An Empirical Investigation into Boubyan Bank`s performance

Transcription

1 An Empirical Investigation into Boubyan Bank`s performance I N V E S T M E N T U P D A T E March 2009 Coast Investment & Development Company

2 Corporate Finance and Investment Services - Research Manal Hani Sabbah Investment Analyst manal@coast.com.kw Direct: (965) Coast Investment & Development Company Shuhada Street, Al Sharq Area, Near Sawaber Complex P. O. Box Safat Kuwait Tel: / (965) Fax: (965) / (965) research@coast.com.kw Website: Coast Research Investment Update 2

3 Boubyan Bank is a Kuwaiti shareholding company established in September, 2004 by Amiri Decree No. 88 with a paid-up capital of 100 million Kuwaiti Dinars to provide Islamic banking services including deposits, loans and credit cards as well as islamic asset management services such as fund, wealth and portfolio management. It was listed in Kuwait Stock Exchange in May,2006. At the time of listing, Kuwait Investment Authority (KIA) held 20% equity while Public Institution for Social Security (PIFSS) held 4% whereas 76% of equity is floated in the market. Currently, Commercial Bank of Kuwait holds 19% sold by Al-Dar since al Aldar was seeking debt restructuring worth up to $1.1 billion. The banking sector in Kuwait Stock Exchange holds 35% of total market capitalization. As shown in Figure 1, National Bank of Kuwait(NBK) is the sector`s largest player that holds 35% of the sector`s total market capitalization followed by KFH with 28%.As for Boubyan Bank, it holds 4% of the banking sector`s total market capitalization. Boubyan`s market capitalization has dropped 43% since 4 th April,2008 affected by the global economic recession. Overall, Islamic and Sharia Compliant companies make up about 60% of the total Kuwait market capitalization as of August,2008. Figure 1: Table 1: Market Capitalization (KWD`M`) Current Shares Outstanding(KWD`M`) 1, P/E P/BV EPS (Year Ended 2008`KWD`) Source: Reuters, Coast Research Boubyan Bank has 15 branches in Kuwait as well as some local and international investments including ; Bank of London and The Middle East(United Kingdom), First Investment Bank (Bahrain) and Al- Imtiaz Investment Company(Kuwait). Boubyan`s subsidiaries/associates and affiliates are summarized in Table 2. Table 2: Column1 Country Holding Al Seera Real Estate Company Kuwait 100% [9% directly and 91% via Boubyan Capital Investment Company] Boubyan Capital Investment Kuwait 100% Company [BCICO] Boubyan Industrial General Kuwait 100% Trading Company [9% directly and 91% via Boubyan Capital Investment Company] Boubyan Takaful Insurance Kuwait 56.78% Company Ijarah Indonesia Finance Indonesia 33.33% Company Bank Syariah Muamalat Indonesia Indonesia 21.28% Tbk Source:Zawya Table 1 shows the fundamental figures of Boubyan Bank as of 7 th April, On 16 th December,2008, Kuwait's Investment Dar sold its 19% stake in Boubyan Bank to Commercial Bank of Kuwait (CBK), for 94.1 million Kuwaiti dinars ($341.6 million). The Investment Dar Company maintained the option to buy back the stake at a later stage. On 23 rd December,2008, The National Bank of Kuwait received the central bank's initial approval to buy a 40%-stake in Boubyan Bank. This stake includes the 19.5%-stake of Investment Dar Co. in Boubyan. However, on December 24, 2008 the Commercial Bank of Kuwait announced that it has canceled the acquisition of Boubyan Bank. During January, Boubyan Bank lost four Board officials. Coast Research Investment Update 3

