Alpha Dinar

By Naser

I came about an article about a Chairman of a Saudi company being jailed and fined for insider trading:

“A Saudi financial court has taken the unprecedented step of slapping a jail sentence on a violator of stock market rules, after the chairman of Bishah Agricultural Development Co was found guilty of insider trading.

According to a statement published on the Capital Market Authority’s website, the Committee for the Resolution of Securities Disputes has issued a final verdict against Najm-Eddine Ahmad Najm-Eddine Dhafer, sentencing him to three months in jail.

The CRSD’s ruling found Dhafer “guilty of insider trading in Bishah shares based on him being the Chairman of the company’s board”, CMA said.

He was sentenced to 3 months in jail and fined of SR 100,000. Further, he was also banned from working for any listed firm for five years. Dhafer also has to deposit the SR 52,690 he profited from the illegal stock sales in CMA’s account.

Bishah was involved in the processing of dates and in the cereal seeds business before CMA suspended its stock from trading in January 2007 after it posted a 2006 net loss of SR 38 million, exceeding the regulatory 75% of its paid-up capital. The measure reduced Bishah’s 400 million riyals market value to nil and left some 10,000 shareholders in limbo, according to traders familiar with the company.

The Bishah sentence is not the first, and hopefully not the last. The Saudi Authorities in July found Mohammed bin Ibrahim bin Mohammed Al Issa guilty of insider trading activities in shares of the Saudi Hotel Company, using information based on his membership of the company’s board. He was fined SR 100,000, and was ordered to pay back to the Saudi watchdog SR 3.3 million; the amount the CMA said he made in profit from the insider share trading. Mr. Al Issa is no small fish as he is considered the third largest retail investor in Saudi Arabia (behind Al Waleed and Sulaiman Al Rajhi), and holds key investments in Saudi Hotels Company, Savola, Riyad Bank and Calyons, the subsidiary of Saudi Fransi Bank.

I applaud the actions of Saudi regulators, and I hope that these actions would lead to a more transparent market. I personally think that we need this type of courage in Kuwait to limit insider trading and improve the efficiency of the market. The Kuwait Stock Exchange is in dire need for a regulatory commission.

Posted in Gulf, Kuwait
Tags: Capital Market Authority, Insider Trading, KSA, Saudi Arabia, Saudi Company Chairman fined jailed

Guest Contributor: (Osama)

I still haven’t met anyone who gets ripped off by Zain more than I do. Honestly, I barely talk on the phone and have my blackberry service fee, therefore, I should be paying just about KD20/month. But on every 11th day of the month, I get the most beautiful morning message from Zain: Dear customer pay KD65 or else. And happily I go to the Zain website month after month and pay.

WHY? Is the service Zain provides worth more than the services of other Telecom companies? No, however, with Zain I get my phone service, my internet service, my bb service, I use their one network when I’m travelling, and I know that a portion of my bills will be spent on greater causes. Do I get that with other telecom companies? No. For that reason: I choose Zain.

I’m really sick and tired of people who play around with financial models and fictional numbers, try to be smart and evaluate Zain on previous performance. Frankly, I still haven’t met a person whose an expert on the economic stability of every single one of the 24 countries Zain operates in neither have I met a person with a crystal ball that can predict the future . Nevertheless, I believe in real numbers and I believe in evaluating the competition. I know that  Zain is trading at a very high multiple of 7.9X EV/EBITDA, but still recommend people to buy it either for short term gains (sell at KD1.800) or long term capital appreciation with a company that has shown that it sets very high standards and reaches them. Yes, they play around with the balance sheet but GAAP asset valuation methods changed in March, hence, if auditors believe that the financials fairly reflect the company’s current state then that’s the end of the story.

Compared to its regional peers, Zain is way ahead. It is perfectly positioned in its home market, secured the Levant, progressing in Iraq, blossoming in Saudi, and breaking records in Africa. Most of it markets have dense bottomed population pyramids, economic growth, and specifically Africa has very low penetration rates. Currency swings, high interest payments, and so on will naturally have an effect on the company’s bottom line. However, Zain is building relations with the world (a wonderful world).

I have great trust in Zain’s management and wouldn’t be surprised if Zain were to make a 7X oversubscribed bond offering and reschedule their debt. In my view of the Telecom industry, no company can increase their customer base more than Zain, MTN, and Bharti Airtel. These three companies’ operations add value to societies and to others. Hence, in a time where liquidity is very apparent in banks around the world and investments are made based on a company’s ability to  provide solid cash flow; everyone wants a bite. So if Mr. Khorafi wants to sell his stake, there are many willing buyers. The remaining question is: At what cost?

In my view, at a cost much higher than what many believe the company is worth or at least double that.   

P.S. I’m not expecting a cash sale. What I’m expecting is a share swap which will give Zain an even more steady income stream and add more value. But for those of you who love the quick buck, sell the stock the day you see high value and its at limit up (KD1.800).  Then, buyback at  around KD1.400. Try to time it, but if you get caught its your fault. What I advise is long term investing in this company even at current prices.

