Aamal Company Q.P.S.C. (AHCS) Earnings Call Transcript & Summary

Good day, and welcome to the Aamal Company presentation of financial results for the year ended 31st of December 2019 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mehmet Aksoy. Please go ahead, sir.

Good afternoon, ladies and gentlemen. This is Mehmet Aksoy from QNB Financial Services. I would like to welcome everyone to Aamal Company's 2019 Financial Results Conference Call. On this call from Aamal, we have Mr. Imran Chughtai, who's the CFO; and we have Mr. Zaid Shelleh who is the IR Officer. We will conduct this conference call first with brief comments on the presentation followed by Q&A. I will now hand the call over to Mr. Chughtai to get us started. Imran, please go ahead.

Thank you, Mehmet. Good afternoon, everyone, and welcome to the presentation of Aamal Company's results for the year ended 31st of December 2019. My name is Imran Chughtai, and I am Aamal's Chief Financial Officer. Accompanying this call is a short presentation, which can be viewed and downloaded from Aamal's website. I will begin with an overview of Aamal's key highlights and financial performance in 2019 before addressing each of our segments in turn and then concluding with an update on the market environment and the outlook for 2020 and beyond. There will be an opportunity for you to ask questions at the end of the presentation. Turning to Slide 2 of our presentation and main factors determining our performance in 2019. Aamal continued to face market headwinds throughout last year which impacted the construction sector, in particular. Increased market competition and customer price sensitivity challenged our business operations and led to a lower profit margins across all 4 of Aamal's business segments. Despite a subdued real estate market, the Property segment performed well when compared to our peers. Trading and Distribution delivered a mixed performance with strong sales growth at Ebn Sina offset by margin erosion at Aamal Medical. Our Industrial Manufacturing segment was impacted by a slowdown in major infrastructure projects and intense competition. Overall, however, our diverse business model again proved highly resilient and Aamal responded positively, growing the top line by 0.6% and delivering net profit of QAR 322 million. It is against this backdrop that the Board recommends a cash dividend of QAR 4 a share, equivalent to 4% of paid-up share capital, subject to approval at our AGM on the 1st of April 2020. 2019 also marked a year of substantial development in embedding environmental, social and governance considerations in the way we do business and achieve sustainable growth. Most notably, our corporate governance mechanisms were significantly strengthened. I will provide more detail about this later in the presentation. Turning to Slide 4. Despite the extreme difficult market environment, I'm pleased to report that Aamal achieved moderate revenue growth of 0.6% year-on-year to QAR 1.294 billion. Heightened competition and customer price sensitivity pushed sales prices down, impacting our profit and margins. Gross profit was down 6.9% year-on-year, and net profit attributable to Aamal shareholders fell 27.6% year-on-year to QAR 322 million, equating to QAR 5 per share. Three other factors also impacted our profitability in 2019. Our net finance costs increased by QAR 26 million following a loan taken out in December 2018. We implemented a revenue recognition correction at Ebn Sina Medical and in accordance with IFRS 9, we have increased our provisions balance. I will now add [Audio Gap] most notably, Doha Cables, which is now the largest cables manufacturer in Qatar, successfully increased its production of high-voltage cables, expanded its product range through the launch of new fire alarm cables and successfully expanded into new markets in the Philippines and Hong Kong. Demonstrating the company's agility, Doha Cables also opened a dedicated showroom in Barra city to offset reduced local demand. In 2020, Doha Cables will continue to target infrastructure projects related to energy and transportation services, and we'll explore new markets in Asia and Eastern Europe. At Senyar Industries, construction of the drum and copper factories continued to progress. These factories are expected to be operational from late in the fourth quarter of 2020 with the benefit showing from 2021. As part of a wider series of initiatives being implemented to improve processes and production volumes, Aamal Cement Industries replaced 3,500 HESS steel block pallets, and this has notably improved the manufacturing process and increased production capacity. In the year ahead, Aamal Cement plans to further enhance its product portfolio by introducing a greater variety of concrete slabs in terms of design and color and both drop and highway curbstones to its product range. Aamal Cement also plans to launch a modernized design of interlocking paving stones. At Aamal Readymix, 2019 performance was impacted largely due to the slowdown in the construction projects with pump cement volumes dropping 28% and average prices down 7% year-on-year, impacting both revenue and profit margins. However, we saw several major government-sponsored infrastructure projects put out to tender in 2019, which are expected to drive higher construction activity in the market in 2020. Most notably, Aamal Readymix was awarded projects for the development of Lusail Boulevard and the expansion of Doha Port. The supply of concrete for these projects will start in the first quarter of this year. In order to fulfill the large production requirements of these projects, Aamal Readymix reopened its mothball facility and has leased an additional factory equipped with machinery, vehicle fleets and trained staff. It is, however, worth noting that due to fierce market competition, margins are expected to continue to remain subdued. Turning to Slide 7. It was a mixed performance for the Trading and Distribution segment, which delivered strong top line growth of 15% to deliver revenues of QAR 800 million while net profit declined by 21% to QAR 99 million. This performance results from a combination of factors, including intense market competition and one-off challenges such as a revenue recognition adjustment of QAR 6 million at Ebn Sina Medical