SICO initiates coverage on Ithmaar Bank with an 'Over-weight' stance

The "Over-weight" rating and target price of $0.92/share (presenting a 33% upside to its current market price of $0.69/share).

The 42 -pager highlights the aggressive expansion plans of the Bank through its diversified network of subsidiaries and associate companies in varied lucrative financial business segments.

It mentions Ithmaar Bank's plans of expanding its banking operations through its subsidiaries namely Faysal Bank Limited (FBL), Pakistan and Shamil Bank, Bahrain.

Ithmaar's stake in Bank of Bahrain & Kuwait (BBK) will help it to cater to the Indian & Kuwaiti markets and its new operation in Saudi through Ithraa Capital will give it access to the biggest and fastest growing market in the GCC region.

Moreover, it discusses Ithmaar's exposure in private equity (PE) funds, which are geographically diversified real estate funds focused on Middle East, Central and Eastern Europe (CEE), and Latin American regions. The bank has plans to launch new funds which can take the total fund under management to about $4.0 bn by FY09 from the current $1.7 bn.

According to the report, the new operations of Ithmaar and its renewed focus on its existing associates & subsidiaries have already started yielding results with the bank's adjusted net profit surging by 53% from $57m in 2006 to $88m in 2007.

This earnings growth momentum is expected to continue driven by the full consolidation impact of Shamil Bank, the newly acquired interest in Bank of Bahrain & Kuwait (BBK) and Ithmaar's real estate activities through its subsidiary, Ithmaar Development Company.

SICO believes that the value of these operations is not fully reflected in the Bank's stock price, providing significant upside potential.

The analysis indicates that Ithmaar's strong balance sheet and capital base is expected to enhance its capability to venture into future growth opportunities, providing it with a long run competitive advantage.

The bank also has the potential to augment the profitability and returns by leveraging its balance sheet further and through a more aggressive use of its existing equity base.

Ithmaar's current capital adequacy level is comfortably placed at 25.8% (FY07), along with its total borrowings being insignificant relative to its equity base of $1.3bn.

The coverage on Ithmaar Bank was initiated with an "Over-weight" recommendation. According to the blended valuation approach, the fair value of the stock is $0.92, offering a 33.3% upside from its current market price of $0.69.

Ithmaar is currently trading at a Price to Book Value (PB) of 1.4x based on its 2007 book value, which is a steep discount to average PB multiples of both Bahrain banking sector (2.4x) and investment sector (1.9x).

The report argues that this discount is not justifiable considering Ithmaar's broad financial services franchise and strong growth potential, possible expansion in ROE and strong balance sheet.

The fair price implies a Price to Book Value of 1.71x based on its 2008 estimated book value. SICO's rating reflects strong growth potential for the retail banking operations and its focus on PE, development projects and the investment banking business, besides significant stake in several companies across the region.

The report strikes a balanced approach as it also highlights the key risks facing Ithmaar's business, namely impact of global credit squeeze on Ithmaar's fund raising activities, rising competition, increasing exposure to real estate business and resulting volatility, limited track record, relatively new management team etc.

Securities & Investment Company is an investment bank offering a selective range of services, including asset management, brokerage, corporate finance and market-making, on a regional basis and with a particular emphasis on Bahrain. SICO was incorporated in Bahrain in 1995 and holds a banking license from the Central Bank of Bahrain.

As of December 31, 2007, SICO reported total assets of BD104.832m, with shareholders' equity of BD42.106m.

SICO's shares have been listed on the Bahrain Stock Exchange since May 2003. Securities & Investment Company was the first 'closed' company to list on the exchange.