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Introduction | Market Conditions | Review of the Year's Results | KIPCO's Adherence to Strategies | Wataniya Telecom | Gulf Insurance Company | Burgan Bank | United Gulf Bank | Showtime |
Other Companies in the KIPCO Extended Family | Regional Developments and Outlook |
Prospects for the Coming Year

Introduction
It gives me particular pleasure to present the 2003 Annual Report, because this year many of the strategies we have been implementing in recent years have begun to bear fruit. Our strategies have been directed towards the twin goals of building sustainable profits and growing the real value of the Group. It is therefore deeply satisfying that this year's results show a substantial increase in profits and underlying value, and that this performance has been recognised by investors with a leap in the price of KIPCO's shares.

It is also pleasing to be able to report how busy and exciting this year has been, as the foundations that have been so carefully laid have paved the way for significant business expansion. It has been a year when the Group has gone from strength to strength; from a strong foundation to a strong operating performance. Without exception, all the companies in the Group have seen growth. In some cases the growth has been through new business ventures, as management have identified and seized new opportunities. In others it has been in serving a steadily growing customer base (across a widening number of countries in our region), as the quality of our services has become increasingly recognised in our markets. In yet others it has been in acquisitions and mergers, as synergies have become apparent.

It is a year that has filled me with optimism for the future, as it has shown the Group to be poised to continue from strength to strength. I am convinced that our committment to quality service - be it the service a Burgan Bank customer receives from a teller, a "Tamam" guarantee to a Showtime subscriber, the building of a mobile telephone network for a nation, or the respect and professionalism shown to a joint venture partner - will ensure our growth. And with that growth will come sustained profitability, increased dividends and significant share value appreciation for our shareholders.

Market Conditions
The fulfillment of these strategies was always going to make 2003 a banner year for the Group, regardless of market conditions. For market conditions to have been so favourable has been an added bonus. The business opportunities in our region have been many, and derived from a number of sources. A new optimism arising from the removal of external threats; the need to assist Iraq in building and rebuilding its infrastructure; the inflow of United Nations Compensation Claim funds; the levels of oil prices; and the numbers of large-scale development projects throughout the region, have all contributed to a buoyant market in the Middle East. The Group has been able to grasp many of these opportunities. In some cases these have resulted in "one-off" gains, but often they have led to the establishment of continuing business services which will generate sustained profits.

These factors, combined with stock market advances throughout most of the world, have led to a prolonged rebound in the region's stock markets, and especially in Kuwait. It was encouraging to see KIPCO's share price more than double in the year, and even more so to see that it outperformed the market by almost ten per cent. This, and the fact that the volume of KIPCO's shares traded was almost twice that of the next highest company, demonstrates that a growing number of investors understand the strength of KIPCO's performance and potential. However, I believe the stock market as a whole still continues to underestimate KIPCO and undervalue its share price. If KIPCO's holdings in listed companies were marked to current market prices its net asset value would increase by KD258 million - a valuation that should imply a jump of approximately 246 fils in KIPCO's share price. Factoring in a premium for control, and a revaluation of its unquoted investments to a current estimate of their value would further boost the price of KIPCO's own shares.

Review of the Year's Results
This year the Group's profits surged from KD6.4 million to KD18.2 million.All of the "direct" KIPCO companies played a part in this, with income from core assets (principally its share of the profits of subsidiaries and associates plus dividend income) increasing from KD12.0 million in 2002 to KD21.7 million this year. This is a significant achievement, but the underlying operating performance is even better, as a high proportion of those profits derive from recurring income streams. "One-off" gains are always a welcome supplement to a year's results, but the core revenues of a company are its recurring income streams. These also provide investors with much more certainty in respect of predictions of future performance. This year I estimate some 60 per cent of KIPCO's profits to be derived from such sources; it is this which allows me to so confidently predict that KIPCO will continue from strength to strength in the future.

One highlight in the profits of KIPCO's direct subsidiaries and associates was an excellent performance from United Gulf Bank, whose profits leapt from KD2.9 million to KD10.7 million for the year, despite a very prudent approach to provisioning being taken once again. It is important to appreciate that this outcome was not just the result of current year market conditions or exceptional opportunities, but rather the culmination of a number of years' efforts to develop an outstanding asset base and a top-class reputation.

After the disappointments of last year, Burgan Bank also produced a strong showing, demonstrating that those difficulties have been properly resolved. The bank has adopted an aggressive provisioning stance, providing against any loans, advances and investments that are at all doubtful. Despite this the profit, at KD20.4 million, not only eclipsed last year's KD12.8 million, but also matched that of the previous year.

