OVERWEIGHT. The Sultan Center Food Products Co. (SCFK.KW)

Transcription

1 The Sultan Center Food Products Co. (SCFK.KW) OVERWEIGHT CMP KWD Target KWD Potential Upside 22.2% MSCI GCC Index Kuwait Stock Exchange Key Stock Data Sector Retail Reuters Code SCFK.KW Bloomberg Code SULTAN KK Equity Net Outstanding Shares (mn) Market Cap (KWD mn) Market Cap (USD mn) Avg. 12m Vol. (mn) Volatility (30 day) Volatility (180 day) Stock Performance (%) 52 week high / low (KWD) / M 3M 12M Absolute (%) 4.5% -15.5% -56.0% Relative (%) 9.9% 14.6% -5.7% Shareholding Pattern (%) Khaled Sultan Al Essa 9.85 Abdullah Sultan Al Essa 9.40 Faisal Sultan Al Essa 9.13 Jamil Sultan Al Essa 8.84 Anwar Sultan Al Essa 6.92 Public TSC and KSE Movement Executive Summary Established in 1981, The Sultan Center Food Products Co. better known as The Sultan Center (TSC) is Kuwait s largest independent retailer. The company is primarily engaged in retail, restaurants, fashion, trading, securities and telecom segments. The company s major investments include a 30.8% stake in National Real Estate Company of Kuwait (NREC). The company is present in Kuwait, Oman, Jordan, and Lebanon. TSC was listed on the Kuwaiti stock exchange in 1997 and currently the public holds a 55.86% stake. Operating Profit improved 36.4% in 9M08 For the nine months ended September 30, 2008, TSC s total revenues increased 14.5% to KWD million from KWD million. Total operating cost increased 15.6% YoY to KWD million and as a percentage of revenue was 80.8%, up 79 bps from 80.0% in 9M07. Total expenses and charges were reported at KWD million, up 6.6% from KWD million, on account of 6.1% rise in selling, general and administrative (SGNA) expenses in 9M08. Total expenses and charges as a percentage of revenue declined to 15.2% from 16.4% in 9M07. As a result, the company s operating profit improved 31.3% to KWD million from KWD 8.28 million in 9M07. Furthermore, net profits attributable to shareholders decreased 36.4% to KWD million in 9M08 from KWD million in 9M07. The company s net profit margin narrowed 487 bps to 6.1% from 10.9% during the same period. This can be attributed to rise in finance charges and 92.1% fall in investment income. The adjusted annualised EPS, decreased to KWD in 9M08 from KWD in 9M07. Outlook and valuation The Kuwait retail sector is expected to witness subdued growth in the mid-term due to the economic slowdown and is likely to revive with the global economy. Government spending is also expected to slow in the current year, with a dip in oil prices. Private consumption is also expected to witness a low growth with employment and real wages likely to remain at low levels. TSC s focus on expansion via organic and inorganic route in the MENA region is expected to keep its long-term growth drivers in place. However, the global economic downturn and relatively weak outlook on economic growth in the medium-term is expected to lead to a decline in the volumes of business and demand for luxury products, thereby negatively impacting the top and bottom-line of the company. To determine the value of the company, we have used the DCF valuation method. Currently, TSC s stock is trading at a P/E multiple of 6.79x and 5.87x on 2009E and 2010E earnings, and at a P/B multiple of 0.70x and 0.67x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has lost 7.0% since the beginning of this year as against a negative YTD return of 15.5% registered by the Kuwait Stock Exchange Index. Based on our DCF valuation, we have arrived at a Fair Value of KWD exhibiting a 22.2% upside from its closing price of KWD (as on March 04, 2009). Accordingly, we initiate our coverage on the Sultan Center s stock with OVERWEIGHT recommendation. KWD Millions 2007A 2008E 2009E 2010E 2011E Operating revenues EBITDA EBITDA Margin % Net Profit Net Profit Margin % Adjusted EPS (KWD) Total Assets RoAE % Call us on or us at research@taib.com

2 Kuwait s independent retailer largest Background TSC was established in 1981, and is Kuwait s largest independent retailer. It was incorporated as a holding company on September 29, The Sultan Center originated from PSC Supply, a unit of the Petroleum Services Company, which was a major provider of hardware, tools, and supplies to the oil industry. It was founded in 1976 by Jameel Sultan. TSC expanded to become a premier retailer and leading supplier in the Middle East. The company launched its first self-service store in Shuwaikh, Kuwait, specialising in the supply of household hardware and do-it-yourself product. Currently, the company operates in the retail, restaurants, trading, fashion, securities and telecom segments. As of 2007, it holds about 15% in the retail segment in Kuwait. In 1997, TSC was listed on the Kuwait stock exchange and currently the Sultan family owns 44.14% of the company and the remaining 55.86% is held by the public. TSC s Business-line The Sultan Center Retail Segment Trading Telecom Security Investment Services Household goods Fashion Restaurant United Capital Source: TSC Introduces the concept of one-stop shop to the Middle East Board of Directors Chaired by- Mr. Ayman Bader Sultan Al Essa Vice Chairman - Mr. Jamil Sultan Al Essa Mr. Tarek Abdulaziz Sultan Al Essa Mr. Faisal Jamil Sultan Al Essa Mr. Fawzi Khaled Sultan Al Essa Source: Zawya TSC opened its first overseas retail store in 1999, the Sultan Center Oman, which became one of the largest retail stores in the country, prompting the launch of a second Oman-based store, in 2005, the Wholesale Center Al-Khoud. In 2003, TSC expanded into Jordan with the acquisition of Safeway Jordan. Currently, the company s portfolio includes 55 retail outlets and over 40 representative agencies in the Middle East. The company also introduced the one-stop shop concept in the Middle East. TSC restaurant division operates through local and international franchises such as the Kuwait-based Jeans Grill and Café Sultan and the US-based Chi-Chi s and Tumbleweed. Its trading division, Market Vision Trading, a legally separate entity with no national or regional restrictions, develops local and international strategic trading partnerships. Specialty Fashion Group operates 15 international retail outlets as of 2007 in the Gulf with brands including Naf Naf, Quiksilver, Ocean Pacific and others. The division plans to expand throughout the Middle East. TSC provides telecom services through its subsidiaries, Sultan Telecom, and is the sole telecommunications service provider in the Kuwait Free Trade Zone. Another fully owned subsidiary ATCO, specialises in communication networks involving fiber optics, microwave transmission, and various narrow band and broadband systems. The United Capital Group is TSC s investment arm that mainly focusing on the establishment or investment in companies, private placement, and investment in real estate and trading securities, financial consultancy, valuations and management of companies. The company s major investments include a 30.8% stake in National Real Estate Company of Kuwait (NREC), which in turn owns 22.9% stake in Agility. Agility, a recognised leader for global logistics solutions has an infrastructure of over 20,000 employees in 450 offices across 100 countries.

