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Our results – satisfactory in difficult times | Our companies – satisfactory performances | Our ‘club deal’ – good timing and astute management | Our ratings – the region’s highest rated corporate | Our future – people are key

Dear Shareholder,
Some periods in history are described as the best of times and the worst of times. The past year in global financial markets has certainly been the worst of times in the way the financial crisis and subsequent recession in the United States, Europe and Asia has affected almost everyone, everywhere, in every walk of life. Perhaps the worst is yet to come as recession takes hold of the global economy and the full impact is felt.

These are the best of times in the opportunities that lie ahead. When times are hard, the weakest companies struggle and some fail. So, as this financial crisis unfolds, it will provide some extraordinary opportunities for companies that have both the means and skills to make the most of the situation. Well-managed companies with strong financial discipline will adapt to these difficult circumstances and be in a favourable position to exploit opportunities as they emerge.

As we have proved so many times before, KIPCO is such a company. Almost anyone can do well when times are good, but the real test of any enterprise is the ability to be successful in difficult times. With the financial world upside down, it takes a special kind of company – and a special management team committed to financial discipline – to deliver success. This is a test KIPCO has passed before and it fully expects to exploit the current business climate to its advantage.

Our results – satisfactory in difficult times
Although for the first time since we began to announce forecasts we have not delivered the profit target we set for ourselves, 2008 was KIPCO’s seventeenth consecutive year of profitability. KIPCO delivered profit of KD 24.1 million (US$ 87.3 million) for the year. As a result, subject to approval by our General Assembly, we propose to pay shareholders a dividend of 40% (40 fils per share).

Although 2008 was a disappointing year, the impact of the current global financial crisis upon KIPCO could have been far worse without the regional focus and disciplined investment strategy which has protected your company from the worst of the crisis. KIPCO had minimal exposure to the toxic assets that have led to such huge losses among many global institutions. For example, despite the glowing forecasts being made less than a year ago, your company did not invest in real estate assets in the United Arab Emirates. This strategy of avoiding high valuations and concentrating on high-growth, medium risk sectors that offer long-term returns has always been – and will continue to be – the key to our success.

As we reviewed the situation towards the end of 2008, it became clear to us that the good operating results produced by our core portfolio companies could be used to protect the future income streams of the Group. So, we directed our companies to adopt a very prudent and conservative approach that would build reserves against expected and potential losses. This approach has bolstered your company and KIPCO will emerge from the financial crisis even stronger.

Our prudence can be measured by the provisions our companies have made in their 2008 results. Across the Group, we have taken more than KD 60 million (US$ 217.4 million) in provisions against assets. Obviously, these provisions had an impact on KIPCO’s profitability, but they are a necessary insurance against the current downturn.

Our companies – satisfactory performances
The terrible trading conditions in the second half of 2008 had a major impact on the performance of our core companies. Although profits are down from last year, each company delivered a satisfactory performance in the circumstances: Burgan Bank’s (Burgan) profits decreased by 50%; Gulf Insurance Company (GIC) profits decreased by 90%; and United Gulf Bank’s (UGB) profits decreased by 5%.

The highlight of the year for our financial services companies was the agreement by UGB to sell its holdings in Jordan Kuwait Bank (JKB), Algeria Gulf Bank, Tunis International Bank and the Bank of Baghdad, to Burgan for a total of KD 194 million (US$ 703 million). Burgan successfully completed the purchase of UGB’s share in JKB during the year to give Burgan majority control of the bank, but the purchase of the other three banks was set back due to a regulatory delay. However, UGB and Burgan are moving forward to complete the deal as soon as possible and are in the process of securing further necessary regulatory approvals.

Burgan’s agreement with UGB followed extensive studies on how to implement its regional expansion strategy and is part of the plan announced at our 2008 Shafafiyah (Transparency) Investor’s Forum, to reorganize our financial services businesses. Once completed, the deal will make Burgan one of the most geographically diversified commercial banks in the MENA region.

In 2008, GIC also maintained its reputation for innovation by taking its products direct to its customers. Through the installation of largescreen terminals at convenient locations, GIC customers can now buy or renew insurance products while at their bank, leisure centre or out shopping with their family, quickly and easily, 24 hours a day, seven days a week.

As to UGB, the bank’s successful sale of JKB to Burgan Bank made a positive contribution to its performance. As part of its proactive liability management, during the year UGB raised KD 32 million (US$ 115 million) through a medium term loan facility and repaid a maturing medium term KD 48 million (US$ 175 million) Murabaha facility.

