(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Kamco Investment Company K.S.C.P. (Kamco) at ‘BBB’ and ‘A3’, respectively. The Outlook on the ratings remains Stable.
The two most important credit strengths that support the ratings are Kamco’s market leadership position within the Kuwait asset management sector and its strong funding and liquidity base. There is currently no short-term bank debt, with funding mainly coming from the KWD40mn bond issue and a KWD5mn long-term bank loan. Kamco however enjoys considerable flexibility in its funding plans as existing cash balances plus committed but undrawn bank lines comfortably exceed the amount of the maturing bond.
Earnings performance in 2022 was more ‘normal’ in terms of both net profit and ROAA – although by both measures performance was better than in pre-Covid 2019. Most financial markets across the globe suffered major Covid-related falls in 2020. Kuwait suffered a sharp Q1 20 fall. Although subsequent quarters saw most of the lost ground being recovered, markets were still down for the year as a whole. As a result, Kamco posted a loss for 2020. This was more than made up in 2021, with very strong performance and a record profit; nonetheless, this earning volatility is seen as being one of the main credit challenges for the Company. Performance in GCC equity markets so far in 2023 has been lacklustre and this may weigh on performance at Kamco. However, absent a significant market correction, a reasonable level of profitability should be achieved.
Kamco’s main credit strengths continue to be the substantial volume of assets under management (AUM) giving a large and normally stable revenue stream, and the growing investment banking (IB) business. While the geographical expansion has made a somewhat limited earnings contribution to date, it offers considerable opportunities for the future, both in terms of earnings growth and in reducing geographical concentrations. In the meantime, the real estate platform is generating regular and growing asset management fees.
Further important credit strengths include low leverage and debt-equity ratios, particularly on a net basis, and a strong and capable management team. The value of the wider KIPCO group is seen as being a major source of both asset management funds and IB business, rather than as a source of extraordinary support. Similarly, the group banks could be a potential additional source of funding, although all current bank funding comes from third party banks.
Apart from earnings volatility discussed above, other main credit challenges are seen as being the reliance on asset management income, the concentrations (albeit declining) in the asset management customer base, and the inherent potential volatility of IB revenues – the latter are very still largely transactional in nature.
The Stable Outlook indicates that Kamco’s ratings are likely to remain unchanged over the next 12 months.
Rating Dynamics: Upside Scenario
Given the nature of the business model, an upgrade in either the ratings or outlook is seen as being unlikely over the next 12 months – even if financial performance were to be much stronger than currently expected.
Rating Dynamics: Downside Scenario
Either the outlook or (less likely) the ratings themselves could be lowered over the next 12 months were there to be a major correction in GCC markets – and were that correction seem to be likely to persist. Earnings performance at Kamco is closely linked to market volatility and corrections are therefore part of the normal cycle. This downside scenario therefore refers to a correction that would seem to have established a new – and much lower – trading range.
Secondary Analyst: George Panayides, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
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