* This article is a guest contributor article. Further, it does not represent the views of Alpha Dinar.

Posted in Kuwait
Tags: Bharti Airtel, Kuwait, Long Zain, MTN, Zain, Zain Africa, Zain Bullish, Zain Kuwait, zain sale, Zain Telecom

We have been screaming sell on Zain since it broke the KD 1.200 level. Moreover, every analyst I speak to agrees with me that Zain is overvalued; the latest report I read by CREDIT SUISSE (17 Aug) valued the stock at KD 0.800. However, something seems to be wrong and the stock keeps soaring! What is driving the stock up? Is it the rumors about the sale of their African Operations or is it the sale of part of the company? Even with Vivend’s deal the stock isn’t worth KD 1.500 (click here for details). I lost track of all the rumored deal, but it seems the latest one is Indian Reliance which is offering to buy a the African operations of the company.

Whatever it is driving the stock up is just making it more expensive! Zain is considered the most expensive Telecom stock, valued at EV/EBITDA of 7.32x against the GCC aggregate of 5.83x and MENA aggregate of 5.59x. Please look at the table below for more details.

On the other hand, technically speaking the stock has broke its resistance of KD 1.200 and its 20, 40 and 200 day moving average and it seems like there is no place else to go except the KD 1.700 levels.

Nevertheless, I would still be a seller…

Posted in Gulf, Kuwait
Tags: Etisalat, GCC, Indian Reliance, Khorafi, Kuwait, MTC, UAE, Vivendi, Zain, Zain Africa Sale, zain sale, Zain Takeover, Zain Telecom

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”
- Mark Twain

Posted in Quote of the Week

By Sal:

Throughout history, the U.S. and the world have experienced different kinds of economic cycles from booms and bubbles, to busts followed by different letter shaped recoveries. However, in 2008, the world stopped! Government efforts fell short of expectations in halting the recession and putting Humpty Dumpty back again. Is this crisis different than any the world has experienced before?

Well, YES! It’s different than the Latin American debt crisis of the 1980’s, Japanese asset price bubble of the 1990’s, and even the Asian financial crisis of 1997-98. In those instances, pressures were confined largely to a region or asset class, while the rest of the world seemed resilient. Today, the world economies have proven to be interconnected more than ever with the contagious spread of the crisis starting with the coordinated interest rate cuts and extended swap lines. In 2008, fortunes got reversed, with the U.S. at the epicenter of the financial crisis; it has failed to practice what it preached. Back in 1997-98, the U.S. lectured Asia on avoiding over-leverage, increasing transparency and regulation. Government policy shifted from the deregulation and privatization of industries to protectionism and nationalism.

The fact is that over the past decade, total debt in the U.S. doubled from $26 trillion in 2000 to over $52 trillion year to date. Of that, $14 trillion consists of gross Federal State and local Government debt and $38 trillion of private debt. Different from the Japanese crisis in that most of the excess debt in the U.S. was in the private household sector, while in Japan it was in the corporate sector. According to a report titled “Substituting Debt for Savings and Productive Investment,” a study showed that it took $1.50 of debt to generate $1 of GDP in the 1960’s, $1.70 in the ‘70s, $2.90 in the ‘80s, $3.20 in the ‘90s, and $5.40 of debt to generate $1 of GDP. Cheap and available credit, coupled with a property bubble, helped confine the U.S. consumer in a bubble of his own.

Today, the U.S. is the world’s largest in-debtor with households saving only two percent of income, average American household having nine credit cards and a debt of $17,000, and the government owing the world more than $10 trillion. With the U.S. consumer bubble, derivate bubbles were created and depended highly on their excessive spending habits. Today, overextended U.S. consumer is tapped out, and is unlikely to spring back overnight. Most of the export-led economies grew with the growth of the U.S. consumer. (72.4% in the first quarter of 2009, from a pre-bubble norm of 67% and 62% between 1955 to 1985) The lack of internal private consumption and over-reliance on exports for growth puts a huge question mark on their future prospects. With the contraction of the biggest spender, what’s next for the global economy remains a mystery.

Posted in World
Tags: Credit Cards, Debt, US Consumer Debt, US Government Debt

By Naser

I was looking at Zain’s financial statements and I came across a striking piece of information. According to Zain’s 2008 incomes statement, Zain Kuwait contributes to 19% of the group’s overall revenues, while they contribute to 53.3% of the groups overall net income!

What adds insult to injury is that Zain is receiving 3-6 times as much from Kuwaiti customers in revenues than from their other clients. When looking at the Average Revenue per Unit (ARPU), Zain Kuwait has a whopping $69, while the three largest markets of Zain out side Kuwait, Nigeria, Iraq, and Sudan, have an ARPU of $9, $13, and $16, respectively. ARPU is an important measure for telecom companies since it illustrated how much revenue the company is generating from each customer.