In 2008 UGB acquired an associate shareholding in Millennium Finance Corporation – a licensed Dubaibased Islamic investment bank. UGB also expanded its regional banking presence by increasing Algeria Gulf Bank’s branch network from five to 13 branches, opening three new Bank of Baghdad branches to give the bank a total of 25 and added two new branches to Syria Gulf Bank’s operations.

Showtime – our pay-TV broadcast company – also expanded during 2008, indicating perhaps that the MENA region’s pay-TV industry is one of the world’s few growth markets. During the year, Showtime subscribers grew by 10%, revenues grew by 18% and the company was EBITDA profitable for the year.

Showtime continues its discussions with other pay-TV operators in the region in an effort to bring about consolidation of the industry which it sees as a significant value-enhancing move.

Our ‘club deal’ – good timing and astute management
One measure of how we manage our business during these difficult times, is management’s foresight in securing our long-term financial position. KIPCO had prudent funding policies in place before current economic circumstances made them necessary for everyone else. As a result, we have not faced the kind of liquidity problems the financial crisis has inflicted upon other companies. We have always focused on long-term funding for our business. The average life of our debt is now 2.3 years, whereas much of our surplus cash is placed in short-term deposits. By managing our liabilities conservatively and extending the maturity profile of our borrowings in good times, KIPCO has avoided the liquidity crunch affecting many firms in Kuwait.

A highlight of this approach was the completion in July of a US$ 350 million (KD 96.6 million) three year ‘club deal’ loan facility with a consortium of seven major international banks.

The timing of the deal could not have been better as it anticipated the downturn in the international credit market that occurred later in the year. The deal – and particularly its timing – allowed your company to consolidate its capital resources by significantly increasing the average life of its borrowings and funded borrowings that matured during the year. So, in November, we were able to repay a KD 15 million (US$ 55 million) bond and a KD 70.5 million (€200 million) medium term note issued in 2006 under our US$ 2 billion Euro Medium Term Note Programme.

KIPCO does not have to make any principal repayments until November 2010. As a result, KIPCO’s leverage and debt service ratios remain well within the guidelines set by the international credit rating agencies that review the company’s position.

As part of our ongoing strategy to broaden our investor base, during the year we explored the potential of a Global Depositary Receipt (GDR) traded on the London and New York Stock Exchanges. We spent some time considering the advantages of launching a GDR because it would allow investors outside our region an opportunity to trade in our stock. However, as market conditions deteriorated in the second half of the year, we decided to postpone the project until market conditions improve.

Our ratings – the region’s highest rated corporate
During the year, KIPCO’s status as the highest-rated private corporate in the region was confirmed by two leading international credit rating agencies.

In its first ever ratings report on KIPCO, Moody’s said its award to KIPCO of Baa1/Prime-2/Stable ratings were driven by the large flow of dividends from our controlled subsidiaries, added liquidity from our portfolio investments and our moderate financial policy. Moody’s also said that KIPCO’s liquidity is strong, with debt maturities more than covered by ample cash and other liquid resources.

In its report, Moody’s also said that although KIPCO has significant and long-standing support from its main shareholder – the Al Futtooh Holding Company – KIPCO’s ratings were assessed on a ‘stand-alone’ basis.

During 2008, Standard & Poor’s (S&P) also reaffirmed KIPCO’s BBB+/ A2/Stable ratings. In its ratings report, S&P said its ratings reflected the financial flexibility offered by our sizeable portfolio of listed equity investments and the good average credit quality of our investments. S&P also said that KIPCO’s holdings continue to have good growth potential from regional expansion and healthy economic growth in the GCC.

Our future – people are key
Most commentators agree there is no end in sight to the current financial crisis and the next 12 months promise to be very difficult. However, we have the utmost confidence that your management has the experience and expertise to steer KIPCO through these troubled times. Indeed, it is during times like these when the strength of any company’s management becomes evident for all to see. KIPCO has always believed in hiring and developing the very best talent the local and international market has to offer and this approach will now prove its full worth.

The response from our people to the current financial situation has been tremendous, demonstrating the commitment, hard work and dedication we have come to expect. We would like to take this opportunity to thank all our employees, in all our companies, for the efforts they made in 2008 and will continue to make in 2009.

If, indeed, these are both the best of times and the worst of times, we should look forward to the challenges that lie ahead. We believe KIPCO has the resources, vision and financial strength to make the best from the current situation and prove its leadership credentials once again. The next 12 months will not be easy, but we will prevail.

Faisal Al Ayyar
Vice Chairman