3 Business Model Engaged in the wholesale and retail, through its subsidiaries, joint venture companies and strategic partners through its 55 stores Plans to increase open onestop store and discount stores to expand its customer base THE SULTAN CENTER Provides Investment advisory and asset management services Diversifying its income sources by expanding into telecom and trading Affiliates of TSC The company has a number of subsidiaries and strategic investments. SUBSIDIARIES / AFFILIATES / INVESMENTS COUNTRY % SHARE ATCO General Trading and Contracting Kuwait Arab Market General Trading and Contracting Kuwait Brothers Holding Company Kuwait Daliya Al Wataniyah General Trading and Contracting Company Kuwait Gezlan Al Deerah General Trading and Contracting Company Kuwait Gulf United Real Estate and Tourism Investment Company Kuwait Market Vision General Trading and Contracting Company Kuwait National Energy Company Kuwait Style Company for Readymade Garments Kuwait Sultan Al Jazeera Catering Company Kuwait Sultan Bin Essa Sons Company Kuwait Sultan Telecom Kuwait The Sultan Center Kuwait United Capital Group Kuwait United Security Group Company [via Ayman Bader Sultan Bin Essa and Partners]] Kuwait White Tower Company for General Trading and Contracting Kuwait Sultan Center Trading and General Kuwait Speciality Fashion Group Kuwait - Jordan Investment and Supply Company Jordan The Sultan Center - Lebanon Lebanon The Sultan Center - Oman Oman Style Kuwait International Readymade Garments UAE Sultan Holding Bahrain Bahrain INVESMENTS Al Khuraif Company [via National Energy Company ] Kuwait Source: Zawya

4 Industry Scenario The MENA region expected to grow at 3.9% The Middle East and North Africa (MENA) has witnessed an unprecedented expansion over the past years in the retail sector, supported by a healthy economic growth, higher disposable income, increasing household consumption, rising share of affluent population amidst flourishing service industry including tourism, banking and trading sectors. The MENA region grew at 5.8% in 2007 and same rate of growth is expected in The region s growth rate is projected to slow to 3.9% in 2009, and expected to rebound to 5.2% in According to McKinsey, between 1993 and 2007, more than USD 1.1 trillion of the GCC wealth had been reinvested in the region. The increase in the wealth of the GCC nations translated into higher disposable income which has been instrumental in changing the lifestyle of the residents contributing to the retail boom. However, given the current global financial turmoil and the subsequent weak demand, the dependence of the GCC economies on oil revenues has turned into a bane rather than a boon. Further, as the OPEC oil prices averaged USD per barrel in 2008, IMF estimates the region to have grown at 6.8% in 2008, but is likely to drop to 3.5% in 2009, as prices cool-off and investment growth decelerates. GDP and Per Capita 2007 USD billions ,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Qatar UAE Kuwait Bahrain SA Oman Libya Lebanon Algeria Tunisia Jordan Morocco USD per capita Syria Egypt Sudan Yemen Nominal GDP Per Capita Source: IMF Middle East has an estimated retail size of USD 100 billion GCC retail market is expected to offer immence opportunities for retail players in the coming decade. The retail sector in the GCC is estimated at USD 100 billion with Dubai emerging as the regional retail hub. According to a report by RNCOS, the Middle East retail market is concentrated in the GCC region and is likely to grow three-fold by 2016 mainly on the back of an increasing tourism industry and growing regional population. Population 12% % 8% 6% 4% 2% % 0 Qatar UAE Kuwait Bahrain SA Oman Libya Lebanon Algeria Tunisia Jordan Morocco Syria Egypt Sudan Yemen CA GR Age group (15-64 years % of total population) in 2007 Source: IMF, EIU Data not available for Oman, Libya, Lebanon, Syria, Sudan, Yemen Data for Saudi Arabia pertains to 2006

