of this year as against a gain of 1.5% by the Kuwait Stock Exchange. Considering the above factors, we arrive at a price target of KWD 0.100, which exhibits a potential downside of 8.8% from its closing price of KWD 0.110 (as on August 24, 2009). Accordingly, we initiate our coverage on Global Investment House with an UNDERWEIGHT recommendation. KWD Millions 2007A 2008A 2009E 2010E 2011E Total Income/ (Loss) 154.37 -40.75 -85.94 13.43 112.47 % Change YoY 39.9 NA NA NA 737.2 Operating Profit 129.80 -61.10 -114.53 -15.45 79.33 % Change YoY 35.6 NA NA NA -613.3 Net Profit 91.37 -257.65 -171.67 -49.99 37.84 % Change YoY 27.9 NA NA NA -175.7 Adjusted EPS 0.034 -0.095 -0.063 -0.018 0.014 Total Assets 912.96 1,252.76 1,050.55 1,007.88 1,207.64 RoAE (%) 32.2% -82.2% -56.4% -17.9% 13.8% UNDERWEIGHT
Shareholding Pattern (%) The Bank of New York International Nominees 11.43 Tarek Khaled Al Humaidhi and others 8.94 Public Institution for Social Security 8.85 Corporate 22.28 Public 48.50
Global and Kuwait Stock Exchange
Executive Summary Incorporated in 1998, Global Investment House (Global) primarily is an investment company. It is one of the leading managers of private placements and public offerings and acts as a strategic advisor to corporations, governments, institutions and individuals in the GCC. Global has a presence in 16 countries spread across the GCC, the broader MENA region and the emerging markets. Global reported a net loss of KWD 98.57 million in 1H09 During 1H09, Global reported a net operating loss of KWD 45.60 million compared to an operating income of KWD 115.67 million in 1H08 negatively impacted the economic crisis. While, fees & commission income was down 53.2%, interest & similar income plunged 81.3% in 1H09. The company also incurred net losses of KWD 5.02 million and KWD 4.33 million on financial assets held for trading and designated at fair value, respectively. Further, on account of associates, the company registered losses of KWD 29.41 million in 1H09, while net loss on investment properties accumulated to KWD 15.54 million and foreign exchange losses were at KWD 9.71 million. Despite a 1.8% reduction in total expenses, Global reported an operating loss of KWD 59.72 million as against an operating income of KWD 101.29 million in 1H08. Also, interest expenses rose 35.8%, while impairment charges stood at KWD 19.52 million during 1H09. Consequently, Global registered a net loss of KWD 98.57 million compared to a profit of KWD 82.24 million in 1H08. Adjusted annualised LPS stood at KWD 0.072 compared to an EPS of KWD 0.060 in 1H08. Outlook and valuation The Kuwaiti investment sector has been under the pressure of investment losses and impairment charges as a result of the economic crisis. Going forward, as Kuwait’s real GDP is expected to contract 1.1% in 2009, the expansion prospects for the sector looks less promising. Further, the investment companies have also been negatively impacted due to their exposure to the real estate sector, which has suffered from declining prices and weak demand. Moreover, Global with exposure to distressed assets and huge losses and impairments has been struggling to post profits after it registered losses for the first time in 2008. The company has even exhausted its reserves and defaulted on payments. Even though it has pitched in a debt restructuring plan and initiated efforts to lower its operating expenses, an exit strategy is recommended under the current market conditions. To determine the fair value of the company, we have used GGM and comparative P/BV valuation methods. Currently, Global’s stock is trading at negative P/E multiples of 1.75x and 5.99x on 2009E and 2010E losses, and at a P/B multiple of 0.98x and 1.18x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has declined 42.7% since the beginning of this year as against a gain of 1.5% by the Kuwait Stock Exchange. Considering the above factors, we arrive at a price target of KWD 0.100, which exhibits a potential downside of 8.8% from its closing price of KWD 0.110 (as on August 24, 2009). Accordingly, we initiate our coverage on Global Investment House with an UNDERWEIGHT recommendation. KWD Millions 2007A 2008A 2009E 2010E 2011E Total Income/ (Loss) 154.37 -40.75 -85.94 13.43 112.47 % Change YoY 39.9 NA NA NA 737.2 Operating Profit 129.80 -61.10 -114.53 -15.45 79.33 % Change YoY 35.6 NA NA NA -613.3 Net Profit 91.37 -257.65 -171.67 -49.99 37.84 % Change YoY 27.9 NA NA NA -175.7 Adjusted EPS 0.034 -0.095 -0.063 -0.018 0.014 Total Assets 912.96 1,252.76 1,050.55 1,007.88 1,207.64 RoAE (%) 32.2% -82.2% -56.4% -17.9% 13.8%
UNDERWEIGHT
Background Incorporated on June 16, 1998, Global Investment House (Global) is a closed shareholding company. Regulated by the Central Bank of Kuwait (CBK) as an investment company, Global is one of the leading managers of private placements & public offerings and acts as a strategic advisor to corporations, governments, institutions and individuals in the GCC. Global became a publically traded company in May 2003 by getting listed on the Kuwait Stock Exchange (KSE). Subsequently, in October 2004, Global got listed on the Bahrain Stock Exchange (BSE) and in September 2005, on the Dubai Financial Market (DFM). In May 2008, Global became the first Kuwaiti company to be listed on the London Stock Exchange (LSE). Headquartered in Kuwait, the company embarked on geographical expansion by establishing branches and subsidiaries in other GCC countries, the broader MENA region and the emerging markets. Currently, Global has a local presence in 16 countries: Kuwait, Saudi Arabia, UAE, Bahrain, Oman, Qatar, Jordan, Egypt, Tunisia, Sudan, Yemen, Turkey, Pakistan, Hong Kong, China and India.
Global is listed in the Kuwait, Bahrain, Dubai and in London bourses Diverse product offerings Several recognitions of its success
Source: Global Global’s client base stands at approximately 7,250 individuals and institutions that are predominantly based in the GCC region. Further, it has one of the largest asset management businesses in the region in terms of total assets under management (AUM) that reached KWD 2.07 billion at the end of June 2009. Further, offering conventional investment funds, Islamic investment funds, alternative investment funds, and portfolio management, this division’s product offering is one of the most diversified in the region. Meanwhile, Global’s investment banking offers equity capital markets and corporate advisory, and debt capital markets services. The real estate division invests in a variety of commercial and residential properties and real estate development projects. Apart from this, Global’s brokerage unit provides online and conventional trading and brokerage services across Kuwait and most of the GCC and MENA-based stock exchanges. Furthermore, its principal investments & treasury undertakes co-investments in its managed funds, private equity and private investment in public equity, proprietary trading, strategic investments for its geographic expansion, investments in fixed income securities and loans & advances and Murabaha receivables. In recognition of its performance and reputation in the region, Global has won numerous local and international awards, such as ‘Best Equity House in Kuwait’ in 2005, 2006 and 2008 awarded by Euromoney; ‘Excellence in Branding’ in March 2009 by Superbrands; ‘Best Local Investment Bank in Kuwait’ and ‘Best Foreign Investment Bank in Jordan’ in December 2008 by EmeaFinance; ‘Fund of the Year’ and ‘Middle Market Deal of the Year’ awards in November 2008 by Terrapin; ‘Best Real Estate Research House in Kuwait’ in October 2008 by Euromoney Liquid Real Estate Awards; ‘ Best Investment Bank in Kuwait’ in 2008 by Asiamoney; ‘Deal of the Year Award’ in 2006 awarded by The Banker magazine; and ‘Best Islamic Fund Manager’ awarded by Real Estate Investment World Summit-2008.
