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Core companies | Rating upgrades | Investment in people | Investment in our community | A remarkable year

Dear Shareholder,
2007 will always be special to me and to this company because it was the year of Wataniya. At KD 1.1 billion (US$ 4 billion), the sale of Wataniya will remain a milestone in KIPCO's history. It was a major achievement for our company and a testament to the way we do business.

The sale followed a strategic review we undertook in late 2006 which forecast a lower rate of growth for Wataniya compared to previous years. This provided us with two clear options: first, invest significant funds over the next few years to develop Wataniya as a panregional operator, or alternatively, sell our holdings in Wataniya for a price that reflected the potential value of the company.

When we were approached with offers to buy Wataniya, we concluded that if a fair price for the company could be negotiated, then our best option was to sell. The price we achieved – at a record EBITDA multiple of 15.1 – has become a landmark valuation in the telecom industry.

Beyond its sheer size and significance to the future of KIPCO, the sale of Wataniya was important in other ways. The deal was indicative of the way KIPCO does business. The team that engineered the sale was a combination of experienced in-house executives supported by world-class external advisors. They managed to complete negotiations within ten days – an extremely short period of time for a deal of this magnitude and complexity. I am extremely proud of this achievement and the way in which your management responded to the pressures placed upon it.

Our philosophy of acquiring, developing and then realizing the value of businesses, has served our shareholders well over the years. Along with the sale of Wataniya, we took advantage of favourable market conditions during 2007 to realize substantial returns on some of our other assets. As a result, 2007 was a year that demonstrated both the viability and sustainability of KIPCO’s long-term business strategy.

The asset sales of 2007 - including the disposals of Wataniya, United Fisheries and the United Projects Company - raised a total of KD1.15 billion (US$ 4.2 billion). The proceeds allowed us to increase our holdings in our core companies, reduce our debt and provided a catalyst for a fundamental review of our businesses.

This review will stimulate an acceleration of our organic growth, act as a blueprint for further acquisitions in our core sectors and seed exciting new ventures in other sectors.

As a result, I am confident the investments we made during 2007 and those we will make during the next 12 months, will deliver even greater return than the assets we sold during 2007.

Core Companies
2007 saw continued strong performance from our core operating companies. In financial services, Burgan Bank’s profits increased by 34 per cent, United Gulf Bank (UGB) profits increased by 117 per cent and Gulf Insurance Company (GIC) profits increased by almost 350 per cent.

During the year, Burgan Bank’s reputation as a leader in transparency and disclosure was underlined by the company winning the Hawkamah-Union of Arab Banks Corporate Governance Award – the first award of its type in the region. In 2007, Burgan also launched its new corporate identity which puts a focus on customer relationships and service. The launch of the new identity followed major refurbishment of Burgan’s branch network during the year.

UGB's highlights of 2007 included increasing its holding in the Bank of Baghdad to 45 per cent, overseeing the expansion of Algeria Gulf Bank and the opening of Syria Gulf Bank’s new Head Office in Damascus. During the year, in cooperation with our asset management company KAMCO, UGB also formed the Royal Capital Company – a new investment firm based in Abu Dhabi.

GIC also continued its progress in 2007 with an upgrade from Standard & Poor’s to BBB+ positive. During the year, GIC also established the Gulf Life Insurance Company, received approval from authorities in Saudi Arabia for the Buruj Cooperative Insurance Company and increased its stake in the Bahrain Kuwait Insurance Company to over 50 per cent.

In 2007, KAMCO launched several innovative investment vehicles including the Al Jazi Money Market Fund, a Shariah compliant product, which aims to tap the increasing demand for this type of fund.

Our real estate business experienced slower growth during 2007, due to the continued freeze on BOT (Build-Operate-Transfer) contracts in Kuwait. However, we fully expect the business to improve its performance during the next 12 months.