5 Gross Leasable Area increased to 9.50 sqmt Kuwait s real GDP grew at CAGR of 7.4% over According to the IMF, the population of the GCC is expected to grow at a five year CAGR of 3.3% till Looking at the growing population in the region and high per capital income, the growing trend of shopping at modern retail formats and with regional consumers increasingly preferring international brands, the GCC region boasts of several unique retail projects in the world. According to Retail International, the GCC region in 2008 had 9.50 million square meters of gross leasable area (GLA) organised retail space, an increase from 7.75 million square meters over the previous year. In addition, currently the region has 4.3 million square meters under development and several plans in the pipeline. Organised retail has expanded in the GCC from a zero base 25 years ago to almost 7.5 million square metres being completed since Kuwait s real GDP grew at a healthy CAGR of 7.4% over reaching KWD billion in 2007, which translates into a 4.6% growth over 2006, led by crude surplus backed robust economic development. The country s real GDP growth was expected to rise sharply to approximately 8.6% in Kuwait s economy is highly dependent on hydrocarbon-related activities (oil & natural gas sector and refined petroleum products industry), which together accounted for 56.8% of nominal GDP and 94.9% of total export earnings in As oil prices declined to record low after touching a record high of USD per barrel in July 2008, reflects the changing outlook for oil revenues and economic growth. Thereby, the growth is expected to moderate to an average of 2.7% in 2009 and likely to revive to 4.8% in Kuwait s budgetary deficit for fiscal is expected to hit KWD 5.00 billion, which is expected to be paid from the state s reserves, while state revenues are estimated at KWD 7.80 billion, according to a report from the parliamentary panel for Budgets and Final Audits. Slowdown in economic growth, strengthening of the US dollar and government s commitment to extend its subsidies is likely to reduce inflation in near future. With a dip in oil prices, government spending is also forecast to slow significantly in 2009, but is expected to revive along with the global economy. The negative global outlook also suggests that inflows of foreign direct investment will be significantly lower than in With a dip in oil prices and a relatively slower demand growth, inflation which was reported at 11% for 2008 is likely to be moderate moving ahead. With a rather negative outlook on the economic growth in mid-term, the retail and wholesale sector is expected to witness a decline in demand. Even though the demand for essential commodities is likely to be less effected, luxury goods, which command higher margins for retailers, are expected to be significantly hit. According to EIU estimates, growth in the services sector led by financial services, logistics, telecommunications and retail, which accounts for around 40% of nominal GDP, will remain strong, averaging almost 8% in Oil will account for around half of Kuwait's nominal GDP in The country s CPI is expected to be around 7.5% in 2009 and further decline to 6.0% in 2010, in line with slowing economic growth and depressed commodity prices. Over 62% of the population in the age group of Increasing population base and rising GDP, which in turn has contributed to growth in the disposable income has led to strong demand for various luxury products and need for a leisure place. The population mix of Kuwait has 32.6% people in the age group of 0-14 years and 62.3% belong to the age group, in The younger population mix of Kuwait is attracted to western lifestyle, including food habits, thereby increasing demand for imported products. Kuwait's population is expected to rise sharply over the coming years. The growth rate in recent years, as rising levels of prosperity pull in more foreign workers, and projected high oil prices mean that this trend is set to continue. According to IMF, the total number of Kuwaiti residents is expected to increase from 3.44 million at end-2008 to around 4.09 million in a CAGR of 3.5%. Immigration is likely to continue to be a driving factor for population growth. As per EIU, Kuwaiti nationals accounted for only 31% of the total population in Population growth among non-kuwaitis, which averaged above 9% in , is expected to remain strong. Inflation to fall as crude and commodity prices cool On the back of robust economic growth, the retail sector of Kuwait enjoyed a period of strong growth, now seems to be slowing in the medium term with lower level of economic activity anticipated for 2009 and Due to global economic slowdown, which led to a liquidity crunch, has taken its toll as many major infrastructure projects across GCC being either put on hold or postponed. This has in turn hit the retail sector, which thrives on health of an economy and availability of retail space. In 2008, inflationary pressures have been a cause of concern. The inflation is forecast to be moderate in 2009, thanks to declining oil and commodity prices. Inflation is expected to ease to 10% in 2009 in the GCC, from 11.5% in 2008, and to 12.7%in MENA, from 14.4%.This will not only temper the effects of the decrease in commodity products, but it will re-stimulate consumer spending, which hit a temporary slowdown in The relatively slower economic growth anticipated in the medium term is likely to negatively impact the growth drivers of the sector. Looking at the long term, outlook of the industry remains intact.

6 Financial Performance FY 2007 Revenues rise 12% to KWD 224 million Revenue The company s total operating revenues grew to KWD million for 2007, up 11.6% from KWD million in the previous year. This was driven by healthy performance across all its functional units, which benefited from higher level of demand and increased pricing for food and other products. Trading revenue from its retail and wholesale activities, accounting for 95.8% of the total operating revenue, rose 11.5% to KWD million from KWD million in In addition to this, while, construction contract revenue, representing 3.3%% of total revenue, reported a 9.9% increase to KWD 7.46 million from KWD 6.78 million a year ago, service contract revenue was KWD 1.85 million, up 45.9% from KWD 1.27 million in Expenses TSC s operating cost increased 12.1% YoY to KWD million in Further, as a percentage of revenues, operating costs increased marginally to 80.0% compared to 79.7% in Construction contract cost and service contract cost rose 14.7% and 38.2% respectively, on higher operating and staff cost. Also, SGNA increased 30.6% to KWD million on account of a 31.3% rise in staff cost. As a percentage of revenue, SGNA expenses were 14.8% compared to 12.6% in The company also reported a 21.5% increase in its depreciation charges, which stood at KWD 4.98 million in 2007 compared to KWD 4.10 million in the previous year. Overall, total operating expenses increased 28.5% to KWD million from KWD million in At the same time, the company s operating expenses as a percentage of revenues expanded 225 bps to 17.2% compared to 15.0% in EPS decreased to KWD in 2007 GP and NP Margins During FY07, the company s gross profit margin declined marginally to 20.0% from 20.3% YoY, despite an increase of 9.9% to KWD million in gross profits on account of higher cost of sales as a percentage of revenues. Subsequently, net profit attributable to shareholders declined 25.7% to KWD million from KWD million in 2006, due to rise in finance charges and total operating expenses, partially offset by higher investment income as it reached to positive QAR 0.62 million from a negative of QAR 0.43 million in Net profit margin declined 378 bps to 7.5% in Adjusted earning per share (EPS) fell to KWD from KWD in However, both RoAE and RoAA plunged to 13.1% and 6.0% from 19.2% and 10.0%, respectively, in 2006.