Global – Product Offering
Services
• Wealth Management • Real Estate • Investment Banking • Asset Management • Brokerage • Research • Principal Investment &
Treasury
Funds
• Fixed Income Funds • Index Funds • Money Market Funds • Equity Funds • Guaranteed Funds • Islamic Real Estate
Business Model Board of Directors • Chaired by Ms. Maha
Khaled Al Ghunaim • Mr. Khaled Jassim Al
Wazzan – Vice Chairman • Mr. Marzouk Nasser Al
Kharafi • HH Sheikh Abdullah Al
Jaber Al Sabah • Mr. Alan Hurd Smith Source: Global
Subsidiaries/Associates/Affiliates of Global Investment House Global has a number of subsidiaries, associates and investments.
SUBSIDIARIES/ASSOCIATES/INVESTMENTS COUNTRY % SHARE
Al Muthana Holding Kuwait 100.00 Eight Project Management Company Kuwait 100.00 Eleventh Project Management Company Kuwait 100.00 Fourteenth Project Management Company Kuwait 100.00 Fourth Marketing Consultancy Company Kuwait 100.00 Global Capital Management Limited Kuwait 100.00 Global Capital Partners Kuwait 100.00 Global Institute of Media Limited Kuwait 100.00 Global Investment House – Bahrain Bahrain 100.00 Global – Egypt Egypt 100.00 Global – India India 100.00 Global – Jordan Jordan 100.00 Global – Qatar Qatar 100.00 Global - Saudi Arabia Saudi Arabia 100.00 National Company for Education Development Kuwait 100.00 Real Estate Mortgage House Kuwait 100.00 Safi Financial Services Kuwait 100.00 Saint Luke Medical Centre Building (via USA Global RE Fund) USA 100.00 Second Administration Consultancy Company Kuwait 100.00 Second Computer Consultancy Company Kuwait 100.00 Second Economic Consultancy Company Kuwait 100.00 Third Marketing Consultancy Company Kuwait 100.00 Universal House Brokerage Company Jordan 100.00
Source: Zawya
Global plays a vital role in promoting investment opportunities in the GCC and wider MENA region through expert financial engineering and in-depth research and reports
Global
Global provides a full spectrum of investment services including corporate finance, asset management, brokerage, treasury, in addition to a range of support services
Operates in a number of countries through strategic partnerships, investments and obtaining licenses to operate on a stand-alone basis
Focusing on continuous improvement in the operating features and security, Global introduced new IT systems to integrate its operations
SUBSIDIARIES/ASSOCIATES/INVESTMENTS COUNTRY % SHARE
Al Bareeq Holding Kuwait 92.00 Shurooq Investment Services Company Holding Oman 76.97 Al Manara Insurance Jordan 76.72 Global Investment House - Sudan Sudan 76.00 First Security Brokerage Company Kuwait 75.00 Fon Finansal Kiralam Turkey 60.00 First Bahrain Real Estate Development Company Bahrain 57.70 Al Ekhlas International Holding Company Kuwait 48.00 First Jordan Investment Company Jordan 43.68 JS Global Capital Limited Pakistan 43.00 National International Holding Company Kuwait 39.34 Al Fajer Retakaful Insurance Company Kuwait 30.00
Al Quds Bank for Development and Investment Palestinian Territories 30.00
Global MENA Financial Assets UK 30.00 Investment House Qatar 30.00 Societe Generale de Banque Jordanie Jordan 29.94 United Towers Holding Company Kuwait 29.42 Elite Kuwait 27.50 Gulf Franchising Company Kuwait 27.43 Baring Private Equity Partners Hong Kong 25.00 Al Soor Financing and Leasing Company Kuwait 24.18 Gulf Custody Company Kuwait 24.00 Real Estate Development (11.21% directly and 10.93% via Waterfront Real Estate Company) Jordan 22.14 Al Nawadi Holding Company Kuwait 21.00 INVESTMENTS
Al Razzi Holding Company Kuwait 18.00 RC Real Estate Development and Finance Corporation (via Global Asia Real Estate Fund) Vietnam 17.00 Ittihad Schools Jordan 16.56 Model Restaurants Company Jordan 16.23 First Dubai Real Estate Development Company Kuwait 16.00 National Company for Consumer Industries Kuwait 15.00 National Ranges Company Kuwait 14.57 United Arab Investors Company Jordan 12.18 Al Mazaya Holding Company Kuwait 11.49 Jordan Islamic Bank Jordan 11.35 MAPE Advisory Group India 11.11 Saudi German Hospital Yemen 10.76 Arabian Hospitality Holding Company Kuwait 10.00 Asian Finance Bank Malaysia 10.00 Reef - Real Estate Finance Company Bahrain 10.00 Sabaek Leasing and Investment Company Kuwait 10.00 Al Mal Securities Saudi Saudi Arabia 9.00 First Qatar Real Estate Development Company Kuwait 8.92 Saudia Dairy and Foodstuff Company Saudi Arabia 8.90 Al Isra for Education and Investment Jordan 8.79 Alumco UAE 8.49 TUNISAIR Tunisia 8.03
Source: Zawya
INVESTMENTS
Syria Gulf Bank Syria 7.00 Al Masaken International Real Estate Development Kuwait 6.91 Tasheed Real Estate Company Qatar 6.80 Middle East Complex for Engineering Electronics & Heavy Industries Jordan 6.70 Network Holding Company Kuwait 6.38 Al Abraj Holding Company Kuwait 6.03 Al Rayan Holding Company Kuwait 6.00 CapCorp Investment Company Kuwait 5.00 Real CAPITA Bahrain 5.00 TAV Airports Holding Company Turkey 5.00 United Group Holdings - Jordan Jordan 5.00 BBK Bahrain 4.40 Al Jazeera Islamic Company Qatar 3.50 Societe Moderne de Céramique Tunisia 3.14 Kuwait National Airways Kuwait 3.00 Taameer Jordan Holdings Jordan 2.13 Gulf Holding Company Kuwait 1.19
Source: Zawya
Global economy expected to witness a negative growth of 1.4% in 2009
Industry Scenario According to the International Monetary Fund (IMF), the world economy will recede 1.4% during 2009 as a result of the continued economic slowdown. This is contrary to the positive growth rates of 5.1% and 3.1% registered for 2007 and 2008, respectively. However, the trend is likely to reverse with the growth rebounding to 2.5% in 2010. The Middle East region’s GDP, which registered a healthy real growth of 5.7% and 6.3% during 2006 and 2007, respectively, is likely to slow from 5.2% in 2008 to 2.0% in 2009 before expanding 3.7% in 2010. Within the region, the GCC countries witnessed a GDP growth of 6.4% in 2008, but are likely to grow at a mere 1.3% during 2009 owing to multiple factors including weak oil prices, contraction of global demand and trade-related activity, liquidity crunch, lower tourism and reduced remittances. However, the GCC’s growth is expected to normalize to 4.2% in 2010 on improving market dynamics. Kuwait’s economy is largely dependent on hydrocarbon-related activities (oil & natural gas and refined petroleum products), which accounted for 56.8% of the nominal GDP and 94.9% of total export earnings during 2007. Buoyed by the high oil prices and consequent economic development, Kuwait’s real GDP had grown at an average 6% over the period 2004-2007, and is expected to register a growth rate of 6.3% for 2008. However, with the continuing economic slowdown and low export volumes, the growth in the country’s real GDP is expected to contract 1.1% in 2009 before recovering to 2.4% in 2010. Kuwait recorded a budget surplus of USD 21.0 billion for the fiscal 2008/09 led by rising oil prices during the first half of 2008. Oil revenues accounted for nearly 94% of the total revenues of USD 72.3 billion that exceed the projections by 66.7%. Budgetary deficit is likely to stand at KWD 4.8 billion for 2009/10 on the budgeted revenues of KWD 8.1 billion.
