KCPC Report - Kuwait University

Investment Project Evaluating
Kuwait Company for Process Plant
Construction and Contracting (KCPC)
As of December 19, 2011
Provided By:
Khalid al Wuhaib, Mohammad al Roumi,
Abdulwahab al Eissa, Ahmed al Rabia
Instructer: Dr. Fahad al Mudhaf
Summary and Recommendation:
Stock Price: 300 fils
Fundamental Vale: 305 fils
Recommendation: (Hold and don’t Buy)
Based on our investigation of the stocks value we recommend to
hold this stock and wait for further market reaction but:
1- (Buy if): if price reaches 325 fils by January or 300 by February
2- (Short sell if): if Price decreased by 5%
Based on the following premise:
- Fundamentally: the price is between 292 fils and 319 fils. But
should check on 2011 annual sales growth and check if
earning provide higher fundamental Value because there is
a current decrease in earnings due decrease in sales.
- Technical: There is current downward trend unbroken with a
current resistance of 325 fils and a 300 fils by February.
Company Overview:
The Kuwait Company for Process Plant Construction and Contracting (KCPC) is a
Kuwaiti based company (The Parent Company) and also owned subsidiaries K.C.P.C
Construction in Dubai, United Arab Emirates and Mass International Company In Oman.
The main line of business of KCPC is divided into two categories: contracting and
commercial, but it is more focused on the contracting.
The objective of the company is to civil, mechanical and electrical engineering and
also maintenance contracting, also another objective of KCPC is the installation and
maintenance of elevators, swimming pools, water treatment and fire alarm equipment, and
there assets also consist of ownership of real estate and land, and also they invest in
surplus funds through portfolio managers. The Parent Company is listed in the Kuwait
Stock Exchange under the services sector.
The KCPC have a strong asset base and they have cash on hand, demand and time
deposit with maturities less than 3 months which classified as cash equivalents, also there
inventories are valued at the lower of weighted average cost and net realizable value , also
they have investment property such as land and building which is meant for long term
rental yield and not occupied by the Group ,and their property plant and equipment are
stated at historic cost less accumulated depreciation and accumulated impairment loss.
Also the company have intangible assets and they are measured at cost on original
recognition, and the Group have post employment benefit as they are liable under various
labor laws including the Kuwait Labor Law and Labor Law of the countries which the Group
subsidiaries operates.
As it was mentioned above, KCPC has a number of strength points that should be
pointed out and it may be indicators of the company's performance in the following years,
the company owns subsidiaries in both of Oman and Dubai, which are both emerging
markets, and should the industrial sector in both countries are recovering, the company
will be exposed to a great investing opportunities, it also enjoys an excellent management
that earned it the ISO 9001:2008.
Moving on to the weaknesses unfortunately the company suffered greatly, along with
any other company in the same sector from the mortgage crisis which dropped the sales of
the company greatly, also in the same matter the Dubai market which it owns a subsidiary
as well suffered more from the crisis.
If we are to discuss opportunities, on a national level the parliament has successfully
agreed to the Kuwait development plan which aims to transfer Kuwait into a trading and
financial hub, in particular the construction of Silk city, Kuwait new airport (terminal two)
and the new University in the city of Shedadiah, this opens a new horizon for the company
to expand its operations on both the contraction side as well as the commercial services the
company provides.
As for the threats facing the company it's still hasn't recovered from the mortgage
crisis in 2008, all the indicators in fact are stating that the performance of the company is
going on a downward sloping path, and also unfortunately the political system in Kuwait
isn't stable enough to carry the Kuwait development plan successfully.
Industry Analysis:
Kuwait’s economy preview:
According to CIA world fact book from 2010 estimation, Kuwait’s GDP is
composed of 48% on the industrial sector and 51.7% on the services
sector, Kuwait is a rich of crude oil, it owns about 9% of the world
reserve of oil.
In pre 2008 crisis year Kuwait’s growth has been witnessing a steady
growth but unfortunately Kuwait’s economy has been exposed and
affected from the 2008 economic crisis resulted from the U.S., according
to Global Kuwait’s Economy overview, Kuwait’s nominal GDP trend took
a hard fall from 23% increase in nominal GDP to a decrease of 21%,
which took a toll in every economic indicators and the triggering a
decline in Equity, real estate and oil prices which slowed the economy
down in the year 2009, although in the recent years 2010-2011 nominal
GDP is showing an improvement and a positive growth as well as real
GDP.
