Management Reports: 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001

Our results – satisfactory in difficult times | Our companies – satisfactory performances | Our deal-making in action – the Showtime & Orbit merger | Our funding – a deal of firsts and an NBK loan | Our reputation – we remain the region’s highest-rated private corporate | Our future – investing in our people

Dear Shareholder,
Writing about the banking crisis and its consequences for the global economy, the respected commentator Malcolm Gladwell said that one of the things that happen to us when we become overconfident is that we start to blur the line between the things that we can control and the things that we can’t.

Overconfidence is like a contagious disease and our region – like most others – has been infected. It is obvious that the current economic situation – both at global and local level – has been fuelled by vastly inflated valuations and leverage combined with a tendency to believe that good times never end. It is also clear that the current economic situation within our region has been made far worse by a glaring lack of transparency and a failure to follow good corporate governance.

KIPCO has stayed clear from overconfidence and continued to lead in transparency and governance. As one of the first companies in the region to adopt international standards for investor relations, we have built a reputation that distinguishes KIPCO from its competitors. Our business culture shuns overconfidence and its consequences. When other companies were making extremely optimistic asset valuations or staking claims to market leadership, we maintained our focus on building sound operating businesses - a hallmark of the way we do business. Our philosophy has been tested over time and each time has proved effective. It has allowed us to chart a course through these difficult times and deliver our promises.

Our results – satisfactory in difficult times
At our annual investor’s presentation in March 2009, we said that if market conditions did not worsen during the year, we expected to double our profits. We are delighted to report that we came very close to that by delivering a total profit of KD 46.3 million (US$ 161.4 million) for the year. This means 2009 was KIPCO’s eighteenth consecutive year of profitability and another landmark in our history. As a result, subject to approval by our General Assembly, we propose to pay shareholders a dividend of 25 fils (25 per cent) per share and a 5 per cent stock dividend.

Our companies – satisfactory performances
The turbulent trading conditions that began in 2008 continued to have an impact on the performance of our core companies. Our companies delivered competitive performances against their peers during 2009: Burgan Bank’s profit was KD 6.2 million (US$ 21.62 million) Gulf Insurance Company’s (GIC) profit was KD 5 million (US$ 17.43 million) and United Gulf Bank’s (UGB) profit was KD 5.8 million (US$ 20.1 million).

During 2009, Burgan Bank took a total of KD 82.8 million (US$ 288.7 million) in specific and general provisions and increased its operating profit by 27 per cent. Burgan also continued the integration of the three regional banks it acquired from UGB during 2008 and each of these banks are now growing in line with Burgan’s regional strategy.

The effectiveness of Burgan’s funds transfer operations management was also recognized in 2009 with the J.P. Morgan Quality Recognition Award. The award - the twelfth consecutive year it has been given to the bank - acknowledges the consistent, high quality performance and standard of Burgan’s operations. Burgan is the only bank in the MENA region to receive this recognition for both its treasury and commercial activities.

During the year, Burgan’s Equity Fund won top ranking in Kuwait in the Zawya Funds Ranking list. The list is used by investment professionals throughout the region when helping clients make investment decisions. Burgan’s Fund outperformed eleven competing funds on performance measures such as returns, volatility, fees and compliance. The position in the Zawya list underlines the strength of Burgan’s product development process.

During 2009, UGB completed its sale of Gulf Bank Algeria and Bank of Baghdad to Burgan Bank and reported its twentieth consecutive year of profitability. UGB has a strong and diversified asset base and maintains a capital adequacy ratio of 2 per cent above the required ratio of 12.5 per cent.

The progress of Syria Gulf Bank (SGB) – one of UGB’s regional banks - was recognized during the year with The Best Bank in Syria 2009 award from The Banker magazine. The award follows a highly successful 2009 for SGB with the opening of five new branches and a 188 per cent increase in its operating income for the first nine months of the year.

GIC also had a busy year in 2009. The Initial Public Offering (IPO) in October of the Buruj Cooperative Insurance Company – GIC’s new affiliate in Saudi Arabia – was oversubscribed almost 12 times with over one million subscribers applying for shares. The IPO has created a platform for GIC to build its business in KSA – a market with enormous growth potential and an untapped demand for insurance products. GIC predicts that in 2010 total insurance premiums written in the Kingdom will exceed SR 10 billion (US$ 3.7 billion) and they intend to exploit this demand through a development of Buruj’s branch network across the Kingdom.

Our deal-making in action – the Showtime & Orbit merger
The merger during the year of Showtime and Orbit was a watershed moment for the business. We had been calling for a consolidation of the region’s broadcast market for some time and were delighted to find a partner providing such a great fit to our existing business. The deal brought together two great brands to create MENA’s leading pay-TV platform and our customers now get the very best in Western and Arabic entertainment with 75 channels featuring first run Hollywood movies, premium sports and general entertainment.

