NEUTRAL. Mabanee Company S.A.K. (MAKB.KW)

Transcription

1 Mabanee Company S.A.K. (MAKB.KW) NEUTRAL CMP KWD Target KWD Potential Upside 6.9% MSCI GCC Index Kuwait Stock Exchange 8, Key Stock Data Sector Real estate Reuters Code MAKB.KW Bloomberg Code MABANEE KK Equity No. of Shares (mn) Market Cap (KWD mn) Market Cap (USD mn) 1, Avg. 12m Vol. (mn) Volatility (30 day) NA Volatility (180 day trend) Stock Performance (%) 52 week high / low (KWD) / M 3M 12M Absolute (%) 27.1% -34.2% -32.6% Relative (%) 0.5% -31.9% -30.0% Shareholding Pattern (%) Alshaya Group National Industries Group Holding Orient Investment Company 6.59 Public MABANEE and KSE Movement Executive Summary Formerly known as Kuwait Building & Construction Co. (KBCC), Mabanee Company was established in Presently, it has three main business lines: Real Estate, Investment and Construction. After its November, 1999, public listing on the Kuwait Stock Exchange (KSE) it is presently one of the largest real estate companies by market capitalization on the bourse. Mabanee embarked on the Avenues Project in 2005, which is Kuwait s largest shopping mall. In 2007, to tap regional opportunities, the company marked its foray into other Middle Eastern countries. It has set up businesses in Bahrain through Mabanee Bahrain Co., and in Egypt through The Mabanee Egypt Co. In September 2007, the company established Injazz Mabanee Real Estate Building Company. Revenue surged 12% thanks to C&R sector growth For the nine months ended September 30, 2008, Mabanee witnessed an 11.7% growth in its revenue to KWD million, primarily due to a strong performance from its Construction & Real Estate (C&R) segment. Revenues from its C&R segment increased an impressive 106.3% to KWD million on account of higher rental income from outlets and basements, advertising services rendered and placement fees. The company s net profit reached KWD million compared to KWD million translating to an EPS of KWD in 9M08. Outlook and valuation The Kuwaiti real estate sector has recently been impacted by the current global economic downturn and the subsequent slowdown in the property market in the region. Mabanee has presence across Real Estate, Investment and Construction. The company has embarked on the Avenues Project in 2005, which is Kuwait s largest shopping mall. However, the company s top-line growth is relatively dependent on investment income, as evident from the fact that financial investment income significantly accounted for 47.9% and 28.0% of its top-line in FY07 and 9M08, respectively. The drop in the regional stock markets is expected to have a negative effect on the company s income. Meanwhile, the company s current reliance on shortterm debt funds to finance its projects, have substantially increased the financial leverage and lowered its net profit margin to 57.0% in 9M08 from 68.7% in 9M07 and 61.8% in FY07. We believe that the phenomenon of rising operating costs and higher finance costs would continue at least in the medium-term. Currently, Mabanee is trading at a P/E multiple of 17.73x based on its 2008E earnings and at a P/B multiple of 3.03x on its 2008E BVPS; and at a P/E multiple of 16.29x based on its 2009E earnings and at a P/B multiple of 2.55x on its 2009E BVPS. The stock has lost 35.6% since the beginning of this year as compared to the KSE index YTD negative return of 31.3%. Considering the above factors and based on our DCF valuation approach, we have arrived at a Fair Value per share for the company at KWD The stock exhibits a 6.9% potential upside from its closing price of KWD (as on December 18, 2008). Therefore, we initiate our coverage on Mabanee with a NEUTRAL recommendation. KWD Million 2006A 2007A 2008E 2009E 2010E Revenue % Change YoY EBITDA % Change YoY Net Profit % Change YoY Adj. EPS (KWD) ROAE (%) Call us on or us at research@taib.com

2 Background The Avenue Project - largest shopping mall in Kuwait Mabanee Company (S.A.K. Closed) formerly known as Kuwait Building & Construction Co. (KBCC) was established in September 19, Headquartered in Safat, it has three main business lines: Real Estate, Investment and Construction. On November 17, 1999, the firm was listed on the Kuwait Stock Exchange (KSE) and presently is one of the largest real estate companies by market capitalization on the bourse. The company and its subsidiaries (together referred to as the Group ) specializes in construction using pre-cast concrete systems, fabrication and erection of steel items and construction of buildings, show rooms, markets and commercial complexes. The company also own, sells, manages and invests in real estate activities and surplus funds are invested in portfolios managed by specialized firms. Mabanee embarked on the Avenues Project in 2005, which is Kuwait s largest shopping mall and one of the Middle East s premier retail and leisure destinations. It is the first major project conceived and developed by Mabanee. The landmark project is built on a 425,000 square meters area and is divided into three phases. Looking for opportunities in other Middle Eastern countries In October 2005, Mabanee sold its 100% shareholding in Mabanee Logistica to an associate Al Rai Logistica Co. (a 45%-owned subsidiary), for a total consideration of KWD 5.32 million. Meanwhile, Al- Rai Logistica aspires to achieve a lead position in the field of inventory and supply chain management across the Gulf and the Middle East region. In 2007, to tap regional opportunities, the company marked its foray into other Middle Eastern countries. It set up the Mabanee Bahrain Co. that will own, develop and invest in real estate projects in Bahrain. The projects in the country are under development. The Mabanee Egypt Co. was also established to plan and develop real estate projects in Cairo and Alexandria. In September 2007, the company established Injazz Mabanee Real Estate Building Company in cooperation with Injazzat Real Estate Development Co. and Al Shaya United Co. with a paid up capital of KWD 25 million. Since its inception, the company acquired several lands in Saudi Arabia and UAE. Business Model Mabanee has adopted the following business model: Engaging in business activities related to commercial real estate. Additionally, warehouses and commercial buildings are built on company-owned land, on which it subsequently generates returns from rental income from tenants leasing its commercial property space as well as from their use of its value added services. In a bid to become one of the leading property developers in the region, Mabanee is considering property development opportunities similar to the Avenues project both locally and regionally. Attracting new occupants to its commercial premises, the company is networking all of its properties together that provides value added differentiation and business benefits. Board of Directors Chaired by Mohammed Abdulaziz Al-Shaya Mohammed A. Latif Al- Shaya Vice Chairman. Hamad Abdullaziz Al- Shaya Abdullah A. Latif Al-Shaya Azzam Abdulaziz Al Fulaij Mohammed Rashed Al Mutairi Ahmed Wasim Al Orabi Source: Company website