Kuwait is currently trying to reduce the dependence of exporting crude
oil as the main source of income of the country, and because of that the
parliament has successfully approved KDP (the Kuwait Development
plan), which allows the government to spend about 135bn USD (37bn
KD) in order to revive Kuwait’s economy that has been suffering from
recessionary pressures resulted from 2008 crisis, and it’s the first part
towards the 2035 Kuwait vision, which aims to make Kuwait the Financial
and trade center for investment.
The KDP ‘s goal is to diversify Kuwait’s economy away from the
dependence of crude oil only; the plan has about 1000 projects that will
be either in private sector and government, it should be noted that the
private sector would follow the B.O.T. (Build, own, transfer) scheme in
handling those projects. KDP largest projects include:
Industry Analysis:
It is clear that this opens new horizons for local companies to be part of the KDP,
and such plan will boost the many sectors of the economy.
Kuwait Industrial sector:
Kuwait Stock Exchange has a list of 29 companies in the industrial sector; the
industrial sector in Kuwait has been affected greatly by the 2008 crisis as it
appears on the chart below (Source: Bloomberg)
Industry Analysis:
As the graph shows the industrial sector index in Kuwait was active pre 2008
crisis and it was affected by it, although it took a heavy fall in the beginning of
2009 and the closing price reached a trough of 275 whereas in April 2008 it
reached a peak of 917, though in the recent years the index is showing
consistency in it’s movements.
According to Alwatan newspaper, Kuwait industries union mentioned that
there is a golden opportunity to invest in the local industrial sector so it can
support the country’s economy GDP alongside the crude oil and to help the
government in providing jobs to Kuwaiti citizens, the union also mentioned
that industries in Kuwait contribute about only 3% of the national Balance of
payments, which is little compared by the other companies in Gulf region, and
the union believes that if the contribution rate would increase to 12% as it
was mentioned in KDP, the industrial sector would increase the national non
petroleum revenue from 2.5 to 3bn KWD annually.
So it is safe to say that the industrial sector in Kuwait is facing a number of
opportunities that would boost its performance and the economy like the
Kuwait development plan that holds many chances for local companies in that
sector to grow on right basis.
Although the company is listed in Kuwait Stock Exchange as a service sector
company, it would be unfair to compare it to companies of that sector since the
nature of those companies are entirely different in activities from KCPC, and in
Reuters it is listed as industrial company, and that is the reason of choosing to
compare KCPC with industrial companies.
Technical Analysis
Weekly KW CO PROC PLANT
11/11/2007 - 08/07/2012 (RIY)
454.5
Price
KWf
Cndl, KW CO PROC PLANT, Last Trade
18/12/2011, 305, 305, 300, 300
390
360
330
302.3
300
270
251.4
240
210
180
174.2
FLAG
.1
Volume
KWf
Vol, KW CO PROC PLANT, Last Trade
18/12/2011, 160,000
6M
5M
4M
3M
2M
1M
.1234
D
J F M A M J
Q1 08
Q2 08
J A
S O N
Q3 08
D J F M A M
Q4 08
Q1 09
J J A
Q2 09
S O N
Q3 09
D J
Q4 09
F M A M
Q1 10
J J A
Q2 10
S O
Q3 10
N D J
Q4 10
F M A M
Q1 11
J J
Q2 11
A S O
Q3 11
N D J
Q4 11
F M A
Q1 12
M J J
Q2 12
In (q2 08 )we can see a triangle and it broke down the we can see double bottoms and top(q1
09 may)bottom 1, (q1 10 may ) bottom 2 , and a top in (q4 10 December ).
Also we can see a flag in (q1 10) concluding from the volume at this period.
