Global Investment House – Commercial Real Estate Company Initial Coverage Report-

The Commercial Real Estate Company (CRC), also known as "Al Tijaria", was established in 1968, and is considered to be one of the oldest and experienced players in the field. The main focus of Al-Tijaria is directed towards commercial property investment in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Kuwait and the Gulf. CRC's major projects include Al Manar, and Al Lodan residential complexes, Al Shorouq, and Al Bodour office towers. Other projects in the pipeline include the X-zone entertainment project, and the Green hills residential complex in Kuwait as well as Hajer and Al Maqam towers in Mecca, and AinAthariPark in Bahrain.

CRC's core business is real estate development and investment, with a focus on divesting low performing financial and real estate assets and replacing them with stronger performing assets, improving land available for private residence, developing commercial and investment property projects using distinctive and creative designs and concepts, and the active participation in high value privatization and B.O.T projects.

In addition to the real estate business, CRC is also engaged in private property portfolio management. Among the funds managed by the company; the Real Estate Center Fund, Al Dar Real Estate Fund, Real Estate investments portfolio of the Kuwait Public Transport Co., Commercial Islamic Fund, and Al Markaz Real Estate Fund. The main revenue sources for CRC are investment properties, land and real estate held for trading, and hotel income representing the company's share in revenues from Kuwait Hilton Resort, and Rester Beach Resort (formerly Safir Al Dana Hotel).

Revenues from sales of land and real estate constituted 55% of operating revenues at the end of FY05, followed by profit from investment properties (27.9%), hotel income (16.9%), and other income (0.2%).

We have arrived at the share valuation of CRC using two methods: DCF valuation and relative valuation. The weighted average share value of the company using the two methods is 272Fils, representing a discount of 5% to its current market price. We therefore initiate our coverage of CRC stock with a "HOLD" recommendation.

Business Strategy

CRC is following a conservative business strategy focused on minimizing risk exposure for its projects and investments through diversification across different segments of the real estate business as well as geographical diversification across markets with a promising outlook. Initially, the Kuwaiti market was the focus of the company's activities and investments. However, the year 2005 marked the first attempts to explore new markets outside the borders of Kuwait either through expanding the company's activities into other countries such as Saudi Arabia, Bahrain, and Morocco or through forging strategic alliances with other international players, and acquiring different assets or stakes in renowned companies in the field that complements the company's scope of activities.

CRC's current portfolio of projects is concentrated in the residential segment considering that it is the most important segment of the real estate market in Kuwait. However, the focus is now shifting to other sectors with an increasing potential for growth such the commercial segment. The company has been also venturing into new vital sectors such as the medical sector and the educational sector. Most of the properties in CRC's portfolio are freehold, with an average occupancy rate of over 90% for most of the company's properties, which is considered to be one of the highest occupancy rates within Kuwait.

The company is planning to continue ahead with the strategy adopted in 2005 of exploring new markets outside the borders of Kuwait either through expanding activities into other countries such as Saudi Arabia, Bahrain, and Morocco or through forging strategic alliances with other international players, and acquiring different assets or stakes in renowned companies in the field that complements the company's scope of activities.

Financial Performance

CRC is characterized by high quality of earnings which is measured by the degree to which core operating revenues have contributed to the bottom line growth. To illustrate the point, CRC's net profit grew by 23% at the end of FY05 while net operating profit grew by 42%. In other words, CRC is mainly relying on recurring sources of income which implies stability in the company's earnings.

Operating revenues grew by 51% to reach KD37.1mn at the end of FY05. Revenues from sales of land and real estate constituted 55% of operating revenues at the end of FY05, followed by profit from investment properties (27.9%), hotel income (16.9%), and other income (0.2%). Revenues from sales of land and real estate grew by 85%,  recording the highest y-o-y growth rate in FY05 to reach KD20mn, followed by real estate rental revenues which grew by 70% to reach KD5.6mn in FY05.

Net profit rose by 23% in FY05 to reach KD33.1mn compared to KD26.9mn in FY04, with a net profit margin of 86.1% at the end of FY05. EPS stood at 28.3Fils for FY05 , up from 22.7Fils in FY04. ROAE and ROAA stood at 17.4% and 12.8% in FY05 respectively, compared to 13.7% and 11.3% in FY04.

The company reported a net profit of KD27.8mn in 9M06 which is 39% higher than the KD20mn reported in the corresponding period at the end of FY05, which includes a net gain of KD14.13mn from the divestment in Kuwait's Resorts.