Rating upgrades
Another highlight of 2007 was the award to KIPCO of a BBB+ long-term credit rating with a stable outlook by Standard & Poor’s (S&P). This was another sign of your company’s progress, since we are the first listed corporate company in the region to achieve this level of rating. The award also demonstrates the global reputation that KIPCO has acquired since we began the process of seeking ratings by international credit agencies.

In its rating report on KIPCO - where the agency also upgraded your company’s short-term credit rating to A2 from A3 - S&P said that the financial flexibility of KIPCO’s sizeable portfolio of listed equity investments and the quality of its investments in financial services companies, supported by a commitment to lower gearing, were the main factors in the rating upgrades. S&P also highlighted the steady improvements in KIPCO’s sizeable portfolio and its portfolio risk profile, as other factors in the upgrades.

Investment in people
During the year, we made further investment in KIPCO’s executive management team. We appointed a new Group Treasurer whose considerable experience in the Gulf region and Europe will help the company develop its status as the region’s leading private holding company. In February, we also appointed the company’s first Corporate Communications Director whose role is to manage KIPCO’s public profile and advise our operating companies on their marketing and communications.

During 2007, we also extended the advisory role of KIPCO’s management team by continuing to appoint our executives to the Boards of our companies. By bringing their experience and expertise to bear on our operating companies, KIPCO executives add real value to our investments. This contribution is highly regarded by our companies and I am determined that this process will continue.

Investment in our community
During the year, KIPCO and its operating companies continued their annual contribution to the Mashree Al Khair charitable foundation which supports important social programmes in Kuwait. In 2007, the charity funded the region’s first public awareness campaign on dyslexia – a condition which affects a large percentage of our region’s population. The campaign was highly successful and was a winner in Kuwait’s first Corporate Social Responsibility awards in January 2008.

A remarkable year
I have described 2007 as a remarkable year in KIPCO’s history. At this time, it is worth looking back to see how far we have come in the past 18 years and to identify what makes KIPCO different.

Back in 1990, your company was among many others in Kuwait with the potential to grow and prosper. At that time, the bitter yet sweet taste of liberation provided many of us in Kuwait with the determination to rebuild and improve the business environment of our country.

Of all the companies in Kuwait that have prospered in the last 18 years, KIPCO applied that determination of 1990 as a force for change.

I am extremely proud that we have been at the forefront of leading Kuwait into a new way of working and a new way of thinking. Leadership is never an easy position to take. Leaders are targets for criticism and imitation, but being a leader also offers the opportunity to make a difference – and I am very pleased with the difference we have made. Your company continues as the leader of the Kuwait business community simply because we decided to take the difficult path of leading by example.

There are many ways we can demonstrate this – since 1990, your company has achieved nearly a hundred fold increase in the value of its assets, has become a model of corporate governance through our annual Shafafiyah (transparency) forums and instilled the discipline of the London Stock Exchange through our EMTN programme.

But if I could point to just one example of our leadership, it is the unique culture we have developed during the last 18 years. In that time, we have created a culture where the best people from the local and international talent pool have been allowed to flourish. It bodes well for our future that we continue to attract the best and brightest talent to our company because this is what marks KIPCO apart from its peers.

Indeed, it is the people that work for this company – at all levels and salary grade – that make your company the force it is today.

Without their commitment, hard work and dedication, we would have been unable to report such impressive results. I would like to personally thank everyone at KIPCO and all the staff in our operating companies for the outstanding contribution they made to 2007.

I hope you share our excitement and passion for the vision we created for this company and the way this vision has been implemented over the last 18 years. I find it hard to think of another company in the region that can equal our achievements and for this we should be justifiably proud.

When I described 2007 as a remarkable year, I did so with immense pride. Whatever the future holds for this company, and whatever challenges we will face, 2007 will always be a remarkable year. As someone once said, it is our past that frames our future. If this is true, the future of this company is constrained only by the limits of our imagination.

Faisal Hamad Al-Ayyar
Managing Director and Chief Executive Officer