And now after this up trend from (q1 10 –q4 10) we can say that the price will drop at least to
270 and the trend now is down
Daily QKCPC.KW
20/06/2007 - 19/12/2011 (RIY)
Price
KWf
Cndl, QKCPC.KW, Last Trade
12/12/2011, 305, 305, 300, 300
2MA, QKCPC.KW, Last Trade(Last), 2MA_1 52, 200, Simple
12/12/2011, 306.9
2MA, QKCPC.KW, Last Trade(Last), 2MA_2 52, 200, Simple
12/12/2011, 366.4
440
430
420
410
400
390
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
.1
J
A
S
Q3 07
O
N
D
Q4 07
J
F
M A
Q1 08
M
J
Q2 08
J
A
S
Q3 08
O
N
D
Q4 08
J
F M
Q1 09
A
M
J
Q2 09
J
A
S
Q3 09
O
N
D
Q4 09
J F M A M J
Q1 10 Q2 10
J A S O N D J F M A M J J A S O ND
Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
We can see that the short term average broke the long term from above and we can say it is
bearish signal
Weekly QKCPC.KW
14/10/2007 - 29/01/2012 (RIY)
Price
KWf
Cndl, QKCPC.KW, Last Trade
18/12/2011, 305, 305, 300, 300
2MA, QKCPC.KW, Last Trade(Last), 2MA_1 52, 200, Simple
18/12/2011, 351.6
2MA, QKCPC.KW, Last Trade(Last), 2MA_2 52, 200, Simple
18/12/2011, 279.9
440
430
420
410
400
390
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
.1
N D
Q4 07
J F M
Q1 08
A M J
Q2 08
J A
S O N
Q3 08
D J F M
Q4 08
Q1 09
A M
J
Q2 09
J A
S O N
Q3 09
D
Q4 09
J
F M A M
Q1 10
J
Q2 10
J A
S O
Q3 10
N D
Q4 10
The short term braked the long term from down so the trend is bullish
J
F M A M
Q1 11
J
Q2 11
J
A S O
Q3 11
N D
Q4 11
J
Daily QKCPC.KW
Value
KWf
23/06/2007 - 19/12/2011 (RIY)
Price
KWf
Cndl, QKCPC.KW, Last Trade
12/12/2011, 305, 305, 300, 300
RSI, QKCPC.KW, Last Trade(Last), 14, Wilder Smoothing
12/12/2011, 42.789
90
420
85
400
80
75
380
70
360
65
340
60
55
320
50
300
45
40
280
35
260
30
240
25
220
20
15
200
10
180
5
.123
.1
Volume
KWf
Vol, QKCPC.KW, Last Trade
12/12/2011, 160,000
2.5M
2M
1.5M
1M
500,000
.1234
J
A
S O
Q3 07
N D
Q4 07
J
F M A
Q1 08
M J
Q2 08
J
A
S O
Q3 08
N
D
Q4 08
J
F M A
Q1 09
We cannot conclude anything from the RSI
M J
Q2 09
J A
S O
Q3 09
N
D
J FM A M J J A S O ND J FM A M J J A S O ND
Q4 09
Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11
Weekly KW CO PROC PLANT
27/05/2007 - 22/01/2012 (RIY)
Price
KWf
Cndl, KW CO PROC PLANT, Last Trade
18/12/2011, 305, 305, 300, 300
400
380
360
top
340
320
304.3
300
280
260
240
220
200
180
171.3
bottom2
bottom1
.1
Volume
KWf
Vol, KW CO PROC PLANT, Last Trade
18/12/2011, 160,000
6M
5M
4M
3M
2M
1M
.1234
J J
A S O N D
Q3 07
Q4 07
J F M A M J
Q1 08
Q2 08
J A
S O N
Q3 08
D J F M A M
Q4 08
Q1 09
J J A
Q2 09
S O N
Q3 09
D J
Q4 09
F M A M
Q1 10
J J A
Q2 10
Here we can see support 1and its (171.3) and resistant 1 (304.3)
(Double bottom and top)
S O
Q3 10
N D J
Q4 10
F M A M
Q1 11
J J
Q2 11
A S O
Q3 11
N D J
Q4 11
Weekly QKCPC.KW
25/10/2009 - 22/01/2012 (RIY)
Price
KWf
Cndl, QKCPC.KW, Last Trade
18/12/2011, 305, 305, 300, 300
420
400
380
360
340
320
300
280
260
240
220
200
.1
Value
KWf
MACD, QKCPC.KW, Last Trade(Last), MACD 12, 26, 9, Exponential
18/12/2011, -8.8
MACD, QKCPC.KW, Last Trade(Last), MACD Signal Line 12, 26, 9, Exponential
18/12/2011, -11.2
25
20
15
10
5
0
-5
-10
-15
-20
.1
Volume
KWf
Vol, QKCPC.KW, Last Trade
18/12/2011, 160,000
4M
2M
.1234
Nov
Dec
Q4 2009
Jan
Feb
Mar
Q1 2010
Apr
May
Jun
Q2 2010
Jul
Aug
Sep
Q3 2010
Oct
Nov
Dec
Q4 2010
Jan
Feb
Mar
Q1 2011
From the MACD we can conclude that the signal is bullish
Apr
May
Jun
Q2 2011
Jul
Aug
Sep
Q3 2011
Oct
Nov
Dec
Q4 2011
Jan
Fundamental Valuation
Two model were used to evaluate KCPC’s intrinsic value, the earnings multiple
model which we heavily relied on and the FCFF Discount model.
