Financial Performance of Companies listed on the Kuwait Stock Exchange. An Exploration using Altman’s Z-Score Model
©2016
Textbook
89 Pages
Summary
A quantitative method was used to explore the financial performance of the firms listed on the Kuwait Stock Exchange. The number of firms explored was 196 out of a possible 206 (two firms are subsidiaries of one of the firms and others are insurance firms excluded from this study). The listed firms were observed from 2009-2014 to understand their status in the market and the direction they were heading towards. The financial data were gathered from the published annual reports of the respective firms and the financial statements from the Kuwait Stock Exchange website. This exploration is a stepping-stone for potential investors by showing the most profitable sectors for investment and for future researchers to predict accurate bankruptcy rates in the State of Kuwait.
Excerpt
Table Of Contents
Research
Instrument
...45
Data Collection Procedures ...46
Data
Analyses
...47
Summary
of Methodology...47
Chapter 4: Analysis and Presentation of Results ...48
Demographic
Statistics
...48
Details of Analysis and Results ...61
Summary of Results ...68
Chapter 5: Conclusions and Recommendations ...69
Summary of the Results ...69
Discussion of the Results ...70
Conclusions and Practical Recommendations ...72
Recommendations
for
Further Research ...73
References
...76
4
List of Figures
Figure 1. Companies Status of the Altman Z-score in 2009...61
Figure 2. Companies Status of the Zmijewski score in 2009...62
Figure 3. Companies Status of the Altman Z-score in 2010...62
Figure 4. Companies Status of the Zmijewski score in 2010...63
Figure 5. Companies Status of the Altman Z-score in 2011...64
Figure 6. Companies Status of the Zmijewski score in 2011...64
Figure 7. Companies Status of the Altman Z-score in 2012...65
Figure 8. Companies Status of the Zmijewski score in 2012...65
Figure 9. Companies Status of the Altman Z-score in 2013...66
Figure 10. Companies Status of the Zmijewski score in 2013...66
Figure 11. Companies Status of the Altman Z-score in 2014...67
Figure 12. Companies Status of the Zmijewski score in 2014...67
5
List of Tables
Table 1 Altman Z-score calculations on the listed firms...48
Table 2 Zmijewski score calculations on the listed firms...54
6
List of Abbreviations
ATS
Alternative Trading System
CA
Current
Assets
CL
Current
Liabilities
EBIT
Earnings before Interest and Taxes
GCC
Gulf
Cooperation
Council
ICB
International Classification Benchmark
KSE
Kuwait Stock Exchange
NI
Net
Income
RE
Retained Earnings
SMC Swiss Management Centre
TA Total Assets
TE
Total
Equity
TL
Total
Liabilities
7
Dedication
This paper is devoted to my mother who believed in my hard work and
determination. As Patrick Driessen quotes, to do everything with love, passion and dedication.
This motto inherited from my mom helped me accomplish this academic success.
This paper is dedicated to my family, friends, and colleagues.
8
Chapter 1: Overview
This research studied the financial performance of the listed companies on the Kuwait
Stock Exchange. This study explored whether the Kuwait market is good for investment by
foreign investors to trade in stocks. Because such a study has not been conducted before, this
study presents limitations, such as lack of and unavailable data. The study presents opportunities
of investment available in various sectors for potential foreign investors and further develops an
understanding of the future of the Kuwait Stock Market. This study used quantitative research
methodology to investigate the financial performance of the Kuwait market via Altman's Z-score
model and Zmijewski's bankruptcy model. Annual reports of the listed companies and financial
statements from the Kuwait Stock Exchange website were used for examination.
Problem Statement
The main problem is that financial markets have been recurrently crashing e.g., stock
market collapse in China. Such phenomenon affects the markets worldwide. For investors, it is
difficult to predict such phenomena. However, they can invest sensibly by using the bankruptcy
prediction models for judging the firm's financial condition.