Source: Economic Intelligence Unit Source: Central Bank of Kuwait
Oil expected to account for approximately 50% of the nominal GDP in 2009-10 Total assets of investment companies report a 4.4% decline in first five months of 2009 Total assets of conventional investment companies decline 12.4% in 1H09
Oil is likely to account for around half of Kuwait’s nominal GDP in 2009-10 and remain a significant driver of economic growth through increased government consumption. However, oil output, which increased 6.4% in 2008, is expected to contract this year following an agreement by OPEC to reduce oil production, before expanding about 9% in 2010. Growth in the services sector including financial services, logistics, telecommunications and retail, which account for around 40% of nominal GDP, is expected to be modest in 2009-10. Slowdown in economic growth, strengthening of the US dollar and the government’s commitment to extend subsidies is likely to reduce inflation from 10.6% in 2008 to 7.0% and 5.6% in 2009 and 2010, respectively. Further, with a dip in oil prices, export earnings are likely to fall leading to a current account deficit in 2009.
Current Account Surplus (KWD Billion) and as a % of Nominal GDP
Source: Economic Intelligence Unit Source: Economic Intelligence Unit The total number of investment companies in Kuwait including conventional as well as Islamic increased from 42 in 2004 to 99 in 2008 and further to 101 (46 conventional and 55 Islamic) by the end of 1H09. Accordingly, total assets of the investment companies grew at a 4-year CAGR of 28% to KWD 17.07 billion over 2004-08. While the assets of conventional investment companies grew at a 4-year CAGR of 17.7% over 2004-08, assets of Islamic investment companies witnessed an impressive CAGR of 50.8% over the same period. However, since the end of 2008, total assets of investment companies have registered a decline of 4.4% in the first five months ending May 2009 to KWD 16.31 billion. This can be attributed to the aftermath of the financial crisis and a fall in real estate demand and prices, which resulted in huge investment losses and impairments. Amongst these, Islamic investment companies were the worst-hit as they registered a 6.6% decline in assets as against a 2.7% decline in assets of conventional companies during the same period. Moreover, Islamic and conventional companies’ total assets to nominal GDP declined to 19.0% and 23.2% in 2008 from 20.8% and 29.6% in 2007, respectively. However, at the same time, the impact of the financial turmoil on banks was lesser than on the investment companies, as local banks’ total assets increased a marginal 0.5% to KWD 39.44 billion in first five months ending May 2009 compared to the end of 2008.
Source: CBK, Economic Intelligence Unit Source: CBK The Kuwaiti investment sector includes 46 conventional investment companies, regulated by the Central Bank of Kuwait (CBK). Most investment companies earn their revenues from investments, while a few derive revenues through lending activities. The investment sector in the country witnessed tremendous growth in credit facilities, investments and assets given the ample liquidity and rising money inflow owing to high oil revenues till the first half of 2008 and the subsequent economic development. Total assets of the sector grew at 23.9% over 2004-1H08, while domestic investments and foreign assets rose at 33.0% and 17.1% respectively, over the same period. However, subsequent to the financial turmoil, total assets, domestic investments and foreign assets declined 9.2%, 20.9% and 8.7% respectively, over the six months ending December 2008 from 1H08. Furthermore, the effect has been extended to the first six months of 2009, as reflected from the plunging domestic investments and foreign assets that fell by 10.3% and 10%, respectively, bringing down the total assets by 12.4% in 1H09.
Economic crisis leads to 6.6% decline during first five months of 2009
Total Assets of Conventional Investment Cos. (KWD Billion)
0
2
4
6
8
10
2004 2005 2006 2007 2008 1H09
Credit Facilities to Residents Domestic InvestmentsForeign Assets Total Assets
Total Liabilities of Conventional Investment Cos. (KWD Billion)
0
2
4
6
8
10
12
2004 2005 2006 2007 2008 1H09
Financing from Residents Foreign Liabilities Ow n Funds Total Liabilities
Source: CBK Source: CBK On the liabilities front, these conventional investment companies are strongly backed by their own funds, which constituted 35.6% of their total liabilities in 1H09. While financing from residents contributed 20.1% of the liabilities, foreign liabilities accounted for 21.6% of total liabilities in 1H09. Own funds of companies witnessed a 33.6% expansion to KWD 4.07 billion over 2004-1H08. However, as weak capital markets negatively impacted the companies’ fair value reserves, own funds declined 20.4% to KWD 3.24 million at the end of 2008. The trend continued in 1H09, with own funds declining 9.9% to KWD 2.92 billion in 1H09. In addition, while financing from residents declined 23.8%, foreign liabilities was lower by 12.1% in 1H09 compared to 2008. The Islamic investment sector in Kuwait has 55 companies, which are regulated by the CBK. The major revenue source for the Islamic investment companies is the financial investments, which includes its profit-sharing business. With the rising popularity and demand for the Shariah-compliant product and services, the country’s Islamic investment sector attained tremendous growth in its financial investments, foreign assets and asset base supported by ample liquidity and rising money inflow owing to the high oil revenues till first half of 2008. Total assets within the sector grew at a CAGR of 50.8% over 2004-08, while financial investments and foreign assets advanced at a CAGR of 64.8% and 66.1%, respectively. However, amid the deepening crisis, total assets and financial investment assets plummeted 6.6% and 15.3%, respectively, during the five-months ending May 2009 compared to the end of 2008.
