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Our 2011 results | Our core companies | Our business highlights | Our investment strategy | When times are hard

Dear shareholder,

The current global economic situation has left many investors in a very difficult position. There seems to be no safe haven for their investments and no quick fix for the problems that afflict the global economy. As the traditional barometer of economic uncertainty, the price of gold remains high as investors with funds to spare seek some kind of surety.

And yet, the idea that we have a truly global crisis is perhaps misleading. So far, it is the Western economies that have suffered most from the problems of sovereign debt, austerity packages and recessionary pressures. Although Asia and the Middle East are not unaffected by these problems and the full ‘knock-on’ effect of the Western economic crisis has perhaps yet to be seen, many developing countries - India and China in particular - continue to grow. How long this growth will continue – especially if Western recession turns to global depression - is open to debate, but for the economies of the Middle East and North Africa, the impact of the financial downturn is certainly less severe than it is in the West.

This is not to say that the MENA region is immune from the economic afflictions of the West or that it is fully reconciled to the impact of the political changes that have rocked parts of the region over the last 12 months. However, four crucial factors have cushioned our region from the worst aspects of the West’s financial crisis and these same factors also provide indications for the region’s long-term growth potential

First, our region does not have the same levels of personal, corporate or sovereign debt which burden Western economies – which is due, in part, to the relatively modest living standards within the MENA region as a whole. Second, our region has positive demographic trends with a high proportion of young people within the total population. This creates a demand for products and services that will only grow. Third, our region has abundant natural resources that the rest of the world requires and needs to buy even when times are hard. Fourth, our region has large and relatively untapped nascent markets with low penetration levels and pent-up demand.Although, in the current circumstances, only a fool would claim to know what dramas tomorrow might bring, it is with some degree of certainty that, due to these four factors, we can predict that our region has the basis for sustained long-term economic growth.

Despite – or perhaps because of – the important political changes that are taking place in our region, we envisage a better future where businesses will experience significant growth in the years to come. As a company with investments across the MENA region, we are exposed to some risk as regimes change, but it is both manageable and necessary. We accept this risk as the price we pay for a diversified investment portfolio.

As a result of our region’s potential, KIPCO’s three part business strategy of managing our debt maturity profile, building our operating companies’ market share through expansion and acquisition and developing new companies in new markets, is perfectly in tune with current conditions and our region’s future prospects.

Our 2011 results
In March last year, we expected 2011 to be our twentieth year of profitability. Despite the difficult economic climate, we met this target by delivering a profit of KD 30 million (US$ 107.7 million) for 2011. As a result, subject to approval by our General Assembly, we are proposing to pay shareholders a cash dividend of 20 fils (20 %) per share and a 5% stock dividend. Our results are encouraging, not least because they demonstrate the resilience of our business strategy and the ability of our operating companies to deliver what we expect from them.

Our core companies
During 2011, our core operating companies delivered as expected performances for the year: Burgan Bank’s year-on-year profit increased to KD 50.6 million (US$ 181.7 million), Gulf Insurance Company’s (GIC) profit was KD 7.1 million (US$ 25.5 million) and United Gulf Bank’s (UGB) profit was KD 0.4 million (US$ 1.5 million).

In 2011, Burgan Bank Group achieved a tenfold increase in net profit, a significant reduction in the cost of credit and maintained its capital adequacy ratio well above the required level. Burgan’s regional banking network made a major contribution to Burgan’s results during the year and Burgan continues to maximize opportunities for organic growth and further acquisitions within the region.

For UGB, 2011 was a milestone year: it was the bank’s twenty-first consecutive year of profitability – a remarkable track record by any standard. Although 2011 proved difficult with reduced investment fees, reduced commission income and required investment impairment provisions, the fall in the bank’s revenue was partly offset by an almost nine fold increase in its share of profits from its commercial banking associates. This bodes well for the next years and shows that UGB is well positioned to capture any upturn in the market during 2012.

At GIC, 2011 was another year of regional expansion and acquisition. The company acquired a 51% stake in Dar Es-Salam Insurance in Iraq. This is a major step for GIC, as the Iraqi market offers an excellent opportunity because of its high population density and low levels of insurance penetration. During the year, GIC also maintained its prudent financial management by strengthening its financial reserve funds so that they now represent 177% of the company’s capital.

During the year, the Orbit Showtime Network (OSN) achieved a 30% rise in customer subscriptions, a 24% increase in the sales of digital video recording devices and a significant reduction in customer churn.

In 2011, the company also launched OSN Yahala! - the region’s first Arabic content high-definition channel - and signed an exclusive deal to distribute content from ART. 2011 also marked a major turnaround in OSN’s financial position with the company reporting consistent and positive EBITDA data.