The Kuwait financial market was limited due to its lack of maturity and depth, lack of
imposed restrictions, and overseas investment in the stock market portfolios did not have the
sufficient attention until the early nineties. These foreign investments are viewed as "hot
money", and the government preferred direct investments (Kuwait Stock Exchange, n.d.).
Kuwait has opened its market for attracting foreign assets with the associated repayment
to the economy of Kuwait by contributing to the national projects and transferring the latest
technological developments (Kuwait Stock Exchange, n.d.). The core intention of the foreign
investors is to maximize proceeds while guaranteeing their rights in the legislative framework.
9
Thus, the restrictions were eradicated on work permits and ownerships, and the clashes in the
related laws and regulations (Kuwait Stock Exchange, n.d.). In 1999, the Amiree Decree Law
No. 10 was issued regarding the directive of the direct investment of foreign assets in Kuwait.
This investment committee studies the investment needs, sponsors the vacant venture occasions
in the country, presents incentives to persuade overseas investors, smoothens the progress of
licensing events, and gets rid of the obstacles which the foreign investors might face (Kuwait
Securities House K.S.C.C., n.d.).
In 2000, the Amiree decree No. 20 was issued for the approval of foreign investors to
possess shares in the shareholding companies of Kuwait that exist or may be established (Al
Yaqout, 2013). According to the ministerial decree No. 205, the inner bylaws of the non-direct
speculation in securities law was issued, which regulates foreign investor's investment in stocks
(Kuwait Securities House K.S.C.C., n.d.).
In 2008, income tax on the earnings of foreign companies was reduced from 55% to 15%,
as per law No. 2 and the freedom from taxes on profits from trading on the Kuwait stock market,
made straight or through portfolios or investment funds, attracted foreign investment
significantly increasing the trading volume in the market (Al-Yaqout, 2013). However, more
awareness is needed to attract investors from around the world. This study will help investors
analyze the sectors that are performing well, and help the listed firms know of their company
status, and take necessary actions to improve their financial image in the eyes of investors.
Purpose of Research
This quantitative study focuses on the financial performance of the companies listed on
the Stock Exchange of Kuwait. The purpose is to find out how likely are Kuwait firms to file for
bankruptcy and to provide additional and better understanding of Kuwait corporate performance
10
since financial ratios alone are not enough to analyze whether the firms in Kuwait stock market
are profitable for foreign investment. The analysis, using the Altman Z-score model and
Zmijewski model, helps in predicting which will be the profitable firms and the endangered
firms, which is a useful indicator for successful firm acquisition by possibly profitable firms
interested in expanding their business. Both tools predict the performance level and bankruptcy
level. The intent of this study was to assess
the
sectors in Kuwait that are suitable for investment
with least involved risk. The results will assist future investors in making profitable investment
decisions and generating fruitful gains.
Significance of the Study
The significance of the study is to expand the existing research that has been conducted
on various financial markets. This exploration creates the initial knowledge and understanding of
the future of the Kuwait stock market. Ijaz, Hunjra, Hameed, Maqbool, and Azam (2013) stated
that the failure of business causes large financial and non-financial losses. Therefore, an
appropriate forecast of the financial health of a business is essential for stakeholders of the
business, including clientele (Ijaz, et al., 2013). The study analyzed the performance of the
companies listed on Kuwait Stock Exchange using the Altman's Z-score model and Zmijewski
score model for any bankruptcy prevalent in the upcoming future. This analysis helps CEOs
understand whether investing in Kuwait Stocks is profitable as Kuwaiti Dinar (KWD) is
relatively strong when compared to the currencies of other Gulf countries. This is a good sign for
generating higher profits in the stock market. So far, no such study has been conducted on the
Kuwait stock market. This study will help foreign investors in understanding this market for
making future investments.
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Over the years, the initial models of Altman and Zmijewski have been altered based on
the firm i.e., manufacturing or non-manufacturing. This study is a stepping-stone for further
analysis by future researchers to enhance the Altman Z-score and Zmijewski score models that
are best suited to the Middle East countries and other types of firms.