Total Assets of Islamic Investment Cos. (KWD Billion)
0
1
3
4
6
7
8
2004 2005 2006 2007 2008 1H09
Financial Investment Foreign Assets Total Assets
Total Liabilities of Islamic Investment Cos. (KWD Billion)
0
1
3
4
6
7
8
2004 2005 2006 2007 2008 1H09
Funding from Financial Sector Foreign Liabilities Ow n Funds Total Liabilities
Source: CBK Source: CBK On the liabilities front, these companies are strongly backed by their own funds, which constituted nearly 35.2% of their total liabilities as of May 2009. Majority funds are borrowed from the financial sector (29.4%), while foreign funding accounted for a significant 24.3%. From 2004-08, the company-owned funds rose at a CAGR of 49%, however declined by 5.1% in the first six months of 2009 since 2008, owing to a fall in capital markets that negatively impacted the equity of various companies. Overall, total liabilities declined 6.6% from 2008 to 1H09 following a growth of 50.8% over 2004-08. Going forward, investment companies continue to be suffering from the after effects of the economic crisis. Slower economic growth and weak financial markets have eroded the investments of the companies with impairment losses and heavy provisioning in 2Q09. The rather low level of economic activity continues to negatively impact the fees and commission income of investment companies. Moreover, the reversal in the trend for these companies can only be expected once the economies start moving on the growth path.
The regions AUM is expected to rise to USD 100 billion by 2012
Projects worth USD 267 billion are currently planned or underway in Kuwait Real estate trading dipped 2.3% in 2Q09
Asset Management IndustryThe increasing wealth within the GCC region mainly led by higher oil and gas revenues has necessitated the need to professionally manage assets. Assets under management (AUM) in the GCC cover investment funds, portfolio management services and discretionary portfolios. It has been estimated that currently, assets worth USD 60-70 billion are being professionally managed in the region. More than 70% of these AUM is in the form of funds. Country-wise Saudi Arabia is the largest market in the GCC with almost half of the regional funds followed by Kuwait. Amongst the funds in Kuwait, 51% are categorised as equity funds having the highest risk tolerance, followed by 26% as money market funds and 11% as fixed income funds. According to Cerulli Associates, a research provider, the Middle East’s AUM is expected to rise to USD 100 billion by 2012.
However, the AUM industry was negatively impacted by the global financial crisis, which negatively impacted the regional financial markets, wiping off wealth across countries. Huge investment losses incurred on investments resulted in a rise in net loss for companies. Property prices rose on the back of easy availability of bank credit, with growth in credit reaching as high as 50% in countries like Qatar, Kuwait and UAE. The main reason behind the phenomenal rise in credit can be attributed to easy availability of cheap offshore funding. However, with the tremors of financial crisis even shaking the most fundamentally sound banks the availability of cheap money is curtailed. Moreover, the GCC banking systems are overleveraged, with loan-to-deposit ratios in excess of 100% in most countries. These call for a cautious lending approach and focus on increasing the deposits base to better prepare for any untoward situation. In addition to this, GCC sovereign wealth funds have lost more than USD 100 billion in a highly leveraged, aggressive deal making on Wall Street, the City of London, the European and Asian stock exchanges. The funds suffered losses as they sought leveraged stakes in international banks at their peak along with non-diversification from the petrochemical sector. Going forward, with an estimated wealth of USD 3 trillion, the region does present immense growth potential, but much will depend on the economic performance and how the revival from the financial crisis shapes up.
Real Estate Rapid population growth, unprecedented expansion of the construction sector & industrial projects and huge investments in the GCC infrastructure led to a surge in the real estate sector. According to Middle East Economic Digest (MEED), projects worth USD 2.04 trillion are either planned or underway in the region, which in turn promises attractive growth prospects for the real estate sector. With investments to the tune of USD 266.99 billion, Kuwait ranks third in terms of infrastructure spending after UAE (USD 803.80 billion) and Saudi Arabia (USD 598.05 billion). However, the recent global credit crisis and cautious spending in the sector has slowed down the growth. The sector has been more prone to price correction and projects being delayed or postponed in the recent times. UAE, Kuwait and Saudi Arabia have projects worth USD 520.71 billion, USD 40.19 billion and USD 39.23 billion, respectively on hold as of August 18, 2009. Meanwhile, declining oil prices are expected to impact oil revenues and further affect the governments’ future investment plans.
Value of Projects in GCC (in USD billion as of August 18, 2009)
-
200
400
600
800
1,000
Bahrain Oman Qatar Kuw ait Saudi Arabia UAE
Value of Projects On Hold in GCC (in USD billion as of August 18, 2009)
-
110
220
330
440
550
Bahrain Qatar Oman Kuw ait Saudi Arabia UAE
Source: MEED Source: MEED The real estate sector in Kuwait is highly fragmented and dominated by small to medium-sized players. There are 58 real estate companies, of which 35 are listed. Since the economy is not vastly diversified, real estate as a sector receives a large portion of the bank credit. The major development in the Kuwaiti real estate sector was the promulgation of Laws 8 and 9 of 2008 in May 2009 that prevented all sole proprietorships from buying, selling, placing lien on and issuing letters of assignment to third parties and prevented Islamic banks from financing the residential housing. While real estate prices witnessed a 10%-30% decline in certain areas, real estate trading decreased 37% YoY in 2008. The trend continued in the first two quarters of 2009 with trading reportedly down 5.8% and 2.3% in 1Q09 and 2Q09, respectively.
Private housing, investment transactions report a sequential increase in 2Q09 Global reports a net operating loss of KWD 40.75 million in 2008
Real estate trading (KWD Billion)
0
1,000
2,000
3,000
4,000
5,000
2003 2004 2005 2006 2007 2008
Change in Real estate trading (YoY)
-36.0%
-18.0%
0.0%
18.0%
36.0%
54.0%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09
Source: Estate Registration & Authentication Dept. Ministry of Justice Private housing transactions increased 5.1% sequentially to KWD 180.46 billion in 2Q09 as transactions increased from 738 in 1Q09 to 834 for the quarter. This also represents a reversal in the trend as private housing transactions reported a 12.4% sequential decline in 1Q09 to KWD 171.67 billion. Furthermore, real estate investment transactions increased 3.7% sequentially to KWD 149.04 billion as the market regained confidence and looked for promising real estate opportunities. However, total commercial real estate trading dropped remarkably by 45.9% sequentially to KWD 81.74 billion due to the inability of some companies to pay off their debts and shortage of cash to finance existing projects. The global economic downturn continues to negatively impact the Kuwaiti real estate sector with reduced transactions and weakening real estate prices. On the other hand, the Kuwaiti government remains committed to adopting measures to minimise the impact and bail out the economy from the economic crisis. The government has set up the Real Estate Clearing Company (RECC) to highlight the problems in the real estate market, to improve regulatory clarity and extend quality market information. Moreover, to reduce inflation the government has also implemented a new regulation, which refrain investment companies from trading in residential properties. In addition, the central bank has also implemented other regulations that limit monthly interest and repayment instalments for private borrowers seeking a new loan to the equivalent of 40% or less of their salaries compared to the previous ceiling of 50%, which further affect property sales. Going forward, even though the short-term outlook for the sector looks weak on declining prices and demand, infrastructure spending lined up for the sector and government’s bid to diversify the economy from its oil-dependence promises hope in the long-term. Financial Performance – FY 2008 Revenues Global reported a net operating loss of KWD 40.75 million compared to a net operating income of KWD 154.37 million in 2007 taking a severe blow from the weak financial markets towards the second half of 2008. The company incurred a net loss of KWD 58.99 million on financial assets held for trading compared to a net gain of KWD 19.74 million in 2007. Furthermore, net loss on financial assets designated at fair value amounted to KWD 60.01 million as against a net gain of KWD 56.10 million in 2007. The company also reported a loss of KWD 6.47 million on disposal of associate in 2008 as against a gain of KWD 5.58 million in the previous year. In addition to this, the company’s net operating loss was further increased by a decline of KWD 13.90 million in the fair value of derivative financial instruments during the year. However, these declines were somewhat offset by an increases in fees & commission income, interest & similar income, share of results of associates and net gain on investment properties. Fees & commission income increased 69.2% to KWD 51 million during the year benefiting from higher management fees on assets under management and investment banking & advisory fees. While management fees on assets under management increased 13.6% to KWD 19.16 million in 2008, investment banking & advisory fees rose approximately four-fold to KWD 24.95 million during the year. Furthermore, interest & similar income increased 56.4% to KWD 19.47 million as against KWD 12.44 million in 2007 mainly on better yield on cash & cash equivalents, loans & advances and financial assets. The company also benefited from a little over four-fold increase in net gain on investment properties to KWD 12.00 million and an 83.6% rise in share of results of associates to KWD 7.49 million during the year.
