MANAGEMENT REPORT

Dear shareholder,

The year 2020 saw a 4.3% contraction in the global economy. According to the World Bank, recovery will be subdued in 2021, with an expected expansion of 4% provided that the COVID-19 vaccine is made available worldwide during the year. In the MENA region, the economy is forecast to recover slightly to 2.1% due to the impact of the pandemic and low oil prices.

In an effort to counter the impact of the COVD-19 pandemic, governments around the world announced stimulus packages to support their economies. In response to the decline of oil prices, OPEC, Russia and other oil producing nations (OPEC+) agreed to cut their output by 9.7 million barrels per day.

The Central Bank of Kuwait (CBK) announced a stimulus package worth KD 5 billion (US$ 16.5 billion) to support SMEs and other businesses that suffered under the pandemic.

For KIPCO and its Group companies, 2020 was a year of cautious monitoring of the evolving impact brought on by the pandemic. During the crisis, we continued to serve our customers in a manner that ensured both their safety and that of our employees. We worked to minimize the financial impact while maintaining operational readiness as curfews were lifted and restrictions were slowly eased.

With the vaccine being rolled out across the world, we look to 2021 with caution. Our companies, led by experienced executive teams, remain strong thanks to the stringent internal measures we continue to take. We are confident that we will weather through these circumstances as we continue to be on the lookout for new market opportunities that may arise.

Our 2020 results

At last year’s Shafafiyah Investors’ Forum, we noted the challenging and evolving circumstances that came with the COVID-19 pandemic, together with the global drop in oil prices that prevailed throughout 2020.

In 2020, we achieved a net profit of KD 6.5 million (US$ 21.4 million), compared to a loss of KD 39 million (US$ 128.6 million) in 2019. The company’s 2019 financials were restated due to a change in the classification of OSN after an increase in ownership.

KIPCO’s earnings per share for 2020 came to 0.4 fils (US$ 0.13 cents), compared to -33.2 fils (US$ -11 cents) per share reported at the end of 2019. Total revenue came to KD 753 million (US$ 2.5 billion) compared to the KD 698 million (US$ 2.3 billion) reported in 2019.

KIPCO’s consolidated assets remained at the KD 10.3 billion (US$ 34 billion) reported at year-end 2019.

Core operations

During 2020, our core operating companies have largely met our expectations given the challenges brought on by the COVD-19 pandemic and the low interest environment: Burgan Bank reported a net income of KD 33.7 million (US$ 111 million). Gulf Insurance Group’s gross written premiums grew 13% to KD 444.4 million (US$ 1.47 billion). Meanwhile, United Industries Company’s net profit reached KD 1.53 million (US$ 5 million).

Over the past twelve months, Burgan Bank’s operations registered a net income of KD 33.7 million (US$ 111 million) and operating profit of KD 115.5 million (US$ 381 million). The bank’s non-interest income for the year came to KD 72.8 million (US$ 240 million). Customer loans and advances grew 1.4% to KD 4.3 billion (US$ 14 billion), while customer deposits grew 2.5% to KD 4.1 billion (US$ 13.5 billion). Liquidity levels were strong, as reflected in the bank’s liquidity coverage ratio of 207.7% and net stable funding ratio of 108.2%.

As part of its plan to digitize its services and make them more accessible to its clients, Burgan Bank launched several applications and digital platforms throughout 2020. Early in the year, Burgan Bank launched its new online and mobile banking platform, as part of an initiative to provide customers with an enhanced omni-channel customer experience through the web and mobile app.

The ‘Tijarati’ app, designed exclusively for SMEs, was launched with the aim of providing business owners and entrepreneurs with real-time data and information about cash flow through their point-of-sale machines and payment gateways provided by Burgan Bank across all outlets.

This year, the bank also launched the electronic virtual assistant, ‘Banki’, a voice-enabled Artificial Intelligence powered banking chatbot. Banki uses the latest in AI and Natural Language Processing to understand the user’s query and fetch the relevant information from thousands of possible sources, all in a matter of milliseconds.

