Management report

Dear shareholder,

Over the past twelve months, the world economy continued to fight its way to rebound from a difficult 2015. Lowered several times by the International Monetary Fund, global economic growth has been slowed down by such events as Brexit, the China slowdown, and post-election growth figures in the US. Closer to home, the flotation of the Egyptian pound, aimed at drawing foreign capital back into the country, has led to an unexpectedly sharp devaluation of the currency. Meanwhile, oil prices came to a 17-month high in December, after the successful OPEC meeting and the non-OPEC agreement that followed, leading to two oil output cuts.

Shortly after the US Federal Reserve raised the discount rates, the Central Bank of Kuwait followed suit with a quarter percentage point increase to 2.5%. The move was to ensure the competitiveness and attractiveness of the Kuwaiti dinar and support the economy’s sustained economic growth and development.

In Kuwait, gasoline prices were hiked during Q3, and at the inaugural parliamentary session in December, H.H. the Amir of Kuwait told the newly elected members of the National Assembly that cuts in public spending were inevitable to reduce a growing budget deficit. Despite the deficit, anticipated spending cuts, and plans for lifting subsidy off electricity and water, Kuwait awarded contracts in excess of US$ 12 billion in 2016 and the State’s development plan is going ahead on track.

KIPCO has successfully overcome challenging economic circumstances in the past, thanks to the strength and experience of its executive team and prudent measures to diversify revenue and manage risks. We foresee that difficult conditions will remain in the coming year and, in light of this, we will continue to take measures to strengthen our companies in order to overcome them.

Our 2016 results

At last year’s Shafafiyah Investors’ Forum, we said that difficult circumstances in Kuwait and the region would result in a growth in the high single digit. With businesses in Egypt’s real estate, insurance and entertainment sectors, KIPCO suffered a direct impact from the devaluation of the Egyptian pound just before the end of 2016. Despite this challenge, I am delighted to report that we succeeded in achieving a net profit of KD 45.5 million (US$ 148.7 million), compared to KD 51.2 million (US$ 167.3 million). We also reported a 6.6% increase in total revenue from operations. This makes 2016 KIPCO’s twenty-fifth year of consecutive profitability. It is also KIPCO’s fifteenth year of continuous dividend payment for its shareholders, with US$ 457 million paid out since 2002.

Core operations

During 2016, our core operating companies largely met our expectations: Burgan Bank’s net income increased 12% to KD 68 million (US$ 223 million), and Gulf Insurance Group’s gross written premiums grew 14.7% to KD 213.2 million (US$ 697.7 million).

Meanwhile, United Real Estate’s total revenue increased 17% to KD 71 million (US$ 232 million), and United Industries Company’s net profit increased by 64% to KD 7.75 million (US$ 25 million), bringing total assets up to KD 230 million (US$ 750.9 million).

Burgan Bank has continued to register progress over the last twelve months. After excluding the discontinued operations resulting from the sale of JKB, Burgan Bank’s net income was up 12% and earnings per share increased by 15%. Adjusted for foreign currencies devaluation and one-offs, the bank’s core revenues for 2016 increased 8%.

Earlier in the year, Burgan Bank successfully closed a KD 100 million Tier 2 capital issuance. The issuance has both a fixed rate and a floating rate tranche with the fixed rate coupon at 6.00% and the floating rate coupon at 6.20% (CBK discount rate plus 3.95%). The bank received strong interest in the bond issue market from local investors, with the order book closing significantly oversubscribed despite challenging market conditions. The issuance, fully compliant with the Basel III guidelines of the Central Bank of Kuwait, has further boosted Burgan’s capital adequacy ratio by over 2%. The bank also priced its inaugural US$ 500 million bond under the newly established US$ 1.5 billion EMTN Program.

As a testament to its successful track record, the Burgan Equity Fund was named ‘Best Equity Fund over 10 Years’ by Thomson Reuters Lipper Awards. The award is in recognition of the fund’s consistent long-term outperformance compared to its benchmark. While Burgan is the fund manager, KAMCO is the external advisor to the fund.

The year 2016 saw further strengthening of Gulf Insurance Group’s operations. In terms of Gross Written Premium (GWP), GIG’s operations in Kuwait, Bahrain and Jordan are all leaders in their respective markets. In Egypt, the company ranks number one in terms of technical profit among private sector players.

Early in the year, the company’s Kuwait arm, Gulf Insurance and Reinsurance, officially closed its deal with the Ministry of Health to provide health insurance to around 117,000 retirees. The deal is worth KD 82 million (US$ 270 million) per year in premiums, and implementation commenced in September.

In June, GIG acquired a 90% stake in Turins Sigorta, a Turkish non-life insurer with a strong market presence, and changed its name to Gulf Sigorta. The acquisition falls in in line with GIG’s strategy to increase its regional foothold, and also expands the breadth of the Group’s services to its clients and Kuwaiti investors.

For OSN, the pay-TV company saw stable revenue in 2016. Over the past five years, revenue has grown 15%.

During 2016, Mr Martin Stewart was appointed as the new CEO of OSN. Mr Stewart, a non-executive director on OSN’s board since 2015, is an experienced international pay-TV professional. He is widely acknowledged for his contribution to the European pay-TV industry, and his mandate is to lead a new chapter of OSN’s growth story.