as a result of our findings through the implementation of the QFMA requirements related to internal controls over financial reporting. Other challenges included stock supply difficulties following technical issues at one of the company's major suppliers. Slow-moving and obsolete stock was liquidated, and we also implemented a much more stringent credit policy, which imposes new credit limits on higher credit risk clients. While achieving its aims of reducing counterparty risk, this has resulted in temporarily reduced sales to several of our larger trade customers with overdue receivables. Despite these headwinds, we are pleased that the net profit margins only declined 5.6 percentage points, demonstrating the resilience of the segment. In response to these challenges, Aamal Trading and Distribution focused on expanding its product and service offerings. The company's Bridgestone tires business launched Total Tyre Care, a solution-based concept offering after-sale services, which aims to increase customer loyalty and drive sales growth. It also launched its dealer loyalty program to further strengthen long-standing relationships with its retail partners. At Aamal Medical, revenues were up by 4.3% but was impacted by a less favorable product mix. The outlook for Aamal Medical is encouraging. The company focused on increasing its market penetration through Masimo, GE and Stryker, all of which have a reputation for market leadership and quality and developed its product diversification strategy by partnering with Olympus in the area of endoscopy. Aamal Medical also benefited from upselling new products to the Ambulance and Emergency Medical Services and signed a contract with ACETECH for RFID tracking. These strategic partnerships are particularly notable as a position Aamal Medical as a holistic supplier for EMS and support Aamal Medical's objective to become a leading player in the field of ambulance vehicles. We're particularly encouraged by what 2020 holds for Aamal Medical. There is a strong pipeline of products and Aamal Medical is continuing to explore the possibility of launching some of the latest cutting-edge health care technologies in Qatar, including AI, stem cell therapy, mobile health and telemedicine. 2019 was a year of strong performance for Ebn Sina Medical, which reported 25% year-on-year revenue growth. Ebn Sina Medical established several strategic partnerships with suppliers, enabling the company to diversify its product offering for generic, branded and biosimilar drugs. Ebn Sina Medical also completed the renovation work of its Ebn Sina Pharmacy at City Center Doha Shopping Mall, where the First Robotic Pharmacy in Qatar was installed towards the end of last year and opened a third pharmacy at Musheireb Railway Station. Throughout 2019, Ebn Sina Medical upgraded its warehouse facilities with the installation of automatic systems that enable large volumes of drugs to be stored and dispensed accurately at high speed. Moving on to Slide 8. Revenue in the Property segment was broadly flat year-on-year, declining marginally from QAR 295 million in 2018 to QAR 290 million in 2019, while net profit was down 7% to QAR 224 million. This reflects increased market competition from new shopping mall openings, coupled with a general weakening in consumer spend per head. Despite this backdrop, City Center Doha maintained its leading position with no change to overall footfall levels. We are pleased to report that at the end of the year, the renovation works at City Center Doha reached their final stages and that renovation of the ground floor carpark has recently commenced. In 2020, City Center Doha will see new shop openings which are expected to drive footfall through the mall and enhance the visitor experience, along with the construction of 2 new pedestrian bridges, which will improve connections to the mall. Construction of the pedestrian bridges is scheduled to start in mid-2020. One of these bridges will connect the mall to the metro station. Meanwhile, Aamal Real Estate completed renovation of 40 apartments located in Bin Mahmoud, Madinat Khalifa and Al Massila and renovation work started at Souq Haraj, which is expected to be completed by mid-2020. 2019 saw the execution of a number of corporate leasing contracts, which means occupancy rates will reach 95% by mid-Q1. And finally, turning to our fourth segment on Page 9, our Managed Services segment. It is important when looking at these figures to be aware that year-on-year comparisons have been marginally distorted by an accounting change that took place in -- during 2019. As a result of our work on internal controls over financial reporting, ECCO Gulf was no longer treated as a subsidiary, but instead as a joint venture. This means the results of ECCO Gulf are now recorded on an equity method basis instead of a line-by-line basis. In practice, this means ECCO Gulf's revenue is no longer included in the segment's total revenue and only Aamal's share of the company's net profit is included as a single line item on the statement of comprehensive income. For the Managed Services segment as a whole, revenue and net profit declined by 34.7% and 29.7%, respectively. This was partly due to the deconsolidation of ECCO Gulf but also due to the impact of increased competition, which impacted Aamal's services, in particular to the tune of QAR 1.8 million. That aside, in 2019, ECCO Gulf signed new contracts with key organizations from various sectors, including retail, telecommunications, banking and finance and government institutions and installed advanced systems such as Microsoft Dynamics 365 CRM to support the efficiency and quality of customer management. Aamal Services also secured key contracts across a range of sectors to meet rising demand and increased its headcount by 15%. To further improve the segment's performance, Aamal Services increased the number of employees in its Façade Cleaning unit due to the increasing level of demand. Looking ahead, the company will focus on small- to medium-sized premium businesses, which have an assiduous focus on quality. 