7 Chart Gallery Revenue (KWD Millions) Net Profit (KWD Millions) M M M M 2008 EBITDA and EBIT Margin Net Profit Margin 14% 14% 11% 11% 8% 8% 5% 5% 2% M M 2008 EBITDA Margin Operating profit margin 2% M M 2008 Return on Average Equity (RoAE) Return on Average Assets (RoAA) 20% 18% 18% 14% 16% 11% 14% 7% 12% 4% 10% M M % M M 2008 Total Assets (KWD Millions) Shareholders' Equity (KWD Millions) M M M M 2008

8 Size of the Company The salient features of the balance sheet are: Cash and bank balances contributed 3.7% to total assets in 9M08 compared to 1.6% in the corresponding period last year. Cash balance reached KWD million, gaining 149.7% from KWD 5.02 million in 9M07, as cash increased from operating activities. Inventories rose 39.1% to KWD million from KWD million. Accounts receivables and prepayments were KWD million, up 116.2% from KWD million, led by multi-fold rise in contract receivables and other receivables. Investments at fair value through income statement was nil compared to KWD million in 9M07, as it was transferred to investments available for sale. Consequently, current assets, representing 17.9% of total assets, fell 8.1% to KWD million YoY. The share of non-current assets in total assets increased to 82.1% in 9M08 from 79.0% in 9M07, as it rose 12.1% to KWD million from KWD million, due to an increase in goodwill, investments available for sale and other assets, countered by decline in advance payment for purchase of investment and due from related parties. Moreover, fixed assets were KWD million, up 15.1% from KWD million during the same period of the last year. Assets turnover ratio improved to 0.79 from 0.77 Assets turnover ratio improved to 0.79 from 0.77 in 9M07, reflecting the rise in sales. Total asset base rose to KWD million from KWD million in the comparable period last year. The company s current liabilities increased to KWD million, up 28.0% from KWD million, primarily on account of a 22.9% rise in bank borrowings to KWD million. Meanwhile, Murabaha payables increased to KWD million from KWD million. During the first nine months of 2008, total non-current liabilities declined 24.3% to KWD million, as long-term loans decreased 35.7% to KWD million from KWD million. The company s shareholders equity plummeted 10.2% to KWD million due to a negative change of KWD 0.28 million in associate equity from a positive of KWD 6.76 million in the prior period. In addition to this a negative cumulative change in fair value to the tune of KWD 4.91 million from nil in 9M07 contributed to the fall in shareholders equity. As a result, the debt-toequity ratio worsened to 1.23 from 0.91 in the comparable year-ago period. However, adjusted book value per share (BVPS) was reported at KWD 0.21 in 9M08 compared to KWD 0.24 a year ago. The shareholders equity to total asset ratio stood at 0.35 in 9M08 from 0.42 in the 9M07. Financial Performance Analysis 9M 2008 For the nine months ended September 30, 2008, TSC s total revenues increased 14.5% to KWD million from KWD million, as trading revenues from its retail and wholesale activities rose 15.1% compared to the same period last year. Operating costs increased 15.6% YoY to KWD million and as a percentage of revenues was 80.8%, up 79 bps from 80.0% in 9M07. Total expenses and charges were at KWD million, up 6.6% from KWD million, mainly on account of 6.1% rise in SGNA expenses in 9M08. Total expenses and charges as a percentage of revenue declined to 15.2% from 16.4% in 9M07. As a result, the company s operating profits improved 31.3% to KWD million from KWD 8.28 million in 9M07. Furthermore, net profits attributable to shareholders decreased 36.4% to KWD million in 9M08 from KWD million, due to rise in finance charges and 92.1% fall in investment income. The company s net profit margin narrowed 487 bps to 6.1% from 10.9% during the same period a year ago. The adjusted annualised EPS, decreased to KWD in 9M08 from KWD in 9M07. However, both annualised RoAE and RoAA plummeted to 12.2% and 4.8% from 18.7% and 8.5%, respectively, in the comparable period of the last year.

9 Working Capital Snapshot (in KWD) 2006A 2007A 9M07A 9M08A 2008E Current Assets 56,304,598 58,760,839 66,251,584 60,896,289 69,658,120 Cash on hand and at banks 3,526,878 4,127,754 5,021,485 12,539,788 10,182,135 Inventory 14,850,648 15,948,185 17,821,389 24,796,343 30,066,795 Inventory Conversion Period (Days) Investments at fair value through income statement 17,622,217 19,717,042 24,218, Accounts receivable and prepayments 13,003,438 14,713,960 10,091,629 21,817,371 27,223,406 Average Collection Period (Days) Gross amount due from customers for contract work 7,301,417 4,253,898 9,098,434 1,742,787 2,185,784 Current Liabilities 123,122, ,051, ,963, ,193, ,783,772 Bank borrowings 82,609,186 82,998,657 93,295, ,706, ,727,003 Accounts payable and accruals 40,287,622 48,407,859 53,992,156 66,019,558 70,627,067 Average Payment Period (Days) Murabaha payable 0 10,285,196 10,285,196 21,110,000 20,054,500 Gross amount due to customers for contract work 225, , , , ,203 Net Core Working Capital -5,357,915-13,851,196-17,370,706-18,020,705-11,526,285 Average Core Working Capital Cycle (Days) Net Current Assets -66,818,006-83,290,253-91,711, ,297, ,125,652 Average Working Capital Cycle (Days) Source: TSC

10 Peer Comparison In order to do a peer comparison, we have taken comparable companies engaged retail within GCC region that include Bahrain Maritime and Mercantile International (BMMI) and The Sultan Center (TSC). BMMI TSC M08* Ratios: Total Assets Turnover Ratio (x) Gross Profit Margin (%) Net Profit Margin (%) RoAE (%) * RoAA (%) * Market Indicators: Adj. EPS (USD) * P/E (x) Adj. BVPS (USD) P/BV (x) Current Market Capitalisation (USD '000) 187, , , ,050 (USD '000) Sales 158, , , ,657 % Y-o-Y change Gross Profit 43,757 56, , ,457 % Y-o-Y change Net Profit 26,972 19,767 59,156 42,992 % Y-o-Y change Total Assets 154, ,523 1,098,355 1,271,376 % Y-o-Y change Shareholders' Equity 106, , , ,429 % Y-o-Y change Sources: Zawya, TSC's financial statements

