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

Okay. Hello, everyone. This is Mira Al Ahmad from the Corporate Communications team of Aamal Company. I hope everyone is well and safe. I want to welcome you to Aamal Company's Third Quarter Financial Results Conference Call. On this call, we have Mr. Imran Chughtai, the Chief Financial Officer of Aamal Company; and Mr. Zaid Shelleh, the Risk and Compliance Manager at Aamal Company. We will conduct this call with, first, the management presenting the company's results followed by a Q&A session. Mr. Imran, please go ahead. I'll share my screen.

Thank you, Mira. Good afternoon, everyone, and welcome to this presentation of the Aamal Company's results for the 9 months ended 30th September 2020. My name is Imran Chughtai, and I am Aamal's Chief Financial Officer. I'd like to begin by saying on behalf of Aamal that we hope you and your families are healthy and staying safe during these challenging times. Accompanying this call is a short presentation, which can be viewed and downloaded from the Aamal website. I will begin with our Q3 highlights on Slide 2 of the presentation. The COVID-19 pandemic has continued to have a profound impact throughout the third quarter, not just on global markets, but on every aspect of our daily lives. Despite the continuing -- continued headwinds from the COVID-19 pandemic during the third quarter of the year, Aamal delivered revenues of QAR 972 million over the 9 months to 30th September, up 2.8% year-on-year. However, total company net profit, after fair value losses on investment properties, of QAR 74.4 million and Aamal's profit share in associates and joint ventures of QAR 43.8 million was down 65.1% at QAR 90.6 million. The net profit result reflects the effects of COVID-19, which were felt across all segments of the group, with the Property and Managed Services segments hardest hit due to the government enforced temporary business closures. On the other hand, we are pleased to record a much stronger performance in our Trading and Distribution segment, with Ebn Sina Medical recording significant increase in sales and profits. Companies in the segment, particularly Ebn Sina Medical and Aamal Medical, played a meaningful role in supporting Qatar's communities during the pandemic, including launching services aimed at ensuring the effective home delivery of medications. We're also pleased to see signs of recovery beginning to emerge, particularly in the industrial manufacturing segment where an uptick in the project pipeline has been noted. For example, Aamal Cables recently signed a QAR 694 million 3-year contract with Kahramaa. I'll provide more information on this shortly. To support the ongoing development of the group, in addition to restructuring and cost-saving initiatives to limit the impact of the COVID-19 pandemic, we remain equally focused on ensuring Aamal remains well positioned for the future. In the Property segment, to improve our offering in the real estate market, initiatives include investment in the frontage development at City Center Doha and renovation works on a Aamal Real Estate residential property portfolio. In addition, we are implementing operational improvements across the group. For example, to improve efficiency at Aamal Readymix, we've implemented a number of operational improvements, including a review of sales and pricing policies to drive competitiveness. While it remains difficult to estimate the extent to which our full year performance will be impacted, our efforts to navigate this very challenging environment are supported by a robust financial position. We have a strong balance sheet. Gearing remains low at just 2.75%, a further reduction from 3.4% at the end of the previous quarter, and we have significant liquidity. A recent testament to Aamal's resilience is our inclusion in the QE index from the 1st of October, comprising the 20 most liquid and largest listed companies on the QSE by free float market capitalization. As a benchmark index for the exchange, we welcome the additional investment profile that inclusion in the QE index will bring. Moving to Slide 4. As the numbers on Slide 4 demonstrates, COVID-19 has clearly had a significant impact on our financial performance since the onset of the pandemic. In addition to the points I've already made, there has been a fair value adjustment on investment properties amounting to a loss of QAR 74.4 million, which further impacted Aamal's net profit. And earnings per share declined by 64.5% year-on-year to QAR 0.01 from QAR 0.04 last year. In line with previous years, Aamal's Board of Directors would take a decision about a dividend for 2020 once the results for the full year are known. Turning now to each of our segments. On Slide 6, Industrial Manufacturing. It's been a challenging 9 months for the Industrial Manufacturing segment. While revenue increased 23.8% year-on-year to QAR 145.6 million, profit was down 26.3% to QAR 31.6 million. New contract wins at Aamal Readymix generated significant top line growth with revenue up 40% year-on-year. However, intense price competition has negatively affected margins. And as a result, measures have been implemented to reduce costs and improve pricing and mix. As the economic activity has slowed in the period, demand for shipping fell leading to a declining shipping rates. At Aamal Maritime, which together with the dry docking of Um El Hanaya for upgrades, negatively impacted revenues and profits. It's been a positive quarter for our Aamal Cables as the company has been awarded a major QAR 694 million 3-year contract with Kahramaa. The sole transmission and distribution system owner and operator for the electricity and water segments in Qatar to supply medium voltage 11KV and pilot power cables. This contract demonstrates our strong competitive positioning in the sector. Demand and volumes are expected to rise as the government seeks to conclude major infrastructure projects well in advance of the 2022 FIFA World Cup. Turning to Slide 7. We are pleased to report that the Trading and Distribution segment has continued to deliver a strong performance in the third quarter