Management report

Dear shareholder,

The last twelve months saw a global trade slowdown, and with the appreciation in the value of the US dollar, borrowing costs have tightened in emerging markets. The World Bank is forecasting a drop in global economic growth from 3% in 2018 to 2.9% in 2019 owing to softened international trade and manufacturing activity, elevated trade tensions and financial market pressures in some of the large emerging markets.

In the MENA region, growth is forecast to rise slightly to 1.9% in 2019, as a less favorable international economic environment is expected to be offset by policy reforms in both oil exporting and importing countries, thus supporting growth in the region.

The year 2018 was one of recovery for oil exporting countries, owing to relatively high oil prices for most of the year. US sanctions on Iran led to a boost in oil prices, coupled with a drop in Venezuelan exports, bringing the price of the barrel to the highest it has been in four years. However, a decline in oil prices began in October 2018, after oil production was raised in the US, Russia and Saudi Arabia.

In the GCC, regulatory improvements and larger investments will support higher growth in the member states in 2019. Investments in infrastructure projects, economic and financial reform, and revenue diversification programs are expected to help maintain a steady economic growth.

In Kuwait, of the KD 4 billion allocated for development projects in 2018, only KD 1.6 billion were awarded due to the restructuring of some government agencies, delays in implementation of megaprojects, among others. Delayed projects are expected to be rescheduled, and that the awards would pick up in order for the ‘New Kuwait’ Vision 2035 to continue on course.

For KIPCO Group, 2018 was a year where our companies continued to face headwinds and weather the storm. Despite this, the performance of our core companies has exceeded our expectations, and we are delighted to announce that 2018 is KIPCO’s twenty-seventh year of consecutive profitability.

While we look to 2019 with caution, we remain confident that our companies have built up the strength they require to withstand these difficulties, thanks to the prudent measures we have taken over the years at the hands of our experienced executive team.

Our 2018 results

At last year’s Shafafiyah Investors’ Forum, we foresaw that our 2018 performance would not be much different from that of the previous year, and we attributed this to a growth slowdown in the GCC and lower purchasing power among consumers, resulting in the creating of a weak operating environment. We also identified growing competition, particularly in the media sector, to result in cost increases.

Despite these challenges, I am delighted to report that we succeeded in achieving a net profit of KD 28.3 million (US$ 93.3 million), an increase of 20% from the KD 23.6 million (US$ 77.8 million) in 2017.

KIPCO’s earnings per share increased to 15 fils (US$ 4.9 cents) compared to 11.5 fils (US$ 3.8 cents) reported in 2017. Total revenue from continuing operations in 2018 increased by 13 per cent to KD 774 million (US$ 2.55 billion) compared to the KD 686 million (US$ 2.26 billion) reported in 2017, and the company’s consolidated assets stood at KD 10.4 billion (US$ 34 billion), compared to KD 10.3 billion (US$ 34 billion) reported at year-end 2017.

Core operations

During 2018, our core operating companies largely met, and in some cases exceeded, our expectations: Burgan Bank reported a strong net income growth of 26.6% to KD 82.6 million (US$ 272.3 million), and an operating income increase of 10.8% to KD 265.3 million (US$ 874.7 million). Gulf Insurance Group’s gross written premiums grew 10% to KD 335.7 million (US$ 1.1 billion).

Meanwhile, United Real Estate’s total operating revenue increased 19% to KD 103.5 million (US$ 341.2 million), while United Industries Company’s net profit reached KD 5.2 million (US$ 17.1 million), bringing total assets up 5.3% to KD 258.1 million (US$ 850.9 million).

Over the past twelve months, Burgan Bank continued to deliver solid financial performance thanks to improved yields supported by the hike in interest rates and the increased contributions from the bank’s international franchises. The 26.6% and 10.8% increases in Burgan Bank Group’s net income and operating income respectively reaffirm the bank’s focus on generating shareholder returns through optimal use of resources. Earnings per share grew 28.1% to 31 fils, with return on shareholders’ equity up from 8.3% at the end of 2017 to 10.7% at 2018 year-end.

In April, Burgan Bank’s DIFC office awarded facilitations of US$ 40 million to the Dubai-based Omniyat Real Estate Company to finance the construction of the residential and commercial twin towers, Sterling.

During the fluctuation of the Turkish Lira, Burgan Bank’s operations in Turkey suffered no major impact. Thanks to the strategic decision to fully hedge the bank’s investments, operations in Turkey continued to run smoothly with no interruptions.

Burgan Bank announced it had completed a rights issue in October, raising KD 62.55 million of equity through the issuance of 240.58 million shares – an increase of 10.6% in issued share capital. The net proceeds of the rights issue were used to further strengthen the bank’s capital position, and for general corporate purposes.