Wataniya Telecom continues to outstrip projections, turning in a profit of KD33.1 million, up sixty-three per cent from 2002, despite the heavy investments in Tunisia and Iraq during the year. Gulf Insurance Company also weighed in with an increase of more than nine per cent in net profits.

This pattern of sharp increases in profits was also evident in the results of all the companies that form part of KIPCO's extended family. Of these, KAMCO and United Real Estate Company merit special mention. KAMCO's profit rose to KD8.0 million from KD2.7 million last year; whilst United Real Estate Company achieved a profit of KD13.1 million compared to KD3.0 million in the previous year.

However, the performance of a holding company is not measured solely by the profits of its operating companies. The holding company itself has a part to play. One responsibility is to help Group companies implement appropriate cost controls, and to minimise costs through economies of scale, which KIPCO has continued to do throughout the year. Another such responsibility is liability management and the provision of an optimum funding strategy across the whole Group. During the year KIPCO again demonstrated market leadership in this area by becoming the first company to issue a KIBOR based floating rate bond. The issue, which was heavily oversubscribed (further demonstrating the market's confidence in KIPCO), completed a strategy that evenly balances liability maturity over the next four years.

KIPCO's Adherence to Strategies
The results outlined above are very satisfying to me, to the management of the Group and to the Board of Directors. However, it is a source of even greater satisfaction that these results are the product of the Group's persistent application of strategies over a number of years - strategies that have been regularly reported here. It is those strategies that provide assurance that these are not "one-off" profits which will disappear when market conditions change; they give us confidence that these are sustainable profits which will generate continued growth in value. It is those strategies which have enabled us to go from strength to strength in the past - and will ensure that we do so in the future.

Of these strategies, none is more important than the Group's committment to quality service. Last year in this report I stated that: "a fundamental element of KIPCO's strategy is an absolute committment to customer satisfaction." In the following paragraphs I would like to briefly illustrate just a few of the ways in which this strategy has been implemented within the Group, and some of the outcomes from it.

Wataniya Telecom
From its inception Wataniya set out to be a "customer-centric" company. The state-of-the-art customer call centre in Kuwait is evidence of the committment to customer care that hallmarks its operations. The popularity of the "Action" service introduced this year shows that the company understands its customer needs. But the most telling testimony of all to the success of this strategy is the phenomenal growth in customers. Wataniya now has 786,000 customers in Kuwait, more than 50 per cent of the market, an astonishing achievement for a company that has only been operating for four years.

Once Wataniya had firmly established its operations in Kuwait, attention could be given to other markets. The company's reputation for service quality helped it to secure a licence for operations in Tunisia last year, and this year to win licences in both Iraq and Algeria. In Algeria the competition was particularly intense, involving a number of leading global mobile operators. This regional strength provides an excellent platform for further expansion in the years to come.

Gulf Insurance Company
Another story of regional growth this year has been Gulf Insurance Company's merger of its existing operations in Lebanon with those of the Fajr Al Gulf Insurance and Reinsurance Company. The synergies provided by this merger allow the Group to offer enhanced services throughout that country.

In Kuwait, Gulf Insurance Company continues to chart the way for the insurance sector in providing a top-class life insurance service, and a premier health insurance partnership for many leading companies, as well as for individual customers.

Burgan Bank
In good times and bad, Burgan's committment to customer care has never faltered. It is a company that openly expresses its intention: "Quality in all we do". And the consistent feedback from customers is that it is its customer service that differentiates Burgan from the competition. Now that the quality of its assets has been improved through a prudent provisioning strategy, the bank is poised to capitalise on this strengthened foundation, its excellence in service and an outstanding banking technology infrastructure.

United Gulf Bank
UGB's excellent profits this year are the fulfillment of the vision - and several years of hard work - by management to restructure and reinvigorate the bank. This drive has produced an across-the-board improvement in quality. This is reflected in relationships with other financial institutions (such as improved numbers and volumes of "lines of credit"); with associates (such as assisting in the establishment of Algeria Gulf Bank); and with both existing and potential customers (such as developing a marketing partnership with Doha Bank of Qatar).

This hard work had a major impact on the profits for the year, on the quality of the bank's assets, the conservative level of provisions, and on the range of business opportunities already identified for the year to come. This has positioned the bank well for a fruitful 2004.

