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2006, another year of substantial growth | The factors behind our success | Our transparency | Our strategy | Our people

Dear Shareholder,
I am delighted to report that 2006 was another record year in the history of this Company. As you have seen in the first section of this Annual Review, during the year all our core companies met their performance expectations and earnings forecasts. These performances – achieved against a mixed background of high liquidity, volatile stock markets, high oil prices and tensions in our region – have been especially pleasing.

2006, another year of substantial growth
For our financial services sector, 2006 was an exceptional year. United Gulf Bank continued the expansion of its operations and has reported a 25% rise in profits and a 22% rise in revenue for the year. Burgan Bank also made substantial progress with its retail business in Kuwait; this resulted in a 26% year-on-year rise in revenue and a 32% increase in profits. Gulf Insurance Company also reported a 49% rise in revenue and a 20% increase in profits for 2006.

We expect our financial services companies to continue this impressive rate of growth during 2007. To achieve this, we are considering launching a number of initiatives such as Re Takaful (Islamic re-insurance). This type of initiative reflects the strength of our financial services sector to answer the needs of consumers and businesses for quality products and services.

Our media and telecommunications sector also reported excellent results for 2006. Wataniya (NMTC) attained year-on-year revenue growth of 40% and a 39% rise in profits during 2006. The company is increasing its subscriber base in its established markets and is steadily improving its market share in emerging economies such as Algeria. Wataniya also won the second operating licence in Palestine during the year and is now investigating further new licence opportunities outside our region. Wataniya’s underlying strength was also reflected by the news that the company has the best mobile telephone brand in the Gulf region, according to an independent survey of consumers conducted during 2006. This clearly shows the effectiveness of Wataniya’s customer services and consumer marketing. It also demonstrates that our expertise in these crucial areas is adding real value to the business. Elsewhere in our media & telecoms sector, during the year we decided to make changes within Showtime’s senior management. Having made it clear that we intend to bring the company to market as soon as possible, we recognized that Showtime needed fresh thinking and relevant experience to help it reach the next stage of its development. Despite this change in management, the company continued to grow and expand its offering during 2006. For example in December, against fierce competition, Showtime secured the regional broadcast rights for the English Premier League – one of the world’s most popular sporting attractions. With new management and continued product investment, we believe Showtime now has all the elements in place for a successful flotation.

The factors behind our success
By any measure, 2006 was another milestone in KIPCO’s impressive growth. But, rather than concentrate on what we achieved last year, I would like to share my thoughts on the factors behind our success and how these factors will influence our future.

I believe that KIPCO’s ongoing success is due to three main factors – our transparency, our business strategy and our people. Each of these factors are interdependent and each factor alone would be insufficient to deliver the consistency we have achieved. However, I think 2006 was the first year that these factors came together to create a competitive advantage for this Company and that this advantage will serve KIPCO for many years to come.

Our transparency
In May 2006, we held our third annual Shafafiyah (‘Transparency’) event where our core operating companies presented their forecasts to shareholders, partners and institutional investors. We are extremely proud that for each of the last three years, our core companies have matched or exceeded the predictions they made for that year. This enviable track record is a testament to the rigorous budget and planning process we have in place and a clear sign that our core businesses are being managed in a robust and professional manner.

When we adopted transparency as part of our business practice, we did so because we recognized the benefits it would bring. We knew that transparency would cement our leadership position within Kuwait’s business community, but we also believed that transparency would deliver far more significant benefits to the Company. The most obvious benefit of transparency is the healthy two-way dialogue it has created between KIPCO and its shareholders. This dialogue – still rare in the region – maintains investor confidence at a time when local stock markets are undergoing a lengthy period of correction. The second benefit of transparency is the access it has given us to international financial markets. This access has allowed us to broaden our investor base and tap alternative sources of funding. For example, in April we launched a US$2 billion Euro Medium Term Note programme – the first Euro bond issue by a private sector corporation from the Middle East. The issue raised over KD175.5 million (US$ 607 million) and allowed us to pre-pay two existing syndicated loans and thereby reduce our overall cost of funding.

I believe this access to international funds is a milestone in the Company’s development because it demonstrates how far KIPCO has come within the last five years. Whereas in the past we looked exclusively towards the Gulf, we now have a global perspective, and more importantly, a global reputation.

The third, and perhaps most important benefit of transparency, is that it has strengthened our relationships with global investors and international rating agencies. These relationships are essential to the future of the Company and our plans for long-term growth.

So, it is clear to me that transparency has played a major part in our achievements and we should not underestimate the positive effect it will have on our future.

Our strategy
Our strategy of building and investing in companies that produce sustainable and predictable cash flows remains unchanged. This strategy has been an tremendous success and is measured by 2006 being the fifteenth consecutive year of profitability and above average growth for the Company.

One example of our strategy in action during 2006, was the investment we made in North Africa Holding – an investment company that is targeting new business opportunities in high-growth economies such as Algeria, Morocco and Tunisia. This is a very exciting investment because the region has such enormous potential. Although KIPCO already has a presence in North Africa through the subsidiary companies of United Gulf Bank and Wataniya, the increasing regionalization of our operations is a sign of things to come. However, without successful implementation, our strategy would remain an empty promise – and as every good leader knows, the successful implementation of any strategy depends upon one crucial factor: people.

Our people
In 2006 we strengthened KIPCO’s management team by hiring a Senior Vice President of Technology & Media and a Senior Vice President of Insurance, Real Estate & Industrial. During the year, these two gentlemen used their extensive knowledge and experience to make outstanding contributions to the business planning of our operating companies. When I consider KIPCO’s track record and how we have achieved it, I have recognized that the one irreplaceable element of our success is the management we have both at Group level and within our operating companies. Indeed, if there was a way to quantify and value the sum total of the experience within our Company so that the results appeared in our financial statement, I’m certain the results would make a significant contribution to our balance sheet. The three factors I have identified as central to our success – strategy, transparency and people – are not the result of luck or coincidence. They are the result of the way this Company was formed and the way it has continued to grow. We have been highly successful in building a company culture where these factors have been able to deliver a competitive advantage. As I look forward to 2007 and beyond, I fully expect this advantage to continue.

Finally, I would like to thank all the staff within KIPCO and our operating companies for the contribution they made during 2006. Without their dedication, commitment and sheer hard work, your company would not have been able to report such impressive results.

Faisal Hamad Al-Ayyar
Managing Director and Chief Executive Officer