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Commercial Real Estate Company (TIJK.KW)

CMP KWD 0.154 Target KWD 0.158 Potential Upside 2.5%

MSCI GCC Index 399.56 Kuwait Stock Exchange 8,240.70

Key Stock Data Sector Real estate Reuters Code TIJK.KW Bloomberg Code ALTIJARIA KK Equity No. of Shares (mn) 1,602.598 Market Cap (KWD mn) 246.800 Market Cap (USD mn) 889.049 Avg. 12m Vol. (mn) 3.260 Volatility (30 day) 81.773 Volatility (180 day trend) 49.669

Stock Performance (%) 52 week high / low (KWD) 0.277 / 0.104

1M 3M 12M Absolute (%) 13.2% -10.5% -38.4% Relative (%) -5.1% -34.4% -33.5%

Shareholding Pattern (%)

Wedyan Real Estate Company 7.71%

Public 92.29%

CRC and KSE Movement

Executive Summary Commercial Real Estate Company (CRC) also known as “Al Tijaria” was established in 1968 as a Shariah-compliant real estate investment, development and management company. CRC’s main focus is on residential and commercial properties, along with ventures in agricultural and industrial activities, contracting work, development of roads and construction of buildings. Along with the major participation in significant projects in Kuwait, the company has expanded into Saudi Arabia, UAE, Morocco and Bahrain where it has several large projects in the pipeline. As of June 2008, the company managed 83 units out of which it owned 54. Total operating income declined 20% to KWD 24.60 million For 9M08, CRC’s total operating income plummeted 19.9% to KWD 24.60 million, attributable to a net loss from land and real estate held-for-trading along with a 70.3% decrease in profit from investments available-for-sale. However, the decline was partially offset by a 19.3% increase in gain from investment properties. Meanwhile, both administrative & other expenses and finance charges increased 9.3% and 8.3% to KWD 3.12 million and KWD 5.20 million, respectively. Subsequently, net profit increased a marginal 1.2% to KWD 27.75 million in 9M08. Improving the shareholder’s wealth, the company’s adjusted annualised EPS advanced to Fils 23.1 from Fils 22.8 in 9M07. Moreover, annualized ROAE and ROAA declined to 15.9% and 10.3% from 17.9% and 11.4%, respectively. Outlook and valuation The regional outlook for oil revenues and economic growth has been adversely impacted by record low oil prices. Kuwait is a hydrocarbon-dependent economy, with oil & natural gas sector and refined petroleum products industry accounting for 56.8% of nominal GDP. In order to boost the economy, the government is resorting to measures like easing borrowing conditions by slashing discount rate by 125 basis points to 4.5%, and lowering the repurchase rate by 100 basis points to 2.5%. The Kuwaiti government controls 90% of the land and thus only 10% is available for private players, which has fuelled the demands and escalated prices. The global economic downturn affected the property market in the region, affecting Kuwaiti developers as well. In order to diversify its risk the company has recently bought an Islamic Bank. Currently, CRC is trading at a P/E multiple of 7.93x based on its 2008E earnings and at a P/B multiple of 1.01x on its 2008E BVPS; and at a P/E multiple of 10.07x based on its 2009E earnings and at a P/B multiple of 0.98x on its 2009E BVPS. The stock has lost 37.3% since the beginning of this year, as compared to the KSE index YTD negative return of 34.4%. 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 0.158. The stock exhibits a 2.5% upside from its closing price of KWD 0.154 (as on December 25, 2008). Therefore, we initiate our coverage on Commercial Real Estate Company with a NEUTRAL recommendation.

KWD Million 2006A 2007A 2008E 2009E 2010E Total Op. Income 27.24 50.43 28.65 26.59 31.54 % Change YoY -30.5 85.1 -43.2 -7.2 18.6 EBIT 23.42 45.34 24.82 22.89 27.16 % Change YoY -31.5 93.6 -45.2 -7.8 18.7 Net Profit 35.63 44.65 31.11 24.51 29.51 % Change YoY 6.5 25.3 -30.3 -21.2 20.4 Adj. EPS (KWD) 0.022 0.028 0.019 0.015 0.018 ROAE (%) 18.1 21.1 13.3 9.9 11.4

NEUTRAL

Background Commercial Real Estate Company also known as “Al Tijaria” was established in 1968 as a Shariah-compliant real estate investment, development, and management company. The company got listed on the Kuwait Stock Exchange in December 2004 and is one of the oldest and largest real estate firms in Kuwait. Presently all of CRC’s financial aspects are governed by Islamic Shariah laws. CRC has expanded into Saudi Arabia, UAE, Morocco and Bahrain where it has several large projects in the pipeline. CRC’s focus area is residential and commercial properties, however, it also ventures in agricultural and industrial activities, contracting work, development of roads and construction of buildings. Within the real estate sphere, CRC handles the sale, purchase and lease of land and property. As of June 2008, the total number of real estate units managed by CRC was 83 out of which, the number of real estate units owned by the company stood at 54, which makes up 65% of the total units. The company managed 29 projects for third party firms and about 2,495 housing units in which it owns about 70%, while managing the remaining 30% for third party companies. The company has also established a couple of real estate funds and portfolios and manages some by itself or for third parties. CRC forayed into the tourism sector in 2002 by acquiring Kuwait Resorts Company, known for managing the Hilton Kuwait Resort. The company’s real estate development and investment arms include the Al Areen Real Estate Co. and Al Mutajara Real Estate Co. and it launched Shefa’a Kuwaiti Medical Care Company, a firm specialized in the ownership and management of medical clinics, centres and hospitals. On the educational front, CRC teamed up with International Integrated Educational Services Co. Internationally, the company launched the Commercial Venture Real Estate Company in Bahrain. It established its presence in the UAE and Morocco by partnering with local players. In Abu Dhabi, CRC signed a deal in 2007 with Abu Dhabi Investment House to create AED 1.8 billion investment fund with the main purpose of building an entertainment city in Qatar. CRC has major participation in significant projects in Kuwait, which include Kuwait Trade Centre and The Aranda, considered one of the largest projects owned by the private sector in Kuwait. In terms of accolades, in 2006, Euro Money declared CRC as the GCC’s “Best Company in Property Development in the Housing Sector.” Business Model CRC aims to drive growth by seizing investment and real estate opportunities and expanding abroad in order to diversify its revenue stream. It has adopted the following business model:

CRC engage in business activities related to commercial real estate. Within the real estate sphere, the company handles the sale, purchase and lease of land and property.