To drive OSN’s strategy for exclusive content, the pay-TV has extended its long-term partnerships with Discovery Communications across the MENA region, and with Metro-Goldwyn-Mayer Studios (MGM). Further consolidating its industry position, OSN signed a long-term exclusive deal with NBC Universal International, a subsidiary of Comcast Corporation. The deal secures first pay window rights for OSN, in addition to exclusive over-the-top (OTT) content access on OSN Play.

United Real Estate (URC), our real estate business, saw a revenue growth of 17% in 2016. In Jordan, Abdali Mall was inaugurated this year and is 65% leased. Aswar Residences in New Cairo, Egypt, has been completed, and substantial progress has been made in the construction of the company’s latest residential development in Egypt, Manazil. URC also obtained the necessary approvals for the new masterplan for Assoufid in Morocco, which included increasing the built-up area, and will enhance value upon completion by an estimated KD 100 million (US$ 326 million).

For Jordan Kuwait Bank (JKB), it remains the third largest conventional bank in Jordan in terms of assets, at US$ 3.9 billion. In 2016, JKB reopened its branch in Limassol, Cyprus, and expanded its network throughout Jordan with the opening of five new branches, including its high-tech flagship branch in Abdali Mall. The Private Banking Unit grew its customer investment portfolios by 15%, and increased revenue from managing customer portfolios by 12%.

Our savings, investment and pensions company, TAKAUD, established 11 partnerships with banks, insurance companies and asset managers during 2016. This included signing an MoU with Bahrain Kuwait Insurance Company – a subsidiary of GIG – aimed at enhancing customer offerings and experiences in both firms. TAKAUD also partnered with Takaful International, Bahrain’s pioneering Islamic insurance company, to provide the latter’s customers with Sharia-compliant savings policies. TAKAUD added 20 top-rated mutual funds and 11 special funds with thematic focus on biotechnology and alternative energy to its offering.

To raise awareness about the importance of pension funds and savings, TAKAUD hosted the Middle East’s first pension’s conference. It also expanded its presence in the Gulf with the opening of an office at the Dubai International Finance Center, while also establishing presence in North Africa with the inauguration of its representative office in Cairo, Egypt.

In the education sector, United Education Company’s (UEC) student base continued to expand in 2016, with around 17,000 enrolled in the company’s schools and higher educational institutions. The American University of Kuwait (AUK) appointed Professor Earl L. “Tim” Sullivan as its fifth president, and he commenced his duties at the beginning of 2017. The American United School (AUS) added Grade 10, as planned.

The year 2016 was one where United Networks, our technology arm, witnessed a streamlining of its operations. The company sold its internet provider, Gulfnet, while continuing to strengthen the position of Gulfsat, a leader in telecommunication services.

For KAMCO, 2016 was a year of successful investments. The company acquired General Electric’s Global Operation Center building in the US, expected to deliver a 6.5% per annum net yield to investors. It also acted as the joint lead manager on a number of large bond issuances. The investment company managed transactions exceeding US$ one billion, and received the approval of the Capital Markets Authority to officially launch the KAMCO Islamic Equity Fund. To implement its regional expansion plans, KAMCO opened an office at the Dubai International Finance Center.

Hessah Al Mubarak District

In 2016, we announced the details of Hessah Al Mubarak District, a comprehensive mixed-use development that caters to the country’s millennial population and expat residents alike. The residential and commercial real estate development project is strategically located on the outskirts of Kuwait City. This prestigious urban community, built over an area of approximately 227,000 sqm and with a total built-up area of 380,000 sqm, overlooks the sea, with easy access to major highways leading into Kuwait City.

Hessah Al Mubarak District is a place where people live, work and experience their surroundings. Fifty percent of the district’s area is dedicated to open spaces, parks and amenities. The district is primarily residential, with 61 of the 82 plots allocated for premium residential buildings and one for a serviced apartment building. The district will also include five restaurants, three commercial buildings, seven specialized profession buildings, two health clubs, and three retail units.

KIPCO Group companies will be developing 40% of Hessah Al Mubarak District, with designs of its residential buildings, office spaces and commercial units complete. Negotiations commenced during the year for the sale of the remaining plots to like-minded developers, pending the issuance of the title deeds by the Municipality in early 2017 to make the official sales. Infrastructure work on land began, and buildings will be constructed once this has been completed. Hessah Al Mubarak District is expected to welcome its residents in late 2020.

Our business highlights

In January 2016, KIPCO repaid its KD 80 million (US$ 264 million) bond, and in October the company repaid its US$ 500 million loan issued under its EMTN Program. KIPCO’s liquidity remains strong, with sufficient cash to meet all debt obligations until December 2019. We will continue to manage our financing activities to ensure that our current and future needs are met, while maintaining the flexibility to accept new opportunities that may arise.

Looking ahead

The global economy is expected to grow at 3.4% in 2017, up from 3.1% in 2016. While the impact of Brexit – where economic and political uncertainty is likely to impact trade and financial operations – and weaker than expected US activity in the first half of the year have brought down growth forecasts for advanced economies, improvements are expected in emerging markets and developing economies.

The gradual increase in oil prices, expected in 2017, will ensure that the Kuwaiti government’s development plan will remain on track despite the call for spending cutbacks. However, we believe that the next twelve months will be challenging. At KIPCO, our stringent practices and strong risk management measures have ensured that we can weather the circumstances ahead and continue to grow our companies across the different sectors in 2017.

Faisal Hamad Al Ayyar

Vice Chairman (Executive)

In this section