We believe the deal is good news for KIPCO shareholders as the merged company consolidates our position in one of the region’s fastest-growing business sectors. The merger creates excellent long-term potential because as partners in the dominant company in the regional pay-TV market, we expect faster growth and greater financial return. We also believe the merger is another example of the way KIPCO builds longterm shareholder value and reflects our strategy of creating and building businesses in high-growth sectors. This approach has been central to our success and we will continue to explore similar opportunities in our other businesses to maximize the return on our investments.

A positive aspect of the merger was the speed with which customers saw improvements. Full integration of the two companies was completed by the end of the year with minimal disruption to customers. The deal highlights our deep merger experience in complicated transactions and circumstances.

During the last half of 2009, the newlymerged Orbit Showtime Network (OSN) delivered a programme of synergy cost savings and started establishing a more secure and efficient broadcast platform. Revenue and subscriber increases exceeded our expectations, following the rapid and well received introduction of improved offers to existing customers. OSN is now preparing to launch High Definition Television and fresh content in both English and Arabic to meet the region’s appetite for quality entertainment.

Our funding – a deal of firsts and an NBK loan
The latest issue under our Euro Medium term Note (EMTN) programme in November was another major success for your company. The US$ 500 million (KD 143 million) seven year fixed rate bond was a deal of firsts: it was the first international bond issue by a private sector corporate from the MENA region in 2009 and the first US Dollar bond issue by a Kuwaiti institution since the credit crunch began almost three years ago. The issue was 6.6 times oversubscribed and the order book closed at US$ 3.3 billion. The subscriptions highlighted our global appeal, with widespread take-up across the world. Investors in the UK took 28 per cent, mainland Europe 29 per cent, Asia 22 per cent, the Middle East 12 per cent, while offshore accounts took 9 per cent of the order book. The issue’s proceeds will be primarily used to replace shorter date liability, thereby extending the average life of our debt.

The bond issue also continued our strategy of regularly raising money in the debt market to diversify our investor base and is the latest mark in our track record as a regular, tried and trusted issuer of bonds. The overwhelming demand for the bond among global investors certainly reflects the global financial community’s confidence in KIPCO as a reliable investment partner and is a measure of our reputation within the global banking community as a company that delivers on its promises.

During the year, we also completed a five-year KD 80 million (US$ 279 million) loan with the National Bank of Kuwait (NBK). The loan is part of the long-term relationship, founded upon mutual appreciation and respect, between your company and NBK. The loan is also part of our strategy to actively manage our funding base through extending maturities and diversifying our currency and investor mix.

Our reputation – we remain the region’s highest-rated private corporate
Despite a year of rating downgrades in the global financial industry, KIPCO maintained its status as the highestrated private corporate in the region during 2009. This was confirmed by the international credit rating agency Moody’s who reaffirmed KIPCO’s Baa1 long-term credit rating, Prime-2 short-term rating and also assigned a Baa1/Prime-2 rating to our EMTN programme. In its report on KIPCO, Moody’s stated that ‘KIPCO has responded well to a challenging global and local market environment by strengthening liquidity and actively managing leverage in support of credit metrics.’

Moody’s also said that KIPCO’s leverage – based on its debt-to-market value - ‘was 16% at year-end 2008 (19% at 1H 2009), thus comfortably within Moody’s 25% ceiling for the rating. Moody’s takes comfort from the fact that KIPCO has actively managed its market value leverage by selling around USD 200 million of core and non-core assets during turbulent market conditions in support of its credit profile’.

Although our credit ratings are founded upon our strict financial discipline and proactive approach to funding, given the decrease in risk tolerance among ratings agencies and extensive downgrades across the region, KIPCO’s credit ratings may be revised in 2010.

The effectiveness of the on-going dialogue we have maintained with investors over the last ten years was recognized in 2009 by KIPCO winning the award from the Middle East Investor Relations Society for the best investor relations programme in Kuwait. The award followed an independent survey by Thompson Reuters Extel of 700 international financial analysts and fund managers. The award was a very satisfying achievement because it reflects the views of one of the company’s key audiences and acknowledges KIPCO’s investment in communication with the global financial community.

Our future – investing in our people
During the year we strengthened our executive management team with the appointment of a new Group Marketing & PR Director. This gentleman has an impressive track record of international media relations and this will serve us well.

As we expected, our management and staff have reacted to the current situation with all the commitment, hard work and dedication we know they can deliver. We would like to take this opportunity to thank all our employees, in all our companies, for the efforts they made in 2009 and will continue to make in 2010.

Although going into 2010, the overall economic situation remains uncertain and prospects remain unclear, we believe your company has the necessary credentials, track record and expertise to emerge from this climate even stronger than before. What is absolutely clear is that your company is highly respected and valued among those whose confidence has been dented by the wide-ranging problems of others. We are determined to maintain the KIPCO difference. As someone once said, without reputation we are lost. Our reputation is secure and it will remain that way.

Faisal Al Ayyar
Vice Chairman