Board of directors report

Dear shareholder,

The world economy continues to struggle to gain equilibrium, with lower growth rates recorded for many oil exporters, emerging markets and developed countries. Oil prices, which have declined to new historical lows at the end of 2015, are expected to remain low for a considerable period of time. Historically, low oil prices sustained over extended periods of time have been followed by a slow recovery of the global economy. For oil importing countries, fiscal deficits have declined but the benefits from low oil prices have yet to materialize. By contrast, the negative impact of the sharp plunge in oil prices on oil exporting countries has been immediate.

In Kuwait, the decline in oil prices is expected to push the State’s fiscal position into a deficit in 2016. H.H. the Amir of Kuwait recently urged the government and parliament to “take urgent reform measures” in light of a 60% drop in State revenue in 2015.

If the government’s infrastructure projects are to proceed without halt, these fiscal constraints are likely to lead to an increased reliance on partnerships between the public and private sector. KIPCO’s core businesses will benefit from such projects.

At last year’s Shafafiyah Investors’ Forum, we set an objective of doubling our 2014 profit by the year 2018. We are delighted to report that we are on track to meet this target; our profit for 2015 is at KD 53.03 million (US$ 175 million) – a 15% increase on 2014. This result makes 2015 our twenty-fourth year of consecutive profitability.

Your company’s total revenue from continuing operations for the year increased 4% to KD 621 million (US$ 2.1 billion) from KD 598 million (US$ 2 billion) in 2014. Subject to approval by our General Assembly, we are proposing to pay shareholders a cash dividend of 25 fils (25%) per share.

A major business highlight for your company during 2015 was the announcement of KIPCO’s plans for the commercial and residential real estate development project, valued at approximately US$ 2.5 billion, that will be constructed in Daiya. The development project, which will be jointly constructed by United Real Estate and other entities, will have a built up area of 380,000 sq.m. Different Group businesses, including banking and insurance, will also be playing a role in this development project. It will include residential and commercial units, as well as infrastructure such as parks, walkways and roads. Infrastructure work is expected to begin in the second quarter of this year.

Another highlight for 2015 was the purchase of a 51% stake of Jordan Kuwait Bank (JKB) by KIPCO Group from Burgan Bank. The transaction, a testament to KIPCO’s flexibility in supporting its core operations, has further raised Burgan Bank’s capital adequacy under Basel III and will allow it to continue to execute its strategy and long-term plan for building shareholder value.

Despite regional tension, Burgan’s network continues to deliver strong performance and the bank is expected to deliver good levels of return on shareholder’s equity in 2016.

For OSN, the past 12 months have seen a revenue increase by 11%. The pay-TV company secured a US$400 million syndicated loan, reflecting the financial community’s confidence in OSN’s business prospects. The loan aimed at strengthening OSN’s exclusive and premium content, and to develop innovative technology platforms that enhance viewer experience using technology that is on par with the best in the world, and offering content that is more comprehensive than that of any other pay-TV business.

During 2015, OSN signed an exclusive five-year agreement with Warner Brothers, and strengthened its partnerships with global networks channels such as HBO and WWE, thus continuing to deliver on its promise of bringing exclusive content to its subscribers in the MENA region.

In its continuing battle against piracy, OSN worked closely with authorities across the region to close down illegal television operators, thereby ensuring that people involved in the creation of television content get rewarded for their work. This, in turn, contributes to the growth of the regional production market and the artists themselves.

The year 2015 saw further strengthening of Gulf Insurance Group’s operations. At the end of the year, GIG was awarded the Kuwaiti Health Ministry’s tender for providing health insurance to retirees, worth KD 82.48 million (US$ 271 million) per year in premiums. GIG will be working closely with government entities to close this deal in early 2016. In terms of its network, four of the Group’s companies – in Kuwait, Bahrain, Jordan and Egypt – rank first in their markets.

Following the launch of its Wealth Management Division, TAKAUD signed a business partnership agreement with the Swiss private bank, Mirabaud. The partnership enhances TAKAUD’s investment platform with the addition of a range of some of the top-performing funds from the Swiss bank. In 2015, TAKAUD continued to build on its wealth management portfolio, offering its affluent clients more diverse investment options.

In preparation for the implementation of the corporate governance framework of the Capital Markets Authority, set for mid-2016, KIPCO has continued to upgrade its existing corporate governance structure. As such, we have taken steps to formalize the Board of Directors Charter, alongside policies related to shareholder and stakeholder rights. This is in addition to the committees established over the last two years.

We look to 2016 with caution. Forecasts for the next 12 months have described global economic growth as disappointing and uneven due to the hike in US interest rates and the economic slowdown in China. In the MENA region, economic growth has stagnated and low oil prices, political turmoil and the global economic slowdown mean that short-term prospects of recovery are unlikely.

We anticipate these conditions will affect the economic outlook for 2016 across the MENA region. As a result, during the next twelve months, greater efforts will be made to further consolidate and integrate our businesses. This may reflect on our profit expectation for 2016. However, we are confident that our core sectors will continue to grow and the fruits of these efforts will be reaped in 2017. KIPCO continues to pursue its target of doubling its 2014 profits by 2018 with conviction.

We thank His Highness the Amir of the State of Kuwait, Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, His Highness the Crown Prince, Sheikh Nawaf Al-Ahmad Al-Jaber Al-Sabah, and His Highness the Prime Minister, Sheikh Jaber Al-Mubarak Al-Hamad Al-Sabah, for their continued support and guidance.

We would like to thank you, our shareholders, for the support and trust you have placed in your Board of Directors and management during the last 12 months. We would also like to thank all the employees of KIPCO and its operating companies for the contribution they made during the year.

On behalf of our shareholders, we thank the management for the results they achieved during 2015.

May God continue to grant us success and prosperity.

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