4 Boubyan Performance Analysis Table 3: The maximum net profit growth was recorded in 2007 when the net profit increased 81% to reach KWD 18 M then it declined 90% in 2008 reaching KWD 1 M as a result of the global recession. Figure 2 shows the apparent increase in daily volume traded since the last quarter of 2008 up to the moment which coincided with Boubyan`s multiple transfer of ownership as mentioned earlier. Figure 2: KWD(`000`) Current Asset 293,567 47% 432,174 44% 621,129 Current Liabilities 221,552 73% 383,929 55% 593,504 Boubyan bank liquidity is performing well since its current ratios for the past three years have always been above 1. For the past 3 years, Current ratio was decreasing on small basis 15% and 7% respectively as a result of the current liabilities increasing on larger pace than the current assets as seen in Table 3. The maximum current ratio was recorded in at Boubyan`s current ratio is less than the industry average of Boubyan could catch up the industry average by lowering its current liabilities by 5.3%. 2. Working Capital During the past year, KSE Price Index posted higher Y-O-Y returns than Boubyan`s stock Y-O-Y in the first three quarters of the year while Boubyan`s returns were higher than KSE Price returns during the last quarter of the year as seen in Figure 3.KSE experienced a huge decline of 24% in the monthly price index return in October,2008 followed by 9% decline in November. The market then continued its downturn as a result of the market`s negative sentiment. Figure 3: Ratio Analysis: 1. Current Ratio Table 4: % 2006 % Working Capital 72,015-33% 48,245-43% 27,625 As seen in Table 4, the working capital has been decreasing for the past three years since the current liabilities were rising on a faster pace than the current assets. Working Capital reached its minimum in 2007 which coincided with the maximum current liabilities. The industry average is 99% higher than Boubyan`s ratio, reducing current liabilities would certainly improve Boubyan`s working capital. Coast Research Investment Update 4

5 Net Income/Revenue Figure 4: Net income/ Revenue Source:Coast Research During the past three years, Boubyan`s revenues and net income were positively correlated. Murabaha and Islamic financing services was Boubyan`s major source of revenues since it formed 60%,62% and 42% of total revenues for,2006 and 2007 respectively. Murabaha`s income grew 144% and 75% for 2006 and 2007 respectively. As seen in Figure 4, the net income to revenues ratio in Boubyan bank has been decreasing over the past 3 years reaching its minimum of 0.34 in This decrease is chiefly attributable to the increase in the bank s operating expenses, mainly staff costs and the general and administrative expenses which had the biggest effect on the net income/ revenues ratio. 4. Receivables Turnover Figure 5: Boubyan`s performance is in line with the industry average of Table 5: 5. Debt Ratio Debt Ratio 67% 13% 76% 7% 81% Source : Coast Research Debt ratio measures the total amount of the company`s funding provided by all categories of creditors as a percentage of the company`s total assets. As seen from Table 5, the debt ratio has been rising for the past three years since the total liabilities have been rising more than the total assets as seen from Table 6. Boubyan`s debt funding is considered average within the industry. Table 6: KWD`000` Total Liabilities 221,552 73% 383,929 58% 606,438 Total Assets 328,469 54% 504,339 48% 745, Debt to Equity Ratio The debt-to-equity ratio indicates the proportion of equity and debt in relation to the company`s use of finance. Table 7: Debt to Equity Ratio % % 4.67 Boubyan`s receivables turnover was increasing for the past three years to reach its maximum of in As a result the increase in revenues is on a faster pace than the banking sector. It is evident that The debt to equity ratio have been rising for the past three years to reach its maximum in 2007 as seen from Table 7 suggesting that the company is more dependable on debt financing. However, Boubyan is less reliant on debt compared to the industry average of 6.82 debt to equity ratio. Coast Research Investment Update 5

6 7. Operating Income Margin Operating margin is a measurement of the proportion of a company's revenue left after paying operating expenses. A healthy operating margin is required for a company to be able to pay its fixed costs, such as interest on debt. Boubyan`s performance is shown in Table 8. Table 8: Operating Income Margin 53.7% 36.2% 35.8% Boubyan`s operating income margin has been decreasing for the past three years to reach its minimum in 2007.Its performance is almost 6% less than the industry average. Boubyan Bank could increase the margin by trying to lower down its expenses. 8. Net Profit Margin It measures how much out of every 1 KWD of sales a company actually keeps in earnings. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Table 9 shows that Boubyan`s net profit margin had been decreasing for the past three years which requires a cut down in the bank`s expenses. Table 9: Net Profit Margin 53.2% 34.6% 34.3% Boubyan`s profit margin is 36% less than that of the industry average urging Boubyan to optimize its expenses and income ratio to push its net income at least 7% further. 9. Total Asset Turnover This ratio shows the rate at which the firm`s assets produce revenues. As seen from Table 10, the maximum asset turnover was 3.11% in 2007.The ratio has been rising for the past 2 years as the EBIT was rising on a faster pace, 56% and 80% respectively, than total assets rising 54% and 48% respectively over the same period. Table 10: Total Asset Turnover 2.11% 23% 2.59% 20% 3.11% Boubyan`s asset turnover is less than the industry average of 3.79% which again emphasizes the importance of lowering down the cost of revenues. 10. Return on Asset(ROA) This ratio measures the management`s efficiency in utilizing the company`s assets to generate (operating) profits. The higher the ratio, the more efficient the company is in utilizing its assets. ROA has been rising for the past three years in accordance to the increase in net income for the same period. Table 11: ROA 2.09% 19% 2.48% 20% 2.98% ROA Industry average is 23% higher than Boubyan`s ROA which requires more efforts from the bank to utilize its assets. Table 12: 11. Return on Equity(ROE) ROE 6.41% 43% 9.16% 56% 14.34% It is the best indicator of profitability on owners` investment. The higher the ratio, the better it is for the shareholders.roe was moving in an upper trend for the past three years to reach its maximum in 2007 as seen from Table 12. ROE upper trend was in line with the upper trend of Boubyan`s net income. Boubyan`s ROE is less than the industry average of 26.1% which again requires the net income to increase 82% to reach KWD(m) 34 instead of KWD(m) 18. Coast Research Investment Update 6