Furthermore, the bank launched its mobile banking app on the Huawei AppGallery, allowing users of Huawei smartphone an enjoyable and seamless banking experience. The year also saw the launch of contactless payment solutions with Samsung Pay, FitBit Pay and Garmin Pay.

In December, Burgan Bank successfully placed US$ 500 million (KD 151.6 million) Subordinated Tier 2 Capital Securities in the international debt market. With an 11-year tenure, and an option for redemption after six years, the bond’s term structure is the first of its kind in the GCC. The bond was four times oversubscribed, allowing the bank to place it at a coupon rate of 2.75% per annum.

This year, the bank held an Extraordinary General Assembly that saw the approval of the increase of the number of Board Members from nine to eleven.

As part of its vision to develop local banking talent, Burgan Bank launched ‘Ro2ya’, a dynamic blended training program to develop and nurture Kuwait’s future banking leaders.

In 2020, Gulf Insurance Group maintained its market leadership position in Kuwait, Bahrain and Jordan in terms of premiums written. The Group achieved a net profit of KD 16.3 million (US$ 53.7 million) during 2020, an increase of 22% compared to 2019. Its net operating profit increased 29% from KD 21.6 million (US$ 71.2 million) in 2019 to KD 27.9 million (US$ 92 million) in 2020.

In December, GIG signed an agreement with AXA to acquire its insurance operations in the Gulf region. The agreement includes AXA’s shareholding in AXA Gulf (Bahrain, UAE, Oman and Qatar), AXA Cooperative Insurance Company (KSA) and AXA Crescent Insurance Company (UAE). The transaction, subject to regulatory approvals, also includes the acquisition of Yousef Bin Ahmad Kanoo’s shareholding in AXA Gulf. Worth US$ 474.7 million (KD 144 million), the acquisition is one of the largest in the region’s insurance sector and will allow GIG to become one of the largest and most diversified insurers in the region once it is approved by regulatory authorities in the host countries.

This year also saw GIG partnering with Addenda Technologies, a blockchain technology startup that specializes in streamlining processes between insurance companies, thus fast tracking the claims process. GIG also acquired a 9.6% stake in ‘yallacompare’, which helps users compare insurance quotes and provide personal finance tools in order to make an informed selection.

Before year-end, GIG invited its existing shareholders to participate in a capital increase, where 14.2 million new ordinary shares will be issued at a value of KD 7.1 million (US$ 23.4 million). This represents approximately 7.6% of the existing issued share capital.

During 2020, GIG acquired a 60% majority stake in Gulf Warranties, Saudi Arabia, for SAR 1.2 million (US$ 0.3 million). The remaining 40% stake is held by Buruj Cooperative Insurance, GIG’s Saudi-based affiliate.

Locally, gig-Kuwait acquired a 65.2% stake in Gulf Takaful Insurance in a deal worth KD 1.4 million (US$ 4.6 million). The company also won a two-year tender to provide insurance coverage for employees of the Public Institute for Social Security and their families, worth KD 2.33 million (US$ 7.6 million).

For OSN, the past twelve months have seen the continued turnaround of operations. With a larger OTT platform outreach, ‘OSN Streaming’ is now able to deliver its content in 25 countries in the region. Our pay-tv company continued to deliver exclusive content, as well as producing original Arabic content for its viewers, including ‘Yalla Neta’asha’ (Come Dine with Me), ‘Aa’det Rigala’ (Men’s Talk) and ‘No Man’s Land’ on the Syrian war. More Arabic original shows are in the pipeline for 2021.

OSN Streaming now enjoys a better user interface, and the addition of Disney+ in April further enhanced the platform’s attractiveness during a time of lockdown that heightened the consumption of content. Viacom CBS launched its new streaming service, Paramount+, on OSN Streaming and on OSN Live. This exclusive content in the region, together with OSN’s successful partnerships with major telecommunications companies, has raised the number of OTT subscribers up from 80,000 at the beginning of 2020 to over 300,000 by the end of the year.