3 Subsidiaries/Affiliates of Mabanee Mabanee has a number of subsidiaries, affiliates and strategic investments. SUBSIDIARIES / ASSOCIATES / AFFILIATES COUNTRY % SHARE Al Rai Lake Kuwait % Al Rai Real Estate Company Kuwait % Avenues Holding Company Kuwait % Fifth Ring Road Company Kuwait % KBCC Realty International Virgin Islands (British) % Kuwait Prefabricated Building Company Kuwait % Mabanee Bahrain Company Bahrain % Mabanee Egypt Company Egypt % Second Ahlia General Trading Kuwait % The Avenues Mall (via Al Rai Real Estate Company) Kuwait % Al Rai Logistica Company Kuwait 44.78% Injazz Mabanee Real Estate Building Company Kuwait 40.00% Source: Zawya.com Industry Scenario GCC economies to grow at 3.6% Kuwait s nominal GDP grew at a CAGR of 22.2% over The impact of the world financial crisis on the Gulf is likely to be minimal on account of its huge liquidity and resources and the government support. Nevertheless, according to a recently published report by the Institute of International Finance (IIF), the growth in GCC economies is likely to decline to 3.6% in 2009 from 5.7% in 2008 on lower oil prices. From a global perspective, while FDI inflows into the GCC remain modest, accounting for 2.3% of total world inflows in 2007, the Gulf nations have been exploring investment avenues in Africa. According to UNCTAD s World Investment report 2008, Africa attracted FDI of around USD 53 billion in 2007 as against USD 46 billion in 2006 and USD 30 billion in The recent plunge in oil prices to levels last witnessed in 2005 is fast altering the outlook for oil revenues and for economic growth, both for Kuwait and for the region. There are 95 conventional and Islamic investment companies in Kuwait, and their total liabilities swelled to USD 66.5 billion in the third quarter of 2008, according to the central bank data. Kuwait s nominal GDP grew at a CAGR of 22.2% over and is likely to grow at between 6% and 7% in Crude oil prices which hit USD 66.40/barrel at the end of 2007 averaged USD /barrel during the first eleven months of Kuwait is a hydrocarbon-dependent economy, which accounted for 56.8% of nominal GDP and 94.9% of total export earnings in The large increase in oil revenue generated substantial fiscal and external current account surpluses, allowing the country to build up its net foreign assets to as high as KWD 5.72 billion in 2007 (accounting for 18.0% of nominal GDP). However, in contrast to a robust 4-year average nominal GDP growth rate of 26.4% over period, the country s nominal GDP advanced at a relatively slower growth rate of 8% in 2007 mainly due to dampening crude oil and liquefied gas production in the country in tandem with the OPEC decisions. The recent dramatic decline in oil prices to levels last seen in 2005 is quickly changing the outlook for oil revenues and for economic growth, both for Kuwait and for the region. Notwithstanding the current low oil price scenario, Kuwait posted a budget surplus of USD billion in the first seven months of its 2008/09 fiscal. Based on the initial budget forecast, total revenue is expected to amount to KWD billion for the whole year including KWD billion from oil exports, the country s main revenue earner.