Thus, the study sheds further light on the usage of models like Altman and Zmijewski
score among future investors and companies, in testing their financial condition of companies
and their investment for mergers and acquisitions, and in further developing the bankruptcy laws
in the country of Kuwait so firms can function better.
Research Design
The quantitative research methodology used numerical data from the financial
statements. To ensure the accuracy of the secondary data collected, published company annual
reports on their individual websites and financial statements from Kuwait Stock Exchange are
used. Hence, no primary data was required as the financials used for analysis are published and
available for easy access. Muthukumar and Sekar (2014) stated that the Altman Z - score is a
quantitative method based on the balance sheet and income statement data for determining a
company's financial health. The Zmijewski score model uses probability versus traditional
analysis to determine whether the listed companies will go bankrupt in the coming two years.
The research design was causal to determine how far the company's performance was affected
post-financial crisis. There are 206 companies listed on the Kuwait stock market out of which
196 were explored. The insurance companies were excluded from the study, and two companies
are subsidiaries for one of the petroleum firms.
Research Questions (Hypotheses)
The objectives of this research were:
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1. Examine the financial soundness of listed companies using the Z - score model in Kuwait
from 2009-2014; and
2. Predict the bankruptcy rate of the listed firms within two years using Zmijewski score.
Keeping the above objectives in mind, the intent of the research was to answer the
following questions:
R1. Are the firms listed in Kuwait stock market efficient for foreign investment?
If the firm is operating as per the criterion of Altman Z-score and Zmijewski score
models, both models go in hand with each other. However, if the firms are operating well under
Altman Z-score model criteria and not under Zmijewski score model or vice versa, then they
oppose each other's theory aiming towards distress/bankruptcy.
H
01
: The models Altman's Z-score and Zmijewski's Score do not contradict each other
H
11
: The models Altman's Z-score and Zmijewski's Score contradict each other.
R2. Is bankruptcy likely to occur in the future in the listed firms of Kuwait stock market?
The Zmijewski score model criterion states that a positive score shows no bankruptcy
while a negative score shows bankruptcy in the coming two years.
H
02
: Bankruptcy does not occur in two years if Zmijewski's Score is positive.
H
12
: Bankruptcy can occur in two years if Zmijewski's Score is negative.
Assumptions and Limitations
All data gathered in this research was from the yearly reports of the respective company
sites and Kuwait Stock Exchange website. This study applied the assumption that the companies
are well established and performing well with positive profits as they are listed in the stock
exchange. Data from 2009 onwards has been used for this study. The aim was to explore the
Kuwait stock market post-financial crisis of 2008. The five-year period 2009-2014 would
13
provide a better scenario of the financial market when compared to one or two years. The
limitations that exist in this research are:
Many firms have no data available for the years 2009 and 2010. The primary
reason being they were not established yet. However, this does not affect the Altman
results for the individual firms.
Many firms do not have annual reports published. These firms have used financial
statements available from the Kuwait Stock Exchange website.
Data reports firms for certain years were available in the language of Arabic and
have not been used in this study. This was compensated by the financials available on the
Kuwait Stock Exchange website.
For calculation, Net profit of a firm has been used instead of EBIT since data was
not available in the statements.
Some firms did not have data for retained earnings and hence, the calculation
scores were incomplete and could be inconclusive. Hence, there could be a discrepancy in
categorizing the firms from distressed to grey zone to secure.
Operational Definitions
Altman's Z-score model is a financial model that uses five ratios from the financial
statements for determining the likelihood of a company's bankruptcy in the coming two years
(The Free Dictionary, 2009).
Asset is defined as a valuable item (The Free Dictionary, 2011).
Bankruptcy is defined as the inability of the firm to pay its debts. This results
in reorganization and continued operation of the firm or liquidation and distribution of the
proceeds to clear the outstanding amount (Scott, 2003).
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Distress is defined as a condition of strain (The Free Dictionary, 2011).
Hot Money is defined as the currency that is moved from one form of investment to
another, to take advantage of changing international exchange rates or gain (The Free Dictionary,
2011).