We preferred the Earning Multiples model because it provided a more up to date
and more accurate data on the Stock.
-
The current Industry P/E was derived from Reuters and so was the firms EPS.
Given an Industry P/E of 13.28
an EPS of 0.024 fils on Reuters
& given
The earnings Multiple model computes a
current Fair Value for KCPC at of .319 fils which
would undervalue the stock by 6% from its
current market price of .300 fils.
Alternative Method of Valuation
The first valuation model we used was Based of the on the method of:
1- forecasting future Income statements and balance sheets
2- Followed by computing the Future Cash Flows of the Firm for the years ahead.
3- Followed by discounting the forecasted FCFFs with the Terminal Value using an appropriate
WACC.
4- Followed by the deriving the FCFE (Equity value to divided by the number of shares to get the
Intrinsic Value per share.
Because the Process wasn’t reliable despite all the taken steps, the resulting intrinsic value of .770 filse
per share should be discarded. The fundamental Errors in the Process in some assumption that we cant
yet determine:
1-
As we increase the growth on sales, Intrinsic Value decreases and vice versa, which isn’t
understandable. This error Implies that there is an undetected error in the forecasting of the
FCFFs.
2- Another week assumption we faced was that the Assumed Growth of sales was higher than
reality, and current 9 month reports project negative sales growth in 2010 and 2011 which
might be a continuing trend.
3- Another short coming was that the data used to forecast the current fundamental value KCPC at
December 19, 2011 is not up to date. KCPC has not released the Dec 2011 report and we don’t
know how to correctly annualize the 9 month unconsolidated report.
The conclusion from this valuation attempt was that we cant depend on our results unless if we fix the
short comings mentioned above.
The Attempt gave us the following Results:
A WACC of 6.49% due to a Cost of Debt of 5.8% and a cost of equity of 7.28% and weight of debt
of 54% and 45%.
The Fair Value was 0.77 fils
With a Sensitivity of
Pro Forma Assumption
Pro Forma of Balance sheet & Income Statements
Deriving FCFF
Deriving WACC
Deriving Fair Value & Discounting Forecasted FCFFs
Financial Reports
Vertical Analysis
Horizontal Analysis
Industrial Report References:
- Global, Kuwait Economic review report (Apr. 2011)
- Bloomberg.com Kuwait industrial index
(http://www.bloomberg.com/apps/quote?ticker=SECTINDT:IND)
- Kuwait Stock Exchange website
- “Industries Union: Kuwait has a golden opportunity
to encourage investment in industries” Alwatan news
paper, Oct. 16th 2011
(http://www.kuwait.tt/articledetails.aspx?Id=145216)
Fundamental Report References:
-
Annual Report from KCPC from 2007-2010
Annual Report from KWSE of KCPC from 2007-2010
Reuter Financial Reports of KCPC from 2007-2010
Long term GDP growth of Kuwait http://www.economywatch.com/economicstatistics/year/2015/
CAPM:
o Fisk Free: Central Bank http://www.cbk.gov.kw/WWW/index.html
o Risk Premium: - Damodaran http://pages.stern.nyu.edu/~adamodar/
o Beta: from Reuters