MANAGEMENT REPORT

Dear shareholder,

The last twelve months saw a postcrisis low of 2.4% in global growth, amid weakening trade and investment. While the World Bank had forecast a very slight increase to 2.5% in 2020, the onset of the COVID-19 pandemic has pushed the world’s economy into uncertainty.

Governments around the world have announced stimulus packages to support their local economies, as they work to strike a balance between working from home and maintaining social distancing, while keeping the economy afloat.

In an effort to arrest the decline of the price of the oil barrel, OPEC, Russia and other oil producing nations (OPEC+) recently agreed to cut their output by 9.7 million barrels per day.

In Kuwait, the Central Bank (CBK) announced a KD 5 billion (US$ 16.5 billion) stimulus package to support businesses impacted by measures taken to contain the COVID-19 virus. The package includes easing the conditions previously set by the CBK for financing the small and medium-sized enterprises (SMEs), thereby enabling Kuwait’s banks to reduce the impact of the virus outbreak.

For KIPCO Group, 2019 was a year where our companies continued to register growth despite the political tensions in the region, and the performance of our core companies has exceeded our expectations.

While we are guardedly cautious about 2020, we are confident that we have built up enough strength within our companies to continue to weather through these circumstances, thanks to the prudent internal measures we have taken over the years and the experienced executive team we rely on in the implementation of our strategies.

Our 2019 results

At last year’s Shafafiyah Investors’ Forum, we foresaw that our 2019 would be a year of relative growth given the stabilization of oil prices, the rising business confidence in the Middle East, and the rise in public spending locally.

I am delighted to report that we succeeded in achieving a net profit of KD 30 million (US$ 99 million), an increase of 6% from the KD 28.3 million (US$ 93.4 million) in 2018.

KIPCO’s earnings per share for 2019 came to 10.1 fils (US$ 3.3 cents), compared to 14.8 fils (US$ 4.9 cents) per share reported at the end of 2018. This is owed mainly to the company’s capital increase, as well as the one time increase in interest and other payments on perpetual capital securities held by a Group bank. Total revenue from continuing operations in 2019 came to KD 766 million (US$ 2.53 billion) compared to the KD 774 million (US$ 2.55 billion) reported in 2018.

KIPCO’s consolidated assets stood at KD 10.3 billion (US$ 34 billion), compared to KD 10.4 billion (US$ 34 billion) reported at year-end 2018.

Core operations

During 2019, our core operating companies largely met, and in some cases exceeded, our expectations: Burgan Bank reported a net income growth of 3% to KD 84.7 million (US$ 279.4 million). Gulf Insurance Group’s gross written premiums grew 8% to KD 394 million (US$ 1.3 billion).

Meanwhile, United Real Estate’s total operating revenue increased 10% to KD 113.8 million (US$ 375.7 million), while United Industries Company’s net profit reached KD 7 million             (US$ 23 million), bringing total assets up 5.8% to KD 273.1 million (US$ 901 million).

Over the past twelve months, Burgan Bank continued to deliver solid financial performance. In July, Burgan Bank issued US$ 500 million in Perpetual Tier 1 Capital Securities to international debt markets, with a yield of 5.75%. The securities saw strong demand from a diverse investor base and were 4.4 times oversubscribed. This reflects the confidence that regional and international investors have in the bank’s strategy, prudent financial management and prospects for growth and development. The issuance was undertaken in conjunction with a tender buy-back offer on Burgan’s existing US$ 500 million Perpetual Capital Securities, the first liability management exercise of its kind in the region.

The bank completed the sale of its headquarter building in Sharq, downtown Kuwait City, for KD 19.45 million (US$ 64 million) to United Investment Group. The bank is in the process of buying the more specious headquarters of the neighboring National Bank of Kuwait.

Also this year, Burgan Bank announced the appointment of Mr Masaud Hayat as Vice Chairman and Group CEO, and of Mr Raed Al Haqhaq as Deputy Group CEO and CEO of its Kuwait operations.

In 2019, Gulf Insurance Group maintained its market leadership position in Kuwait, Bahrain and Jordan in terms of premiums written. The Group also successfully maintained its credit rating at level ‘A’.

For its Kuwait operations, the company’s contract with the Ministry of Health to provide health insurance services to retirees, ‘Afya’, was extended six months for the fifth time in January. In May, the ministry announced that the tender had been awarded to GIG for KD 307.8 million (US$ 1.02 billion) for two years. The new contract includes 11 additional insurance services, with the number of insured retirees jumping from 107,000 to 135,000.

gig-Kuwait also signed a new health insurance contract with the Kuwait Fire Service Directorate covering 4,375 firefighters. The contract, valued at KD 2.143 million (US$ 7.07 million) for 28 months, came into effect in July. The Kuwait business also saw several successful digital initiatives, as part of a strategy to transform the HR, claims and risk functions, among others.