4 Only 10% of the total country area is available to build on Total sales registered the second lowest level this year at KWD 95.2 million, down 23% from September and down 56% from year ago levels Kuwait s real estate sector is highly fragmented and dominated by small to medium players. While expats are not allowed to own property, the government has an obligation to provide housing to all nationals. Over 80% of all transactions are concerning private housing. The government owns 90% of the land and hence only a 10% of the total country area is available to build on, thereby driving demand and inflating prices. As a result of red tape, many Kuwaiti developers focus more on portfolios elsewhere in the region than on projects in Kuwait. Sovereign Wealth Funds and numerous real estate funds created by Kuwaiti companies are heavy investors into property both regionally and internationally. However, limited credit facilities and lack of transparency in the industry means the sector is expected to remain underdeveloped. There is no formal mortgage system, neither are there procedures to effectively deal with foreclosures. Kuwaiti nationals are eligible for subsidized loans up to KWD 70,000 from the Savings and Loan Bank, however due to constantly increasing prices (land prices are now accounting for more than 50% of the cost of a finished house), many are finding the prospect of buying or building their own house out of their reach. Real estate contribution to GDP has demonstrated no clear trend between 1994 and 2006, oscillating during between a high of 10% to a low of 6%. Since the economy is not vastly diversified, real estate as a sector receives a large portion of bank lending. At the end of the last fiscal year (2007/2008), lending increased 53.8% from fiscal year 2006/2007, indicating over exposure by local banks. Given the current financial crisis, the real estate sector could be severely affected. There are large mega projects going on such as the development of the Bubiyan and Failaka islands, along with the City of Silk. A report issued by the Real Estate Registration & Certification Department of the Ministry of Justice at the end of November showed total real estate sales fell to their lowest level in two years in the third quarter of 2008, excluding sales conducted through agents. Total sales registered the second lowest level this year at KWD 95.2 million, down 23% from September and down 56% from the levels a year back. The decline in October came largely from a decrease in activity in the apartments and commercial property sector where sales dropped 28% for the month. The residential sector also reported dip in sales of 11% on the month and 74% on the year, which was partly due to new regulations that came into effect at the start of the year and which forbade investment companies from trading in residential properties. Since then, residential sales volume and the number of transactions have significantly declined (46.8% and 45.6% Y-o-Y). Meanwhile, the average residential transaction size in October fell 12%, but was still up 1.4% Y-o-Y. For the first ten months of 2008, the sales volume was 30.6% lower than the same period in 2007, while the number of transactions declined by 34%. The largest decrease in property sales came in the residential property segment, which saw 40% decline in sales and 41% in number of transactions. On the same basis, sales of apartments and commercial property fell 19.5%. Meanwhile, the value of loans disbursed in October was KWD 12.4 million, 6% higher than the month before. Additionally, in March sales were again affected when the central bank implemented new regulations that limited monthly interest and repayment instalments for private borrowers seeking a new loan to the equivalent of 40% or less of their salaries, compared to the previous ceiling of 50%. The global economic downturn and the subsequent slowdown in the property market in the region are affecting Kuwaiti developers as well. At the end of November, Kuwait-based real estate developer Al Mazaya Holding announced it was delaying plans to expand its operations and would be focusing on completing projects currently under construction. Another leading Kuwaiti developer, Abyaar Real Estate, recently announced it was deferring plans to list on the Dubai Financial Market (DFM) as a result of the global economic downturn. Kuwait real estate can turn around faster Though the Kuwaiti real estate sector has slowed down, and some of the country s major property developers have become cautious, the sector as a whole remains in relatively good health. Sales may be down and developers may be consolidating their positions, but recent moves by the Central Bank - including cutting interest rates for loans to banks and increasing liquidity in the market - should encourage lenders to grant more loans, which in turn could boost property sales and help to make the downturn more short-lived than elsewhere. The positive aspect in this scenario is that speculation which was prevalent in the earlier market is no longer dictating terms.

5 Financial Performance FY 2007 Higher rental income and gain on financial investments drives top-line growth Revenue Structure Mabanee reported a healthy 143.4% Y-o-Y surge in its top-line to KWD million in 2007 mainly attributable to robust performance across its Construction & Real Estate Investment (C&R) and Financial Investment (FI) segments. The company s C&R segment benefitted from higher rental income from outlets & basements and advertising services for tenants to report a significant improvement in revenues to KWD million in 2007 compared to KWD 0.37 million in the last year. While rental income from outlets & basements increased to KWD million in 2007, advertising services for tenants improved to KWD 0.68 million during the same period. The FI segment s revenue surged to KWD million from KWD 1.73 million in 2006 on the back of gain on revaluation of investments and higher dividend income on investments contributed to the rising top-line. Segmental Revenue (KWD million) Y-o-Y % change Construction & Real Estate Investments Rental income from outlets and basements ,667.1 Placement fees from tenants NA Advertising services for tenants ,554.2 Information technology services for tenants NA Construction and real estate revenue Total ,008.1 Financial Investments Dividend income on investments carried at fair value through income statement Dividend income on available for sale investments Gain on sale of investments carried at fair value through income statement Gain on sale of available for sale investments Gain / (loss) on revaluation of investments carried at fair value through income statement (0.17) NA Interest income Murabaha income NA Total Cost Structure For the year ended 31 December, 2007, Mabanee s expenses related to rent advanced 86.8% Y-o-Y to KWD 1.76 million. General & administrative (G&A) expenses surged 228.4% Y-o-Y to KWD 2.15 million in The G&A expenses grew at a higher rate compared to revenues. As a percentage of revenues, it increased by 188 bps to 7.3% during the same period. In addition to this, investment properties expenses substantially went up to KWD 2.14 million as against KWD 0.05 million in Depreciation charges advanced to KWD 1.62 million during the year up from KWD 0.10 million. The company witnessed a considerable increase in the finance costs (up from KWD 0.06 million to KWD 2.66 million in 2007) on a higher level of short-term funding, bank overdrafts and long-term loans. Margins dip on rising costs Operating Profit and Net Profit Margin The company s operating costs ratio sharply deteriorated by 1,240 bps Y-o-Y to 26.8% in 2007, on account steep increase in expenses related to rent, G&A, investment properties and depreciation. Consequently, even though operating profit witnessed an over two-fold increase to KWD million compared to KWD million, operating profit margin contracted the same 1,240 bps to 73.2% during the year. Net profit nearly doubled (up 82.5%) to KWD million compared to KWD million in However, sharply rising operating costs along with surging finance costs led to a 2,063 bps decline in the net profit margin to 61.8% for the year. The company s adjusted EPS also increased 82.5% to KWD as against KWD in While ROAA improved to 11.5% in 2007 from 9.4%, ROAE was reported at 23.2% compared to 15.8% during the same period.