OSN’s management team was further strengthened during the year, with emphasis on people with extensive experience in operating digital world-class products and original content creation. The pay-tv and on-demand video platform also achieved content cost rationalization through the renegotiation of some of its studio contracts.

Due to the mandatory closure of many businesses during the COVID-19 outbreak, United Real Estate (URC) gave exemptions and lowered leasing rates to assist their tenants. The hospitality business also saw a drop in income due to the challenging circumstances brought on by the pandemic.

Despite this, in Kuwait, sales of residential units continued in the two high-rise Hessah Towers, located in Hessah Al Mubarak District. URC also completed the designs of Byout Hessah, another residential component in Hessah Al Mubarak District. Excavation permits for the project were obtained from the authorities, with work now underway. The project is expected to be completed in 2023.

As for Jordan Kuwait Bank (JKB), operating income for 2020 came to US$ 152 million despite the difficult circumstances due to the pandemic and lockdown procedures, while assets grew to US$ 4.0 billion. The year saw a growth in the Western Union Digital service with JKB as the settlement and operating bank for the service in Jordan. The service recorded a 68% growth in digital onboarding, and a 788% increase in the number of transactions and 384% in revenue. The year also saw the introduction of new technologies such as contactless cards and contactless ATMs.

During 2020, United Gulf Holding (UGH) focused on cost control measures, reducing its operating expenses by 13.5% from US$ 112.8 million to US$ 97.8 million. Despite the pandemic, both UGH and United Gulf Bank (UGB) retained their grade BBB- rating with a Stable outlook, reflecting the faith that external credit agencies have in UGH’s business model and the sustainability of its business.

UGH also closed a rights issue of around US$ 70 million, which received a 98% subscription despite market conditions, reflecting the strong shareholder support that the company has.

Our investment arm, Kamco Invest, began the year with the launch of its new identity, following the completion of the legal, operational and integration merger process with Global Investment House. This came hand-in-hand with an organizational restructure aimed at streamlining operations to increase efficiency across the company. Global Saudi also rebranded to Kamco Invest later in the year, after obtaining approval from the regulatory authorities.

During 2020, Kamco Invest successfully raised over US$ 623 million  (KD 189 million) for several products and transactions. Equity funds and managed portfolios continued to outperform their respective benchmarks.

In February, Kamco Invest announced its acquisition of the Service Now headquarters in Silicon Valley, in a deal worth US$ 286 million (KD 86.9 million) and an annual return of 7.5%. The investment company later exited from its investment in Abbott Laboratories’ nutritional headquarters in Ohio, as well as an Amazon warehouse in the UK. The investments achieving a total return of 22.8% and 27.9% respectively during the investment period. The two deals raised Kamco Invest’s managed real estate value to over US$ 1.2 billion (KD 364 million). The company also exited two managed US properties, generating above target returns for its clients.

The Investment Banking team led six bond and sukuk offerings during 2020, amounting to over US$ 2.6 billion (KD 786.5 million). The team was the exclusive sell-side advisor to a healthcare group in Egypt, launched a strategic initiative to support companies in battling the ongoing crisis and signed new advisory mandates.

Oula Wasata, Kamco Invest’s brokerage arm, continued to provide services to clients without interruption, increased its market share and attracted new clients through its online trading platform.

At the close of the year, Kamco Invest was awarded a six-month market maker license by the Capital Markets Authority.

Our industrial arm, United Industries Company (UIC), registered KD 5.95 million (US$ 19.6 million) in income from associates. Owing to the increase in the company’s long-term investments, UIC’s total assets came to KD 257 million (US$ 847.4 million). Net profit for the year came to KD 1.53 million (US$ 5 million).

Qurain Petrochemical Industries (QPIC) saw an increase of sales revenue by 7% in the first nine of the financial year (ended December 31, 2020), to reach KD 175 million (US$ 577 million) compared to KD 163 million (US$ 537.5 million) registered in the same period last year. This is due to the improved performance of its subsidiaries. Economic pressure brought on by the pandemic and lower oil prices led to a drop in net profit to KD 7.6 million (US$ 25 million) for the nine months, compared to KD 14.3 million (US$ 47 million) during the same period the previous year. The company’s finance costs decreased 33% after taking advantage of favorable LIBOR rates and administering better cash management. This year, QPIC raised its stake in its subsidiary, the National Petroleum Services Company (NAPESCO), to 60.53% after acquiring an additional 8.8% for KD 10.8 million (US$ 35.6 million).

