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Kuwait Strategy - Time to focus on heavyweights; Add ZAIN and KFH

Add ZAIN/KFH replacing GBK/BURG in our MENA Top 20 list

Since we said it was too early to sell Kuwait on 14 Mar 2019, the Kuwaiti market has returned 7.5% outperforming MENA, EM, FEM, and FM. Over that period BURG and GBK both returned c11%, taking total returns YTD to 28% and 27%, respectively. We replace these stocks with heavyweights, ZAIN and KFH (assuming the merger goes through KFH could also be accessed via AUB at a c6% discount) within our MENA Top 20 list (ZAIN replaces GBK in our FEM picks list). ZAIN (c6% yield) and KFH (c3% yield) will go ex-div on 1 and 2 April, respectively, and we are recommend investors get those dividends and reinvest them in the two heavyweights ahead of MSCI’s decision in June, which we see as a shoo-in. We keep NBK and HUMANSFT in our MENA Top 20 list (NBK is also in our FEM picks list). 
We keep our three trading calls on Kuwait, reiterate MABANEE

We have three trading calls on Kuwait: i) Long Kuwait’s provisional MSCI EM list weighted by flows / Short MSCI Qatar; ii) Long equal weighted basket of Kuwaiti banks (NBK, KFH, AUB, GBK, and BURG) / Short equal weighted basket of QNBK/QIBK. Those calls are +20% and +30% respectively and we keep them open. In addition, we have a Long MABANEE trade (-5.85% since inception on 24 Jan), and while it has lagged substantially, it is still part of MSCI Kuwait and has the highest flows/ADVT at USD74mn (132x 3MADVT). 
What is next? FM weight incr. May’19, +USD2.4bn May’20

The Kuwait market run still has room to go as i) this May, Argentina will be upgraded to EM lifting Kuwait’s weight in FM from 23% to 28%, while the expected merger between AUB and KFH would lift it further to c31%, which could provide a significant tailwind to the expected MSCI EM upgrade trade (decision June 2019, effective May 2020); and ii) we expect Kuwait to account for c0.57% of MSCI EM (assuming the KFH/AUB merger is completed), and drive cUSD2.4bn of inflows. In addition to flows we like the i) stable macro outlook; and ii) low foreign ownership by regional and global funds relative to peers. Kuwait is trading at 16x TTM P/E (in-line with historical average, but below its 25.8x peak, and still at a discount to Saudi Arabia) with strong EPS growth ahead (14% EPS CAGR for 2018-20e). 

BURG & KPROJ are potential additions to FTSE this September 

Assuming they continue to meet liquidity requirements, we see BURG (USD33mn, 11x ADVT) & KPROJ (USD11mn, 23x ADVT) joining FTSE EM this Sept. KPROJ owns c65% of BURG, and that holding is now equivalent to c174% of KPROJ’s market cap.

Mohamad Al Hajj

Simon Kitchen