11 New Projects and Strategies TSC acquired Geant Casino and Monoprix in Lebanon The company plans to open more than 100 wholesale and retail shops in Egypt TSC is seeking expansion through organic and inorganic channels, with an aim of overcoming competitive pressures as well as capturing the vast opportunities in the GCC region and beyond. Its extensive branch network and expansive geographical spread provides access to broad customer base. TSC is continuously opening branches in Kuwait and Oman (since 1999), and expanding inorganically through acquisitions of existing store chains in Jordan (in 2003) and Lebanon. In July 2008, TSC acquired two retail chains Geant Casino and Monoprix from the Lebanese Admic company via the Kuwait Sultan Center-Lebanon, for KWD 28.6 million. The multiline conglomerate, TSC is planning to open more than 100 wholesale and retail shops across Egypt and possibly a chain of restaurants with an estimated investment of more than USD 800 million over the next three years. It is also looking to expand its operations across the region after entering the Lebanese and Jordanian market. Apart from Egypt, the company is looking to enter the United Arab Emirates, Qatari and Bahraini markets. In March 2008, the company came up with a new concept of TSC Discount Center, specialising in providing customers with every day basic and quality products at a lower price. In a bid to expand its operations, the company entered into partnership between Sindbad frequent flyer programme of Oman Air and TSC rewards programme, to give Sindbad members the additional option to earn valuable Sindbad miles for free travel and upgrades as they shop for their daily provisions. SWOT Analysis STRENGTHS A corporate history of more than 28 years, and 55 branches makes it one of the Kuwait s leading retail chains Presence in more than four countries Growth strategy aimed at enhancing customer attraction like launching discount stores, selling at low prices and increasing volumes WEAKNESS Highly levered company Significant exposure to income from investments and share from associates THREATS Intensified competition on account of expansion initiatives taken by regional and international players Slower growth and rising expenses due to economic slowdown may affect the sector s profitability OPPORTUNITIES Increasing population across GCC with higher proportion of young crowd and changing culture High per capita income across most of the region Expected rise in the expatriates population in the region Bend towards westernisation Risks and Concerns: The demand for goods and services in the retail and wholesale sectors is highly dependent on the performance and wealth generated in an economy. The ongoing global economic crisis has tightened the liquidity position of many economies with declining oil prices further reducing the large reserve surplus enjoyed by them. As a result, the overall economic activity has slowed down resulting in high unemployment rate, thereby leading to a decline in demand in the retail sector. Given the economic scenario, the central banks are promoting savings, which in turn is likely to negatively impact the consumer spending and the business volumes for the retail sector.

12 Valuation Methodology: We have used DCF valuation method to arrive at the fair value of TSC, as discussed below: Assumptions: (i) Risk free Rate (Rf) of 3.48%, equivalent to one year average yield on 10-year US T-bill. (ii) Unlevered Beta of (iii) A terminal growth rate of 2.50%. Cost of Equity: 25.05% WACC: 12.78% Based on the inputs and the Capital Asset Pricing Model (CAPM), we have arrived at a Cost of Equity of 25.05%. Taking into consideration the long-term and short-term debts of TSC, we have arrived at the Weighted Average Cost of Capital (WACC) of 12.78%.

13 DCF Calculations DCF Valuation (FCFF Model) Year 2009E 2010E 2011E 2012E 2013E Operating Profit (EBIT) 14,618,481 17,165,812 21,885,611 29,170,769 37,618,348 Tax on EBIT 303, , , , ,544 Effective Tax Rate (%) 2.08% 2.08% 2.08% 2.08% 2.08% NOPAT 14,314,773 16,809,181 21,430,924 28,564,729 36,836,804 Add: Depreciation and Amortization 4,354,853 5,194,947 6,385,336 7,395,962 8,214,051 Less: Capex 12,969,861 19,088,025 26,377,158 25,206,252 21,490,641 Less: Change in Net Working Capital 1,625,407 2,406, ,733-1,474,393-1,850,293 Operating Free Cash Flows to Firm (OFCFF) 4,074, ,735 2,355,835 12,228,832 25,410,507 Non-Operating Income 7,540,077 9,333,582 11,587,034 12,821,127 13,854,300 Tax on Non-Operating Income 156, , , , ,831 Add: Non-Operating Cash Flows (After Tax Non-Operating Income) 7,383,428 9,139,671 11,346,306 12,554,760 13,566,468 Free Cash Flow to Firm (FCFF) 11,457,787 9,649,406 13,702,141 24,783,592 38,976,975 WACC (Ko) (%) 12.78% 12.78% 12.78% 12.78% 12.78% Present Value / Discount Factor Long-Term Growth Rate (g) 2.50% Terminal Multiple [(1 + g) / (WACC - g)] 9.97 Nominal Terminal Value [(FCFF * (1 + g)) / (WACC - g)] 388,511,132 Present Value of Free Cash Flows 10,159,125 7,585,980 9,551,138 15,317,451 21,359,248 Calculation of Equity Value and Fair Value Per Share NPV of Free Cash Flows (during Explicit Forecast Period) 63,972,943 Terminal Value: Residual Cash Flow (FCFF of 2013E) 38,976,975 WACC 12.78% Long-Term Growth Rate (g) 2.50% Divided by Capitalization Rate (WACC - g) 10.28% Equals Nominal Terminal Value 388,511,132 Implied Multiple of 2013E EBITDA 8.48 Times PV/ Discount Factor 0.55 Present Value of Terminal/Residual Value 212,902,760 Enterprise Value 276,875,703 Implied Multiple of 2013E EBITDA 6.04 Less: Long-term Debts 147,826,149 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 129,049,554 No. of Outstanding Shares 567,582,061 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. Sensitivity Analysis of Nominal Terminal Value (KWD ) Discount Long-Term Growth Rate Factor 1.00% 1.50% 2.50% 2.50% 3.00% 10.78% 402,391, ,163, ,318, ,318, ,806, % 365,074, ,720, ,362, ,362, ,080, % 334,091, ,624, ,511, ,511, ,359, % 307,956, ,079, ,078, ,078, ,303, % 285,613, ,831, ,831, ,252, ,707,655