In December, the bank successfully issued bonds worth KD 100 million in the local market. The private placement transaction, the first of its type by a Kuwaiti bank in the local market, was oversubscribed and well-received by investors. The issuance is in line with the bank’s ongoing strategy to diversify its sources of funds, support the bank’s balance sheet with secure long-term funding, and meet regulatory liquidity requirements.

Also this year, Burgan Bank announced the appointment of Mr Raed Al Haqhaq to the position of CEO of its Kuwait operations. In addition to his duties, Mr Al Haqhaq was named Acting Group CEO at year-end.

In 2018, Gulf Insurance Group maintained its Group credit ratings. The Group’s net profit was up 18.2% in 2018 to KD 11.9 million (US$ 39.2 million), while net underwriting income registered a 45.1% growth to KD 11.98 million (US$ 39.4 million). Shareholder’s equity increased by 9.2% to KD 89.1 million (US$ 293.7 million) and total assets were up 7.4% to stand at KD 529.3 million (US$ 1.74 billion).

For its Kuwait operations, the company’s contract with the Ministry of Health to provide health insurance services to retirees, ‘Afya’, was extended into 2019. GIG Kuwait remains the insurance company with the greatest resources for this contract, making it more likely to win the bid. The initial year-long deal, which kicked off in September 2016, offers services to some 117,000 retirees and was worth KD 82 million (US$ 270.4 million) per year in premiums.

Regionally, the Group maintained market leadership in Kuwait, Bahrain and Jordan in terms of gross premiums written, and in Egypt in terms of underwriting surplus. The Group’s stake in GIG – Iraq, Takaful International Company – Bahrain and GIG – Egypt Life Takaful was increased in 2018. In terms of performance, GIG – Jordan achieved a net profit of US$ 4.5 million, while GIG – Turkey increased its net written premiums by 44%. The company’s operation in Bahrain won a tender for insuring the largest construction project in the Kingdom at a total insured sum of US$ 5.5 billion.

For OSN, 2018 was a year of continued efforts to ensure that customers have access to view premium exclusive content, thus maintaining its position as the region’s leading entertainment network. To this end, OSN signed the Middle East’s first partnership deal with Netflix, the world’s leading internet entertainment service, making the platform and its content available to all OSN subscribers.

The pay-tv network signed an MoU with Huawei, such that the tech giant would provide the regional telecommunication companies with the appropriate infrastructure and technology to enable their customers to watch OSN programs online seamlessly.

Furthermore, OSN debuted the first season of its exclusive regionally-curated-content programing, ‘ASLI’, on its online platform, WAVO. The content hub showcases Arabic and English films and series created by the region’s most creative minds, further strengthening OSN’s commitment to enhancing the entertainment industry and enabling content creators in the Middle East.

In November, Partick Tillieux, a board member of OSN with experience in reshaping major television operations in Europe throughout his long career, was appointed CEO of the pay-tv network.

United Real Estate (URC), our real estate business, total revenue registered a 18.4% growth to KD 103 million (US$ 339.6 million), while shareholder equity increased 3.7% to KD 194 million (US$ 639.6 million) in 2018. In Kuwait, sales of residential units in the two high-rise Hessah Towers, located in Hessah Al Mubarak District, began. Talks are underway with operators of serviced apartment, clinics and food & beverage for different components of the development.

Through its affiliate, MENA Homes Real Estate, URC signed a financial facilitation contract with Kuwait Finance House worth KD 120 million (US$ 395.6 million) for the purpose of purchasing and developing land plots in Hessah Al Mubarak District. URC also issued a KD 60 million (US$ 197.8 million), five year bond.

In Jordan, URC completed a swap with Abdali Investment and Development Company, whereby URC Jordan now holds a 100% stake in Abdali Mall in Amman, and has exited from the Abdali Boulevard.

In Morocco, the concept design for the second phase of the Assoufid development was approved and infrastructure works are now in progress.

As for Jordan Kuwait Bank (JKB), the bank’s net profit more than doubled this year, rising 56% to JOD 42.1 million (US$ 59.4 million) by the end of 2018 from the JOD 27.0 million (US$ 39.0 million) reported in 2017. JKB’s revenue also saw a 7% increase from JOD 167.7 million (US$ 236.5 million) in 2017 to JOD 180.2 million (US$ 254.1 million).

Furthermore, JKB signed a strategic partnership with Al Quds Bank, whereby JKB’s branches in Palestine and its assets and liabilities are merged with Al Quds Bank. As part of the agreement, JKB acquired 10% of Al Quds’ capital.