6 Chart Gallery Revenue (KWD Millions) Net Profit (KWD Millions) M M M M 2008 Total Assets (KWD Millions) Shareholders' Equity (KWD Millions) M M M M 2008 EBITDA Margin Net Profit Margin 88% 100% 86% 80% 84% 82% 80% 60% 40% 78% 20% 76% M M % M M 2008 ROAE ROAA 30% 16% 25% 20% 12% 15% 8% 10% 5% 4% 0% M M % M M 2008

7 Size of the Company The salient points about the balance sheet are as follows: Short term loans rise fivefold to KWD million in 9M08 The share of current assets in total assets decreased 1,200 bps to 11.9% from 23.9% in 9M07. This was driven by reduction in share of investments carried at fair value through income statement from 18.8% to 0.5% in 9M08. On the other hand, trade and other receivables accounted for 10.4% compared to 2.5% in 9M07. Cash and bank balances decreased 44.7% to KWD 2.51 million compared to KWD 4.54 million in 9M07 and its share in the total assets also declined 159 bps to 1.1% from 2.7% in the comparable period of the last year. The share of the non-current assets in total assets went up 1,200 bps to 88.1% in 9M08 from 76.1% in the comparable period of the last year. The share of investment properties contributing 64.5% of the total assets increased to KWD million as against KWD million. However, share of fixed assets in total assets declined to 2.0% from 16.0% in 9M07. For 9M08, shareholders equity was KWD million compared to KWD million in the corresponding period of the last year, mainly on account of an increase in share capital as a result of issue of bonus shares and higher statutory and general reserves. Debt to equity ratio drops to 1.03 in 9M08 Total current liabilities increased over three-folds to KWD million, which increased its share in total assets to 44.0% from 18.9%. The increase was mainly led by just over five-fold rise in short term loans to KWD million. Additionally, two-fold rise in bank overdrafts and a surge in trade and other payables also contributed to the rise in current liabilities. With the decrease in long-term loans partially offset by increases in provision for staff indemnity and other non-current liabilities, non current liabilities declined 32.6% to KWD 33.4 million. Further, its share in the total assets was also restricted to 14.5% compared to 29.2% in 9M07. Consequently, the company s debt-to-equity ratio dropped to 1.03 from 0.67 in 9M07. Financial Performance Analysis 9M08 Higher costs eat up margins resulting in lower profitability For the nine months ended September 30, 2008, Mabanee witnessed a 11.7% growth in its revenue to KWD million from KWD million in 9M07, primarily led by strong performance from its C&R segment partially offset declining revenues from its FI segment. Revenues from its C&R segment increased two-fold to KWD million compared to KWD 9.35 million in 9M07 on account of higher rental income from outlets and basements, advertising services rendered and placement fees. However, a 48.5% decline in the revenues from FI segment to KWD 7.55 million on the back of lower gain on revaluation of investments restricted top-line growth. The company reported a decline in expenses related to rent and G&A as a percentage of revenues, however, costs pertaining to investment properties as a percentage of revenues increased 254 bps to 11.1% in 9M08. In addition to this, depreciation charges rose 23.6% for the nine months in 2008, increasing the operating costs ratio by 443 bps to 26.4%. Consequently, operating profit margin dipped 443 bps to 73.6% compared to 78.0% in 9M07. Furthermore, increased short-term funding and bank overdraft led to higher finance cost, which more than doubled to KWD 3.80 million as against KWD 1.69 million in 9M07. Consequently, net profit decreased 7.2% to KWD million compared to KWD million. Net profit margin also contracted 1,166 bps Y-o-Y to 57.0%. The company s annualized bonus adjusted EPS declined 7.5% to KWD from KWD in 9M07. Moreover, annualized ROAE and ROAA contracted to 22.1% and 9.6% from 28.2% and 15.1%, respectively.

8 Peer Comparison For our peer comparison, we have considered the top five companies on the basis current market capitalization: First Dubai Real Estate Development Company (FIRSTDUBAI), Al Mazaya Holding Company (MAZAYA), The Commercial real Estate (Al Tijaria), National Real Estate (NRE), Mabanee Company (MABANEE). FY 2007 FIRSTDUBAI MAZAYA ALTIJARIA NRE MABANEE Efficiency Ratios: Total Assets Turnover Ratio (x) Working Capital Turnover Ratio (x) Profitability Ratios: ROAE 15.7% 32.1% 21.1% 17.7% 23.2% ROAA 7.3% 14.6% 13.8% 11.6% 11.5% Market Indicators: EPS (KWD) P/E (x) BVPS (KWD) P/BV (x) Current Market Capitalization (KWD million) Net Sales Investment Income# Cash from Operations before Working Capital Changes Operating Profit Net Profit Total Assets Shareholders' Equity Sources: Zawya.Com, Mabanee Financial statements #Includes income from associates/ subsidiaries 9M 2008 FIRSTDUBAI MAZAYA ALTIJARIA NRE MABANEE Efficiency Ratios: Total Assets Turnover Ratio (x) Working Capital Turnover Ratio Profitability Ratios: ROAE 54.7% 48.6% 15.9% 12.4% 22.1% ROAA 35.4% 20.3% 10.3% 6.8% 9.6% Market Indicators: EPS (KWD) P/E (x) BVPS (KWD) P/BV (x) Current Market Capitalization(KWD million) Net Sales Investment Income# * Cash from Operations before Working Capital Changes Operating Profit Net Profit Total Assets Shareholders' Equity Sources: Zawya.Com, Mabanee Financial statements *Includes partial selling of rights entitlement. #Includes income from associates/ subsidiaries