During 2020, NAPESCO was awarded contracts worth KD 127 million (US$ 419 million). Early in the year, the oil services company was awarded two five-year contracts from Kuwait Oil Company (KOC) and the Joint Operations (Kuwait Gulf Oil Company and Saudi Chevron) worth KD 117.3 million (US$ 386.8 million). The contracts are to perform coiled tubing, drilling and environmental sludge treatment services.

NAPESCO also won a bid to provide maintenance and firefighting system services to KOC’s operations in the northern and western parts of the country. The five-year contract is worth KD 7.675 million (US$ 25.2 million). The petrochemical services company also won a KOC bid worth KD 2.37 million (US$ 7.8 million) to provide HSE manpower with logistical support and necessary equipment for four years, with a six-month optional extension.

SADAFCO, Saudia Dairy and Foodstuff Company, continued to overperform compared to the year before. The dairy company maintained its strong position in key Saudi market segments; 28% of the drinking milk market, 50% of the tomato paste market and 26% of the ice cream.

In the education sector, United Education Company (UEC) focused its efforts on ensuring that its students continued to receive quality education online, after the Ministry of Education closed all schools in March as part of its measures to curb the spread of the COVID-19 virus.

The American University of Kuwait (AUK) embarked on a digital transformation of its campus with the aim of providing its students with the learning tools they need anytime, anywhere. Through its Center for Continued Education, AUK provided a range of accredited online training programs. The university also renewed its technology partnership with Ellucian for five years, thereby supporting the digital transformation of such functions as human resources, finance and student services.

Earlier in the year, the AUK Library launched the ‘Oral History and Documentation Project’ in collaboration with KIPCO. The project was established to document Kuwait’s history on a wide range of topics through the memories of people who experienced it.

As for the American United School and our schools under      Al Rayan Holding, e-learning portals were activated to ensure that students continue to receive the best quality education possible while staying in the safety of their homes. Professional development and training was offered for teachers, parents and students.

Our business highlights

Through a capital increase, in March KIPCO increased its stake in OSN from 60.5% to 87.6%.

In July, KIPCO repaid its US$ 500 million (KD 153.9 million) bond, in addition to US$ 23.4 million (KD 7.1 million) in interest, leaving KIPCO with no maturing debts for three years. The bond had been issued in July 2010 for a ten-year tenure, under KIPCO’s EMTN program.

Reflecting our responsibility to our country, KIPCO and its Group companies made a KD 2.5 million donation (US$ 8.2 million) to support the Kuwaiti government’s efforts to fight the COVID-19 pandemic. The sum included a donation made by Burgan Bank under the Kuwait Banking Association, as well as food packages distributed by Kuwait Catering Company in areas that had been closed off to curb the spread of the virus.

Eulogy

KIPCO’s management and employees are saddened by the passing of two very important personalities to both the country and the company; the Late Amir of Kuwait, His Highness Sheikh Sabah Al-Ahmad Al-Jaber Al-Sabah, and His Excellency Sheikh Nasser Sabah Al Ahmad Al Sabah, one of KIPCO’s founders and major investors. We pray that they both rest in peace.

Looking ahead

While uncertainty remains, the nation-wide vaccination campaign started just before the end of 2020. After taking stringent measures to ensure the containment of the virus during the year, the Kuwaiti Government is now working to make sure that everyone who wishes to be inoculated receives the shot during 2021 to ensure a safe transition to a more normal way of life and a revival of business.

At KIPCO, we believe that from challenges rise opportunities. As such, our Group companies will continue to take measures to counter the longer-term factors that may preside as a result of the pandemic. At the same time, we are constantly seeking new business opportunities that may make themselves available.

Faisal Hamad Al Ayyar

Vice Chairman (Executive)