CRC’s network expansion through alliances and consortiums with various firms in the GCC drives its focus towards developing large scale projects apart from developing the residential and commercial projects.

The company’s latest ventures and acquisitions like First Investment Bank (Islamic Bank) are radically strengthening its business model in favour of greater diversification.

CRC is one of the oldest and largest firms in Kuwait CRC has a significant international presence Board of Directors • Chairman and Managing Director - Abdul Fatah M. R. Marafie

• Vice Chairman – Adwan M. Al-Adwani

• HH Sheikh Fahad Y. Al-Sabah

• Ibrahim M. Al-Ghanim • Mohamad Jasim Al-Wazzan

• Jamal A. Al-Mutawa • Abdul Aziz M. Al-Hassawi • Hussain A. Jowhar Source: Company website

Subsidiaries/Affiliates of CRC CRC has a number of subsidiaries, affiliates and strategic investments.

SUBSIDIARIES / ASSOCIATES / AFFILIATES COUNTRY SHARE

Al Areen Real Estate Company Kuwait 100.00%

Rester Beach Resort Kuwait 100.00%

Shefaa Kuwaiti Medical Care Company Kuwait 100.00%

Arab Ready Mix Concrete Centre Company Kuwait 49.56%

Al Motagarh Real Estate Kuwait 44.00%

Al Maqam Tower Real Estate Company Kuwait 40.00%

Kuwait Resorts Company Kuwait 36.74%

Durrat Commercial Company Bahrain 30.00%

Al Mozon Investment Holding Company Morocco 25.00%

Mozon Holding Company Kuwait 25.00%

Kuwait Commercial Markets Complex Company Kuwait 24.80%

Kuwait Central Laundries Kuwait 23.55%

Afkar Holding Company Kuwait 20.00%

Al Mutajara Real Estate Company Kuwait 20.00%

Al Tijaria Venture Real Estate Kuwait 20.00%

Commercial Venture Real Estate Company Bahrain 20.00%

Hajar Real Estate Company Saudi Arabia 20.00%

Amlaak Real Estate Services and Consulting Company Kuwait -

City Centres Development Company Saudi Arabia -

Engineering Systems Group Kuwait -

Jeddah Central District Company [JCDC] Saudi Arabia -

Majan Development Company Kuwait -

Shorouq Tower Kuwait - Source: Zawya.com

Outlook for oil revenues and economic growth have been adversely impacted by the record low oil prices Real estate firms account for 20% of listed firms but account for just close to 7% of market cap

Industry Scenario According to a recent report by the Institute of International Finance (IIF), growth in the GCC economies is likely to decline to 3.6% in 2009 from 5.7% in 2008 on lower crude oil prices. The outlook for oil revenues and economic growth has been adversely impacted by the record low oil prices, which have reached 2005 levels. At the end of 2007, crude oil prices were USD 66.40/barrel, and during the first eleven months of 2008, they averaged at USD 104.75/barrel. Kuwait is a hydrocarbon-dependent economy, where oil & natural gas sector and refined petroleum products industry accounted for 56.8% of nominal GDP and 94.9% of total export earnings, in 2007. Meanwhile, the country posted a budget surplus of USD 29.39 billion for the first seven months of 2008/09 fiscal. Based on the initial budget forecast, total revenue is anticipated to reach KWD 12.68 billion for 2008 including KWD 11.65 billion from oil exports. However, this could change with declining oil prices and government spending. During 2008, the Kuwaiti government launched a new five year plan for the development of the country. The objective is to diversify its economy and promote private sector participation. The KWD 35 billion plan is highly ambitious and entails several infrastructure and urban development mega projects, the most significant being the City of Silk with a projected cost of USD 77 billion. This latest venture is an attempt to develop the country as a business hub and will include a new harbour, airport, international railway link and launch a metro system. During 2003-2007, nominal GDP grew at a CAGR of 22.2%. Record high oil prices generated substantial fiscal and external current account surpluses and the country posted net foreign assets of KWD 5.72 billion in 2007, making up 18.0% of nominal GDP. The year 2007 witnessed slower nominal GDP growth at 8% while real GDP stood at 3.5%, as crude oil and liquefied gas production declined in line with OPEC decision. Inflation is predicted to reach 10% after reaching at the end of 2008 from 5.5% at the end of 2007. Credit has progressed at an average of 30% annually during the last 5 years but has grown by only 6% so far in 2008. In order to boost the economy, the government is resorting to measures like easing borrowing conditions by slashing the discount rate by 125 basis points to 4.5% and lowering the repurchase rate by 100 basis points to 2.5%. Furthermore, Kuwait investment companies have appealed to the government to set up a USD 1.12 billion fund to assist them in settling their foreign debts. There are also calls for the Kuwait Investment Authority (KIA) to increase its investments in the stock market and for the government to contribute to bonds or funds set up by businesses to finance their projects. KIA pledged to inject money into the central bank and markets, and established a fund to buy shares to support the bourse. The real estate sector in Kuwait in marked by small to medium players and is highly fragmented. There are 58 Kuwait-based real estate companies, 35 of which are listed. Real estate companies account for 20% of listed firms but account for just close to 7% of market capitalization. The government controls 90% of the land and thus only 10% of the total country area is available to build on, a situation which has fuelled demand and escalated prices. Market observers suggested that a significant amount of land is being traded, as opposed to relatively lower activity in building construction or real estate development. With limited available land the prices have surged enabling huge capital gains for the players. Consequently, real estate prices surged by 50%, suggesting over-priced market, especially in the residential segment. Currently, the expatriate population in Kuwait is not allowed to own property, but the government nevertheless has an obligation to provide housing for all nationals (80% of transactions concern private housing) and make sure nationals receive a home allowance. High population growth, driven by the expatriate community means that unmet demand is expected to reach 100,000 units by 2010. The private housing segment is separate from investment segment and targets the expatriate population; these properties tend to be located outside the city centre. These properties are expected to offer higher returns due to the potential for rental growth and attractive land valuations. The system currently operating in Kuwait for private-public collaboration is the Build-Operate-Transfer (B.O.T) method, whereby private companies develop plots owned by the government and operate them for 30 years, after which the project ownership reverts to the government.