Showtime
This should have been an extremely difficult year for Showtime. Early in the year the uncertainty in Iraq depressed new sales and increased churn, and the market had little chance to recover before the summer slowdown. The competition became even more fierce with greater numbers of "free-to-air" channels and intensified subscription rate pressure from the Pay-TV competitors. Under these circumstances it would have been easy to adopt a "cut costs, content and service" strategy.

But that would not have been consistent with the long-term strategy of being accepted as the region's outstanding provider of quality programming. So Showtime kept the content quality high and even added channels. It also introduced the "Tamam" service guarantee, promising to back-up its claims of excellent quality of customer service with compensation to customers any time the delivery systems dip below Showtime's market-leading standards.

This strategy has clearly been vindicated in the results for the year. Showtime is reaching more subscribers than ever and is increasingly recognised as the premier provider in the region. This has been converted into financial success; despite the adverse conditions through much of the year Showtime reached all its financial targets, and achieved cash-flow break-even, putting this young company on course for an exceptionally quick attainment of profitability. Showtime's growth rates for subscribers and its financial performance trends are on a par with those of industry leaders worldwide.

Other Companies in the KIPCO Extended Family
There are too many success stories this year to mention them all in this report, but I would like to give you a flavour of the breadth and depth of them. A highlight this year was the hugely successful float of KAMCO on the Kuwait Stock Exchange, and another was the eight millionth customer to visit United Real Estate's Marina Mall. Anyone who has travelled out of the country will have visited another of those success stories, the transformed Kuwait International Airport terminal. Kuwait United Construction Management and the United Projects Aviation Services Company have spearheaded this development which has benefitted so many passengers. We are also very proud of the excellent health care provided to a growing number of patients through the International Clinic and Al Maidan Clinic for Oral Health Services.

Finally on this note, it is always pleasing when our perception of the strength of a Group company is recognised by independent third parties, as happened with Jordan Kuwait Bank this year. The ratings agency Capital Intelligence upgraded its financial ratings for the Bank during the year, reflecting its solid asset basis and vigorous growth in profitability. With this upgrade there is only one bank in Jordan with a higher rating.

Regional Developments and Outlook
Many of the regional economic stimuli from 2003 can be expected to persist into the coming year, providing a degree of optimism for the financial outlook of the Group. The capital inflows into Kuwait arising from the settlement of United Nations Compensation Claims which provided a significant boost to investment can be expected to continue, and global interest rates should remain relatively low.

It has always been the Group's view that Iraq's restoration into a regional economic powerhouse would be a slower process than some have predicted. The events since its liberation indicate the resumption of a normal social and business environment will still require some time. In the interim the need for development of the country’s neglected and ravaged infrastructure will continue to require significant input from long-term, regional partners such as this Group.

Wider issues in the region are also likely to generate business opportunities. The increasing levels of professionalism in management that have been visible in recent years will spur growth, as will the ongoing infrastructure developments within the whole of the Middle East, and in the Gulf in particular. In fact, the development cycle is now reaching a stage where many of those infrastructure projects are beginning to need substantial renewals, overhauls and maintenance for the first time.

One imponderable question with a significant potential impact on business in the coming year is the performance of stock markets both globally and in this area. Markets have shown vigorous growth this year, and the growth in Kuwait in particular has been remarkable. Whilst it appears unlikely that a bear market will return in the course of the next year, it is difficult to see this exceptional level of growth in Kuwait being sustained for much longer. However precisely when the market growth will taper off, and to what extent, is impossible to predict.

Prospects for the Coming Year
However as the markets move, I look forward to the future with great optimism and confidence. Whilst a bear market can make business more difficult, it does present opportunities of its own. One benefit of the investment made in our long-term strategies and in our strong foundations is that KIPCO is now equally well placed to take advantage of the opportunities of a bear market or to benefit from a continued bull market.

It is this investment, focussed upon the building of long-term, sustainable profits and stable operating cash flows, the mainspring for growth in value, that has enabled KIPCO to go from strength to strength this year. It is KIPCO's committment to continue making such investments - in its businesses, in this region and in delivering products and services of value and quality to its customers, the people of this region - that will ensure that KIPCO will continue from strength to strength next year, and in the years to come.

My sincere hope is that the coming year will be one of greater stability and peace for our region. However, I am confident that no matter what the future holds, the KIPCO Group is prepared and positioned to continue to move from strength to strength, and in predicting that this year is the first of many good years for our shareholders.

Faisal Hamad Al-Ayyar
Managing Director and Chief Executive Officer