No bubble in record-breaking KSE

02 December 2005
The Kuwait Stock Exchange (KSE) was the regional champion in October, continuing to soar as others put in more muted performances. The rise has continued into November, with the benchmark KSE index hitting new record highs. And explosive profitability among local companies means valuations remain reasonable.

Given prevailing macroeconomic conditions, for a local corporate to fail to increase earnings would be quite a feat, as nine-month results confirmed. Profitability at the 136 listed companies to have published results was up by a cumulative 92 per cent, while the KSE is up by about 80 per cent from the start of 2005. 'This contrasts with other regional markets, where share price rises are running ahead of profits growth,' says Shailesh Dash, head of research at Global Investment House. 'Consequently the average forward price/earnings [PE] ratio is only 13.9, which is very cheap by regional standards. There is certainly no overheating.'

Valuations vary between sectors, with Global's figures showing the insurance sector cheapest at a PE of 5.6 and banking most expensive at 19.2. But in spite of foreign competition, the banking sector remains attractive, as rises in interest rates have widened spreads. ' Burgan Bankand Al-Ahli Bank of Kuwaitare looking good at the moment,' says Dash. The fate of Commercial Bank of Kuwait'sshare price will be interesting to watch as it negotiates to acquire majority control of Bank of Bahrain & Kuwait (BBK). Shareholding is already in flux, as Gulf Bankannounced through the KSE in late November the sale of its BBK stake to Pearl Real Estate Company and United Investment Company (see Banking & Finance).

Insurance companies are attractive in light of their price. ' Al-Ahlia Insurance Companywould be my favourite, followed by Gulf Insurance,' says Dash. 'Many of the real estate companies, Mabanifor example, are also cheap and are holding hidden value not being taken into account. Also a lot of the companies in the investment sector, the likes of Kipco [Kuwait Projects Company], have good assets.'

PWC Logisticsis a widely tipped stock following rampant expansion and recent deals worth billions of dollars signed with the Pentagon. 'While some of the smaller or more speculative stocks are good picks in the short term, in the longer term investors go back to those with the strongest fundamental basis - the likes of NBK [National Bank of Kuwait]and [telecoms operator] MTC,' says Dash. However, MTC was the chief loser in the week to 16 November, as it shed value following the approval of a 100 per cent capital increase.

Barred by the regulator from initial public offerings (IPOs) without a track record, private placements are becoming increasingly popular as companies bet on the continued strong performance of the stock market over the next two-three years, by which time they can list. The only potential IPO activity in the medium-term will be further offerings of stakes in state-owned companies and projects along the lines of the public sale of shares in Al-Qurain Petrochemical Companyin early 2005.

However, in light of the problems created by offerings in greenfield companies elsewhere in the GCC and the relatively calm state of prices in the local market, the authorities are likely to be satisfied with their regulatory prudence.

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