9 New Projects and Strategy Avenues Project expected to complete in 2011 to give Kuwait its largest shopping mall Mabanee embarked on the Avenues Project in 2005, which is Kuwait s largest shopping mall and one of the Middle East s premier retail and leisure destinations. It is the first major project conceived and developed by Mabanee, which will not only elevate the shopping experience in Kuwait to international levels but also raise the benchmarks and standards throughout the industry. The landmark project is built on 425,000 square meters and is divided into three phases in the Al Rai area. It also has the advantage of easy accessibility with being bounded by Fifth Ring Road to the south, Al-Ghazali Expressway to the east and Mohammed bin Al-Qassim Street to the west. The first phase of the project comprises, The Avenues Mall located in the Al Rai area of Kuwait City, construction for which began in 2004 and was officially inaugurated in April With over 216 stores, it houses a large number of regional and international brand names and trade marks. Among them is the first Carrefour store in Kuwait, the largest IKEA store in the region, in addition to the largest complex of 11 movie theatres, 39 restaurants and cafes, leisure and recreational facilities catering to the needs of children and families. The complex is also equipped with a car parking deck for approximately 4000 vehicles. The second phase that included expansion of the Avenues Mall began in early October 2006 on an area of 45,000 square meters and was opened in April The company has submitted its plans for Phase III, on the remaining area of 240,000 square meters, to the municipality of Kuwait City. The last phase of the project, with an estimated cost of KWD 250 million encompasses high-end shopping centres, as well as a traditional market and exclusive offices, showrooms, restaurants and an entertainment area for children. With the completion of all the phases expected in 2011, Avenues Project will have a gross built up area of approximately 1,000,000 square meters and retail gross leasable area of 330,000 square meters. Additionally, it will have a parking space for more than 14,000 cars. Further, using its rich experience of the Avenue project, Mabanee plans to venture into a similar project in Egypt and a multi-use real estate project in Bahrain. SWOT Analysis Strength: Established in 1964, Mabanee has a vast experience of more than four decades in real estate sector. It achieved significant recognition within and outside Kuwait, via its effective marketing efforts for The Avenues, which will be Kuwait's biggest and one of the largest mall in the GCC, thereby increasing its brand value. The company s presence across several segments in the property development and specializes in construction using pre-cast concrete systems, fabrication and erection of steel items and construction of buildings. Aiming for organic growth outside Kuwait, the company has setup a subsidiary and entered into joint ventures, will help to take advantage of new opportunities in other countries. Weaknesses: The company s high dependence on investment income can be seen by its performance in 2007 and latest nine-month results. The company is banking on only one major project in the near term, thus limiting its revenue generating opportunities. Opportunities: The Kuwait s efforts to shift focus from being an oil-based economy towards a more diversified economy will provide significant opportunities in the future for the sector and the company. Rapid population growth and significant demographic changes, such as trends of living separately from their families is becoming increasingly popular, therefore, demand for more living space will increase. In a bid to diversify, the company is looking to tap the field of inventory and supply chain management across the Gulf and the Middle East region.

10 Threats: With the ongoing global financial turmoil, the real estate and construction sector is likely to be hit hardest in near term. Rising liquidity crunch could force companies to dispose their projects and properties and new upcoming projects may get delayed. Risks and Concerns:. Declining oil revenues will reduce government expenditure, thereby reducing investments towards the real estate and infrastructure sector. Due to the liquidity crunch, globally, the bigger funding sources have been shrinking, increasing the gestation period for the ongoing projects and leading to a delay in new upcoming projects. Excluding agent transactions, total real estate sales fell 23% from September and down 56% from a year ago, in the third quarter of 2008, which is the lowest in two years, with residential property segment reporting the largest decline of 40% in sales. Valuation Methodology: We have used DCF valuation method for arriving at the fair value of Union Properties, as discussed below: Assumptions: Cost of Equity: 9.98% WACC: 9.75% (i) Risk free Rate (Rf) of 2.36% (ii) Historical equity premium of US equities over the risk-free rate. (iii) Country premium of 0.75% using Moody s long-term country rating (Aa2 for Kuwait) and estimating the default spread for the rating, based upon the difference in yields for traded country bonds. (iv) Unlevered industry Beta for emerging markets real estate developers of (v) A terminal growth rate of 3.0% Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 9.98%. Taking into consideration the long-term debt of Mabanee, we have arrived at the Weighted Average Cost of Capital (WACC) of 9.75%.

11 DCF Calculations DCF Valuation (FCFF Model) KWD 000 4Q08E Operating Profit (EBIT) 3,728 26,673 28,407 37,720 48,022 Effective Tax Rate 4.10% 4.10% 4.10% 4.10% 4.10% NOPAT 3,575 25,579 27,242 36,173 46,053 Add: Depreciation and Amortization 587 3,262 4,053 4,841 5,518 Less: Capex 6,396 57,302 54,020 47,591 42,431 Less: Change in Net Working Capital ,397-22,091-4,832-24,418 Operating Free Cash Flows to Firm (OFCFF) -1,576-15, ,746 33,558 Add: Non-Operating Cash Flows Free Cash Flow to Firm (FCFF) -1,576-15, ,746 33,558 WACC 9.75% 9.75% 9.75% 9.75% 9.75% Present Value / Discount Factor Long-Term Growth Rate (g) 3.00% Present Value of Free Cash Flows -1,552-13, ,300 22,771 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 5,887 Terminal Value: Residual Cash Flow (FCFF of 2012E) 33,558 WACC 9.75% Long-Term/Terminal Growth Rate (g) 3.00% Divided by Capitalization Rate (WACC - g) 6.75% Equals Nominal Terminal Value 511,807 Implied Multiple of 2012E EBITDA 9.45 Times PV/ Discount Factor 0.68 Present Value of Terminal/Residual Value 347,294 Enterprise Value 353,181 Implied Multiple of 2012E EBITDA 6.52 Less: Market Value of Long-term Debts 18,571 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 334,609 Net Outstanding Shares ('000) 417,450 Fair Value Per Share (KWD) Sensitivity Analysis We have prepared a sensitivity analysis table, showing the probable nominal terminal value, discounted terminal value and enterprise value given different growth rate assumptions and the WACC. The shaded area represents the most probable outcomes. Discount Factor Sensitivity Analysis of Nominal Terminal Value (KWD 000) Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00% 7.75% 595, , , , , % 507, , , , , % 441, , , , , % 391, , , , , % 351, , , , ,325