During 2018, JKB implemented the Control Objectives for Information and Related Technologies (COBIT), an IT governance system, thereby ensuring that all associated policies, processes and procedures are aligned with requirements of the Central Bank of Jordan. The bank also launched its rewards smart phone application, ‘JKBRewards’, the first of its kind in Jordan.

Besides expanding and upgrading its ATM and branch network, the bank expanded its payment solutions and ATM services. Furthermore, JKB launched the state of art ‘Decision Intelligence’ MasterCard fraud management solution, and implemented the GOAML Anti Money Laundry and Siron Risk rating systems in Jordan and Cyprus, in line with compliance regulations.

Celebrating its twentieth anniversary in 2018, KAMCO purchased a majority stake in Global Investment House. The acquisition extended to Global’s existing investment products and services, managed real estate, asset management business, its brokerage subsidiary and physical infrastructure in Kuwait, as well as Global’s international offices. Advisors have been hired to explore options for a merger between the two investment entities.

Besides acting as joint lead manager for several important bond issuances of major market players, KAMCO issued its own bonds in 2018. The KD 40 million (US$ 131.8 millon), five-year bond was oversubscribed and witnessed the shortest subscription period for a KD denominated bond ever: three days.

For Qurain Petrochemical Industries, 2018 was a positive year. The company continued to raise its stake in NAPESCO – National Petroleum Services Company – to 51.48%. Towards the end of 2018, NAPESCO was awarded a contract by Kuwait Oil Company for hydraulic operations that enhance the production of oil wells. NAPESCO was also awarded a five-year KD 15 million (US$ 49.4 million) contract for well cementing and drilling support services by the Kuwait Gulf Oil Company and Saudi Arabian Chevron.

SADAFCO, QPIC’s subsidiary, acquired a 76% interest in Mlekoma Group Poland this year. Kuwait Aromatics (KARO), achieved its highest net income after taxes since inception in 2005.

In education sector, United Education Company (UEC) continued to grow its facilities and student base. In 2018, the American United School received accreditations from two internationally recognized institutions; the Middle States Association Commissions on Elementary and Secondary Schools (MSA-CESS) and the Council of International Schools (CIS). The accreditations bring global recognition to AUS and make it easier for students to apply to the best universities. As planned, Grade 12 was added at the beginning of the academic year.

For the American University of Kuwait (AUK), an MoU was signed with Dartmouth College to extend the partnership between the two entities, now already in its fifteenth year, for another five years. The agreement deepens and expands the academic experience on both campuses.

In terms of accreditation, AUK’s computer science and electrical engineering programs were both accredited this year by the ABET, thereby bringing the total internationally accredited programs offers by AUK to six. Also, the Center of Continuing Education received accreditation from two major institutes – the HR Certification Institute and Cambridge Assessment International Education – allowing the center to offer more accredited courses and internally recognized certificates.

Hessah Al Mubarak District

In 2018, the infrastructure for Hessah Al Mubarak District was handed over to the relevant government entities. This allowed the Kuwait Municipality to begin processing developers’ applications for construction permits for all residential and commercial land plots in the district.

KIPCO also signed an MoU with Kuwait Finance House, such that the bank would offer Sharia-compliant financing solutions to parties interested in purchasing residential or commercial property in Hessah Al Mubarak District. During the year, URC launched the sale of residential units in Hessah Towers, the two 40-floor towers on the waterfront that the real estate company will begin to construct in the district.

Our business highlights

Late in the year, KIPCO completed a KD 100 million (US$ 330 million), five-year bond issue. The issue was 1.35 times oversubscribed. KIPCO’s strategy of regularly raising money in the debt markets aims to diversify its investor base and provide financial flexibility to the company.

In November, KIPCO announced that it had hired Goldman Sachs as an advisor to study several strategic options with regards to its investment in OSN, including exiting the investment.

And in December, KIPCO purchased, through a subsidiary, a plot of land measuring 231,803 square meters, located in Fahaheel, for KD 90 million (US$ 296.7 million) from Gulf Bank. Plans for this plot, Khabari, are still being discussed, and the deal is part of KIPCO’s strategy to diversify its investment portfolio.

Looking ahead

While the global economy is expected to slow down slightly in 2019, the outlook for the GCC is promising. Among member states, growth is expected to accelerate to 2.6% from 2% in 2018 owing to reforms introduced to the financial sector, increasing investment in infrastructure projects, as well as efforts to diversify revenue.

Meanwhile, the Kuwaiti government is expected to make up for the delays in awarding development projects in 2018, in order to ensure that the 2035 Vision ‘New Kuwait’ remains on track. This will continue to provide diverse investment opportunities. While we remain cautious about the next twelve months, we have no doubt that our core operations will be able to continue to overcome obstacles and register growth.

Faisal Hamad Al Ayyar

Vice Chairman (Executive)

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