This leads us to the conclusion that either Kuwait customers are being overcharged, or the others are being undercharged. I lean towards the former since Kuwait is the only market being overcharged so it is more realistic than all other 21 markets being undercharged. Also Zain was the first mobile company in Kuwait, so they first mover advantage and a gifted monopoly for decades. These facts ensured that Zain had a well established client-based that were attached to the company; giving the company freedom to charge whatever they want.

I hope that with the introduction of the third telecommunications company in Kuwait, Viva, prices will be lowered and the offers would increase. This inequality illuminates the dire need for a regulatory Telecommunication Commission in Kuwait.

Posted in Kuwait
Tags: Kuwait, Viva, Zain, Zain Africa, Zain Earningss, Zain geographic breakdown, Zain Kuwait, Zain net income breakdown, Zain revenue breakdown

Posted in Gulf
Tags: Bear Market Cartoon, Bull Market Cartoon, finance cartoon

By NASER:

The talk around Wall St. nowadays is what’s going to happen after the US economy recovers. The government has amassed huge debt to jump start the economy. The US consumer is drowning in debt, which caused the recession in the first place. No action has been taken to alleviate these problems.

The US Government debt as percent of GDP is in the 80% range. Government debt levels are close to reaching the $12,100 bln limit set by Congress. Total debt to GDP is close to 350%, outpacing the rate of the Great Depression and World War II periods.

Many fear that the US is going to face a fate similar to Japan in the 90’s when their debt levels were high (although lower than the US) and faced a period of stagnation. Consumption is about 70% of GDP, and as consumers delever and increase saving, consumption will falter. They also believe that the government will go back to the consumers and tax them after the recession to pay down the debt. All of these factors will cause growth levels to decline. Leverage was a main contributor to GDP growth in the 90’s an early 2000’s, so with the lack of this leverage, GDP growth rates will suffer.

On the other side of the coin is Kuwait. The government has not been doing much to combat the recession, other than entertaining obnoxious proposals by MPs (see Want a one year PAID vacation? Get Fired NOW*). Kuwait’s government debt to GDP is slightly higher than 6%, largely due to the fact that high oil prices in the past years led to large budget surpluses. When the Kuwaiti economy recovers along with the Global economy, Kuwait will not face the same lingering leverage problem as the US and other nations.

My recommendation is that the government should jump start the economy so that it recovers faster. The government can spend money on developmental projects, such as the building of new hospitals, renovation of schools, improvement of the infrastructure, etc. The government has the luxury of spending the surpluses it had accumulated throughout the years without worrying about debt and leverage. However, one look at the government and the parliament makes these recommendations look farfetched.

Posted in Kuwait, World
Tags: Debt, Debt to GDP, Deleveraging, GCC, Government Spending Kuwait, Great Depression, Japan, Kuwait, Kuwait GDP, Leverage, Oil, US Consumer, US Economy, Wall street

By Naser (Article Contributor):

I’ve realized that an important piece of information is lacking in most Kuwaiti fund advertisements that are found in the newspapers. Most of these advertisements just state the YTD performance, performance since inception, and the unit price. Others might include the redemption terms and biggest holdings, but almost all lack the benchmark’s performance over the period of time they are talking about.

What is a benchmark? It is usually an index that covers the same asset class and region as the fund. Why is the benchmark’s performance important? Because it gives the investor something to compare the fund’s performance to. To illustrate my point please observe the following fund advertisement:

** Please note that I am not picking on that fund, it is a mere example, and I thought it would most beneficial to illustrate my points**

The example I am using is of the Commercial Bank of Kuwait’s India Fund. The information given to us includes the fund’s YTD performance (using a size that consumes ¼ of the space), unit price, and a brief description.

A newspaper reader might look at this fund and be amazed by the great returns generated by this fund, which amounted to 31.09%. A more sophisticated reader might also compare it to Kuwait’s Stock Exchange performance, which was negative during that period. They might be tempted to invest in this fund due to its great performance. However, unbeknown to them is that the Bombay Stock Exchange, the appropriate benchmark for this fund since the fund invests only in Indian equities, returned a whopping 74.96% (adjusted the currency). The MSCI India Index returned 82.5% (also currency adjusted) during that period. The fund missed out on more than half of the profits that could have been generated during that period!

On the other hand, lets take a look at how Putnam Investments advertised its services in the United States. They list every fund they have with the fund manager’s info (name, management and investment experience), and the fund’s 1, 3, 5, and 10 year performance relative to other managers operating within the same category. This gives investors a prospect about how well the manager is doing, and if he is worth the management fees.

I hope that a greater knowledge of basic financial terms and concepts among investors in Kuwait would lead to better financial disclosure by institutions and a better maintenance of their fiduciary duties.

Posted in Kuwait
Tags: Benchmark, Comparing Return to Benchmark, Fund Performance Advertisements in Kuwait, GCC, Kuwait, Putnam Investments, Relative Valuation