12 Discount Factor Sensitivity Analysis of Discounted Terminal Value (KWD 000) Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00% 7.75% 436, , , , , % 357, , , , , % 299, , , , , % 255, , , , , % 220, , , , ,462 Discount Factor Sensitivity Analysis of Enterprise Value (KWD 000) Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00% 7.75% 443, , , , , % 364, , , , , % 305, , , , , % 260, , , , , % 225, , , , ,079 Investment Opinion The Kuwaiti real estate sector has recently been impacted by the current global economic downturn and the subsequent slowdown in the property market in the region. In addition to this, the falling crude oil prices (which is at its lowest level since May 2005) has been dragging down the GCC bourses, which in turn have certainly squeezed the access to credit thereby slowing the regional property market. Simultaneously, the ongoing liquidity crunch is likely to hit hard at the real estate and construction sector across the region in terms of funding sources, increasing the gestation period for the ongoing projects and leading to delay in new upcoming projects apart from hampering sales. However, the recent moves by the Central Bank - including interest rates cuts for loans to banks and increasing liquidity in the market appears to be the only silver lining. Mabanee has presence across real estate, investment and construction sectors. The company has embarked on the Avenues Project in 2005, which is Kuwait s largest shopping mall and one of the Middle East s premier retail and leisure destinations. With the completion of the last phase of the Avenues real estate project in 2011; the project will have a gross built up area of approximately 1,000,000 square meters and retail gross leasable area of 330,000 square meters, which promises healthy revenue flows. Further, using its rich experience of the Avenue project, Mabanee plans to venture into a similar project in Egypt and a multi-use real estate project in Bahrain. On the flip side, the company s top-line growth is hugely dependent on investment income, as evident from the fact that financial investment income significantly accounted for 47.9% and 28.0% of its topline in FY07 and 9M08, respectively. The liquidity hit falling regional stock markets may further slowdown the company s top-line growth. The region s market cap fell by USD 127 billion during November 2008 to USD 595 billion which represented a nearly four-year low. Meanwhile, the company s recent reliance on short-term debt funds to finance its projects, have substantially increased the financial leverage and lowered its net profit margin to 57.0% in 9M08 from 68.7% in 9M07 and 61.8% in FY07. We believe that this phenomenon of rising operating costs and higher finance costs will continue at least in the medium-term, as the company is going to develop the last phase of the Avenues real estate project at a total cost of KWD 250 million. Currently, Mabanee is trading at a P/E multiple of 17.73x based on its 2008E earnings and at a P/B multiple of 3.03x on its 2008E BVPS; and at a P/E multiple of 16.29x based on its 2009E earnings and at a P/B multiple of 2.55x on its 2009E BVPS. The stock has lost 35.6% since the beginning of this year, as compared to the KSE index YTD negative return of 31.3%. Considering the above factors and based on our DCF valuation approach, we have arrived at a Fair Value per share for the company at KWD The stock exhibits a 6.9% potential upside from its closing price of KWD (as on December 18, 2008). Therefore, we initiate our coverage on Mabanee with a NEUTRAL recommendation.

13 Financial Statements Consolidated Balance Sheet (in KWD '000) 2006A 2007A 9M M E 2009E 2010E ASSETS Non-Current Assets Property, plant & equipment and investment properties 77, , , , , , ,376 Investments in associates 5,481 15,424 5,615 15,424 15,424 15,424 15,424 Available for sale investments 7,066 12,664 11,860 34,162 35,645 42,028 47,099 Total Non-Current Assets 90, , , , , , ,898 Current Assets Investments carried at fair value through income statement 25,634 29,062 31,831 1,171 1,217 2,491 5,652 Trade and other receivables 6,038 4,717 4,277 23,889 27,737 33,934 39,563 Cash and bank balances 1,421 3,916 4,541 2,510 3,920 4,034 5,677 Total Current Assets 33,093 37,696 40,649 27,569 32,873 40,458 50,891 TOTAL ASSETS 123, , , , , , ,789 EQUITY AND LIABILITIES Equity Share capital 33,000 36,300 36,300 41,745 41,745 41,745 41,745 Treasury shares -1, ,334-2,334-2,334-2,334 Reserves (including retained earnings) 37,225 53,252 51,767 56,418 63,926 83, ,093 Total equity 68,500 89,552 88,067 95, , , ,504 Non-Current Liabilities Provision for staff indemnity Other non-current liabilities 0 12,796 8,809 14,608 15,572 20,547 25,622 Long-term loans 33,931 37,857 40,714 18,571 18,571 18,571 18,571 Total Non-Current Liabilities 34,130 50,758 49,622 33,424 34,399 39,430 44,551 Current Liabilities Bank overdrafts 5,636 6,539 5,550 11,407 12,044 19,146 26,187 Short-term loans 7,500 26,364 12,936 68,714 67,640 83,433 85,908 Trade and other payables 7,773 22,026 13,585 21,338 25,890 46,758 77,639 Total Current Liabilities 20,909 54,929 32, , , , ,734 Total Liabilities 55, ,687 81, , , , ,285 TOTAL EQUITY AND LIABILITIES 123, , , , , , ,789

