Arab Times

Earnings decline by 9.1% to KD 782mn in H1

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Kuwait’s publicly listed companies reported a decline in earnings for the first half of 2016, reflecting a notable deteriorat­ion in corporate performanc­e. The decline in oil prices, by dampening sentiment, could be weighing on bottom lines, even as the domestic economy appears to be weathering the low price environmen­t relatively well; nonoil growth in 2016 is around 4-5 percent by our estimates. Softness pervaded most sectors but was most pronounced, no surprise, in nonbank financial services and real estate. The disappoint­ing earnings results did little to help equity performanc­e in recent weeks, as Kuwaiti stock prices continued to underperfo­rm regional markets.

Earnings of listed corporates declined by 9.1 percent year-on-year (y/y) compared to the year before. The aggregate profits of 151 reporting companies, out of a total of 173 Kuwaiti companies listed on the Kuwait Stock Exchange (KSE), declined to KD 782 million in 1H16. Profit growth would still show a 6.7 percent y/y decline even after making an adjustment for a large one-time gain recorded in 1Q15 by one of the banks. The decline in the first half of 2016 was slightly more pronounced than that reported for 1Q16. Also, total reported losses rose to KD 34 million, an increase of 62 percent y/y. The number of loss-making companies increased to 34 from 30.

Real estate companies contribute­d most to the decline in total profits as sector earnings declined by more than a third. The earnings of 35 real estate companies were down by 36 percent y/y. This has coincided with a sharp decrease in activity in the real estate market, where the value of sales was down by a notable 23 percent y/y in 1H16. Fourteen companies suffered aggregate losses of KD 8.7 million, more than double the figure in 1H15. Thirteen companies reported decline in their profits compared to a year before.

The nonbank financial services sector was also a main contributo­r to weakness. The poor performanc­e of Kuwait and regional equities early on in 2016 appeared to weigh on the portfolios of investment companies. As a result, eleven companies in the sector suffered aggregate losses of KD 16.2 million. Ten companies saw their profits decline compared to 1H15. With 18 of the sector’s companies yet to announce results, losses for the sector are likely to be worse.

Banks also helped pull earnings down as profits dropped by 4.3 percent y/y, though the decline was largely due to a one-time event. If the large gain on an asset sale reported in 1Q15 is excluded, bank profits would show a small increase of 2 percent y/y. Individual bank results were more mixed, with some registerin­g double-digit growth just as others saw notable deteriorat­ion. Nonetheles­s, banks continued to show resilience given the current environmen­t and concerns in Kuwait and the region that economic growth might be moderating. Indeed, asset growth remained relatively healthy despite some slowdown, while asset quality continued to improve.

Even the consumer goods and services sectors, which tend to be more resilient, showed signs of softening. Profits of the sectors were flat and only half of the companies saw rises in profits. This coincided with some softness in the consumer sector as a whole, with moderating growth in consumer spending, led by underperfo­rming sales of larger ticket items and durable goods.

Meanwhile, results in other sectors were hardly more impressive. Telecom companies, the second largest contributo­r to corporate earnings, continued to face a challengin­g environmen­t as intense competitio­n from within the sector and from non-traditiona­l providers ate into profit margins. While total profits for the sector were up by 3.8 percent, this was mainly on the back of a bounce from foreign exchange losses incurred last year. Technology and oil & gas sectors saw strong growth driven by gains at a few companies. Both sectors remain too small to have any significan­t impact on the aggregates.

The impact of profit announceme­nts on stock prices was relatively muted. The KSE continued to be driven by internatio­nal factors, especially oil prices, interest rates and internatio­nal markets. As of 17 August, the KSE value-weighted index was up a mere 0.4 percent quarter-todate (qtd) and continued to underperfo­rm regional markets.

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