despite the negative impacts of COVID-19, with revenue and net profit up 25.9% and 18.4% year-on-year, respectively. These positive results are mainly attributable to the resilient performance of Ebn Sina Medical, which delivered year-on-year revenue growth of 35.8%, in part, a result of moving away from the direct billing of customers by pharmaceutical companies and increased orders of medical supplies needed to support the medical profession during the COVID-19 pandemic. As highlighted in the last 2 quarters, Ebn Sina Medical and Aamal Medical have continued to work hard to support Qatar's local communities during the pandemic, including facilitating the home delivery of medicines and the repurposing of warehouse delivery vans as mobile pharmacies for local distribution. It's been more of a challenging quarter for Aamal Medical, where revenue grew 13.8%, but net profit declined 3.2%, specifically as competitive pressure impacted pricing. And in line with guidance from the Qatari authorities, all Foot Care Center branches and the Ebn Sina pharmacy located at Musherieb Railway Station remained close throughout the quarter. Turning to Slide 8. Revenue and net profits in the Property segment were down 43.9% and 92.2% year-on-year, respectively, resulting in net profit of QAR 13.5 million for the period, reflect the impact of COVID-19, which saw all retail properties, except pharmacies and supermarkets, closed from mid-March 2020 to the end of Q2 at City Center. And from mid-March to Mid Q3 at Souk Al Harraj. In addition, there was a negative impact on the fair value of investment properties totaling QAR 74.4 million. Underlining Aamal's commitment to supporting its tenant during these difficult times, all rents payable for the closure period at City Center and Souk Al Harraj was waived. And further tenant support at City Center was provided in Q3 in the form of reduced rent while footfall recovers. Footfall levels have continued to improve throughout the quarter, albeit still remaining below pre-COVID levels. As a result, rental income at City Center Doha is down 51% with -- versus Q3 2019. It is also worth noting that in line with government guidance, some parts of the mall remain closed such as personal care and entertainment venues. Having taken the opportunity to complete Phase 2 of the major renovation works at City Center Doha during the lockdown, the works are now complete, adding an additional 7.1% of leasable space, and the leasing process has commenced. The next phase of renovation will be the opening of the mall's new dedicated jewelry retail area, the Gold Souq, by the end of the fourth quarter of this year. Meanwhile, Aamal Real Estate recorded a 27% decline in revenues versus the previous year, largely due to the closure of Souk Al Harraj and Al Saad shops in mid-March while the portfolio mix of residential properties provided some resilience to the pandemic. As I mentioned earlier, the Board of Directors and management remain committed to investment in the retail -- real estate sector. As such, the Property segment has commenced the development of the frontage of City Center Doha, which will see the launch of new outdoor cafes and restaurants as well as landscaping. And Aamal Real Estate has commenced renovation of several buildings and compounds to improve its offering in the real estate market. Turning to Slide 9. It's been a challenging 9 months for the Managed Services segment, with revenues down 54.5% year-on-year to QAR 34.7 million, resulting in a net loss of QAR 3 million. This result is largely attributable to reduced demand for office hospitality and facilities management services during the COVID-19 pandemic, while Fun City and Winter Wonderland remains closed due to the COVID-related restrictions imposed by the Qatari government. Furthermore, the deconsolidation of ECCO Gulf, which has now been reclassified as an equity accounted investee, impacted net profit in the amount of QAR 1.4 million as only 51% share of the company's net profit is recognized in Aamal's P&L compared to 100% last year. Finally, turning to Slide 11. As we reflect on the past 9 months, we are proud of how Aamal has successfully navigated this challenging environment whilst ensuring all segments remain well positioned for the future by implementing operational improvements across the group. Looking ahead, the global nature of the COVID-19 and the uncertainty around its progression, severity and duration mean we expect to feel its impact throughout the final quarter of 2020. However, signs of recovery are beginning to emerge, and we expect to see continuous improvement as Qatar gradually resumes normal business activity post-COVID-19. Most notably, an improvement in the Property segment's performance is expected as tenant support measures are eased in Q4 2020, and an uptick in the project pipeline is expected in Industrial Manufacturing as the Qatari government seeks to conclude major infrastructure projects in advance of the 2022 FIFA World Cup. Furthermore, the group continues to maintain a strict focus on cash management and cost control to further support the financial strength of Aamal. The Board and management team remain confident in Aamal Company's long-term strategy. The diversity of our business model offers additional resilience and the group has demonstrated its ability to adapt effectively and with agility to external change. Aamal's resilience in these challenging times is underscored by its strong operational and financial position with a robust balance sheet and gearing is low at 2.75%. Naturally, our main priority remains the health and well-being of our colleagues and customers. And to that end, we continued to implement and refine social distancing measures across the business in accordance with the government directives. The Board of Directors would like to, once again, thank all employees for their unwavering dedication during this challenging period and would like to reiterate Aamal's ongoing commitment to providing a safe and supportive working environment for all of its employees. This concludes our presentation, and I now welcome any questions you may have.