Speculation is defined as trading a financial mechanism involving high risk, in
expectation of substantial returns. The motive is to maximize gains from fluctuations in the
market (Definition of Speculation, n.d.). Speculators are widespread in the markets where price
movements of securities are recurrent and unpredictable. They play very important roles in the
markets by absorbing excess risk and providing much-needed liquidity in the market by buying
and selling when other investors don't take part (Definition of Speculation, n.d.).
Zmijewski model is similar to Altman's Z-score model, i.e. it uses ratios from the
financial statements, as the probability unit to predict whether a firm will go bankrupt in two
years (YCHARTS, n.d.).
Summary of Overview
The first chapter covers the framework of this study. This research analyzed the financial
condition of the firms listed on the Kuwait Stock Exchange. Due to lack of research on this
subject, the investors are unaware whether Kuwait is a strong market for investment. The
significance of this quantitative research is to use financial tools like the Altman Z-score model
and Zmijewski model to predict the performance and bankruptcy level of these firms. More
stability of the firms and lesser bankruptcy probability will show the sectors and firms excellent
for stock trading. The hypotheses prove whether the Altman Z-score model and Zmijewski
model
are on the same path together. If true,
H
01
hypothesis is fulfilled. If
H
02
is true, the
hypothesis is fulfilled.
These models will answer the research questions whether the Kuwait
15
market is efficient for investment as per the Altman Z-score model and if bankruptcy prevails
soon as per the Zmijewski score model. Annual reports of the companies and financial
statements from the Kuwait Stock Exchange website are used for gathering and calculating the
secondary data.
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Chapter 2: Literature Review
Before proceeding further into the theoretical set up of this study, it is necessary to
position the history of the Kuwait Stock Market. The study forecasts the bankruptcy probability
of companies listed on the stock exchange by using financial ratios and probability units. The
financial ratios are calculated by using balance sheet data and income statement for each
company while the probability units will further be conducted using Microsoft Excel software.
This area will then illustrate the conclusions of several papers on the Altman Z-score model and
Zmijewski score model by using the financial ratios, and it will be concluded by expanding the
existing literature.
Theoretical Orientation
The Gulf Cooperation Council (GCC) is comprised of six Gulf States, namely Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, a political and economic
pact, pledged to achieve endlessly closer unification (Sikimic, 2015). The stock markets in the
GCC are comparatively small, and the majority of stocks are infrequently traded since the
trading volume is low (Hassan, Al-Sultan, & Al-Saleem, 2003).
The banking sector accounts for 49%, followed by telecoms with 11% of the total Kuwait
Stock Exchange value (World Bank, n.d.). As of September 2014, the capital adequacy ratio in
Kuwait's banking industry was 18.3%, up from 15.6% at the end of 2008, and above the
minimum requirement of 12% (World Bank, n.d.). Kuwait's sovereign net foreign assets were
valued at 269% of GDP at the end of the 2014 the highest of any rated sovereign, according to
Fitch and government debt was at just 5.3% of GDP, showing Kuwait's strong fiscal position
(Oxford Business Group, 2015).
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Commercial banks control the financial markets in this constituency (Hassan et al.,
2003). In 1952, the investors of Kuwait were introduced to stock trades and National Bank of
Kuwait was the primary Kuwaiti shareholding company (Kuwait Securities House K.S.C.C.,
n.d.). In 1976, exploratory trading led to a twist in stock prices and volume in the over-the-
counter market until the market failed
(Hassan et al., 2003).
This led the government to put
restrictions on listing of new companies in the stock exchange, by making a forward trade and
margin set of laws
(Hassan et al., 2003). In 1978, the Kuwait stock market stabilized and led to
the creation of Souk Al-Manakh (a parallel stock exchange) in 1979 as an unregulated market in
Kuwait, where Gulf-based companies did not meet the exchange listing requirements (Hassan et
al., 2003). In August 1983, the Kuwait Stock Exchange was established under the Amiri
declaration (Kuwait Securities House K.S.C.C., n.d.). Towards the end of 2001, the top ten listed
firms in Kuwait in terms of market capitalization was about 55.5 % of the market capitalization
of every listed firm (Omet, & Mashharawe, n.d.).