Expenses Global’s total expenses decreased 17.2% to KWD 20.35 million compared to KWD 24.58 million in 2007 mainly led by a significant dip in personnel expenses. The success of company’s efforts aimed at reducing its operating cost base was reflected in a 55.2% decline in personnel expenses to KWD 6.51 million during the year. It has envisaged a 20% reduction in its operating costs by decreasing its workforce by 10%, scaling back salaries and cancelling bonuses. However, the company did witness a 27.8% rise in other operating expenses to KWD 11.93 million in 2008 mainly on account of its expansion initiatives. Provisions The companies generating income primarily through investments have suffered the most from the global economic downturn in terms of heavy losses and reduced yield. Moreover, the global economic downturn has raised serious doubts on the quality of assets and future of investments. This has, in turn, necessitated higher provisions to cover up for the losses that might occur in future along with booking impairment charges. Global realised an amount of KWD 152.92 million as impairment of other financial assets & intangibles during 2008. In addition to this, the company also incurred KWD 7.51 million as impairment charge for credit losses. Profitability Global reported an operating loss of KWD 61.10 million compared to an operating income of KWD 129.80 million in 2007 primarily on account of weak top-line performance during the year. Further, the company’s interest & similar expenses also went up 12.9% to KWD 38.86 million compared to KWD 34.42 million in 2007 due to expansion of its interest bearing liabilities portfolio. This along with higher impairment charges resulted in a net loss of KWD 257.65 million compared to a net profit of KWD 91.37 million in 2007. Adjusted loss per share (LPS) was reported at KWD 0.095 compared to an EPS of KWD 0.034 in 2007.
Net Operating Income/ (Loss) and Net profit (KWD Million)
-300
-200
-100
0
100
200
2006 2007 2008
Net Operating Income/ (Loss) Net Profit
Source: Global
Global reports net loss of KWD 258 million in 2008 on account of impairment charges
-60
0
60
120
180
2006 2007 2008 1H08 1H09
Total Operating Income (KWD Million)
-300
-200
-100
0
100
2006 2007 2008 1H08 1H09
Net Profit (KWD Million)
-
300
600
900
1,200
1,500
2006 2007 2008 1H08 1H09
Total Assets (KWD Million)
-5%
0%
5%
10%
15%
2007 2008 1H08 1H09
Return on Average Assets (RoAA)
-
160
320
480
640
800
2006 2007 2008 1H08 1H09
Shareholders' Equity (KWD Million)
-5%
0%
5%
10%
15%
2007 2008 1H08 1H09
Return on Average Equity (RoAE)
Chart Gallery
Size of the Company The salient features of the balance sheet are:
Global’s total assets declined a substantial 27.1% to KWD 1,011.25 million during 1H09 compared to KWD 1,386.46 million in the comparable period of the last year led by declines in financial assets, murabaha receivables and investment properties, partially offset by an increase in property under development, other assets and loans & advances.
During 1H09, Global’s financial assets held for trading declined 75.7% to KWD 24.81 million as
against KWD 102.26 million in 1H08 on weak financial markets. The share of financial assets in the total assets base also decreased to 2.5% from 7.4% in 1H08. Similarly, financial assets designated at fair value declined 62.8% to KWD 278.96 million in 1H09 as against KWD 750.18 million during the comparable period last year. Accordingly, its share in the total assets decreased to 27.6% from 54.1% in 1H08.
Murabaha receivables declined 68.8% to KWD 11.68 million in 1H09 compared to KWD 37.42
million in the previous year. Its share in the total assets base also declined from 2.7% to 1.2%. The company’s carrying value of investment properties declined 52.9% to KWD 44.43 million from KWD 94.33 million in 1H08. Accordingly, its share in the total assets also dipped to 4.4% during the first half of 2009 from 6.8% in 1H08.
However, these declines were partially offset by a nearly four-fold increase in property under
development to KWD 38.68 million, representing 3.8% of the total assets base in 1H09. Further, loans & advances also increased 32.2% to KWD 41.11 million compared to KWD 31.11 million in 1H08 taking its share in total assets to 4.1% from 2.2% in 1H08. In addition, others assets increased 21.7% to KWD 173.57 million as against KWD 142.67 million in 1H08 on account of rise in deposits and prepayments & other receivables. Its share in the total assets rose from 10.3% in 1H08 to 17.2% in the first half of 2009.
Total liabilities, representing 70.9% of the total balance sheet size, increased 8.2% to KWD 717
million compared to KWD 662.92 million in 1H08 as declines in wakala payables, medium-term borrowings and other liabilities were offset by a rise in short-term borrowings and bonds. Wakala payables declined 58.2% to KWD 46.82 million, while medium-term borrowings were lower by 92.5% at KWD 6.18 million. Other liabilities representing 5.4% of the total balance sheet size, decreased 32.6% to KWD 54.57 million during the first half of 2009. However, these were offset by a 57.6% rise in short-term borrowings to KWD 508.77 million compared to KWD 322.86 million in 1H08. Accordingly, its share in the total balance sheet increased from 23.3% to 50.3% in 1H09. The value of bonds also rose 54.9% to KWD 100.66 million, thereby taking its share in the total balance sheet to 10%.
Global’s shareholders’ equity declined a massive 69.2% to KWD 212.97 million in 1H09 from
KWD 690.83 million in the same period of the last year on account of higher retained losses and write-offs of reserves and share premium. Global’s share premium reserve declined 41.9% to KWD 230.32 million on account of write-offs to the tune of KWD 166.76 million to cover for the losses incurred by the company. Similarly, the general and statutory reserve amounting to KWD 55.53 million was written-off. In addition, the company’s shareholders’ equity was also negatively impacted by the accumulated losses worth KWD 98.57 million compared to the retained earnings of KWD 117.60 million in 1H08. However, the impact was partially negated by a write-off of KWD 222.29 million in 1H09.