Developers are faced with the challenge of red tape, which forces them to seek opportunity outside Kuwait. Major players in the market include Sovereign Wealth Funds and numerous real estate funds established by Kuwaiti companies, which heavily invest in property both regionally and internationally. Presently, the market is underdeveloped as the industry is faced with limited credit facilities and a lack of transparency. Furthermore, there is neither a formal mortgage system, nor are there any procedures to effectively deal with foreclosures. Though Kuwaiti nationals are eligible for subsidized loans up to KWD 70,000 from the Savings and Loan Bank, many are finding the prospect of buying or building their own house out of their reach with surging prices. During 2002-2006, the contribution of real estate to GDP has fluctuated between a high of 10% to a low of 6%. Significant real estate developments under way include the Bubiyan and Failaka islands, along with the City of Silk. However, given the current economic turmoil, the real estate sector could be severely affected and since the economy is still not widely diversified, real estate as a sector receives a large portion of bank lending. At the end of 2007/2008, lending increased 53.8% from 2006/2007 levels, indicating over exposure by local banks. The performance of the real estate market in Kuwait during 3Q08 was lesser than the previous two quarters. According to the real estate transactions reports issued by the Ministry of Justice - Real Estate Registration and Certification Department - the third quarter performance of the value of total transactions declined by 27.1% to KWD 545.8 million from KWD 749.1 million during 2Q08. During 3Q08, transactions value was 54.7% less than during the same quarter in 2007. Residential Real Estate Market During 2Q08, the transactions value of the residential real estate market was KWD 219.7 million and declined 15.9% to KWD 184.7 million in the third quarter. Meanwhile, the number of transactions that occurred in the second quarter stood at 971, which decreased to 907 in the third quarter, a 6.6% drop. During the third quarter, the number of transaction for the residential sector declined from 518 in July to 223 in August, declining 56.9% and to 166 in September falling by 25.5%. Apartment Real Estate Market The transaction value in the apartment sector during 3Q08 stood at KWD 184.8 million, a decline of 45.5% over the second quarter transactions value, which was KD 339.1 million. The number of transactions during 2Q08 was 476, which declined 10.1% to reach 428 transactions in the third quarter. During the period, rents in the apartment buildings declined marginally because of increasing vacant units, as the supply of newly constructed buildings is catching up to demand. The number of vacancies in apartment buildings had also surged as real estate owners refused to reduce rent rates. Commercial Real Estate Market The value of transactions in the commercial sector during 3Q08 reached KWD 169.6 million compared to a value of KWD 155.5 million in the second quarter, a 9.3% growth. The number of transactions in the third quarter stood at 56 transactions which did not alter from the second quarter, implying that third quarter transaction values averaged KWD 3,029, increasing from the second quarter transactions value of KWD 2,776. This is due to the increased activity in this sector, particularly in September. At the beginning of the year, as part of the government’s attempt to curb inflation, new regulations forbidding investment companies from trading in residential properties contributed to weakening in the residential sector. Additionally, sales were also 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%. As of October 2008, residential sales volume and the number of transactions 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 during the same period in 2007, while the number of transactions decreased 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, while sales of apartments and commercial property fell 19.5%.

Kuwaitis are finding the prospect of buying or building their own house out of their reach with surging property prices

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 revealed that it is delaying plans to expand its operations and would be focusing on completing projects currently under construction. Another leading Kuwaiti developer, Abyaar Real Estate, announced to postpone its plans to list on the Dubai Financial Market (DFM). There are however fears that by the first quarter of 2009, there could be an increase in defaults of consumer debts if the financial crisis does not ease. For now, the Kuwaiti real estate sector has slowed down and some of the country’s major property developers have become cautious. Sales may be down and developers may be consolidating their positions. However, recent moves by the Central Bank - including cutting interest rates for loans to banks and increasing liquidity in the market – is likely to boost confidence and encourage lenders to grant more loans, which in turn could improve property sales and help cushion the downturn. Nevertheless, the sector is dependant on government action and development may ensue if changes are made in some outdated decrees, including scrapping the 30 year old rule that foreigners cannot own property and extending the timeframe for the B.O.T system of development. Financial Performance FY 2007 Operating Structure During FY07, CRC reported that its total operating income surged 85.1%, on 141.4% growth in gains from investment properties and a 132.1% increase in profit from land and real estate held-for-trading. Driven by a fair value gain and sale of investment properties, gain from investment properties increased to KWD 26.87 million from KWD 11.13 million in 2006. Meanwhile, net profit from land and real estate held-for-trading surged more than two-fold to KWD 13.99 million from KWD 6.03 million Y-o-Y, on account of higher sale of land and real estate. However, profit from available-for-sale investments plummeted 36.9% to KWD 5.87 million from KWD 9.31 million during the last year, hurt by the reduced cash dividend income and decline in gain on sales of available for sale investments. During 2007, the company’s administrative expenses and other charges went up 35.0% to KWD 4.95 million from KWD 3.67 million, partially contributed by a rise in management staff costs. Consequently, its EBITDA swelled 92.9% to KWD 45.48 million as against KWD 23.57 million. Moreover, the company charged 10.9% lesser depreciation on property, plant and equipment in 2007 as compared to 2006. Non-operating Performance For the year ended December 31, 2007, CRC’s finance charges advanced 78.9% to KWD 6.45 million in 2007, while share of income from its associates soared 160.2% to KWD 7.59 million from KWD 2.92 million in 2006. Bottom-line As a result of its operating and non-operating activities, the company’s net profit increased 25.3% to KWD 44.65 million from KWD 35.63 million in 2006. However, in 2006, the company recorded a non-recurring gain of KWD 14.14 million on partial disposal of one of its subsidiary. Net profit for 2007 surged 107.8% Y-o-Y, excluding the non-recurring item in 2006. Meanwhile, adjusted EPS rose to Fils 27.9 from Fils 22.2 in 2006. Return on average equity (ROAE) grew 295 bps to 21.1% from 18.1% and return on average assets (ROAA) improved by 179 bps to 13.8% from 12.0% last year.

There could be an increase in defaults of consumer debt by 1Q09 if the financial crisis does not ease Operating income surged 85.1% on gain from investment properties Net profit increased 25.3% to KWD 44.65 million

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Chart Gallery

Size of the Company The salient features of the balance sheet are:

During 9M08, the share of current assets to total assets decreased 577 bps to 11.0% from 16.8% in 9M07, due to the decline in all the current assets. Receivables and other debit balances fell 27.3% to KWD 19.24 million from KWD 26.48 million from the comparable period last year. Land and real estate held for trading was KWD 22.38 million, down 15.7% from KWD 26.55 million in 9M07. Moreover, cash and cash equivalents plunged 84.5% to KWD 0.44 million.