14 Sensitivity Analysis of Discounted Terminal Value (KWD) Discount Long-Term Growth Rate Factor 1.00% 1.50% 2.50% 2.50% 3.00% 10.78% 241,145, ,391, ,043, ,043, ,112, % 209,169, ,426, ,576, ,576, ,884, % 183,081, ,140, ,902, ,902, ,875, % 161,472, ,877, ,655, ,655, ,212, % 143,346, ,478, ,240, ,240, ,997,649 Sensitivity Analysis of Enterprise Value (KWD) Discount Long-Term Growth Rate Factor 1.00% 1.50% 2.50% 2.50% 3.00% 10.78% 309,239, ,486, ,138, ,138, ,207, % 275,156, ,412, ,563, ,563, ,871, % 247,054, ,113, ,875, ,875, ,848, % 223,520, ,925, ,703, ,703, ,259, % 203,552, ,684, ,446, ,446, ,203,808 Investment Opinion Fair Value: KWD Investment Opinion: OVERWEIGHT Kuwait s retail sector has been blooming on the back of robust economic growth, high disposable income, increasing household consumption, increasing population and changing lifestyles. However the liquidity crunch arising out of the ongoing financial turmoil is likely to slow down the retail sector s growth in the medium term due to economic slowdown. Private consumption is expected to witness a normal growth. Government s spending is also forecast to slow in 2009, with a dip in oil prices but is expected to revive once the global economy starts picking up. With a negative outlook on the economic growth in the medium term, the retail and wholesale sector is expected to witness a slowdown in demand. Even though the demand for essential commodities is likely to be less effected, luxury goods, which command higher margins for retailers are expected to bear the burnt. Despite this, rising population base and growing western influence on the lifestyle and considerable demand for essential commodities is likely to drive growth in the sector in the long run. TSC has presence across retail, restaurants, trading, fashion, securities and telecom segments. The company is focused at increasing its market share through organic as well as inorganic expansion. In 2008, the company acquired two retail chains, Geant Casino and Monoprix from the Lebanese Admic company. Further, it chalked out a plan to invest more than USD 800 million in Egypt to set up wholesale and retail shops across the country. It also wishes to establish a chain of restaurants while expanding its presence in Egypt. Despite this, the gloomy outlook on economic growth in the medium term is likely to impact the operations of the company. The volumes of business and demand for high margin products are expected to decline in the medium term impacting the top and bottom-line growth of the company, but expansion is likely to keep the growth in future. At the current market price, TSC s stock is trading at a P/E multiple of 6.79x and 5.87x on 2009E and 2010E earnings, and at a P/B multiple of 0.70x and 0.67x on 2009E and 2010E BVPS, respectively. Meanwhile, the stock has lost 7.0% since the beginning of this year as against a negative YTD return of 15.5% registered by the Kuwait Stock Exchange Index. Based on our DCF valuation, we have arrived at a Fair Value of KWD exhibiting a 22.2% upside from its closing price of KWD (as on March 04, 2009). Accordingly, we initiate our coverage on the Sultan Center stock with an OVERWEIGHT recommendation.

15 Financial Statements Consolidated Balance Sheet (in KWD) 2007A 9M07A 9M08A 2008E 2009E 2010E 2011E ASSETS Current Assets Cash on hand and at banks 4,127,754 5,021,485 12,539,788 10,182,135 9,421,151 10,698,838 10,240,049 Investments at fair value through income statement 19,717,042 24,218, Accounts receivable and prepayments 14,713,960 10,091,629 21,817,371 27,223,406 28,577,093 31,974,975 38,001,675 Gross amount due from customers for contract work 4,253,898 9,098,434 1,742,787 2,185,784 2,647,430 3,442,248 4,666,857 Inventories 15,948,185 17,821,389 24,796,343 30,066,795 32,749,365 37,567,293 46,491,239 Total Current Assets 58,760,839 66,251,584 60,896,289 69,658,120 73,395,039 83,683,354 99,399,819 Non-Current Assets Due from related parties 8,235,785 15,913,712 9,869,989 10,354,452 11,150,759 12,287,624 15,343,376 Investments available for sale 8,461, ,104 25,102,073 25,057,473 20,502,581 25,493,796 34,355,477 Investment in associates 122,772, ,161, ,869, ,704, ,813, ,865, ,622,316 Investment properties 8,118,128 6,024,803 8,118,128 7,801,695 7,814,051 9,332,172 11,776,095 Advance payment for purchase of investments 8,015,577 30,716,004 15,577 15, Fixed assets 72,706,175 76,405,268 87,942,430 89,633,088 98,248, ,141, ,132,996 Other assets 11,160,855 6,541,053 13,677,677 13,991,585 14,936,900 19,148,945 24,137,113 Goodwill 3,267,190 3,267,190 16,236,938 16,236,938 16,236,938 16,236,938 16,236,938 Total Non-Current Assets 242,737, ,670, ,832, ,795, ,702, ,506, ,604,311 Total Assets 301,498, ,921, ,728, ,453, ,097, ,189, ,004,130 LIABILITIES AND EQUITY Liabilities Current Liabilities Bank borrowings 82,998,657 93,295, ,706, ,727, ,105, ,415, ,810,501 Accounts payable and accruals 48,407,859 53,992,156 66,019,558 70,627,067 73,484,192 80,033,773 97,033,585 Murabaha payable 10,285,196 10,285,196 21,110,000 20,054,500 23,062,675 34,594,013 32,864,312 Gross amount due to customers for contract work 359, , , , , , ,428 Total Current Liabilities 142,051, ,963, ,193, ,783, ,042, ,488, ,245,826 Non-Current Liabilities Due to related parties 109, Bank borrowings long term portion 21,896,036 18,679,556 12,009,684 12,009,684 3,602,905 18,374,817 56,961,931 Provision for employees end of service indemnity 5,044,598 4,869,985 5,813,288 5,822,318 6,674,855 7,623,893 8,658,496 Total Non-Current Liabilities 27,049,893 23,549,541 17,822,972 17,832,002 10,277,761 25,998,710 65,620,427 Total Liabilities 169,100, ,512, ,016, ,615, ,320, ,487, ,866,253

