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

Hello, everyone. This is Mira Al Ahmad from the Corporate Communications team of Aamal Company. I hope everyone is doing well and staying safety today. I want to welcome you to Aamal Company's full year financial results investors 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.

Thank you, Mira. Good afternoon, everyone. I hope you and your families are all safe and well, and welcome to this presentation of Aamal Company's results for the year ended December 31, 2020. 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 the Aamal website. I will begin with an overview of Aamal's key highlights and financial performance in 2020 before addressing each of our segments in turn and then concluding with an update on the market environment and the outlook for 2021 and beyond. There will then be an opportunity for you to ask questions at the end of the presentation. Turning to Slide 2 of our presentation. And the main factors determining our performance in 2020. COVID-19 has meant that Aamal faced an extremely challenging environment in 2020. Since the start of the pandemic, our overriding priority has been the safety, welfare and well-being of our staff, customers and other stakeholders. At the same time, the company demonstrated its capability to adopt tough fast-changing market conditions with speed and agility. Through the huge efforts of our staff and the strength and resilience of our diversified business model, Aamal delivered a degree of top line growth in 2020, albeit with reduced profitability due to the significant impact of the pandemic, particularly on our Property business. A strong performance in Trading and Distribution helped partially offset the subdued property and Managed Services segments. It is against this backdrop that the Board recommends a cash dividend of QAR 0.04 a share, equivalent to 4% of paid up share capital subject to approval at our AGM on the 30th of March 2021. Aamal's operational performance in 2020 has established a strong platform for post-pandemic growth. And we are all positioned to capitalize on the economic recovery, which is now beginning to get underway. To name a few examples, Aamal Cables has secured a QAR 694 million contract with Kahramaa. And Aamal Readymix, Aamal Cement, and Advanced Pipes and Casts have healthy 2021 pipeline. Phase 2 of the City Center Doha redevelopment is now complete and City Center Doha and Souk Al Harraj are now operating normally after supporting tenants throughout 2020. In parallel, over the course of 2020, we have executed on a number of investments, cost saving and restructuring initiatives across the 4 segments to optimize the efficiency of our operations going forward. These include manufacturing facility rationalization, investment in new warehouse automation technology and investment in new production plant to meet new sources of demand with high efficiency. Aamal continues to benefit from a strong balance sheet and liquidity position, and gearing remains low at 4.2%. The company's international investment profile increased last year through Aamal's inclusion in both the MSCI Qatar Small Cap Index and the QSE 20 Index. Turning to Slide 4. Despite the extremely difficult market environment, I am pleased to report that Aamal achieved moderate revenue growth of 1% year-on-year to QAR 1.37 billion. However, the pandemic did significantly impact revenue and profits. Gross profit was down 21.4% year-on-year and net profit attributable to Aamal shareholders fell 61.7% year-on-year to QAR 123.3 million, equating to QAR 0.02 per share. As mentioned, 2020 was a very challenging year for the property sector, in particular, Aamal's property sector saw fair value losses on investment properties of QAR 122 million and rent wave for City Center and Souk Al Harraj tenants had an QAR 85 million impact on revenues and profits. Government restrictions also meant that businesses in our Managed Services segment were severely impacted by closures. However, our diversified business model enabled the company to benefit from increased volumes at Ebn Sina Medical and Aamal Medical, up 18% and 11%, respectively, which saw our trading and distribution sector deliver a robust performance. In addition, we are now seeing increased volumes for industrial manufacturing as the pipeline of infrastructure and other projects resume as Qatar continues to prepare for the FIFA World Cup 2022 and execute on the Qatar National Vision 2030. We are, therefore, well positioned for market recovery as Aamal emerges from the COVID-19 pandemic with strong operations, a healthy balance sheet and low gearing. I will now take you through the performance of each of Aamal's 4 segments in more detail, starting with the Industrial Manufacturing on Page 6 of the presentation. Moving to Slide 6. Revenue in the Industrial Manufacturing segment was up 19.8% year-on-year at QAR 202.7 million. Net profit fell by 38.4% to QAR 32.4 million. These numbers primarily reflect significant top line growth at Aamal Readymix, offset by increased competition, which impacted margins and profits and a drop in net profit at Senyar Industries as a result of lower sales volumes. A key focus in 2020 was to prepare for the economic recovery in 2021. Aamal Cables has established a strong position in the Qatari market by winning a major 3-year contract with Kahramaa worth QAR 694 million. Senyar Drums Factory, the first specialized cable drum manufacturing, Qatar, also started commercial production in the third quarter of 2020. Advanced Pipes and Casts significantly increased its order book and began work on new production line for glass reinforced pipe or GRP, to drive efficiencies and vertical integration. Commercial production of GRP is due to commence in the second quarter of 2021. Aamal Maritime transport services was inevitably impacted by the pandemic particularly by restrictions at international ports and the lower rental rates. However, Aamal Maritime was able to use the opportunity this presented to complete a major upgrade on one of its vessels in the first half of 2020 and is now seeing greater demand for its services internationally. Frijns Structural Steel Middle East expanded its Mesaieed production facility and has secured a strong commercial pipeline for 2021. As construction for the 2022 World Cup nears completion, Frijns remains well positioned to benefit from further opportunities as demand for structural steel in Qatar transitions from infrastructure to energy-related industrial projects. Aamal responded to the very tough trading conditions of 2020 by continuing to focus on improving operational efficiency and optimizing its production base with the closure of its smaller Readymix facility at Al Khor. Although pricing and margins in industrial manufacturing remain under pressure from acute competition during 2020 as well as from the broader global economic fallout from the pandemic. The groundwork has been laid for a more prosperous 2021. For example, we expect to see the benefits of Advanced Pipes and Casts investing in a new GRP manufacturing machine that will enable it to vertically integrate and reduce its product costs. Aamal's Industrial and Manufacturing segment is well placed to benefit from the government's 2021 budget allocation of QAR 20.4 billion for highways, internal road networks and drainage systems. More than 150 large-scale projects are expected to be undertaken over the coming years, primarily focused on roads, hospitals and schools as part of Qatar's National Vision 2030, and will help drive the demand for the segment's core concrete pipe, cement blocks and power cable businesses. Turning to Slide 7. 