7 12. Return on Investment(ROI) Since the net income has been rising on a faster pace than shareholders equity and long term liabilities as seen from Table 13, ROI has been rising for the past three years according to Table 14. Boubyan`s ROI is 27.5% above the industry average due to Boubyan`s less long term liabilities than the industry average. Table 13: KWD`000` Net Income 6,853 51% 10,314 81% 18,632 Average Shareholders Equity 106,916 5% 112,546 15% 129,950 Long Term Liabilities ,934 Table 14: ROI 6.41% 43% 9.16% 42% 13.04% Valuation: Table 15: Net Income(KWD`000`) 11,170 13,404 16,756 20,944 26,179 Present value 10,059 10,870 12,235 13,772 15,501 Total present value 62,436 Terminal value 589,613 Value of firm 652,050 Number of stocks 1,059,370 Value per share Table 16: 2008 Net Income (KWD) 1,846,000 Number of shares 1,165,310,000 EPS (KWD) Equity 135,148,000 Book Value (Bv) FMV Based on P/E method FMV based on P/Bv method FMV based on DCF 0.616, Reuters Table 17: EPS We used the weighted average approach of three methodologies; Discounted Earnings method, P/E approach and P/Bv approach to arrive at a Fair Market Value for Boubyan Bank s common stock. For the Discounted Earnings method we used the company s projected net income as the benefit stream, and discounted it at 11%. The discount rate represents the minimum rate of return investors are looking at when investing in the company. The Fair Market Value per share of Boubyan bank as of 8/4/2009 based on Discounted Earnings method stands at KWD 0.616, which is 71% above the closing price as of the date of the valuation. Future Projections are shown in Table 15.Under the P/E method as an average of the past five years,the Fair Market Value per Share of Boubyan bank is at KWD Finally, P/BV gives Boubyan KWD as a Fair Market Value per Share considering the past five years. Table 16 shows the summarized results. Sector P/E Coast Research Investment Update 7

8 Table 18: Book Value Sector P/BV By using the weighted average of the three mentioned methods, the Fair Market Value per Share of Boubyan bank stands at KWD The discounted Earnings, P/E and P/BV methods were given the weights of 50%, 10% and 40% respectively. Sensitivity analysis for both the P/E and P/Bv approaches is presented in Table 17 and Table 18.The Valuation process in general is bound by certain limitations, and is chiefly based on projections into the future with a degree of uncertainty. Coast Research Investment Update 8

9 Disclaimers: This document and its content are prepared for your personal information purposes only and it is not an offer, or the solicitation of an offer, to buy or sell a security or enter into any other agreement. Projections of potential risk or return are illustrative, and should not be taken as limitations of the maximum possible loss or gain. The information and any views expressed are given as at the date of writing and subject to change. While the information has been obtained from sources believed to be reliable we do not represent that it is accurate or complete and it should not be relied on as such. Coast Investment and Development Company, its affiliates and subsidiaries accept no liability for any direct or consequential loss arising from use of this document or its contents. At any time, Coast Investment and Development Company or its employees may have Coast a position, Research subject Investment to change, Update in any securities or instruments referred to, or provide services to the issuer 9 of those securities and instruments.