Regionally, GIG increased its stake in both gig-Egypt and gig-Iraq. Egypt operations achieved the highest penetration ratio for micro insurance products. In Jordan, 2019 saw the launch of several digital transformation projects for archiving, vehicle pricing and parts systems, collection tracking systems, in addition to remote issuance of insurance policies for certain client segments.

OSN, over the past twelve months, has offered a richer programming experience for all customers. With the closing of a major piracy source in August 2019, positive impact is expected on subscriptions and revenue in 2020. Furthermore, the content cost saving target of US$ 75 million set for 2019 was surpassed during the year.

As a result of changes in KIPCO ownership of OSN over 2019 and Q1 2020, and in accordance with IFRS requirements, the pay-TV company has become a subsidiary of the Group. The details and impact are available in 2019 financial statements (note 31).

With consolidated content, fewer repeats, new channels and a stellar programming line-up, the region’s leading entertainment network is making the TV viewing experience truly unique.

In April, OSN unveiled its new ‘Binge’ Channel, offering viewers a TV destination for an uninterrupted marathon-viewing experience. This channel further reinforced OSN’s customer-first strategy to deliver exceptional value through exclusive content, adding even more to its digital platforms – OSN Play and OSN on Demand.

OSN revamped its streaming platform, WAVO (now rebranded OSN Streaming). Streaming platforms have given viewers control over when, where and how to watch their favorite TV content. WAVO was soft launched in 2017 and was officially relaunched in April 2019 to coincide with the release of season eight of the internationally-loved show, ‘Game of Thrones’. The streaming platform features content from some of the world’s biggest studios, including Disney, Sony, Paramount and Universal, as well as HBO shows and Arabic dubbed shows. WAVO has enabled OSN to deliver products to 25 countries in the region for the first time in its history, and at a unit cost of content and pricing point that fits mass markets.

United Real Estate (URC), our real estate business, registered a 10% growth in revenue from KD 103.5 million (US$ 341 million) in 2018 to KD 113.8 million (US$ 376 million).

In Kuwait, sales of residential units in the two high-rise Hessah Towers, located in Hessah Al Mubarak District, continued. After having started digging the foundations under a temporary permit, URC obtained the license to begin construction of the two 40-floor towers, which are expected to be completed in 2022. Approximately 50% of the apartments have been sold.

URC also signed an agreement with Marriott International to bring the iconic St. Regis brand to Marrakech. The five-star hotel will be the second phase of the 2.5 million square meter Assoufid development and will consist of 60 rooms and 20 villas equipped with exclusive amenities such as a world-class spa, swimming pool, state-of-the-art fitness center, as well as three specialty restaurants for a world-class culinary experience. The development also includes 22 branded residences, 28 real estate tourist residences, 25 residential villas, 120 apartments and a retail area of 2,312 square meters. The first phase of the Assoufid development consists of a multiple-award winning 18-hole high-end golf club that lies on a naturally undulating terrain, with the beautiful, snow-capped Atlas Mountains providing a stunning backdrop.

Jordan Kuwait Bank (JKB) achieved a net profit of US$ 42 million, while assets came to US$ 3.9 billion.

Furthermore, JKB partnered with Western Union to launch wu.com in Jordan, enabling customers to send money internationally with a few clicks to more than 200 countries and territories, online at any time. This is in line with JKB’s vision to serve the diverse money transfer needs of its customers.

United Gulf Holding’s (UGH) revenue was up 8% to US$ 224.4 million in 2019 from US$ 208 million the previous year. Total assets came to US$ 3.47 billion, up 2% from the US$ 3.4 billon registered in 2018.

Our investment arm, now rebranded KAMCO Invest, successfully completed the legal execution of the merger by amalgamation with Global Investment House, whereby KAMCO is the merging company and Global the merged. KAMCO’s authorized, issued and paid capital stood at KD 34.2 million (US$ 113 million) after the merger. The company now enjoys a larger and more diversified shareholder base with non-controlling shareholders representing more than 40% of total issued shares.

During 2019, KAMCO introduced a new organization structure to support its fee-based core businesses, namely asset management, investment banking and brokerage. The investment company was ranked the fifth largest asset manager in the GCC region in Moody’s asset management report issued in September.

Furthermore, KAMCO successfully completed 10 investment banking mandates amounting to US$ 1.9 billion, raising the total successful mandates to US$ 22.3 billion since inception.

KAMCO continued to act as a joint lead manager for important bond issuances of major market players, including being awarded an advisory role in the bidding process by the CMA for an equity stake in Boursa Kuwait. It was later appointed by the CMA to manage the Boursa Kuwait IPO, which was the second and final phase of the privatization of the local stock exchange. KAMCO was also selected as the financial advisor for Kuwait National Petroleum Company (KNPC), to lead the financing of the Dibdibah solar power plant that the petroleum company is executing at KD 500 million (approximately US$ 1.6 billion).