Financial Performance Analysis – 1H09 Global witnessed a weak 1H09 as the extended economic crisis continued to negatively impact its investments portfolio. The company reported a net operating loss of KWD 45.60 million compared to an operating income of KWD 115.67 million in 1H08 led by declines across all the functional units including fees & commission, interest & similar income, share of results of associates, foreign exchange losses and losses on financial assets. The company’s fees & commission income was down 53.2% at KWD 11.71 million compared to KWD 25.04 million in the same period of the last year. In addition, interest & similar income decreased 81.3% to KWD 2.65 million during the first half. The company also incurred net loss to the tune of KWD 5.02 million and KWD 4.33 million on financial assets held for trading and designated at fair value, respectively. The company shared KWD 29.41 million as losses compared to a profit of KWD 1.31 million in 1H08 on account of its associates. Further, Global also witnessed a net loss of KWD 15.54 million on investment properties compared to a net gain of KWD 7.78 million in 1H08. Foreign exchange losses also stood at KWD 9.71 million for the first half as against KWD 4.31 million in 1H08. The company’s impetus on cost containment was reflected in 1H09. The company’s total expenses decreased 1.8% to KWD 14.12 million compared to KWD 14.38 million in 1H08. Most noteworthy was the substantial 53.3% decline in personnel expenses to KWD 4.55 million compared to KWD 9.73 million in 1H08. However, other operating expenses more than doubled to KWD 8.38 million compared to KWD 4.11 million on account of one-time costs related to the restructuring process and pertaining to the acquisitions made in 2H08. Despite reduction in total expenses, the company reported an operating loss of KWD 59.72 million compared to an operating income of KWD 101.29 million in 1H08. In addition, the company’s interest expenses rose 35.8% to KWD 20.49 million from KWD 15.09 million in 1H08. While impairment charge for credit losses stood at KWD 0.84 million, charge on financial assets accumulated to KWD 18.68 million during the first half of 2009. Consequently, Global registered a net loss of KWD 98.57 million compared to KWD 82.24 million in 1H08. Adjusted annualised LPS stood at KWD 0.072 compared to an EPS of KWD 0.060 in 1H08. As a result of net loss, the company registered a negative annualised RoAE of 76.3% as against a positive 32.4% in 1H08. The company generated a negative RoAA of 8.7% in 1H09 as against a positive 7.2% in 1H08.
Net loss at KWD 99 million in 1H09
Peer Comparison In order to do a peer comparison, we have taken comparable companies engaged in investment activities within Kuwait that includes International Financial Advisors (IFA), National Investments Company (NIC) and Global.
Peer Analysis (in KWD Million) IFA NIC Global 2008 1H09 2008 1H09 2008 1H09 Total Income/(Loss) -19.41 4.42 -9.28 3.76 -40.75 -45.60 % YoY Growth NA -86.5 NA -90.6 NA NA Total Operating Profit -44.05 -6.14 -20.23 1.53 -61.10 -59.72 % YoY Growth NA NA NA -95.6 NA NA Net Profit -65.12 -3.64 -20.73 1.46 -257.65 -98.57 % YoY Growth NA NA NA -95.6 NA NA Total Investments 93.79 102.66 191.61 184.39 489.75 362.44 % YoY Growth -61.6 -46.4 -23.8 -28.1 -13.1 -59.8 Total Assets 536.96 607.29 277.48 269.81 1,252.76 1,011.25
Shareholders' Equity 173.36 155.66 207.42 219.70 303.49 212.97 % YoY Growth -30.1 -32.1 -29.7 -32.8 -6.1 -69.2 Finance cost to interest bearing liabilities (%) 6.7 5.7* 7.6 6.1* 5.8 5.6* Operating expenses to income ratio (%) NA 239.1 NA 59.4 -50.0 -31.0 Total Investments to Assets Ratio (x) 0.17 0.17 0.69 0.68 0.39 0.36 Equity to Total Assets Ratio (x) 0.32 0.26 0.75 0.81 0.24 0.21 RoAA (%) -11.6 -1.3* -6.0 1.1* -23.8 -17.4* RoAE (%) -30.9 -4.4* -8.3 1.4* -82.2 -76.3*
Sources: Zawya, Global Investment House * Annualised
Streamlining management framework to enhance corporate governance Fast developments across various business lines
New Projects and Strategies In a bid to strengthen the company’s position and enhance stakeholders’ value in the prevailing difficult times and beyond, Global is taking various steps. Global started implementing its future strategy and announced to focus and continue to develop its fee-generating lines of businesses, namely asset management, investment banking and brokerage, as these emerged to be the company’s core strength. Apart from this, Global is continuously taking initiatives to reduce expenses. In the first half of 2009, the company reduced its personnel expenses by 53.3% compared to the same period last year by decreasing its workforce, scaling back salaries and cancelling all 2008 related bonus payments. Further, its staff costs declined by 14.6% during 2Q09 and other operating costs declined 11.2% as compared to 1Q09 as a result of continued cost rationalization efforts. However, in April 2009, the group decided to reinstate 75% of the amount it had planned to cut from the salaries of its employees. In March 2009, Global restructured its management framework to enhance corporate governance. Alongside, the company has also set up a new IT system designed to improve performance and serve clients more efficiently. It has invested in IT infrastructure, specifically in the data processing system to enhance the flexibility in reporting. The company selected Prospero as its new platform for portfolio management, treasury, fund administration and CRM. This is provided by SAGE - a Swiss IT firm and the implementation and roll-out is being done and divided into four phases over 18 months. Further, in a bid to offer more value-added services to complement the existing products, Global announced to introduce a new Account Statement at the beginning of August 2009. The new Account Statement is designed to provide clients with easier to read and more comprehensive information on their portfolio with the company. In December 2008, Global defaulted on the repayment of a syndicated facility triggering cross-default provisions in the group’s other debts. On December 18, 2008, it appointed HSBC bank as financial advisor to renegotiate the existing credit facilities’ terms with the lending bank group. Recently, Global revealed plans to ink a debt rescheduling agreement with more than 90% of its creditors to extend payments for five more years. The company presently owes local and international banks as much as USD 2 billion for which it is planning to sign an agreement by September this year. Despite such difficulties, in June 2009, Global announced plans to launch a SAR 500 million fund to invest in the Saudi Arabian real estate sector by next year with duration of 3 to 5 years. The expected annual return on investment for the fund is estimated at around 20%. Furthermore, the company is also planning for a 114.3% rights issue that will increase its capital, which had decreased as a result of write-offs. Meanwhile, Planet Pharmacy, a joint venture between UAE-based Gulf Pharmaceuticals Industries (Julphar) and Global Opportunistic Fund II & Affiliates announced that it is all set to launch 250 pharmacies across the UAE and more than 500 in Saudi Arabia by 2012, making it the largest pharmacy chain in the Middle East. In July 2009, the company acted as the financial advisor to Zain Group in a share-swap deal between Zain and Palestinian Telecommunications Co. (Paltel). In the previous month, Global in Jordan inked a financial advisory mandate with the Middle East Complex for Engineering, Electronics & Heavy Industries PLC (MECE). As per the deal, it will act as an advisor for the merger transaction between MECE and the National Integrated Industries Complex Co. (NIIC), which is considered one of the largest in the Middle East in the field of electronics. During March 2009, Global received approval from the Ministry of Commerce and Industry to issue and sell a bond worth KWD 24 million in a public offering on behalf of Al Arabiya Real Estate Co. The bond with a maturity period in 2013 is convertible into 4,800 individual bonds at KWD 5,000 each. Subsequently, in April, Global sold 32.66 million of its shares in Al Arabiya Real Estate Co. for KWD 2.12 million and sold a 7.3%-stake in Kuwait Business Town Holding Co. to Al Zumorroda Holding Co.