14 Consolidated Income Statement (in KWD '000) 2006A 2007A 9M M E 2009E 2010E Revenue Construction and real estate investment revenue (including investment properties revenue and gain on sale of leasehold land) 10,390 15,300 9,350 19,293 25,029 29,716 32,402 Financial investment income 1,729 14,205 14,664 7,554 8,865 9,816 10,840 Other income Share of results in an associate Total Revenues 12,174 29,633 24,122 26,949 34,031 39,681 43,407 Expenses Rent , ,008-2,222-2,344 General and administrative ,154-1,043-1,051-2,178-2,540-2,778 Investment properties expenses -50-2,141-2,066-2,994-3,357-4,438-5,237 EBITDA 10,523 23,573 20,324 22,165 26,488 30,481 33,048 Depreciation ,619-1,512-1,868-2,455-3,262-4,053 Impairment loss on AFS investments and impairment in value of investment in an associate Operating Profit (EBIT) 10,422 21,695 18,813 19,824 23,552 26,673 28,407 Finance costs -61-2,659-1,687-3,797-5,028-6,527-7,492 Profit before contribution to Kuwait Foundation for the Advancement of Sciences ( KFAS ), National Labour Support Tax ( NLST ), Zakat and Directors fees 10,361 19,036 17,125 16,027 18,524 20,145 20,915 Total Taxation (contribution to KFAS, NLST and Zakat) Directors fees Profit for the year/period 10,031 18,306 16,575 15,374 17,659 19,214 19,953

15 CONSOLIDATED CASH FLOW STATEMENT (in KWD '000) 2006A 2007A 9M M E 2009E 2010E CASH FLOW FROM OPERATING ACTIVITIES Profit for the year/period before contribution to KFAS, NLST, Zakat and Directors Fees 10,361 19,036 17,125 16,027 18,524 20,145 20,915 Adjustments for: Depreciation 101 1,619 1,512 1,868 2,455 3,262 4,053 Provision for staff indemnity Investment income -1,729-14,205-14,732-7,554-8,865-9,816-10,840 Share of results in an associate Impairment in value of investment in an associate Impairment loss on AFS investments Gain on sale of leasehold land -10, Gain on sale of property, plant and equipment Finance costs 61 2,659 1,687 3,797 5,028 6,527 7,492-1,161 9,423 5,708 14,751 17,758 20,832 22,400 Movements in working capital Decrease (increase) in accounts receivable and prepayments -2,974 1,320 2, ,020-6,196-5,629 Increase in trade and other payables 1,939 10,735 4,489-1,316 3,864 20,868 30,881 Increase in other non-current liabilities 0 12,796 8,809 1,812 2,776 4,975 5,075 Cash generated from / (used in) operations -2,196 34,274 21,869 15,527 1,378 40,478 52,727 Staff indemnity paid Finance cost paid -56-2,659-1,687-3,196-5,028-6,527-7,492 KFAS, NLST and Zakat paid Net cash generated from / (used in) operating activities -2,558 31,136 19,701 11,703-4,535 33,013 44,233

16 CASH FLOW FROM INVESTING ACTIVITIES Purchases of property, plant & equipment and investment properties -41,192-50,055-35,248-26,002-32,397-57,302-54,020 Proceeds from sale of property, plant and equipment Proceeds from sale of intangible assets 18, Investments in associates , Purchase of investments carried at fair value through income statement -1,410-2,526-1, Purchases of available for sale investments -6,733-9,022-7,481-10,872-11,335-13,365-14,977 Proceeds from sale of investments at fair value through income statement 6,586 11,099 7,819 7,878 7, ,806 Proceeds from sale of available for sale investments 3,275 3,657 3,064 8,641 13,994 12,798 13,449 Murabaha income received Interest income received Dividend income received on investments at fair value through income statement Dividend income received on available for sale investments ,114 1,225 Net cash used in investing activities -20,547-55,166-31,551-19,258-20,624-55,795-52,105 CASH FLOWS FROM FINANCING ACTIVITIES Amount due from associate , Purchases of treasury shares ,469-2, Proceeds from sale of treasury shares 512 2,836 2, Long-term loans obtained/(repaid) 17,325 9,641 19,719-19,286-19, Short-term loans obtained/repaid) 1,217 13,150-7,500 42,350 41,276 15,793 2,475 Dividends paid Net cash generated from financing activities 19,006 25,623 15,055 1,280 19,658 15,793 2,475 Net increase / (decrease) in cash and cash equivalents -4,100 1,592 3,206-6,275-5,502-6,988-5,398 Cash and cash equivalents (Opening) ,215-4,215-2,623-2,623-8,124-15,112 Cash and cash equivalents (Closing) -4,215-2,623-1,009-8,897-8,124-15,112-20,510

