Fundamental Buy: Kuwait China Investment Co

A tiny niche of Kuwaiti companies qualify as being operationally sound, especially when one looks at investment-specialized ones. When individuals thinks of investing in “operational” companies in the Kuwait Stock Exchange, they may settle on National Industries only to be shocked that a mere 5% of their revenues come from selling bricks! Other investors may settle for buying Zain only to be bored by its pending marathon takeover-run which seems to be never-ending. Another group of investors may take a chance at Agility only to be shocked by the unveil of a major lawsuit. Banks are exposed to such companies deeming them “not the best” of investments.

The Kuwaiti stock exchange has lagged nearly all worldwide markets in 2009 and especially Emerging markets. Think BRIC* countries and you will not be disappointed: markets up an average 70% year-to-date. Fortunately, Kuwaiti investors can get exposure to such growth through an ideal company of their own: Kuwait China Investment Company (KCIC). The company is headed by an internationally-experienced Harvard alumni and most employees which I personally know are very well-educated and trained. Not only that, but also the company’s returns speak for it. It recently listed in the Kuwait SE and is worth a serious look.

KCIC is currently trading at 93 fils, below its 100 fils IPO price. It is treated as another commodity in the investment companies space which is utterly unfair. KCIC is deeply undervalued at these levels. As of Sept. 30th, the company had KD25.5 million of cash on its balance sheet with no long-term liabilities. This accounts to 32 fils of cash per share which provides ample downside protection and illustrates a strong balance sheet in a sector sickened by over-leverage. KCIC earned 15 fils for the last 9 months. If we assume they earn 5 fils next quarter (which is very reasonable since they earned 15 fils during the last 3 quarters), the total comes out to 20 fils of earnings for the year. This means the company is trading at a P/E of merely 5 times earnings!

Savvy investors may argue that KCIC only earned 3 fils during the last quarter and they have a point. However, even if we normalize such trough earnings of 3 fils per quarter, KCIC would earn 12 fils during a year. If we put a 10x P/E multiple on it, KCIC should be trading at 120 fils. A ten multiple is considered low as the US market, BRICs, and some GCC countries all trade above 15 times earnings.

Based on the aforementioned reasons, I recommend adding KCIC as fundamental buy to your Kuwait SE portfolio.

*BRIC: Brazil, Russia, India, China.

Below is a snapshot of KCIC’s Q3 financials(click to view original):