SWOT Analysis
THREATS
If the negative trend in the financial markets continue, investments may take a hit resulting in huge losses and higher impairments Deteriorating real estate scenario may result in massive write downs Any further debt defaults may spoil the company’s repute in the market
OPPORTUNITIES
Focus on diversifying towards a non-oil economy to provide opportunities of investments Government’s initiatives to inject liquidity in the economy to act as catalyst for growth
WEAKNESS
Exposure to investments in a weak financial market Higher impairment losses amid declining capital markets may affect the company’s profitability International rating agency, Fitch withdrew its rating coverage on the company
STRENGTHS
Wide presence across financial services including asset management, investments and treasury Wide geographical foot print with operations in 16 countries One of the largest asset management businesses in the region with total AUM of KWD 2.07 billion
Risks and Concerns
Depressed by severe liquidity crunch, plummeting equity markets, eroding property valuations and rising NPLs, 2009 will continue to be a tough year for financial institutions in the region
Over exposure to investment in securities and financial instruments in a weak financial market
pose liquidity risks
The current economic downturn has led to a liquidity crunch across economies in the GCC with lower oil prices proving detrimental to the budget surpluses enjoyed by them. The dearth of liquidity has forced the central governments to curtail/postpone their ambitious infrastructure expansion plans. The slow economic growth has negatively impacted the demand across the real estate and construction sectors. Going forward, if the economic growth remains weak, companies engaged in real estate activities might face restrained bottom-line growth.
Cost of Equity: 12.77%
Valuation Methodology: We have used two valuation methods for arriving at the fair value of Global, as explained below:
I. Target P/BV approach based on the Gordon Growth Model (GGM) II. Comparative P/BV method
Target P/BV Multiple Approach using the Gordon Growth Model (GGM) The model uses the sustainable return on average equity (RoAE), cost of equity (Ke) and expected growth in earnings (g) to arrive at the target P/BV of the company under review using the formula:
Target P/BV = (RoAE - g) / (Ke - g) Subsequently, we have multiplied the target P/BV multiple for 2009E with the 2009E BVPS to arrive at the fair value of the company over a medium-term investment horizon. We have made the following assumptions to arrive at the target P/B multiple for 2009E of the company:
i. For sustainable RoAE, we have considered the 3-year average RoAE of the company over 2011E-2013E.
ii. We have estimated the cost of equity using Capital Asset Pricing Model (CAPM):
a. Risk free rate of return (Rf) of 3.22%, which is 12-months average yield on 10-year US T-bill.
b. Cost of Equity – 12.77%
iii. We have assumed a terminal growth rate (g) of 2.00%.
GGM Valuation Summary Sustainable RoAE (%) 12.76 Cost of Equity (Ke) (%) 12.77 Perpetual Growth Rate (%) 2.00 Target P/BV Multiple for 2009E (x) 1.00 2009E BVPS (KWD) 0.112 Fair Value per Share using Target P/BV (KWD) 0.112 CMP (KWD) 0.110 Upside/(Downside) 1.7%
*No. of shares considered for valuation equivalent to 2.723 billion includes effect of rights issue Sensitivity Analysis The tables below exhibits the sensitivity analysis for the estimated fair value per share based on various terminal growth rates, cost of equity and RoAE. The shaded area represents the most probable outcomes.
Comparative P/BV Multiple Based Valuation Summary Global’s 2009E BVPS (KWD) 0.112 Target P/BV (x) 0.79 Fair Value per Share using Target P/BV (KWD) 0.089 CMP (KWD) 0.110 Upside/ Downside(-) -19.2%
Banks
Outstanding Shares
(Millions) CMP# (KWD)
Market Capitalization (KWD Millions) P/BV (x)
International Financial Advisors 720 0.136 98 0.63 Gulf Investment House 442 0.102 45 0.74 Global Investment House 1,223 0.110 135 0.68 International investment group 457 0.089 41 0.72 KIPCO Asset Management Co. 263 0.495 130 1.41 Jeeran Holding Co. 143 0.160 23 0.93 Kuwait Investment Co. 525 0.142 75 0.61 Aref Investment Group 1,061 0.174 185 0.63 Average P/BV 0.79 Source: Zawya #CMP as on August 24, 2009
Weighted Average Fair Value On an equal weight basis (GGM – 50% and comparative P/BV – 50%), we have arrived at a final fair value of KWD 0.100 for Global, which provides a downside of 8.8% from its current market price of KWD 0.110 (as on August 24, 2009).