Thank you, Mr. Imran. Thank you, everyone. [Operator Instructions] We'll take our first question from Varun.

I have 3 questions. Sorry, some of my questions might be blessed by recent distracted tracking of [ company. ] So I would like to understand more on the contract that we -- or [indiscernible] captured, which is the QAR 694 million for 3 years. So if you can help us understand this contract in detail, is it like a fixed contract? Or is this like, depending on the requirement of the company, if you can help me understand this? And what are the margins that we can expect from this contract? My second question is on the Property segment. So Property segment, so if you can let me know what's the occupancy and rent occupancy at City Center Doha and Aamal Real Estate? And have you seen any dropouts in this Property segment? I'll come over with my other questions later.

Okay. Perfect. Okay. Well, let me address your first question. The contract that has been signed between Aamal Cables and Kahramaa covers a period of 3 years. And the total contract value is QAR 694 million based on the copper prices that existed at the signing of the contract. So that is able to be altered by Kahramaa, of course. But in principle, we don't see any reason for that supply not to take place in totality. Our companies have been dealing with Kahramaa for an extensive number of years and have very good experience of dealing with Kahramaa and the completion of those projects. In terms of occupancy, I won't provide very many details. But what I can say, Aamal Real Estate occupancy is 90% and above. And at City Center, occupancy is now running lower than capacity due to the fact that we've now released almost 10,000 square meters of retail space with the completion of the Phase 2 Stage 2 expansion project.

Sorry, I mean, coming to contract to Kahramaa again. So is this renewal? Or is this like a new contract on top of the existing revenue that the company generates?

The QAR 694 million contract with Kahramaa is a new contract. It's a new win.

Okay. And can I say that this can be -- basically it happens equally for 3 years?

I'm sorry, could you repeat -- you were not coming in very good.

I mean like a fixed amount that we generate every year. I mean, every quarter. Is this or is this some...

The contract is to run for 3 years, and that depends on the call off by Kahramaa related to its requirements for the cables. So I'm not sure that you can say it's going to be an even call off over a 3-year period, but that is the value of the contract that has been signed between Aamal Cables and Kahramaa.

Okay. So I mean, sorry to harp on this, can I say that this QAR 694 million need not happen and it can be lower as well?

We fully expect that the QAR 694 million real contract is going to be executed in totality. What -- so we're fairly clear that this is going to -- this is going to take place. We don't have any reason not to assume that it will not take place. But what we cannot say to you is that there's going to be an even call off every month for the next 36 months or so.

Understood. And if possible -- is it possible to reveal what kind of margins we can expect from this contract?

Well, I prefer not to, but since it's commercially sensitive.

Okay. Sure. My one more question that I have is on the Aamal Maritime. I understand where there's one grid that is happening. So if both the ships are up and running, and if you can provide me on the [Technical Difficulty] what kind of revenue can we expect from this segment if you can disclose 30 days?