The company’s non-current assets soared 22.9% to KWD 341.18 million in 9M08 from KWD

277.72 million in 9M07, mainly driven by an increase in projects under progress and investments available-for-sale. Investment properties jumped 7.0% to KWD 129.80 million from KWD 121.35 million on account of higher fair value gain. Meanwhile, projects under progress and investments available-for-sale swelled 44.4% and 46.2% to KWD 69.42 million and KWD 54.45 million in 9M08, respectively.

For 9M08, the shareholders’ equity was KWD 240.64 million, up 14.7% from KWD 209.79 million

in the corresponding period last year, mainly on account increased share capital owing to bonus share issuance and higher reserves.

CRC’s total current liabilities surged 58.8% to KWD 98.45 million, which increased its share to

total assets to 25.7% from 18.6% in 9M07. The increase was largely on account of two-fold surge in current portion of term financing to KWD 70.59 million Y-o-Y.

The non-current liabilities decreased 28.5% to KWD 44.22 million from KWD 61.85 million, as

non-current portion of term-financing declined 29.2% to KWD 43.20 million.

The company’s debt-to-equity ratio changed marginally to 0.47 from 0.46 in 9M07. Financial Performance Analysis – 9M 2008 For the nine months ended September 30, 2008, CRC witnessed a 19.9% decline in its total operating income to KWD 24.60 million from KWD 30.71 million in 9M07, majorly due to a 70.3% decrease in profit from available-for-sale investments. However, the decline was partially offset by a 19.3% increase in gain from investment properties. Meanwhile, both administrative and other expenses and finance charges went up by 9.3% and 8.3% to KWD 3.12 million and KWD 5.20 million, respectively. On the other hand, group’s share of associates’ income increased 78.2% to KWD 9.50 million from KWD 5.33 million in 9M07. As a result, net profit increased a marginal 1.1% to KWD 27.75 million from KWD 27.44 million during the comparable period last year. Improving the shareholder’s wealth, the company’s adjusted annualised EPS advanced to Fils 23.1 from Fils 22.8 in 9M07. Moreover, annualized ROAE and ROAA dwindle to 15.9% and 10.3% from 17.9% and 11.3%, respectively.

Investment properties increased 7.0% to KWD 129.80 million Net profit increased marginally 1.1% to KWD 27.75 million

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), National Real Estate (NRE), Mabanee Company (MABANEE) and The Commercial real Estate (Al Tijaria).

Financial Performance of Listed Real Estate Companies in KUWAIT

FY 2007 FIRSTDUBAI MAZAYA MABANEE NRE ALTIJARIA Profitability Ratios: ROAE 15.7% 32.1% 23.2% 17.7% 21.1% ROAA 7.3% 14.6% 11.5% 11.6% 13.8% Market Indicators: EPS (KWD) 0.023 0.102 0.044 0.055 0.028 P/E (x) 6.43 3.33 17.10 4.51 5.530 BVPS (KWD) 0.16 0.35 0.22 0.31 0.141 P/BV (x) 0.95 0.98 3.07 0.80 1.09 Current Market Capitalization (KWD million) 148 154 276 202 247 (KWD million) Net Sales 4.53 65.22 29.63 7.68 NA Cash from Operations before Working Capital Changes 4.44 -2.66 34.30 -2.34 17.57 Operating Profit 3.97 14.21 21.70 -4.14 45.34 Net Profit 4.53 31.60 18.31 39.02 44.65 Total Assets 75.47 267.07 195.24 396.28 337.49 Shareholders' Equity 31.17 109.24 89.55 228.37 225.46 Sources: Zawya.Com, CRC Financial statements

Financial Performance of Listed Real Estate Companies in KUWAIT

9M 2008 FIRSTDUBAI MAZAYA MABANEE NRE ALTIJARIA Profitability Ratios: ROAE 54.7% 48.6% 22.1% 12.4% 15.9% ROAA 35.4% 20.3% 9.6% 6.8% 10.3% Market Indicators: EPS (KWD) 0.049 0.156 0.049 0.034 0.023 P/E (x) 3.05 2.18 13.47 7.38 6.67 BVPS (KWD) 0.14 0.40 0.23 0.26 0.15 P/BV (x) 1.02 0.85 2.87 0.95 1.03 Current Market Capitalization (KWD million) 148 154 276 202 247 (KWD million) Net Sales 69.99 77.51 26.95 5.99 NA Cash from Operations before Working Capital Changes 28.72 43.14 13.71 -1.56 1.53 Operating Profit 35.89 31.49 19.82 -3.78 21.37 Net Profit 34.53 53.03 15.37 20.53 27.75 Total Assets 184.65 430.58 230.71 413.36 383.30 Shareholders' Equity 137.12 181.89 95.83 213.50 240.64 Sources: Zawya.Com, CRC Financial statements

CRC buys 8.33% stake in Shariah-compliant investment bank CRC has partnered with Booz Allen Hamilton to restructure its strategy and administration

New Projects and Strategies On October 28, 2008, CRC announced to buy an 8.33% stake in First Investment Bank (FIB), a new Bahrain-based Shariah-compliant bank, founded in 2007, with a capital of USD 200 million, as a Shariah-compliant investment bank for institutional and high net worth individual investors in the Middle East. During the same month, CRC launched a SAR 3.5 billion consortium, Jeddah Central District Company (JCDC), along with Urban Development Co., Solidere International Limited, Siraj Capital and Venture Capital Bank. JCDC, which has signed a MoU with Jeddah Municipality, aims to transform the historic downtown Balad part of Jeddah. Furthermore, the venture endeavours to promote the area as the “Gateway to the Two Holy Mosques” and boost its role as both a regional and global economic centre. The project will commence next year and will take 25 years for completion. It is hailed as potentially the largest city centre urban project in the Arab world, spread over an area of 6 million square meters. Additionally, CRC, along with property developer Durrat Al Bahrain, signed an MoU in June 2008 to set up a real estate firm with a capital of BHD 100 million. Durrat Al Bahrain is an artificial island project, which will connect 15 islands, in Bahrain. The latest venture, Durrat Al Tijaria, will develop Al Marjan islands 5 and 6, and residential islands, which will cover a combined area of 445,000 square meters and are components of the Durrat Al Bahrain project. Durrat Al Tijaria will be 30% owned by CRC, while its affiliates, Kuwait Resorts Co. and Kuwait Commercial Markets Complex Co. will hold 10% each. The remaining 50% will be held by Durrat Al Bahrain. Earlier in 2008, CRC secured a USD 400 million murabaha financing deal with BNP Paribas to finance the company’s local and regional development. In March 2008, one of CRC’s subsidiaries, Majan Development Company (MDC) sought to develop a healthcare city in Oman with an estimated investment of OMR 300 to 400 million. Construction is anticipated to start next year and will be allotted one million square meters of land near Blue City, 100 kilometres from Muscat. Other strategic alliances include a MoU with UAE’s Al-Qudra Co. in January 2008 to establish a joint real estate development company with two branches in Kuwait and UAE. Significant international projects under development include Hajar Tower and Maqam Tower, located within the Al-Bait Towers Complex in Makkah in Saudi Arabia. Furthermore, the firm was also chosen to develop the central business district of Abha city, which is one of the most attractive tourist destinations in Saudi Arabia. In Bahrain, the company is developing the Ain Athari park project with surface area of 170,000 square meters. Significant local ventures include Symphony, The Dome, Salmiyah Park, Al-Tijaria Tower, the Kuwait International Tennis Complex, Juman Residential Complex and Ruba Residential Complex. These ventures will include a range of entertainment complexes, resorts, and hotels, commercial and residential complexes at prime locations across Kuwait. Additionally, CRC has been working with US-based strategy consultant, Booz Allen Hamilton, to restructure its strategy and administration. CRC is looking to create a new organizational structure and the consultant has laid down the strategy for expansion outside Kuwait or in other investment sectors. They have also established new business policies and measures for CRC for training their staff. SWOT Analysis Strength:

CRC has a well-established brand name both locally and in the GCC and harnesses 40 years of experience.

The company’s development of two major cities in Saudi Arabia over the next couple of decades is expected to provide continuous revenue stream.

Weaknesses:

Though the firm is geographically diversified, it relies on its real estate business to drive revenue, which is vulnerable globally, implying a risk of weak revenues going forward.

Opportunities:

Its alliances with other companies in the GCC allow the firm to take advantage of various opportunities overseas and provide opportunities to participate in large-scale projects.

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, like nuclear family trend is becoming popular, thereby demand for more living space will increase.

Threats:

The poor economic global outlook has affected the Kuwaiti real estate market as well and quarter on quarter sales and value of transactions has been weakening.

New regulations have forbidden investment companies from trading in residential properties, which also contributed to weakening in the residential sector.

The central bank implemented new regulations limiting monthly interest and repayment instalments for private borrowers seeking new loans to the equivalent of 40% or less of their salaries, compared to the previous ceiling of 50%, which can dampen the prospects for the real estate sector.

Risks and Concerns:

The third quarter performance of the value of total transactions in Kuwait’s real estate sector declined 27.1% from second quarter while value of transactions was 54.7% lower during the same period.

Going forward, declining oil revenues are expected to reduce government expenditure, thereby reducing investments towards the real estate and infrastructure sector

The financial crisis created a greater liquidity crunch than expected and a situation with shrinking funding sources, which is a threat for ongoing projects in the construction sector and is leading to delays in new upcoming projects.

Declining oil revenues will reduce government expenditure, thereby reducing investments towards the real estate and infrastructure sector.

Valuation Methodology: We have used DCF valuation method for arriving at the fair value of CRC, as discussed below: Assumptions:

(i) Risk free Rate (Rf) of 3.34%, which is 3 month average of yield on 10 years US T bill (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 1.27. (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 13.76%. Taking into consideration the debt of CRC, we have arrived at the Weighted Average Cost of Capital (WACC) of 11.02%.

Cost of Equity: 13.76% WACC: 11.02%

DCF Calculations

DCF Valuation (FCFF Model) KWD ’000 4Q08E 2009 2010 2011 2012 Operating Profit (EBIT) 3,452 22,890 27,160 32,884 38,592 Less: Tax on EBIT 88 585 694 840 986 Effective Tax Rate 2.55% 2.55% 2.55% 2.55% 2.55% NOPAT 3,364 22,306 26,466 32,044 37,606 Add: Depreciation and Amortization -14 -120 -124 -132 -139 Less: Capex 1,427 12,955 18,568 16,417 12,020 Less: Change in Net Working Capital -70 -3,209 2,009 2,200 2,255 Operating Free Cash Flows to Firm (OFCFF) 1,993 12,439 5,765 13,296 23,192 Add: Non-Operating Cash Flows 113 7,953 9,884 11,296 12,158 Free Cash Flow to Firm (FCFF) 2,106 20,392 15,648 24,591 35,350 WACC 11.02% 11.02% 11.02% 11.02% 11.02% Present Value / Discount Factor 0.9827 0.8851 0.7973 0.7181 0.6468 Long-Term Growth Rate (g) 3.00% Present Value of Free Cash Flows 2,070 18,050 12,476 17,659 22,865

Calculation of Equity Value and Fair Value Per Share

NPV of Free Cash Flows (during Explicit Forecast Period) 73,119 Terminal Value: Residual Cash Flow (FCFF of 2012E) 35,350 WACC 11.02% Long-Term/Terminal Growth Rate (g) 3.00% Divided by Capitalization Rate (WACC - g) 8.02% Equals Nominal Terminal Value 453,807 Implied Multiple of 2012E EBITDA 11.72 Times PV/ Discount Factor 0.65 Present Value of Terminal/Residual Value 293,525 Enterprise Value 366,645 Implied Multiple of 2012E EBITDA 9.47 Less: Market Value of Long-term Debts 113,795 Less: Market Value of Preferred Shares 0 Add: Surplus Cash and Investments 0 Equity Value 252,850 Net Outstanding Shares ('000) 1,602,598 Fair Value Per Share (KWD) 0.158

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 ’000)

Discount Factor

Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00%

9.02% 513,633 555,733 604,826 662,813 732,351 10.02% 449,589 481,832 518,668 561,154 610,698 11.02% 399,597 425,112 453,807 486,317 523,455 12.02% 359,850 380,607 403,664 429,428 458,404 13.02% 327,196 344,427 344,427 384,320 407,583

Sensitivity Analysis of Discounted Terminal Value (KWD ’000)

Discount Factor

Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00%

9.02% 358,407 387,784 422,041 462,504 511,027 10.02% 302,007 323,666 348,411 376,950 410,231 11.02% 258,462 274,965 293,525 314,552 338,574 12.02% 224,246 237,180 251,549 267,604 285,661 13.02% 196,484 206,832 218,212 230,788 244,758

Sensitivity Analysis of Enterprise Value (KWD ’000)