Investment Opinion Kuwait’s economy is mainly dependent on hydrocarbon-related activities, which accounted for 56.8% of the country’s nominal GDP and contributed 94.9% to the total export earnings during 2007. As a result of high oil prices and subsequent economic development, the country’s real GDP grew at an average rate of 7.1% over the period 2004-2007 and is estimated to grow by 6.3% in 2008. However, with the impending global economic crisis and declining oil exports, the growth in the country’s real GDP is expected to contract by 1.1% in 2009 before recovering to 2.4% in 2010. In addition to this, the budget deficit is also likely to be around KWD 4.8 billion for 2009/10. The once upbeat investment sector buoyant with rise in credit facilities and investments given the ample liquidity and rising money inflow on high oil prices seems to be badly hit by the economic crisis. The contraction expected in the GDP growth of Kuwaiti economy along with lower budget allocation is expected to keep the investments as well as the infrastructure-development activities at a relatively slower pace. In addition, a direct implication of the economic crisis was witnessed on the capital markets, which remained weak and generated negative returns. This resulted in huge investment losses and impairment charges for the companies having large exposure to investments. The investment companies also reported a significant depletion of assets as write-offs became more common. In the first five months of 2009, total assets of investment companies were down by 4.4%. At the same time, the real estate sector has also been feeling the heat of the economic crisis, with several projects being put on hold or cancelled on liquidity crisis and reduced demand and price level. With a decline in property prices, companies having exposure to real estate witnessed a significant downward revision in fair value. However, on a positive note, the government remains focused on reviving the economy through much needed regulations and bail-outs. In order to revive the real estate sector, it has set up the RECC to highlight real estate problems and improve regulatory clarity. Further, even though the long-term drivers of the sector looks promising on investments to the tune of USD 266.99 billion across a variety of projects, a cautious approach is recommended until the economic recovers from the downturn. Global’s financial performance suffered a big blow in 2008 and 1H09 on account of negative impacts of the financial crisis. The company’s investments resulted in recognition of impairments to the tune of KWD 160.43 million in 2008. Accordingly, the company reported losses of KWD 257.65 million in 2008 for the first time since it was incorporated. The company’s shareholders’ confidence also received a severe blow, when it defaulted on the repayment of a syndicated facility triggering cross-default provisions in the group’s other debts in December 2008. Moving into 2009, the company exhausted its reserves in order to write-off its losses. However, more positively, the company continues to move on with its debt restructuring efforts. It has already appointed HSBC as the financial adviser to renegotiate the existing credit facilities’ terms with its lenders. Moreover, Global is also planning to sign an agreement with the lenders that will provide it with extended time period to repay its debts. The bank has also been keen on reducing its operating costs by restructuring its employee-related costs. Consequently, in 1H09, the company was able to reduce its personnel expenses by 53.3% by decreasing its workforce, scaling back salaries and cancelling all 2008 related bonus payments. Also, the company continues to move on with its expansion initiatives, and exit unprofitable businesses. The planned capital raise through 114.3% rights issue is likely to provide support to the company’s future expansion plans. Despite all these, a complete revival is ruled out in the near term as revamping the company’s fundamentals might take time. Given the current scenario and problems, the company is engulfed with, we recommend an exit strategy. Currently, Global’s stock is trading at negative P/E multiples of 1.75x and 5.99x on 2009E and 2010E losses, and at a P/B multiple of 0.98x and 1.18x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has declined 42.7% since the beginning of this year as against a gain of 1.5% by the Kuwait Stock Exchange. Considering the above factors, we arrive at a price target of KWD 0.100, which exhibits a potential downside of 8.8% from its closing price of KWD 0.110 (as on August 24, 2009). Accordingly, we initiate our coverage on Global Investment House with an UNDERWEIGHT recommendation.
Common-Size Consolidated Income Statement 2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Fees and commission income 19.5% -125.2% 21.6% -25.7% -27.6% 194.2% 25.7% Interest and similar income 8.1% -47.8% 12.3% -5.8% -6.5% 39.4% 5.9% Net (loss) gain on financial assets held for trading 12.8% 144.8% -3.5% 11.0% 13.0% -47.0% 5.7% Net (loss) gain on financial assets designated at fair value through income statement 36.3% 147.3% 51.6% 9.5% 11.0% -72.7% 6.0%
Net gain on financial assets available for sale 0.0% -4.1% 1.6% -9.4% -9.7% 69.4% 10.5% Share of results of associates 2.6% -18.4% 1.1% 64.5% 75.3% -114.1% 33.6% Net gain on investment properties 1.9% -29.4% 6.7% 34.1% 37.6% -30.9% 4.8% Loss on disposal of property under development 0.0% 0.0% 0.0% 11.9% 6.3% 0.0% 0.0% (Loss)/ gain on disposal of associates 3.6% 15.9% 4.1% -1.4% -0.7% 0.0% 0.0% Gain on disposal of subsidiaries 12.3% -5.9% 0.0% 0.0% 0.0% 0.0% 0.0% Change in fair value of derivative financial instruments 0.0% 34.1% 0.0% -1.4% -0.7% 0.0% 0.0%
Foreign exchange losses -2.7% 10.5% -3.7% 21.3% 11.3% 0.0% 0.0% Other operating income 5.6% -21.8% 8.0% -8.5% -9.3% 61.8% 7.8% Net operating (loss) income 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Personnel expenses -9.4% 16.0% -8.4% 10.0% 10.5% -68.0% -10.8% Depreciation of property and equipment -0.5% 4.7% -0.5% 2.6% 2.4% -17.0% -2.2% Other operating expenses -6.0% 29.3% -3.5% 18.4% 20.4% -130.0% -16.5% Total expenses -15.9% 50.0% -12.4% 31.0% 33.3% -215.0% -29.5% Operating profit 84.1% 150.0% 87.6% 131.0% 133.3% -115.0% 70.5% Interest and similar expenses -22.3% 95.4% -13.0% 44.9% 46.1% -261.4% -35.4% Impairment (charge)/ reversal for credit losses 0.1% 18.4% 0.1% 1.8% 1.0% 0.0% 0.0% Impairment of other financial assets and intangibles 0.0% 375.3% 0.0% 41.0% 21.7% 0.0% 0.0%
(Loss)/ Profit before taxation and director's fees 61.9% 639.0% 74.6% 218.7% 202.1% -376.5% 35.2%
Taxation -2.0% 0.0% -3.2% 0.0% 0.0% 0.0% -1.1% Directors’ fees -0.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% (Loss)/ Profit for the year 59.8% 639.0% 71.4% 218.7% 202.1% -376.5% 34.0% Attributable to: Equity holders of the parent company 59.2% 632.3% 71.1% 216.2% 199.8% -372.1% 33.6% Minority interests 0.6% 6.7% 0.3% 2.5% 2.4% -4.4% 0.4%
Financial Ratios
2007A 2008A 1H08A 1H09A 2009E 2010E 2011E Margins and Profitability Ratios: Total Expenses to Net Operating Income/ (Loss) 15.9% NA 12.4% NA NA 215.0% 29.5% Finance Cost to Average Interest Bearing Liabilities 7.2% 5.8% 5.4% 5.6% 5.6% 5.8% 6.0% Return on Average Equity (RoAE) (%) 32.2% -82.2% 32.4% -76.3% -56.4% -17.9% 13.8% Return on Average Assets (RoAA) (%) 11.4% -23.8% 14.3% -17.4% -14.9% -4.9% 3.4% Leverage Ratios: Shareholders' Equity to Total Assets Ratio (x) 0.35 0.24 0.50 0.21 0.29 0.25 0.24 Total Liabilities to Total Assets Ratio (x) 0.64 0.73 0.48 0.71 0.63 0.66 0.67 Total Investments to Total Assets Ratio (x) 0.62 0.39 0.65 0.36 0.35 0.33 0.34 Investment in Associates to Total Assets Ratio (x) 0.10 0.22 0.04 0.21 0.22 0.21 0.21 Growth Rates: % YoY Growth in Net Operating Income 39.9 NA 57.3 NA 110.9 NA 737.2 % YoY Growth in Operating Profit 35.6 NA 55.3 NA 87.4 -86.5 NA
% YoY Growth in Net Profit 27.9 NA 76.2 NA -33.4 -70.9 NA % YoY Growth in Total Assets 32.0 37.2 64.9 -27.1 -16.1 -4.1 19.8 % YoY Growth in Shareholders' Equity 32.2 -6.1 150.9 -69.2 0.5 -16.4 14.8
Ratios used for Valuation: Adj. EPS (KWD) 0.034 -0.095 0.060 -0.072 -0.063 -0.018 0.014
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