Well, I think that's a very difficult question to answer because really it depends on a number of factors. So what I can certainly tell you this year, earlier in the year, the amount of requirements for ships fell dramatically at the start of the COVID-19 period. So therefore, the shipping rates fell directly with that fall in demand. So really, this is based on, a, the direct demand that's in the market that will drive the shipping rates, also where your ships are at any point in time in the world. Um El Hanaya was basically sent into dry dock for a month in China this year. So you're going to have these regular fit outs, which also will impact the revenue from time to time. So depending on the actual demand at the time, that really impacts significantly the rates that you're going to get for shipping at Aamal Maritime.

[Operator Instructions] Okay. Since there are no further questions, I would like to -- sorry. Go ahead, Varun.

I have a couple of questions again. One is on the Property segment. Have you seen any dropouts in terms of -- have you seen any closures because of this pandemic? That is one. And our yields, I have been following historically from, say, from 2015. And I think it's at around 4% levels. So where do you think that your number will stabilize in the future? If all things are normal, [Technical Difficulty] that this number will stabilize? I mean I understand that you have unlocked temporarily permit at City Center. But at the same time, the yields are -- been falling from these properties. So have you seen any closures in the -- in CCV? That is one. And the second question is, if you can help me understand what is the CapEx for the next 2 years and where are we planning to spend that on?

I'm sorry, Varun, could you repeat the question? You faded out. The last part of the question.

The CapEx. CapEx over the next 2 years and where are we planning to spend this?

Okay. In terms of closures and dropouts at our Property segment, actually, we've been relatively fortunate. We had a very, very limited impact from closures and people wanting to leave renting our properties. For example, where it could potentially have impacted significantly as Souk Al Harraj. However, I'm pleased to note Souk Al Harraj occupancy is extremely high. And we've had very limited impact there, except for the fact that it remained closed for 4.5 months. We've had, again, negligible impact at City Center other than the fact that it's been -- City Center was closed for about 3.5 months. And of course, we've had to provide some tenant support in the aftermath of COVID-19 as a result of the lower footfall that City Center experienced. And actually, not just City Center, it was consistent with most of the shopping malls across Qatar. In terms of the CapEx, we're going through our bucket period now, and we're based on the impact of COVID-19, and we're going to assess our CapEx levels for the next year or 2 years. So it's difficult to give you precise numbers now given the fact that there's huge variability in the economic dynamic at the moment.

Okay. My last question, if I may. My last question, on trading and distribution, our revenue. So have you seen this spurt in growth in Ebn Sina Medical and Aamal Medical? Aamal Medical, I mean, obviously, competitive reasons, are still not making [ money there. ] But have you seen -- do we think that this kind of margins and growth is sustainable, or this will normalize once the situation comes to normal? And what kind of growth are we expecting from this segment?

Okay. I think we've had a combination of 2 things at -- in our medical business. One, clearly, there's been an impact of COVID-19 as the health care infrastructure ordered supplies to meet the requirements of the pandemic. That's one point. The second thing is there's been a shift away from pharma companies directly invoicing customers to taking it through their distributor. So the growth has been significant. It's exceeded our expectations. And unfortunately, part of that has been due to the COVID-19. So it's difficult to -- I don't expect the growth to be as high next year. We're currently going through our budget process. So it's difficult to actually give you what level of growth we would expect. But I certainly expect growth out of our companies in the health care sector.

Okay. Yes. And one more question before I stop myself. On competition in the industrial manufacturing segment, so I understand this competition is because of the requirements for the upcoming World Cup as well. And where do you think will this stabilize? I mean, do you think that this will stabilize post the FIFA World Cup? Or do you think that this pressure will continue on the smaller pace? If you can just help me understand more on this competition in the segment?

I think part of the competition has been due to COVID-19. Essentially, people have been trying to hoover up contracts. I think part of it is due to the fact that there is an element of oversupply in the market, in some markets, which obviously drives pricing. So however, we're starting to see an uptick in projects. And we're expecting stabilization to come into the market in the first part of next year actually.

[Operator Instructions] Mr. Zohaib has a question from Al Rayan Investment.

My question is on the Property segment. As you mentioned that none of your or probably a very minimal number of tenants actually closed out or -- from your malls or Souk Al Harraj and your -- this was -- occupancy was really high. So what led to the QAR 74 million decline in investment property fair value? Pricing?

The -- we have the valuers issue evaluation every quarter for our investment properties. And they benchmark and value our properties according to market conditions in Qatar. And it was a valuation driven by our values that -- which showed a lower value of QAR 74.4 million. And therefore, we passed that value for our books of account.