Discount Factor

Long-Term Growth Rate 2.00% 2.50% 3.00% 3.50% 4.00%

9.02% 435,273 464,650 498,907 539,369 587,892 10.02% 376,966 398,625 423,370 451,909 485,190 11.02% 331,581 348,084 366,645 387,672 411,693 12.02% 295,607 308,542 322,910 338,965 357,022 13.02% 266,148 276,495 287,875 300,451 314,421

Investment Opinion The Kuwaiti real estate sector has recently been negatively impacted by the ongoing global economic downturn and the subsequent slowdown in the property market in the region. In addition to this, the falling crude oil prices (which are at the lowest level since May 2005) have been dragging down the GCC bourses, which in turn have led to credit crunch, 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 delaying upcoming projects along with hampering sales. However, the recent moves by the Central Bank - including interest rates cuts for loans to banks and increasing liquidity in the market - aim to restore the confidence in the economy. CRC has several local as well as international projects in the pipeline, which include development of commercial as well as residential properties. As a part of its expansion initiative CRC, along with property developer Durrat Al Bahrain, signed a MoU in June 2008 to set up a real estate firm with a capital of BHD 100 million in order to develop Al Marjan islands 5 and 6. However, on a negative note, given the liquidity crunch, the timely completion of on going projects and the commencement of new projects looks uncertain. The company generates a signification portion of its income from sale of investment properties and land and real estate, which is likely to take a hit given the dearth of liquidity in the economy, thereby reducing its profitability. Currently, CRC is trading at a P/E multiple of 7.93x based on its 2008E earnings and at a P/B multiple of 1.01x on its 2008E BVPS; and at a P/E multiple of 10.07x based on its 2009E earnings and at a P/B multiple of 0.98x on its 2009E BVPS. The stock has lost 37.3% since the beginning of this year, as compared to the KSE index YTD negative return of 34.4%. 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 0.158. The stock exhibits a 2.5% upside from its closing price of KWD 0.154 (as on December 25, 2008). Therefore, we initiate our coverage on Commercial Real Estate Company with a NEUTRAL recommendation.

Financial Statements

Consolidated Balance Sheet (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E ASSETS Non-Current Assets Property, plant & equipment 6,971 6,846 6,878 6,854 6,861 6,883 6,905 Projects in progress 49,778 52,612 48,078 69,420 70,473 76,778 85,224 Investment properties 84,173 123,248 121,353 129,796 130,150 136,657 146,633 Investments in associates 38,820 61,853 61,542 76,564 77,188 78,059 87,816 Investments in joint projects 8,713 2,426 2,625 4,093 4,126 4,167 5,127 Investments available-for-sale 27,453 41,373 37,242 54,452 54,896 51,542 62,376 Total Non-Current Assets 215,908 288,358 277,720 341,179 343,694 354,087 394,081 Current Assets Lands and real estate held-for-trading 29,082 23,103 26,547 22,381 22,563 18,886 21,247 Receivables and other debit balances 27,417 25,429 26,477 19,244 19,401 15,692 22,174 Investments at fair value through profit and loss 80 68 72 62 62 62 62 Cash and cash equivalents 38,589 535 2,832 438 710 1,568 1,518 Total Current Assets 95,169 49,136 55,928 42,125 42,736 36,207 45,000 Total Assets 311,077 337,493 333,648 383,304 386,430 390,294 439,081 EQUITY AND LIABILITIES Equity Share capital 134,071 144,796 144,796 160,260 160,260 160,260 160,260 Share premium 0 0 0 671 671 0 0 Treasury shares -11,834 -12,264 -11,408 -13,976 -14,090 -14,231 -16,009 Statutory reserve 15,676 20,296 15,676 20,296 23,515 26,051 29,104 Voluntary reserve 12,855 17,475 12,855 17,475 20,586 23,036 25,987 Change in fair value reserve 3,957 1,850 3,136 9,320 9,320 9,320 9,320 Group’s share in associates’ reserves 5,068 4,650 4,375 3,807 3,797 3,481 3,190 Gain from sale of treasury shares 0 166 166 166 166 0 0 Employee’s stock options reserve 0 740 423 1,288 1,298 1,311 1,475 Retained earnings 38,729 47,745 39,771 41,329 38,355 43,390 49,452 Total Equity 198,521 225,455 209,791 240,636 243,878 252,618 262,779 Non-Current Liabilities Employees’ end of service indemnity 785 843 809 1,021 1,055 1,126 1,197 Term financing from third party – Non current portion 50,019 55,489 61,041 43,200 42,314 29,350 48,738 Total Non-Current Liabilities 50,804 56,332 61,850 44,221 43,369 30,476 49,935 Current Liabilities Payables and other credit balances 38,605 25,979 27,204 27,853 28,080 27,580 32,053 Term financing from third party – current portion 23,146 29,727 34,802 70,594 71,103 79,620 94,315 Total Current Liabilities 61,752 55,706 62,006 98,447 99,183 107,200 126,368 Total Equity and Liabilities 311,077 337,493 333,648 383,304 386,430 390,294 439,081

Consolidated Income Statement (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Gain from invested properties and land and real estate held-for-trading 17,160 40,862 23,496 22,305 26,270 24,855 29,180 Hotel income 466 403 268 0 0 0 0 Profit from available-for-sale investments 9,305 5,874 5,689 1,691 1,705 1,085 1,684 (Losses)/Profits from investments at fair value through profit and loss -240 -9 -4 -1 -1 0 0 Other Operating Income and foreign exchange differences 548 3,296 1,257 607 680 646 678 Total Operating Income 27,239 50,426 30,707 24,602 28,654 26,586 31,542 Administrative expenses and other charges -3,666 -4,948 -2,858 -3,124 -3,710 -3,575 -4,258 Depreciation of property, plant and equipment -157 -140 -105 -105 -119 -120 -124 Operating Profit (EBIT) 23,416 45,339 27,743 21,372 24,824 22,890 27,160 Group’s share of associates’ results 2,917 7,591 5,329 9,498 9,614 8,162 10,143 Gain from sale of investments in associates 25 86 86 67 67 0 0 Gain on partial disposal of a subsidiary 14,139 0 0 0 0 0 0 Provision of impairment of investment in associates 0 -362 0 0 0 0 0 Reversal of impairment in associates 0 0 0 3,033 3,033 0 0 Finance charges -3,605 -6,449 -4,797 -5,198 -5,287 -5,642 -6,709 Profit before taxes 36,892 46,203 28,360 28,773 32,252 25,410 30,594 Contribution to KFAS -301 -348 -210 -168 -188 -148 -179 National labour support tax (NLST) -843 -1,021 -625 -538 -604 -475 -572 Zakat expense 0 -25 0 -197 -220 -174 -209 Board of Directors’ Remuneration -120 -160 -90 -120 -135 -106 -128 Net Profit 35,628 44,650 27,435 27,750 31,105 24,507 29,506 Adjusted EPS 0.022 0.028 0.023 0.023 0.019 0.015 0.018

