Kamco Investment Company – Ratings Affirmed

(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 rating are Kamco’s market leadership position within the Kuwait asset management sector and its satisfactory funding and liquidity base. Although the previous KWD40mn bond was repaid, it has been replaced by a series of long-term bank lines from non-KIPCO Group relationship banks – a funding base that is seen as being stable.

Kamco also continues to enjoy considerable flexibility in its funding plans given existing substantial cash balances, plus committed but undrawn bank lines.

While earnings performance in 2022 was more ‘normal’ in terms of both net profit and ROAA, 2023 was more disappointing. Although the KSA equity market (and that of Dubai) rose, nearly all other markets declined with indices in Kuwait down by around 7%. Given the P/L dynamics at Kamco, the result was a sharp drop in both net profit and TCI. Although a strong Q1 24 saw almost all the lost ground to be recovered, Kuwait indices performance in April was again soft.

This earnings volatility is seen as being one of the main credit challenges for the Company. Performance in wider GCC equity markets so far in 2024 has also been lacklustre and this may weigh on performance at Kamco in future quarters. However, absent a significant market correction, a reasonable level of profitability should be achieved for the year as a whole, given the more positive markets seen in Q1 24.

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 earnings contribution from non-Kuwait geographical expansion has been limited to date it is growing and 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 principally being a source of extraordinary support. Similarly, the group banks could be a potential additional source of funding, although as a matter of policy, 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 still largely transactional in nature. The operating environment can also be a credit challenge, either reflecting domestic conditions in Kuwait or geopolitical factors in the wider MENA region; both can negatively impact equity indices and demand for DCM transactions.

Rating Outlook

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 and the level of the current ratings, 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 that is likely to persist going forward.


Contact

Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: ...
Secondary Analyst: George Panayides, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst


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