Also this year, KAMCO acquired the HP Plaza building in CityPlace at Springwoods Village in Houston, Texas, in partnership with the Washington DC-based real estate asset management firm, Northridge Capital. The acquisition has the potential to generate a net cash yield of 7.5% per annum. It also acquired a building in Virginia in a deal worth US$ 80.5 million. Both properties were sold down to company clients.

Qurain Petrochemical Industries (QPIC) had a very positive year and registered a balanced performance across the company’s diversified portfolio. The company acquired a 60% stake in Jassim Transport and Stevedoring Company, a logistics, warehousing and heavy machinery rental services company. The deal was worth KD 42 million (US$ 139 million). QPIC was boosted to Boursa Kuwait’s Premier Market, after it fulfilled the required criteria.

QPICS’s subsidiary, NAPESCO – National Petroleum Services Company – was officially notified in August that it had been awarded a contract for insulated pipes and nitrogen pumps by the Kuwait Gulf Oil Company and Saudi Arabian Chevron. The five-year contract, affective August 1, is worth US$ 22 million (KD 6.7 million).

SADAFCO, Saudia Dairy and Foodstuff Company, commissioned the new state-of-the-art Jeddah Central Warehouse in 2019, allowing capacity for future growth and unlocking productivity savings to drive profit improvement across the value chain. The facility has a capacity of 42,000 pallets.

In education sector, United Education Company (UEC) continued to grow its facilities and student base. In May 2019, the American United School (AUS) graduated its very first class of seniors. The timing of the school’s first graduation was significant in that it followed the great work by many students, parents and staff members who diligently worked together to satisfy the requirements of accreditation. The work of many resulted in a rare ten-year dual accreditation granted by the Council of International Schools (CIS) and Middle States Association (MSA).

AUS finished the school year while also completing its final stage of construction. Adding to the continued expansion of course offerings for its students, AUS completed the installation of a video production laboratory and television studio. The addition of educational media courses in this professional environment is yet another unique opportunity for students to create, collaborate and achieve.

As for the American University of Kuwait (AUK), the beginning of the academic year 2019/2020 saw the opening of the College of Engineering and Applied Sciences. The college offers Bachelor of Engineering degrees in computer, systems and electrical engineering, and Bachelor of Science degrees in computer science and information systems. The computer engineering, computer science and electrical engineering degrees are accredited by ABET, the leading accreditation body for applied and natural science, computing, engineering and engineering technology degrees.

Our business highlights

In July, KIPCO successfully completed its share capital increase and allocation of shares to subscribing shareholders. The Board of Directors had approved the capital increase in January, with the aim of supporting the positive growth of KIPCO’s businesses through continuing to invest in its core portfolio companies. The rights issue saw a 17% oversubscription in the 452,748,662 new ordinary shares that were on offer, raising around KD 95.08 million (US$ 313.7 million) in equity and representing an approximate 29.3% raise on KIPCO’s former issued share capital. The offer price was set at 210 fils per issued share, and KIPCO’s issued share capital now stands at KD 200 million. KAMCO acted as the issuance advisor and subscription agent.

In October, KIPCO issued a seven-year US$ 500 million (KD 151 million) bond under its US$ 3 billion EMTN Program. The demand of US$ 3.6 billion on the order book was KIPCO’s largest ever in international debt markets, representing a seven-fold oversubscription. The bond was issued at a fixed coupon rate of 4.229%, the company’s lowest ever coupon rate. The issue will reduce annual cost of funding by US$ 26 million once the July 2020 notes are repaid.

This year, we are proud to announce that we inaugurated The Late Salwa Sabah Al Ahmad Al Sabah Stem Cell and Umbilical Cord Center, the Gulf region’s first center dedicated to stem cell research and the storage of umbilical cords. The center was built with a donation of KD 7 million (US$ 23 million) by Masharee Al Khair Charity Organization on behalf of KIPCO Group to the Ministry of Health. The facility, adjacent to the Maternity Hospital in the Sabah Health Zone, is built over an area of 12,000 square meters and includes testing and research labs, blood and cord storage banks, research and medical libraries, as well as lecture theater.

Looking ahead

Amidst the global fight against the COVID-19 pandemic, circumstances remain uncertain as businesses continue to be affected by closures, the enforcement of curfews and social distancing restrictions.

In Kuwait, the measures taken by the Government have been most effective in containing the spread of the virus and ensuring the safety of all people.

Within KIPCO Group, each arm of our business is closely evaluating the situation and taking measures to minimize its impact, while putting in place courses of action in order to ensure readiness once the pandemic has subsided.

While we remain cautious about the next twelve months, we are working through our core operations to continue to overcome these circumstances.

Faisal Hamad Al Ayyar

Vice Chairman (Executive)