CONSOLIDATED CASH FLOW STATEMENT (in KWD '000) 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Cash flows from operating activities Net profit for the year 35,628 44,650 27,435 27,750 31,105 24,507 29,506 Adjustments: Depreciation on property, plant and equipment 157 140 105 105 119 120 124 Change in fair value of investment properties -5,892 -20,600 -14,394 -16,048 -16,091 -16,896 -18,129 Gain from sale of investment properties 0 -577 0 -1,805 -1,805 0 0 Reversal of impairment of land and property held for trading -50 -289 -289 0 0 0 0 Gain from sale of investments in associates -25 -86 -86 -67 -67 0 0 Provision of impairment of investment in associates 0 362 0 0 0 0 0 Profits from available for sale investments -8,174 -5,255 -5,689 -1,691 -1,705 -1,085 -1,684 Dividends -1,131 -619 0 0 0 0 0 Doubtful debts provision -91 174 414 -109 -109 0 0 Losses from investments at fair value through profit and loss 240 9 4 1 1 0 0 Gain on partial disposal of a subsidiary -14,139 0 0 0 0 0 0 Group’s share of associates’ results -2,917 -7,591 -5,329 -9,498 -9,614 -8,162 -10,143 Employee’s stock options plan 0 740 423 548 548 0 0 Finance charges 3,605 6,449 4,797 5,198 5,287 5,642 6,709 Employees’ end of service indemnity 291 59 147 178 178 0 0 Gain from sale of lands and real estates held for trading 0 0 -5,511 0 0 0 0 Reversal of impairment in associates 0 0 0 -3,033 -3,033 0 0 Operating gain before working capital changes 7,502 17,567 2,028 1,529 4,814 4,126 6,383 Lands and property held for trading 5,690 5,688 7,756 162 540 3,677 -2,361 Inventory 5 0 0 0 0 0 0 Receivables and other debit balances -5,958 3,517 65 -905 6,028 3,709 -6,482 Investments at fair value through profit and loss 914 3 0 5 6 0 0 Payables and other credit balances 9,920 -19,556 -15,771 1,132 2,101 -500 4,473 Payment of employee's end of service indemnity 0 0 -123 0 0 0 0 Net cash resulted from operating activities 18,072 7,219 -6,045 1,922 13,489 11,013 2,013

Contd.

Cash flows from investing activities Payment for purchase of property, plant and equipment -120 -15 -12 -113 -134 -142 -146 Payments for projects in progress -9,042 -18,324 -11,136 -17,347 -17,861 -6,306 -8,446 Paid for purchase of investment properties -683 -6,809 -6,697 -226 -6,902 -6,507 -9,976 Proceeds from sale of investment properties 0 5,000 0 12,610 12,610 0 0 Payment for purchase of investments in joint venture -2,304 0 -321 -1,667 -1,700 -41 -960 Proceeds for sale of investment in joint venture 1,485 478 868 0 0 0 0 Payment for purchase of investment in associates -1,616 -12,364 -17,035 -5,127 -5,336 -871 -9,757 Proceeds from disposal of investment in associates 93 0 0 0 0 0 0 Proceeds from partial disposal of subsidiary 24,547 0 0 0 0 0 0 Payment for purchase of available for sale investments -2,664 -22,206 -11,459 -2,447 -4,801 3,354 -10,834 Proceeds from sale of investments available sale 12,284 11,745 10,711 3,955 3,955 0 0 Dividends received 2,361 619 1,778 1,193 1,193 0 0 Proceeds from sale of investments in associates 0 0 0 2,540 2,540 0 0 Proceed from associates' dividend 0 0 0 231 231 0 0 Net cash (used in)/ resulted from investing activities 24,342 -41,875 -33,303 -6,398 -16,205 -10,513 -40,119 Cash flows from financing activities Proceeds from subsidiary’s capital incremental 16,556 0 0 1,565 1,565 0 0 Net received from/ (paid to) financing from third party -5,436 12,050 22,368 28,578 28,201 14,739 56,895 Purchase of treasury shares -5,850 -1,512 -656 -1,547 -1,826 -141 -1,779 Gain of sale of treasury share 0 1,249 1,249 0 0 0 0 Dividend paid -12,934 -9,466 -15,665 -19,696 -19,762 -8,598 -10,352 Finance charges paid -4,345 -5,718 -3,705 -4,522 -5,287 -5,642 -6,709 Net cash used in financing activities -12,009 -3,398 3,591 4,379 2,891 358 38,056 Net (decrease) / increase in cash and cash equivalent 30,405 -38,054 -35,758 -97 174 858 -50 Cash generated from consolidating subsidiaries not consolidated before 3,000 0 0 0 0 0 0 Cash and cash equivalents at beginning of the year 5,185 38,589 38,589 535 535 710 1,568 Cash and cash equivalents at the end of the year 38,589 535 2,832 438 710 1,568 1,518