2019 has proved particularly successful for Aamal Travel, which recorded 25% year-on-year increase in net profit and increased profit margins by 7 percentage points. In 2019, the business established agreements with several football-playing South American countries, which are expected to drive performance in 2020. Furthermore, in the year ahead, Aamal Travel plans to open a new branch and boost its activity and exposure to the Qatar travel market. 2019 was a year of mixed performance for the Family Entertainment Center. Works at City Center continued to impact the company significantly. In response to this challenge, Fun City installed new amusement rides, VR games, a trampoline park and inflatable games which helped to track more customers and boost revenues by 18%. These were also supported by a number of successful promotional activities. Performance is expected to improve with the opening of the East Food Court at City Center by mid-2020. Turning to Slide 11. 2019 marked a year of significant development in terms of how we embed environmental, social and governance considerations in the way we do business to achieve sustainable growth. From a governance perspective, we developed our corporate governance framework to ensure Aamal is aligned with the highest levels of corporate standards and policy. As part of this, Aamal has established a whistle-blowing mechanism and a code of conduct policy for all its employees, ensuring they are able to act if they encounter any potential breaches of our standards. Furthermore, in 2019, we successfully completed the design and testing of the internal controls of the financial reporting framework in compliance with the QFMA regulations No. 5 2016. We are pleased to report that PwC issued a clean audit opinion following its review of Aamal's internal control over financial reporting as required by the QFMA regulations. As reported earlier in the year, Aamal also implemented all amendments to the company's Articles of Association to ensure compliance with the Qatar Financial Markets Authorities Corporate Governance Code. For example, a 10-for-1 stock split was implemented in June 2019, in compliance with the stock split directive issued to all QSE-listed companies by the QFMA. Strengthening our Board and executive team, we are delighted to welcome Sheik Faisal Bin Fahad Al Thani as an independent director who brings more than 30 years experience working in several international companies in the oil and gas industry. The Board approved the appointment of Sheik Mohammed Bin Feisal Al Thani as Chief Executive Officer and Managing Director; and the appointment of myself as Chief Financial Officer. Turning to Slide 13, market update. The slowdown in the construction sector in 2019 intensified competition and impacted profit margins. That aside, we are optimistic about the macroeconomic outlook. In December, the Qatari government announced its biggest bucket in 5 years, with a significant share dedicated to major infrastructure projects and a new wave of activity is expected to stem from the government's plans to invest QAR 90 billion in major projects over the course of 2020. This is part of the gradual transition to focus on non-oil industries. Aided by a supportive Qatari government and upbeat macroeconomic statistics, we believe there are many opportunities across Aamal's segments, a few of which we have highlighted on Slide 13 of the presentation. As we look beyond 2020, following investment spending on projects related to the World Cup will be replaced by higher infrastructure spending on Qatar National Vision 2030 projects. More than 150 large-scale projects where over QAR 700 billion of scheduled after 2022. And Aamal's Industrial Manufacturing segment is already well positioned to take advantage of these opportunities, winning 2 major contracts commencing in 2020. Meanwhile, the Trading and Distribution segment expects to benefit from increased government demand for medical equipment in advance of FIFA 2022, underpinned by the government's expansion plans in the public health sector. Moving to Slide 14, to conclude. Aamal's performance in 2019 clearly reflects the challenging market dynamics. However, the Board is extremely proud that Aamal's diversified business model displayed strong resilience and ensured the company remained competitive. This is demonstrated by the group's success in winning new contracts, establishing exciting new strategic projects and successfully launching new products and services in a difficult environment. As I've highlighted, Qatar's macroeconomic backdrop provides many opportunity for Aamal in 2020 and beyond. We are confident that Aamal is well positioned to capture the growth opportunities this will generate. In 2020, Aamal expects to reap the benefits of strategic investments implemented in 2019. These include Aamal Readymix award of projects for the development of Lusail Boulevard and Doha Port, new contract agreed in the Trading and Distribution segment, the rollout of cost control measures and, of course, the newly renovated City Center Doha Shopping mall. Furthermore, we will progress internal projects, including the digital transformation of Aamal, and we also plan to invest in high-caliber employees to ensure we are suitably resourced to remain competitive and deliver value to all our stakeholders. This concludes our presentation, and I now welcome any questions you may have.

[Operator Instructions]

This is Mehmet again. While we are calling for questions, if I can start off with a question of my own. Can you please give us some color about the renovation and expansion in city centers? What will be the extent of the JD increase in the mall?

The renovation at City Center has added a complete corridor that links hotels from end-to-end City Center, so it significantly increases the gross leasable area. And we have been finalizing the various ministry approvals. This will result in that entire corridor being opened as well as the East Food Court. So that will drive a significant element of the mall to be opened. So we've already secured tenants and there are some major tenants that are going to open soon. We've just had confirmation that the Alashaya Group will be opening around 9 new stores there in the center of the mall. So this is fairly significant. And whilst the impact of this may not be felt immediately, because there is timing related to fit out, this is extremely positive for the mall.

[Operator Instructions] We will now take our first question from [ Mete Bahat ] from Axis.