Key developments in the local real estate portfolio

The year 2005 witnessed the launch of several real estate projects for CRC. It launched three projects worth more than KD50mn which are set to open concurrently at the end of 2006 or beginning of 2007. The projects are the 40-storey KuwaitTradeCenter costing KD21mn; the Symphony Complex (commercial and residential complex) worth KD27mn; and the Dome Complex, a KD4mn restaurant project.

In 2006, CRC announced that it is finalizing plans for four projects worth KD118mn. The first project is a KD100million project in the area of Al Mahboulah and the remaining KD18mn are distributed between another three projects in the Abu Halifa area including the residential project "Green Hills", the tourism project "Garden" and the recreational project "X Zone". The company has also increased its local portfolio of properties with the addition of two recent acquisitions namely Al Shouafat commercial Complex in Al Sharq area at a value of KD9.5mn and Al Rihab commercial complex in Hawally at a value of KD17mn.

Key developments in the international real estate portfolio

Saudi Arabia

CRC invested 20% in HajerTower in Mecca. The tower is one of the house towers project, on the door of King Abdul Aziz, at the threshold of the Kaaba. It consists of 31 floors, 10 floors of which are occupied by Movenpick Hotel, and the remaining floors consists of furnished hotel apartments that are serviced by the administration of Movenpick Hotel.

In August 2006, CRC along with Venture Capital Bank and Siraj Co. entered into an alliance for developing the downtown in JeddahCity, "AbhaCityCenter" considered to be the most important touristic region in the Kingdom of Saudi Arabia. This alliance is led by The Construction Development Co. (Saudi Arabia), in addition to a group of international, regional and local investors.

CRC signed in June 2006 a KD176mn contract to build Al-MaqamTower in Mecca. AL-MaqamTower is one of the seven towers of Al-BaitAl-MaqamTower project on the King Abdul Aziz Waqf in the yard of royal campus. The project involves the following parties; Commercial Real Estate Company (30%), Market Complex Company (25%), Bin Laden Group Company (25%), Industrial and Financial Investments Company (10%), Hajj and Oumra Services Group (5%), Al Mas'a Real Estate Investment Company (5%).

Bahrain

The Ain Athari park project in Bahrain is a B.O.T project in participation with the Markets Complexes Company (Kuwait)  and Gulf Construction Company (Bahrain). The project is  spread over 170,000 sqm, and is 5 min away from the bridge of King Fahd.

CRC along with the Markets Complex Company and the Al Khaleej Development Company (Bahrain) have acquired a 324,000 sqm piece of land in Bahrain, for a total cost of KD16.3mn equally divided among the three partners.

CRC acquired 6.82% of Venture Capital Bank in Bahrain, which is the Middle East and North Africa's (MENA) first specialist venture capital and private equity bank regulated by Bahrain Monetary Agency (BMA) with a paid up capital of US$66mn and a GCC widespread shareholder base comprising 80 high net worth individuals and corporate investors. VCBank is considered the first Islamic bank to invest in promising small to medium enterprises (SME's) with growth potential, with the focus of exploring investment opportunities in the Gulf region and the Middle East, especially Bahrain and Morocco in the first stage, then Iran and Turkey at a later stage.

CRC entered into a strategic alliance with the top financial and investment companies in Bahrain and Kuwait, to form Commercial Venture Real Estate "VREC", which is a Bahraini joint-stock company established in March 2006. The alliance include Venture Capital Bank (VCB) (50%), Commercial Real Estate Company (20%), Securities Group (10%), Industrial Investments Company (10%), Kuwait Resorts Company (5%) and Commercial Complexes Company (5%).

Morocco

CRC along with Venture Capital Bank signed a Memorandum of Understanding (MoU) with the Caisse De Depot et De Gestion (CDG) in the Kingdom of Morocco to invest in joint projects between the three establishments and their strategic investors in different economic sectors in the Kingdom of Morocco, provided that CDG Development would provide the necessary support and facilitate the investment process for such opportunities. In return, Venture Capital Bank and Commercial Real Estate Company and their partners and investors would provide all the technical, financial and administrative capabilities and means to exploit such opportunities. CDG is a public financial institution that manages 35% of the institutional savings reserves in the Kingdom of Morocco and manages more than US$10bn in the form of assets.

In September 2006, the company entered in partnership with Venture Capital Bank and other investors from Morocco for a US$500mn housing project. The Moroccan government granted them 105 Hectares of land to build 24 thousand residential units in Rabat and Marrakesh in a three year period.

Investment Indicators for CRC

Source: Company annual reports, Global Forecasts.

- Actual P/E and P/BV multiples are based on the  respective year end prices, while those for future years are based on current market price on KSE on December 27,2006.