The firms in Kuwait finance their standard
economic activities from the local money and capital markets and the "excess" cash is invested
in international portfolios (Omet, & Mashharawe, n.d.).
On 28
th
February 2010, the trading
activities and regulations were reassigned to the Capital Markets Authority by the latest law (Al-
Yaqout, 2013).
The Arab stock markets have witnessed a latest trading environment, because of
globalization, liberalization, and the mixing of the world economy, leading to new practices in
the majority of stock exchanges (Sabri, 2008). These practices are: the linkages increase in the
midst of the world stock markets, an increase in the share of foreign ownership, increase in
cross-border stock trading transactions, the use of ATS for stock trading, and the use of the
internet to stock trading, which changed the environment from floor trading to screen-based
18
trading (Sabri, 2008). A lot of stocks in the Kuwait Stock Exchange is traded (Hassan et al.,
2003).
Kuwait has the following history regarding stock market trading:
x
In 1992, the liberalization policies practiced by Kuwait fascinated the Western
fund managers in quest of high rates of return and diversification of the portfolio (Hassan et al.,
2003).
x
In November 1995, first electronic trading system was implemented (Kuwait
Stock Exchange, n.d.).
x
In October 1998, forwards were established.
x
In August 2003, futures were introduced.
x
In November 2003, online trading began.
x
In March 2005, options started trading.
x
In Late 2009, a partnership contract was signed between NASDAQ OMX and
Kuwait Stock Exchange, implementing the "X-stream" trading system Phase 1 in 2012.
x
In May 2010, the "SMARTS" supervision system was put into operation.
x
Phase 2 of the trading system is under process to introduce new items and
services, counting ETFs, Futures and Options in the global form, Market makers for suitable
products, fixed income instruments, Sukuks, and New indices.
There are a lot of corporate and government bonds and treasury bills traded in the
majority of the Arab stock exchanges, and Islamic and conventional bonds (Sabri, 2008). Today,
there are numerous mutual Islamic and conventional closed- and open-end funds traded in Arab
stock markets, including equities and bond portfolios, with local and foreign currencies (Sabri,
2008).
19
Kuwait has a longstanding reputation as a center for Islamic financial services, leading to
the rapid expansion of sharia-compliant banks and investment companies in recent times. Islamic
banking assets, at just over 20% of the total in 2005, grew to around 45% by the end of 2013,
and an IMF report released in December 2014 showed Kuwait's sharia-compliant banking sector
is the fifth largest in the world, with more than $68.9bn in assets (World Bank, n.d.). The bond
market appears poised for a resurgence, with a variety of private and state-owned firms recently
announcing plans to issue Sukuk, or sharia-compliant bonds (Oxford Business Group, 2015).
As per the Kuwait Stock Exchange website (n.d.), the market capitalization of Kuwait
Stock Exchange has consistently been one of the biggest of Arab markets, in the company of
more than 200 companies working out over KD 28 billion (US$100 billion) market value. With a
market capitalization to GDP ratio of approximately 100%, the Kuwait Stock Exchange
market is unfathomable than its neighbours (Kuwait Stock Exchange, n.d.).
Sharif and Benmeleh (2015) stated the shares volume crashed to 123 million, 49% of the
three-month daily average. The sectors that exist in the Kuwait stock market for
primary/secondary trading are banking, investment, insurance, real estate, industrial services,
food, and non-Kuwaiti. The firms in Kuwait with growth opportunities have higher debt ratios
because they can get the debt finance whenever needed (Omet, & Mashharawe, n.d.).
The
primary market involves the IPOs which can be bought by Kuwaitis only, when the company
goes public. The secondary market involves the purchase of shares from existing investors
(Ayms, 2010).
The following changes occurred in the market in Kuwait (Kuwait Stock Exchange, n.d.):
x
Closing prices were calculated in a closing auction (Kuwait Stock Exchange,
n.d.).