Common-Size Financial Statements

Common-Size Consolidated Balance Sheet 2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E ASSETS Non-Current Assets Property, plant & equipment 2.2% 2.0% 2.1% 1.8% 1.8% 1.8% 1.6% Projects in progress 16.0% 15.6% 14.4% 18.1% 18.2% 19.7% 19.4% Investment properties 27.1% 36.5% 36.4% 33.9% 33.7% 35.0% 33.4% Investments in associates 12.5% 18.3% 18.4% 20.0% 20.0% 20.0% 20.0% Investments in joint projects 2.8% 0.7% 0.8% 1.1% 1.1% 1.1% 1.2% Investments available-for-sale 8.8% 12.3% 11.2% 14.2% 14.2% 13.2% 14.2% Total Non-Current Assets 69.4% 85.4% 83.2% 89.0% 88.9% 90.7% 89.8% Current Assets Lands and real estate held-for-trading 9.3% 6.8% 8.0% 5.8% 5.8% 4.8% 4.8% Receivables and other debit balances 8.8% 7.5% 7.9% 5.0% 5.0% 4.0% 5.1% Investments at fair value through profit and loss 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Cash and cash equivalents 12.4% 0.2% 0.8% 0.1% 0.2% 0.4% 0.3% Total Current Assets 30.6% 14.6% 16.8% 11.0% 11.1% 9.3% 10.2% Total Assets 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% EQUITY AND LIABILITIES Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Share capital 43.1% 42.9% 43.4% 41.8% 41.5% 41.1% 36.5% Share premium 0.0% 0.0% 0.0% 0.2% 0.2% 0.0% 0.0% Treasury shares -3.8% -3.6% -3.4% -3.6% -3.6% -3.6% -3.6% Statutory reserve 5.0% 6.0% 4.7% 5.3% 6.1% 6.7% 6.6% Voluntary reserve 4.1% 5.2% 3.9% 4.6% 5.3% 5.9% 5.9% Change in fair value reserve 1.3% 0.5% 0.9% 2.4% 2.4% 2.4% 2.1% Group’s share in associates’ reserves 1.6% 1.4% 1.3% 1.0% 1.0% 0.9% 0.7% Gain from sale of treasury shares 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Employee’s stock options reserve 0.0% 0.2% 0.1% 0.3% 0.3% 0.3% 0.3% Retained earnings 12.4% 14.1% 11.9% 10.8% 9.9% 11.1% 11.3% Total Equity 63.8% 66.8% 62.9% 62.8% 63.1% 64.7% 59.8% Non-Current Liabilities Employees’ end of service indemnity 0.3% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% Term financing from third party – Non current portion 16.1% 16.4% 18.3% 11.3% 11.0% 7.5% 11.1% Total Non-Current Liabilities 16.3% 16.7% 18.5% 11.5% 11.2% 7.8% 11.4% Current Liabilities Payables and other credit balances 12.4% 7.7% 8.2% 7.3% 7.3% 7.1% 7.3% Term financing from third party – current portion 7.4% 8.8% 10.4% 18.4% 18.4% 20.4% 21.5% Total Current Liabilities 19.9% 16.5% 18.6% 25.7% 25.7% 27.5% 28.8% Total Equity and Liabilities 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Common-Size Consolidated Income Statement

2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Gain from invested properties and land and real estate held-for-trading 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Hotel income 2.7% 1.0% 1.1% 0.0% 0.0% 0.0% 0.0% Profit from available-for-sale investments 54.2% 14.4% 24.2% 7.6% 6.5% 4.4% 5.8% (Losses)/Profits from investments at fair value through profit and loss -1.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other Operating Income and foreign exchange differences 3.2% 8.1% 5.3% 2.7% 2.6% 2.6% 2.3% Total Operating Income 158.7% 123.4% 130.7% 110.3% 109.1% 107.0% 108.1% Administrative expenses and other charges -21.4% -12.1% -12.2% -14.0% -14.1% -14.4% -14.6% Depreciation of property, plant and equipment -0.9% -0.3% -0.4% -0.5% -0.5% -0.5% -0.4% Operating Profit (EBIT) 136.5% 111.0% 118.1% 95.8% 94.5% 92.1% 93.1% Group’s share of associates’ results 17.0% 18.6% 22.7% 42.6% 36.6% 32.8% 34.8% Gain from sale of investments in associates 0.1% 0.2% 0.4% 0.3% 0.3% 0.0% 0.0% Gain on partial disposal of a subsidiary 82.4% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Provision of impairment of investment in associates 0.0% -0.9% 0.0% 0.0% 0.0% 0.0% 0.0% Reversal of impairment in associates 0.0% 0.0% 0.0% 13.6% 11.5% 0.0% 0.0% Finance charges -21.0% -15.8% -20.4% -23.3% -20.1% -22.7% -23.0% Profit before taxes 215.0% 113.1% 120.7% 129.0% 122.8% 102.2% 104.8% Contribution to KFAS -1.8% -0.9% -0.9% -0.8% -0.7% -0.6% -0.6% National labour support tax (NLST) -4.9% -2.5% -2.7% -2.4% -2.3% -1.9% -2.0% Zakat expense 0.0% -0.1% 0.0% -0.9% -0.8% -0.7% -0.7% Board of Directors’ Remuneration -0.7% -0.4% -0.4% -0.5% -0.5% -0.4% -0.4% Net Profit 207.6% 109.3% 116.8% 124.4% 118.4% 98.6% 101.1%

Financial Ratios

2006A 2007A 9M 2007 9M 2008 2008E 2009E 2010E Liquidity Ratio: Current Ratio (x) 1.54 0.88 0.90 0.43 0.43 0.34 0.36 Profitability Ratios: Return on Average Equity (ROAE) (%) 18.1% 21.1% 17.9%* 15.9%* 13.3% 9.9% 11.4% Return on Average Assets (ROAA) (%) 12.0% 13.8% 11.3%* 10.3%* 8.6% 6.3% 7.1% Leverage Ratios: Debt to Equity (D/E) Ratio (x) 0.37 0.38 0.46 0.47 0.47 0.43 0.54 Shareholders' Equity to Total Assets Ratio (x) 0.64 0.67 0.63 0.63 0.63 0.65 0.60 Total Liabilities to Total Assets Ratio (x) 0.36 0.33 0.37 0.37 0.37 0.35 0.40 Current Liabilities to Equity Ratio (x) 0.31 0.25 0.30 0.41 0.41 0.42 0.48 Growth Rates: % YoY Growth in Operating Profit -31.5% 93.6% NA -23.0% -45.2% -7.8% 18.7% % YoY Growth in Net Income 6.5% 25.3% NA 1.1% -30.3% -21.2% 20.4% % YoY Growth in Total Assets 9.5% 8.5% NA 14.9% 14.5% 1.0% 12.5% % YoY Growth in Shareholders' Equity 1.9% 13.6% NA 14.7% 8.2% 3.6% 4.0% Ratios used for Valuation: EPS (KWD) 0.027 0.031 0.025* 0.023* 0.019 0.015 0.018 Adj. EPS (KWD) 0.022 0.028 0.023* 0.023* 0.019 0.015 0.018 BVPS (KWD) 0.148 0.156 0.145 0.150 0.152 0.158 0.164 Adj. BVPS (KWD) 0.124 0.141 0.131 0.150 0.152 0.158 0.164 Current Market Price (KWD) 0.154 0.154 0.154 0.154 0.154 0.154 0.154 P/E Ratio (x) 6.93 5.53 6.75 6.67 7.93 10.07 8.36 P/BV Ratio (x) 1.24 1.09 1.18 1.03 1.01 0.98 0.94

*Annualised

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