Bloodshed. The KSE weighted index (SECTMIND Index) closed down -4.74% yesterday and is down another 2.2% as of Wednesday 10:15 AM. Agility (AGLTY KK) was accused yesterday in an $8.5Bn fraud and conspiracy case by the US government. The indictment will prevent Agility from bidding for contracts during the legal proceedings but the suspension doesn’t preclude it from completing current contracts. This is a severe blow for the company as it derives 75% of its EBIDTA from US government contracts (Cheuvreux estimates). Moreover, this is a calamity for an already weak Kuwait SE sickened by the potential collapse of the Zain (ZAIN KK) sale deal and constant political unrest. Needless to say, Agility closed limit-down yesterday and is currently also trading limit-down. It also dragged the top 3 Kuwait Stock Exchange index heavyweights Zain, NBK (NBK KK), and KFH (KFIN KK) limit-down with it.
As acting U.S. Attorney for the Northern District of Georgia Mr. Shelnutt elaborates, “The indictment alleges PWC submitted false information and manipulated prices to overcharge for food. This indictment is only the first step. Our investigation of entities and persons who have defrauded the United States and our military is ongoing.” According to reports, an initial appearance and arraignment for the company is set for Nov. 20 in Atlanta. Prosecutors said they were unsure who would be representing the company in that proceeding. It will be peculiar to see what Agility has to say at the initial appearance.
The Agility crisis is significant for several reasons:
- As stated earlier, Agility derives 75% of its EBITDA from the US government. With no more contracts, the company is simplistically speaking worth 75% less.
- According to Mr.Shelnutt, if convicted of violations of the False Claims Act, Agility faces probation and a fine of up to twice the gain it realized or twice the loss to the United States. The company’s market cap stands at ≈ $1Bn. If convicted, Agility will be required to pay the US government ≈ $17Bn. This means the company would be g o n e.
- Agility is the 4th largest company in the Kuwait SE by market cap ranking only behind Zain, NBK, and KFH respectively. This means that its fall materially affects the index and confidence levels in the market. The Kuwait SE is already down YTD trailing the Saudi (SASEIDX Index) and Dubai (DFMGI Index) indices by nearly 50% YTD. The Zain deal doubts and political unrest were enough strains on the market and banks. It can be assumed that banks will make less money financing to a thought-to-be US government backed defensive company. Some banks could potentially increase provisions and start taking write-downs. (Figure 1)
- During 2009, Agility has been the undisputed star of the Kuwait SE. Before the adverse news came out, Agility was outperforming the Kuwait SE index by > 80%. Agility was the hope of the Kuwaiti stock market and was thought of as one of the only remaining truly operational companies besides banks. It’s demise will be tragic. (Figure 2)
- As with other Kuwaiti blue-chips, Agility have numerous companies that depend on its success. These companies are considered derivative plays on Agility and part of the Qena’at family group. An example would be the National Real Estate Co. (NRE KK) which owns 22.44% of Agility. Another would be Sultan Center (SULTAN KK) which partners/supports Agility in fulfilling contracts and could be indicted too. Obviously, both firms traded limit down yesterday and are doing the same today. Before the news, both firms were significantly outperforming the market YTD. (Figure 3)
- The sudden nature of the news will only add to concerns about transparency in the Kuwait SE and the unacceptable absence of a Capital Markets Authority. In its latest 3Q filing, Agility didn’t see it necessary to take provisions on the US government investigation. Volume traded on Monday was uncharacteristically high and points to potential insider knowledge. Investors will understandably desert the Kuwait SE for more regulated GCC markets which will adversely affect the index.