20
x
Bids made use of price/time priority.
x
Firms were placed into sectors by the International Classification Benchmark (a
product of FTSE International Limited and certified for use by KSE).
x
The "Kuwait 15" index was introduced KSX15 for sustaining a variety of
inventive products and services.
x
New order types were supported by the trading system GTC and GTD
According to a report titled, "Dealing with Bankruptcy in the GCC", issued by Kuwait
Financial Centre (2013), bankruptcy laws in Kuwait are still pending. This report stated that as of
March 2009, after the financial crisis, the Financial Stability Law (FSL) was introduced.
However, issues regarding bankruptcy and insolvency are still not discussed. The period it takes
to resolve the insolvency in Kuwait is around four years or more (Raghu, Pattherwala, &
Tulsyan, 2013).
In 2013, the World Bank Team launched a project with the government of Kuwait to
bring up regional and international standards of Commercial law and regulation in Kuwait
(Ibrahim, 2013). Issues addressed by this project were corporate rehabilitation, distress
resolution, debt recovery, secured transactions, financial reporting, and strengthening the judicial
system (Ibrahim, 2013).
As of May 2015, the bankruptcy regime in Kuwait is governed by Articles 555 to 800 of
the Kuwait Law of Commerce No. 68 of 1980 the Current Law (Lexology, 2015). As of May
2015, a "Draft Law" is under process by the Department of Legal Opinions & Legislation of
Kuwait to bring its bankruptcy and insolvency legal regime closer to Chapter 11 of the United
States Bankruptcy Code (Lexology, 2015). If this law is declared, Kuwait may become the first
GCC country to have a bankruptcy and insolvency regime that facilitates the rehabilitation of a
21
debt-stricken businesses versus forced liquidation. This will enable entrepreneurs and local
executives to grow businesses (Lexology, 2015).
Given is a discussion on the status of various sectors in Kuwait. According to the Oxford
Business Group report on Kuwait (2015), Kuwait has oil reserves the sixth largest in the world.
The revenues from hydrocarbons comprise about 60% of GDP and 95% of exports (World Bank,
n.d.). Kuwait faces a long-term challenge in the recent fall in oil prices, which have added to its
drive for economic diversification.
The Kuwaiti construction market saw a marked rebound in 2014, with the government
moving forward with key developments in several sectors. The country's oil and gas sector was a
major contributor to the country's resurgence in construction projects, with oil and gas projects
representing more than 60% of the $25.1bn awarded in 2014 (World Bank, n.d.). Rising
investment in real estate, meanwhile, is bolstering that sector, with the total value of transactions
in 2014 increasing by almost 40% in 2013 to reach $7.27bn (Oxford Business Group, 2015).
Kuwait's insurance sector had solid expansion in recent times in key areas, including
Takaful (Islamic insurance) and other non-life segments, with the industry bringing in $1.04bn in
gross written premiums in 2014. The industry in Kuwait is crowded, with the top five insurers
controlling around 60% of revenues at the end of 2013. The Takaful segment has been active in
the country since the early 1990s, and the most recent figures show that Kuwait's 11 Islamic
insurers brought in 18.7% of total gross written premiums in 2012. Meanwhile, the new health
care system includes plans to cover expatriates, which accounted for an estimated 69% of the
population as of the end of 2014 (Oxford Business Group, 2015).
Access to the internet, via mobile devices, has sped up quickly in Kuwait since the
government liberalized the telecoms and IT sector in the early 2000s. The nation has one of the
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Details
- Pages
- Type of Edition
- Erstausgabe
- Publication Year
- 2016
- ISBN (PDF)
- 9783960675433
- ISBN (Softcover)
- 9783960670438
- File size
- 4.3 MB
- Language
- English
- Institution / College
- Swiss Management Center University
- Publication date
- 2016 (May)
- Keywords
- Bankruptcy Distress Altman Z-score Zmitjewski score Stock market Kuwait Firm Foreign investment
