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Introduction | Market Conditions | Review of the Year's Results | Achievement: Financial Outlook Forum | Regional Developments and Outlook | Prospects for the Coming Year

Introduction
As I look back at my report to you last year, and reflect on the theme of "from strength to strength" that ran through it, I see the way that this year's operations have continued - and extended - that theme. And as I recall my assertion that the Group's strategies were beginning to bear fruit, I am confident in presenting this year's report to you, knowing that you will find that assertion to have been fully justified. This has indeed been a year of achievements for this Group. As you read this statement and review these pages, you will see many of them. And I am equally certain that you will continue to see such achievements in Annual Reports in the coming years.

Market Conditions
The market conditions were particularly favourable for Middle East businesses in 2004. The worldwide backdrop of broadly positive markets was reflected in, and added to, the upbeat economic climate for the region. The only significant adverse factor for worldwide markets was the high oil price, a factor which increased the potential in the Middle East. The demand "pull" on oil output has given a double fillip to the economy, with increased production and a price spike. The resulting liquidity has enabled a number of major infrastructure projects throughout the region to be initiated. These factors, plus the high risk/ reward opportunities arising from Iraq’s reconstruction have presented great opportunities to businesses. This in turn has generated a political and economic "feel-good" factor which has percolated right down to the consumer level. Closing the feedback loop has been the continued record-breaking levels of stock markets and real estate markets.

Review of the Year's Results
This was another record year for KIPCO, with net profits of more than KD 25 million, a 39 per cent leap from last year's figure of KD 18 million (which was itself a record) and KD 6 million the year before. This year's results stretched the Company's unbroken run of profitability to 13 years. More significantly, the change in the levels of profits is of an order of magnitude, and is based on sustainable business models and income streams. These facts show that KIPCO has now truly moved up to a higher league.

The results have been driven by the core companies in the KIPCO Group, whose contribution to the net profit increased by 20 per cent in 2004. United Gulf Bank set the pace with an unprecedented KD 13 million in profit, and Burgan Bank's profits surged by 45 per cent up to KD 30 million. Wataniya achieved KD 40 million in net profit, and Gulf Insurance Company contributed KD 6 million.

Achievement: Financial Outlook Forum
It is KIPCO's clear and express intention to be a leader, not a follower, in best corporate practice. KIPCO has always believed in corporate transparency and openness with investors and the business community, and in the highest standards of corporate governance. During 2004 the Group led the way for the Kuwait market in this regard by initiating the Financial Outlook Forums for the Kuwait Stock Exchange. In these Forums, Group companies presented their expectations for performance and profits in the year ahead to shareholders and potential investors, clearly and unequivocally. It was encouraging to note that even though some of the profit targets presented were aggressive they have, without exception, been achieved this year.

Achievement: Strategic Alliance
During the year the Group was instrumental in arranging a strategic partnership between Wataniya Telecom and Gulf Investment Corporation in respect of the mobile telephone business in Algeria. The strength and reputation of Gulf Investment Corporation substantially enhances the operations in Algeria, and those of Wataniya Telecom as a whole. It is also extremely pleasing that this major regional organisation has the confidence in this relatively new company to make such a substantial investment.

Achievement: International Recognition
It was encouraging that Wataniya's credibility was recognised by Gulf Investment Corporation, but 2004 has shown that the recognition is not just limited to one Group company, or to the local region. The growth, prospects and strength of the whole Group were effectively acknowledged by the upgrade in KIPCO's financial rating received from a reputable ratings agency in the year.

Achievement: Financing
These increasing levels of recognition of financial strength and earnings potential have enabled the Group to make a number of financing breakthroughs in the year. They have included some substantial new lines of credit from notable financial institutions in and outside the region, favourable roll-overs of a KD 40 million bond and other facilities, and the issuing of new bonds. They culminated in the signing of a US$ 100 million debut syndicated loan, which closed significantly oversubscribed. The Group has also made some breakthroughs in paying down debt. The most notable example is in the settlement of the US$ 260 million loan used to finance the acquisition of Tunisiana. The loan's scheduled term was seven years, but market conditions presented an opportunity to make gains through early settlement; the sound financial structure engineered in the Group enabled Wataniya Telecom to grasp the opportunity and pay down the loan.

Taken together, all these changes have extended maturity profiles of the Group's borrowing and matched them with balance sheet requirements. The net effect is to have left the Group in an excellent gearing position, yet with the financial muscle to pursue investment opportunities as they arise.

Achievement: Investment Research and Consulting
In addition to the pure investment research capabilities that already exist within the Group, over the past two years KIPCO has been nurturing an in-house knowledge management operation, Pulsar Knowledge Centre (PKC), which is now capable of rapid and in-depth analyses of market opportunities, together with comprehensive research and evaluation of business models and best practices. The achievement for PKC in the year was in progressing from a tool effectively available to KIPCO senior management for focussed research, into a resource available to all Group companies capable of delivering highest quality product across the whole spectrum of Group activities.

Achievement: New Business Opportunitie
The result of these infrastructure breakthroughs has been business growth. Organic growth has been seen throughout the Group, and growth through expansion has also been significant. The acquisition of a mobile telephone licence in the Maldives is one example of this expansion. The establishment of the American University of Kuwait is another.

The list of such examples is too long to repeat in this report, and it is hard to single out specific businesses, but this has been such a banner year for United Real Estate it is impossible not to acknowledge its progress. The company has made further substantial strides in the Waterfront Project, adding to the highly-successful Marina Mall by opening the Marina Crescent to great acclaim. The five-star Marina Hotel has also opened its doors since the year-end. These developments are already generating income, and the project pipeline looks just as strong. During the year the company gained official approval for the Abdaly Project (a six square kilometre project with a value measured in hundreds of millions of Kuwaiti Dinars); began work on the construction of a 50-storey office block in Kuwait City; and continued with the development of a prestigious hotel complex in Lebanon.

Regional Developments and Outlook
The increased production levels for oil may well have produced a permanent upward shift in regional economies, irrespective of the downturn in prices late in 2004. Certainly the impact can be expected to be sustained through at least the year ahead. Similarly, the major infrastructure projects initiated in the past 12 months will take some time to complete, and so will continue to stoke the economies for at least a further 24 months. With these drivers on full throttle, failing some unpredictable crisis in world markets, it is likely that the consumer-based market indicators will also continue to be strong. In essence therefore, the regional outlook continues to be robust.

Prospects for the Coming Year
The prospects for the coming year appear excellent. I believe that many companies in our region are likely to continue to show outstanding profitability in 2005, but I expect that 2005 is the year when our Group will start to really stand out. A significant drag on the Group's results in the past has been an undervaluation of Group companies’ shares. With two Initial Public Offerings scheduled for the year ahead, I believe we will be able to realise a substantial part of the undervaluation and to conclusively demonstrate the market lag once and for all. I expect the market to react with a much more realistic positioning of Group companies’ stock prices which will, of course, further add to the profits in the holding companies. With such a double impact, I cannot help but believe that we will all agree with the Board of Directors that this is the point of inflection, the years of breakthrough, and the start of good times for KIPCO shareholders.

Faisal Hamad Al-Ayyar
Managing Director and Chief Executive Officer