At the beginning of the year 2008, we had expected the consolidated earnings of companies in the Kuwait market to grow by 42%, however, till the first half of 2008, the earnings have witnessed a decline of 12%. Going forward, we expect the earnings to witness a flat growth for 2008. The decline in growth has ensured an expansion in PEG and a decline in fair value for the index. We were expecting a 30% increase in the index for the current year, we downgrade our fair value estimates to provide for a 6% increase from the current levels, which corresponds to an index fair value of 13595.
Earnings – What has changed?

Consolidated earnings of Kuwait companies declined by 12% during 1H08. Investment companies (48% & 38% of Kuwait Inc earnings for 2007 and 2008 respectively) took the biggest hit in earnings. As at 1H08, the sector witnessed a decline in earnings by 29% on a YoY basis. The decline in earnings can be attributed to a higher base and one off positive impact in 2007 and lack of the same in 2008. We expect the sector to end the year with a 22% decline in earnings.
On a positive note, banks (16% & 22% of Kuwait Inc earnings in 2007 and 2008 respectively) have witnessed an earnings growth of 24% in 1H08. We expect the banks to close the year with a 34% growth in earnings, which is higher than the 26% growth posted in 2007.
In terms of size, large caps will see earnings contraction of 4% while mid cap and small cap stocks earnings will expand by 12% and 17%. However, ultra small cap companies (there are 81 of them) will see a significant decline (-33%) in their earnings during 2008.
P/E: On a consolidated market basis at the current market prices, we believe that the Kuwait stock market is discounting its FY08E earnings by 10x, which is 8% less than the average 5 year forward PE.

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