16 Financial Statements Equity Consolidated Balance Sheet (in KWD) 2007A 9M07A 9M08A 2008E 2009E 2010E 2011E Capital 52,620,798 52,620,798 57,882,878 57,882,878 57,882,878 57,882,878 57,882,878 Share premium 4,543,220 4,543,220 4,543,220 4,543,220 4,543,220 4,543,220 4,543,220 Statutory reserve 13,008,313 11,300,191 13,008,313 14,486,812 16,040,776 17,838,154 20,030,510 Voluntary reserve 13,008,313 11,300,191 13,008,313 14,486,812 16,040,776 17,838,154 20,030,510 Effect of changes in associate s equity 6,162,332 6,759, , , Cumulative changes in fair value 0 0-4,906,406-5,039,320-4,366,754-5,392,502-4,603,103 Land revaluation surplus 168, , , , , , ,977 Foreign currency translation adjustments -640, ,383-1,737,043-1,822,305-1,710,914-1,738,339-1,842,202 Retained earnings 44,737,631 49,472,935 40,708,466 61,081,974 64,836,619 69,179,393 74,476,500 Treasury shares -1,454,197-1,454,197-1,947,817-1,947,817-1,947,817-1,947,817-1,947,817 Total Equity attributable to parent shareholders 132,155, ,167, ,446, ,559, ,487, ,372, ,739,473 Minority Interest 242, , , , , , ,404 Total Equity after Minority interest 132,397, ,409, ,712, ,837, ,777, ,702, ,137,876 Total Liabilities and Equity 301,498, ,921, ,728, ,453, ,097, ,189, ,004,130

17 Consolidated Income Statement (in KWD) 2007A 9M07A 9M08A 2008E 2009E 2010E 2011E Operating revenue: 224,294, ,315, ,359, ,527, ,445, ,538, ,579,037 Sales 214,983, ,431, ,579, ,566, ,716, ,283, ,310,357 Construction contract revenue 7,458,058 5,478,443 5,312,491 5,958,988 5,476,310 5,585,836 6,060,633 Service contract revenue 1,853,710 1,405,018 1,467,499 2,002,007 2,252,258 2,668,925 3,208,048 Operating cost : -179,422, ,117, ,869, ,972, ,657, ,710, ,063,028 Cost of sales -171,511, ,232, ,921, ,976, ,848, ,388, ,802,221 Construction contract costs -6,415,581-4,615,050-4,615,284-5,176,936-4,784,985-4,964,473-5,459,180 Service contract cost -1,495,201-1,270,388-1,332,947-1,818,447-2,023,230-2,357,494-2,801,627 Gross profit 44,872,800 33,197,493 36,489,374 45,555,599 48,787,955 56,827,774 70,516,009 Other operating income 3,264,140 2,320,026 3,411,788 4,257,181 4,527,222 6,077,752 8,745,251 Expenses and charges: Selling, general and administrative -33,110,933-23,803,125-25,251,988-31,746,600-34,269,056-40,468,785-50,896,282 Depreciation and amortisation -4,982,697-3,308,682-3,722,169-3,793,726-4,354,853-5,194,947-6,385,336 Obsolete and slow moving items - written-off -124, Provision for obsolete and slow moving items -379, ,111-55,111-66,825-72,787-75,982-94,031 Total expenses and charges -38,597,153-27,235,918-29,029,268-35,607,151-38,696,696-45,739,714-57,375,649 Operating profit 9,539,787 8,281,601 10,871,894 14,205,628 14,618,481 17,165,812 21,885,611 Net investment income 617,659 5,098, , , , , ,675 Group s share of results from the associates 12,359,151 10,564,509 6,668,945 6,996,286 7,282,916 8,912,827 10,914,359 Change in fair value of investment properties 2,093, Finance charges -8,020,102-5,936,971-6,068,839-6,436,558-6,157,445-7,991,863-10,898,043 Gain on sale of fixed assets 177, ,446 61,699 61, Gain on sale of investment property 335, , Profit for the period before contribution to KF for the Sciences, Zakat and NLST 17,103,321 18,485,555 11,935,054 15,224,049 16,001,113 18,507,531 22,574,602 Contribution to Kuwait Foundation for the Advancement of Sciences -66,902-68,992-86,691-98, , , ,912 Contribution to Zakat -10, , , , , ,531 National Labor Support tax -113, , , , , , ,470 Net profit for the period 16,912,897 18,226,431 11,600,405 14,809,358 15,565,256 18,003,401 21,959,688 Attributable to : Parent Company's shareholders 16,890,792 18,209,852 11,581,317 14,784,990 15,539,644 17,973,777 21,923,554 Minority interest 22,105 16,579 19,088 24,368 25,612 29,624 36,134 Adjusted EPS * 0.027* * Annualised