Our business highlights
The major highlight of the last 12 months was the launch of our KD 80 million (US$ 290 million) fixed and floating rate four-year bonds issue - the largest ever issue by a corporate in Kuwait. These dinar bonds will be repaid in January 2016, which leaves us with no debt repayments to make for the next three years. The funds raised by the bonds will be used to make selective prepayments of our existing obligations, reduce our average cost of funds, stagger our maturities and diversify our investor base. As one of the region’s premier holding companies, we believe KIPCO is a role model for other corporates and we take this into account when looking at our strategic funding options. By issuing these dinar bonds we are also meeting our leadership responsibilities by answering the needs of our local financial market, because Kuwait’s bond market has been starved of new issues since the onset of the global economic crisis. It is therefore crucial that companies like KIPCO help to stimulate growth, because a fully functioning and vibrant local bond market is a key element in the development of Kuwait’s private sector – an objective the Amir of Kuwait has set as part of his vision for our country.

Another highlight of 2011 was the establishment of the Takaud Pensions & Savings Company. Takaud is the first company in our region to offer consumers and companies the kind of personal pension and savings products common in other parts of the world. The company – which is based in Bahrain – is currently recruiting its executive management team and building the sales channels it will need when it launches in selected markets in the second half of 2012. The opportunities for Takaud are based on the demographic trends at work within the MENA region. For example, the number of people aged over 65 in the region, estimated at 10.6 million in 2000, will increase to 32 million, or 6.8% of the total population, by 2030. This number is expected to grow to 70 million, or 12.3% of the total population, by 2050. This means that while the region’s total population will double during the first half of this century, the proportion of over 65s will multiply by more than six times in the same period. As a result, we believe there is a large and unmet demand throughout the MENA region for low-risk, long-term pension products with secure and reasonable returns.We are highly confident that Takaud will seize these opportunities to build its business. Essential to this is the creation of a strong consumer brand that will instill confidence in the company and its product range. As a new concept within the region, most consumers are unfamiliar with personal pensions and how they differ from the saving schemes currently being offered by existing financial institutions. This will require a marketing programme that both educates and informs the company’s target market on the benefits of personal pensions. Takaud’s management team have between them, significant experience of launching ‘start-up’ financial companies and this will be invaluableas they develop their sales and marketing strategy.

During the year, we also saw the first tangible effects on the local economy of Kuwait’s KD 30 billion (US$ 108 billion) development plan. A number of major infrastructure projects have now been approved which will help stimulate activity in many business sectors. An example is Kuwait’s new KD 900 million (US$ 3.23 billion) international airport terminal which will be complete by 2016. Through a presence in a broad range of sectors such as finance, insurance and construction, KIPCO’s operating companies are ideally placed to exploit opportunities within the development plan and compete successfully for project tenders. We anticipate success on a number of these tenders and expect to announce them during the year.

Our investment strategy
It is always encouraging when independent and respected commentators endorse our investment strategy.

This was the case when Citigroup Global Markets published a comprehensive analysis of your company in January 2012. The report said:
"KIPCO's strengths are its ability to source deals across MENA, its controlling stakes in the investments which make up most of its value (Burgan, UGB, Gulf Insurance and OSN), its business development expertise pro-active approach to valuation events which crystallize the value of its holdings above book value and its transparent communications with minorities. Track record on this combination is rare among MENA conglomerates."

We believe this view of KIPCO’s position can be taken as a measure of our excellent reputation within the global financial community.

When times are hard
It is a well-worn statement that when times are hard, the best companies find ways of making opportunities while others flounder. We are confident that KIPCO’s long-standing business strategy will continue to deliver in exactly this way. The fundamental strengths of our region – positive demographics, natural resources and under-developed markets – will certainly help us achieve our long-term goals.

At the same time, the consequences of the political changes occurring in our region are hard to predict and call for constant attention and consideration. However, our view is that business opportunities are likely to be enhanced as a result of these political upheavals. Although it will take time for the political situation to become clear, our exposure within the region is manageable and worth the risk it implies.

The strengths of your company – our cash balance, our debt profile and our broad market exposure and continued focus for developing new businesses - remains in place and provides the basis for our future success.

Overall, I am pleased with the effort and determination our people have demonstrated over the last year. KIPCO is a company unique in this region and as I look over our companies, I am convinced that we have the teams in place to deliver our expectations. The next 12 months are likely to be very challenging, but as we move into 2012, we are confident that we have what it takes to succeed.

Faisal Hamad Al Ayyar
Vice Chairman