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Kuwait corporate earnings to fall
Published in The Saudi Gazette on 27 - 09 - 2008

Corporate Kuwait faces a bleak outlook, Kuwait Financial Centre (Markaz) told Saudi Gazette on Thursday.
The financial house has revised downward its forecast on Kuwait markets, saying that corporate earnings were projected to post lower growth rate.
M.R. Raghu, head of research and Amrith Mukkamala, senior analyst at Markaz noted that at the beginning of 2008, Markaz had expected the consolidated earnings of companies in the Kuwait market to grow by 42 percent, however, till the first half this year, the earnings have witnessed a decline of 12 percent, leading them expect that earnings will witness a flat growth for 2008.
The decline in growth has ensured a decline in fair value for the index which corresponds to an index value of 13,595. On a consolidated market basis at the current market prices, Kuwait stock market is discounting its earnings (2008) by 10 times, which is 8 percent less than the average 5-year forward PE.
Markaz noted that investment took the biggest hit in earnings. As of the first half of this year, the sector witnessed a decline in earnings by 29 percent on a Y-o-Y basis. The decline in earnings can be attributed to a higher base and one off positive impacts in 2007 and lack of the same in 2008.
The analysts expect the sector to end the year with a 22 percent decline in earnings.
However, on a positive note, banks (16 percent and 22 percent of Kuwait Inc earnings in 2007 and 2008 respectively) have witnessed an earnings growth of 24 percent in the first semester.
The report expects banks to close the year with a 34 percent growth in earnings, which is higher than the 26 percent growth posted in 2007.
The aggregate earnings slow down can be mainly attributed to the steep fall in earnings of the investment services companies, Markaz said.
In 2007, the aggregate earnings of the investment services sector witnessed a growth of 222 percent, mainly due to a revival in stock markets post the 2006 fall (Kuwait price index fell by 12 percent in 2006 and revived to post a 25 percent growth in 2007, the scenario was similar for most of the markets in the GCC). Due to a higher base effect, nonetheless, the growth in earnings declined for the first half of 2008.
The markaz report expects the sector to close the year with a decline in earnings to an extent of 19 percent.
Banks, however, have witnessed robust growth rates in earnings in the first half and is therefore, expected to continue and close the year with a 34 percent growth in the bottom line.
The telecommunications segment was another let down in terms of growth. In Kuwaiti dinar terms, the sector posted a 4 percent decline in the period covered.
“We believe (the telecommunications sector) will pose the biggest risk to our earnings forecast for 2008. We are expecting a 9 percent full year growth for Zain and 33 percent growth for NMTC. The factors that impacted the 1H08 profits negatively include a decline in ARPU rates, higher capex and increasing competition. We expect these factors to continue thru the rest of the year as both the companies are expected to face an increase in competition due to the entry of the third mobile player in Kuwait.
On the positive side, significant subscriber additions in Saudi Arabia for Zain should be a positive outcome.”
The growth in the real estate segment, which provides to 11 percent of 2008E earnings (9 percent of 2007 earnings) is expected to be robust at 24 percent for 2008.
However, this rate of growth represents a marked decline from a 52 percent growth posted in 2007.
The decline in growth rates can be mainly attributed to weakness in earnings growth in the smaller real estate companies.
Large real estate companies such as Al Mazaya and Commercial Real Estate (combined 2007 earnings was 17 percent of the total real estate segments earnings) posted growth rates of 162 percent and 45 percent. Smaller companies in terms of earnings witnessed a weakness in growth.
The earnings growth has been driven by strong performance in the mid- and small-cap stocks.
The large cap earnings has been facing a consistent decline to the over all earnings from 65 percent in 2002 to 55 percent in 2008 eranings.
For 2008, the report expects large cap earnings growth to witness a 4 percent decline.
The mid caps, which currently contribute to 27 percent of Kuwait Inc earnings is expected to grow by 12 percent.
The small caps are expected to lead the pack with an earnings growth of 17 percent, however, with a small earnings contribution of 15 percent to the overall earnings.
Kuwait is expected to post another year of strong growth in 2008 due to the expected 19 percent growth in the non-hydrocarbon segment of the economy.
The IIF, which forecasted in August 2007, nominal GDP growth for 2008 of 7.4 percent, revised its estimates upwards in August this year to 13 percent at $131.3 billion.
Kuwait is likely to witness another year of buoyant fiscal surplus (64 percent of government revenues), with revenues almost three times expenditure. In August, the IIF revised its 2008 revenue and expenditure growth forecasts upwards from 9 percent and 15 percent in August to 70 percent and 26 percent, respectively. A sharp increase in Kuwait's current account surplus of about 78 percent is expected to take it close to 64 percent of GDP in 2008, significantly higher from 11 percent in 2002. The positive trade balance primarily due to oil exports, which surged 64 percent, is expected to drive the current account surplus upward apart from other income and transfers. While exports are expected to jump 56 percent, growth in imports may lag at 14 percent. Money supply has been growing at rising rates over the past few years in the Kuwait economy and fueling inflation.
Money supply jumped 22 percent and 19 percent in 2006 and 2007, respectively.
Central banks across the GCC have taken monetary measures to contain money supply. These measures include issuing sovereign bonds to drain out excess liquidity from the markets and raising reserve requirements for banks.
Last year saw the gradual pickup in inflation rates. By the beginning of 2008, the CPI index recorded 7.5 percent annual growth.
Since then, the price rise scenario worsened and jumped to double digits by May, posting 11.1 percent growth. This amounts to a surge of 3.6 percent in inflation rate in a matter of just five months.
For the full year, the price of the consumer goods basket is expected by IIF to register a significant 10.4 percent growth over last year's levels (contrasting the 3.4 percent estimates at last year). __


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