18 Consolidated Cash Flow Statement (in KWD) 2007A 9M07A 9M08A 2008E 2009E 2010E 2011E Cash Flows from Operating Activities: Profit before tax 17,103,321 18,485,555 11,935,054 15,224,049 16,001,113 18,507,531 22,574,602 Adjustments for: Depreciation and amortisation 4,982,697 3,308,682 3,722,169 3,793,726 4,354,853 5,194,947 6,385,336 Provision for obsolete and slow moving 379, ,111 55,111 66,825 72,787 75,982 94,031 Obsolete and slow moving items - written-off 124,202 Net investment income -617,659-5,262, , , , , ,675 Group s share of results from associates -12,359,151-10,564,509-6,668,945-6,996,286-7,282,916-8,912,827-10,914,359 Change in fair value of investment properties -2,093,326 Gain on sale of fixed assets -177, ,000-61,699-61, Gain on sale of investment property -335, , Provision for employees end of service 965, , , ,477 1,119,901 1,275,088 1,428,419 Finance charges 8,020,102 3,588,483 6,068,839 6,436,558 6,157,445 7,991,863 10,898,043 Changes in operating assets & liabilities : Accounts receivable and prepayments -1,615,270 3,007,061-7,103,411-12,509,446-1,353,687-3,397,882-6,026,700 Due from related parties 7,633,672-44,255-1,634,204-2,118, ,307-1,136,865-3,055,752 Inventories -1,559,866-3,053,658-8,903,269-14,118,610-2,682,570-4,817,928-8,923,946 Gross amount due from customers for contract work 3,047,519-1,797,017 2,511,111 2,068, , ,818-1,224,608 Accounts payable and accruals 7,717,246 10,789,689 16,671,087 22,219,208 2,857,125 6,549,581 16,999,812 Due to related parties 97,511-11,748 7,890,741 7,890, Gross amount due to customers for contract work 133, ,206-1,732 15,823 15,372 54,679 92,175 Cash generated from operations 31,445,749 19,116,347 25,043,211 22,499,819 17,744,309 20,168,595 27,654,377 Employees' end of service indemnity paid -53, , , , , , ,816 Paid to KFAS -108, ,902-66,902-98, , ,625 Paid to Zakat 0-10,033-10, , , ,557 Paid to National Labor Support Tax -293, , , , , , , , , , , , , ,946 Net cash from (used in) operating activities 30,990,853 18,709,331 24,657,917 22,100,792 17,062,255 19,406,688 26,756,430 Cash flows from investing activities Net purchase/sale of investments at fair value through income statement -2,025,535-2,046, , , Net purchase/sale of investments available for sale 488,046 8,473,304-1,684,387-1,386,191 4,554,891-4,991,215-8,861,681 Net purchase/sale of investment in associates -11,520, ,931,996-5,108,982-16,052,314-32,756,700 Net purchase/sale of investment properties -1,560,064-1,560, ,433-12,356-1,518,121-2,443,923 Paid for advance payment for purchase of investments -8,015,577-30,716, Paid for acquisition of new subsidiary -4,786,066-4,786, Net purchase/sale of fixed assets and other assets -16,926,768-14,372,580-35,073,638-24,386,081-11,618,560-22,109,707-28,178,615 Dividend income received 7,612,202 7,612,202 5,275,749 6,893,493 6,216,728 6,956,702 8,913,242 Net cash (used in) investing activities -36,733,762-37,396,002-31,981,282-20,993,348-5,968,279-37,714,655-63,327,677

19 Consolidated Cash Flow Statement (in KWD) 2007A 9M07A 9M08A 2008E 2009E 2010E 2011E Cash flows from financing activities 15,101,314 22,181,958 21,821,456 11,841,994-28,619 26,082,428 60,981,937 Net movement in bank borrowings 10,285,196 10,285,196 10,824,804 9,769,304 3,008,175 11,531,338-1,729,701 Net movement in Murabaha payable -8,020,102-3,806,880-6,068,839-6,436,558-6,157,445-7,991,863-10,898,043 Finance charges paid , , Paid for purchase of treasury shares -11,120,607-8,576,980-10,348,402-9,734,183-8,677,070-10,036,248-12,241,736 Cash dividends paid -5,483-5, Cash dividends paid (subsidiary) 6,240,318 20,077,811 15,735,399 4,946,936-11,854,959 19,585,654 36,112,457 Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents 497,409 1,391,140 8,412,034 6,054, ,984 1,277, ,790 Cash and cash equivalent at the beginning of period 3,526,878 3,526,878 4,127,754 4,127,754 10,182,135 9,421,151 10,698,838 Cash on hand and at banks relating to newly consolidated subsidiary 103, , Cash and cash equivalent at the end of period 4,127,754 5,021,485 12,539,788 10,182,135 9,421,151 10,698,838 10,240,049

20 Common Size Statements Common-Size Consolidated Balance Sheet 2007A 9M07A 9M08A 2008E 2009E 2010E 2011E ASSETS Current Assets Cash on hand and at banks 1.4% 1.6% 3.7% 2.8% 2.5% 2.5% 2.0% Investments at fair value through income statement 6.5% 7.7% 0.0% 0.0% 0.0% 0.0% 0.0% Accounts receivable and prepayments 4.9% 3.2% 6.4% 7.6% 7.7% 7.5% 7.4% Gross amount due from customers for contract work 1.4% 2.9% 0.5% 0.6% 0.7% 0.8% 0.9% Inventories 5.3% 5.6% 7.3% 8.4% 8.8% 8.9% 9.1% Total Current Assets 19.5% 21.0% 17.9% 19.5% 19.7% 19.7% 19.4% Non-Current Assets Due from related parties 2.7% 5.0% 2.9% 2.9% 3.0% 2.9% 3.0% Investments available for sale 2.8% 0.2% 7.4% 7.0% 5.5% 6.0% 6.7% Investment in associates 40.7% 34.9% 34.9% 34.9% 34.9% 34.4% 34.9% Investment properties 2.7% 1.9% 2.4% 2.2% 2.1% 2.2% 2.3% Advance payment for purchase of investments 2.7% 9.7% 0.0% 0.0% 0.0% 0.0% 0.0% Fixed assets 24.1% 24.2% 25.8% 25.1% 26.4% 26.4% 25.8% Other assets 3.7% 2.1% 4.0% 3.9% 4.0% 4.5% 4.7% Goodwill 1.1% 1.0% 4.8% 4.5% 4.4% 3.8% 3.2% Total Non-Current Assets 80.5% 79.0% 82.1% 80.5% 80.3% 80.3% 80.6% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% LIABILITIES AND EQUITY Liabilities Current Liabilities Bank borrowings 27.5% 29.5% 33.7% 29.3% 30.4% 29.3% 28.7% Accounts payable and accruals 16.1% 17.1% 19.4% 19.8% 19.7% 18.9% 19.0% Murabaha payable 3.4% 3.3% 6.2% 5.6% 6.2% 8.2% 6.4% Gross amount due to customers for contract work 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Total Current Liabilities 47.1% 50.0% 59.3% 54.8% 56.4% 56.5% 54.1% Non-Current Liabilities Due to related parties 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Bank borrowings long term portion 7.3% 5.9% 3.5% 3.4% 1.0% 4.3% 11.1% Provision for employees end of service indemnity 1.7% 1.5% 1.7% 1.6% 1.8% 1.8% 1.7% Total Non-Current Liabilities 9.0% 7.5% 5.2% 5.0% 2.8% 6.1% 12.8% Total Liabilities 56.1% 57.5% 64.6% 59.8% 59.2% 62.6% 67.0%