17 Common-Size Financial Statements ASSETS Non-Current Assets Common-Size Consolidated Balance Sheet 2006A 2007A 9M M E 2009E 2010E Property, plant & equipment and investment properties 63.1% 66.3% 65.8% 66.6% 65.5% 68.6% 69.9% Investments in associates 4.4% 7.9% 3.3% 6.7% 6.3% 5.0% 4.1% Available for sale investments 5.7% 6.5% 7.0% 14.8% 14.7% 13.5% 12.5% Total Non-Current Assets 73.2% 80.7% 76.1% 88.1% 86.5% 87.0% 86.5% Current Assets Inventories 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Investments carried at fair value through income statement 20.7% 14.9% 18.8% 0.5% 0.5% 0.8% 1.5% Trade and other receivables 4.9% 2.4% 2.5% 10.4% 11.4% 10.9% 10.5% Cash and bank balances 1.2% 2.0% 2.7% 1.1% 1.6% 1.3% 1.5% Total Current Assets 26.8% 19.3% 23.9% 11.9% 13.5% 13.0% 13.5% TOTAL ASSETS 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EQUITY AND LIABILITIES Equity Share capital 26.7% 18.6% 21.4% 18.1% 17.2% 13.4% 11.1% Treasury shares -1.4% 0.0% 0.0% -1.0% -1.0% -0.7% -0.6% Reserves (including retained earnings) 30.1% 27.3% 30.5% 24.5% 26.3% 26.7% 27.4% Total equity 55.4% 45.9% 51.9% 41.5% 42.5% 39.4% 37.8% Non-Current Liabilities Provision for staff indemnity 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Other non-current liabilities 0.0% 6.6% 5.2% 6.3% 6.4% 6.6% 6.8% Long-term loans 27.5% 19.4% 24.0% 8.0% 7.6% 6.0% 4.9% Total Non-Current Liabilities 27.6% 26.0% 29.2% 14.5% 14.1% 12.7% 11.8% Current Liabilities 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Bank overdrafts 4.6% 3.3% 3.3% 4.9% 5.0% 6.2% 7.0% Short-term loans 6.1% 13.5% 7.6% 29.8% 27.8% 26.8% 22.8% Trade and other payables 6.3% 11.3% 8.0% 9.2% 10.6% 15.0% 20.6% Total Current Liabilities 16.9% 28.1% 18.9% 44.0% 43.4% 48.0% 50.4% Total Liabilities 44.6% 54.1% 48.1% 58.5% 57.5% 60.6% 62.2% TOTAL EQUITY AND LIABILITIES 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

18 Revenue Common-Size Consolidated Income Statement 2006A 2007A 9M M E 2009E 2010E Construction and real estate investment revenue (including investment properties revenue and gain on sale of leasehold land) 85.3% 51.6% 38.8% 71.6% 73.5% 74.9% 74.6% Financial investment income 14.2% 47.9% 60.8% 28.0% 26.1% 24.7% 25.0% Other income 0.7% 0.4% 0.7% 0.4% 0.4% 0.4% 0.4% Share of results in an associate -0.2% 0.0% -0.3% 0.0% 0.0% 0.0% 0.0% Total Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Expenses Rent -7.8% -6.0% -2.9% -2.7% -5.9% -5.6% -5.4% General and administrative -5.4% -7.3% -4.3% -3.9% -6.4% -6.4% -6.4% Investment properties expenses -0.4% -7.2% -8.6% -11.1% -9.9% -11.2% -12.1% EBITDA 86.4% 79.6% 84.3% 82.2% 77.8% 76.8% 76.1% Depreciation -0.8% -5.5% -6.3% -6.9% -7.2% -8.2% -9.3% Impairment loss on AFS investments and impairment in value of investment in an associate 0.0% -0.9% 0.0% -1.8% -1.4% -1.4% -1.4% Operating Profit (EBIT) 85.6% 73.2% 78.0% 73.6% 69.2% 67.2% 65.4% Finance costs -0.5% -9.0% -7.0% -14.1% -14.8% -16.4% -17.3% Profit before contribution to Kuwait Foundation for the Advancement of Sciences ( KFAS ), National Labour Support Tax ( NLST ), Zakat and Directors fees 85.1% 64.2% 71.0% 59.5% 54.4% 50.8% 48.2% Total Taxation (contribution to KFAS, NLST and Zakat) -2.7% -2.1% -2.3% -2.4% -2.2% -2.1% -2.0% Directors fees 0.0% -0.4% 0.0% 0.0% -0.3% -0.3% -0.2% Profit for the year/period 82.4% 61.8% 68.7% 57.0% 51.9% 48.4% 46.0%

19 Financial Ratios 2006A 2007A 9M M E 2009E 2010E Liquidity Ratios: Current Ratio (x) Quick Ratio (x) Average Collection Period (Days) Length of Operating Cycle (Days) Average Payment Period (Days) Length of Cash Cycle (Days) Activity Ratios: Debtors Turnover Ratio (x) Creditors' Turnover Ratio (x) Total Assets Turnover Ratio (x) Net Fixed Assets Turnover Ratio (x) Working Capital Turnover Ratio (x) Capital/Equity Turnover Ratio (x) Profitability Ratios: EBITDA Margin (%) Operating Profit Margin (NPM) (%) Net Profit Margin (NPM) (%) Return on Average Equity (ROAE) (%) * 22.1* Return on Average Assets (ROAA) (%) * 9.6* Leverage Ratios: Debt to Equity (D/E) Ratio (x) Shareholders' Equity to Total Assets Ratio (x) Total Liabilities to Total Assets Ratio (x) Current Liabilities to Equity Ratio (x) Growth Rates: % YoY Growth in Revenue NA % YoY Growth in Net Operating Income NA % YoY Growth in Net Income NA % YoY Growth in Total Assets NA % YoY Growth in Shareholders' Equity NA Ratios used for Valuation: EPS (KWD) * 0.049* Bonus. Adj. EPS (KWD) * 0.049* BVPS (KWD) Bonus Adj. BVPS (KWD) Current Market Price (KWD) P/E Ratio (x) P/BV Ratio (x) *Annualised