2020 saw a strong revenue performance from Trading and Distribution segment, driven in particular by Aamal Medical and Ebn Sina Medical, revenue in the segment increased 13.5% year-on-year to QAR 907.9 million, while net profit increased 22% year-on-year to QAR 120.6 million. As major players in Qatar's pharmaceutical and medical devices sector, both Aamal Medical and Ebn Sina Medical played a key role in supporting the government's response to the pandemic and benefited from increased demand for health care services and products. Profits increased 20% at Ebn Sina Medical and 15% at Aamal Medical, while volumes increased by 18% and 11%, respectively. In 2020, Ebn Sina Medical focused on supporting Qatar's health care sector in its fight against COVID-19 and successfully secured local stock, including medicines, baby milk, face masks, gloves and hand sanitizers. Simultaneously, it continued its warehouse efficiency program. The warehouse installation of 2 large robot will be completed by the end of the first quarter 2021 and will enable more drugs to be dispensed accurately at high speed. It was also a strong year for Ebn Sina Pharmacies, where revenue increased by 45% and profit grew 83%. 2020 also saw the expansion of Ebn Sina Pharmacy with a contract signed for a new pharmacy located at Msheireb Downtown and scheduled to open by the end of March 2021. While a number of our Trading and Distribution businesses were impacted by COVID-19-related restrictions, such as Foot Care Center, which remained closed until August 2020. There were also a number of encouraging results in the year. These include winning 2 major 3-year contract for the supply of tires in the construction and health care sectors as well as a major supply contract lubricants in the construction raw material space. Additionally, the segment is expected to benefit from the normalization of relations between Qatar and its neighboring countries, particularly through cost savings and improved supply chain efficiencies. Looking ahead to 2021, Aamal Medical plans to diversify further into IT health care, expand its services business, implement its product development strategy and to benefit from opportunities relating to plans for new hospitals in Qatar. It should also continue to benefit from the QAR 1.3 billion allocated by the government for major projects in the health care sector. While the projected increase in the new vehicle sales of 4.1% in 2021 should see healthy growth in Aamal's tire and lubricant business in the future. Turning to Slide 8. 2020 was a particularly difficult year for the real estate sector. Revenue in Aamal's Property segment fell 34.8% to QAR 189.2 million. Fair value losses on investment properties of QAR 122 million and a loss of revenue of QAR 85 million from waiving rent for commercial tenants at both City Center Doha and Souk Al Harraj contributed to profit falling 91.6% to QAR 18.9 million. Although most of City Center Doha reopened in June 2020, Aamal maintained a provision of financial support to tenants throughout Q3 while footfall recovers. Investment for future growth continued despite the pandemic. Phase 2 of the redevelopment of City Center Doha was completed in 2020, including renovations and the completion of the Gold Souq area with 34 units, increasing the leasable area by approximately 7%. City Center Doha continues to benefit from its strategic location at the heart of West Bay. And in 2021, these improvements and new developments are expected to attract increased footfall. Looking ahead, the Property segment is set to benefit from continued investment and further improvements, which will enhance its accessibility and leading market position. These include 2 new bridges, which will connect City Center Doha directly to the metro station and connect Aamal to the central business district, providing improved access for residents and businesses. Additionally, a new frontage area will offer a greater variety of food and beverage outlets, free Wi-Fi and improved parking facilities. We expect continued refurbishment will also add value to our existing residential portfolio. Finally, turning to our fourth segment on Slide 9, our Managed Services segments. We've hit hard by the global pandemic and saw revenues decreased 26% to QAR 46.7 million, and net profit decreased by QAR 7.4 million year-on-year to a loss of QAR 1.7 million. While the first quarter of 2020 saw an encouraging start from our services, as it continued to successfully focus on hospitality services, the pandemic significantly impacted the business as clients close their workspaces and move to working from home. The unit has invested in new sanitization equipment and inventory to meet the increased demand for sanitary services across all client sectors and has benefited from a return to normalized operation in the fourth quarter, winning a significant contract starting in the last quarter of 2021 to support the FIFA 2022 World Cup. ECCO Gulf won several contracts in 2020 and performed very well despite the challenges of the pandemic. Improving profitability by almost 8%. Elsewhere COVID-19-related restrictions materially impacted a mild travel and meant that family entertainment center and Winter Wonderland remained close for the majority of 2020. Looking forward, we believe the outlook for 2021 and beyond is much more promising. Qatar is expected to resume its status as a major meetings, incentives, conferences and events destination as the situation normalizes. And pandemic restrictions permitting, the FIFA 2022 World Cup and government initiatives to facilitate international travel and tourism to Qatar, are expected to drive future demand across all of our businesses in the Managed Services segment. Turning to Slide 11 and to conclude. Aamal has successfully navigated a year of unprecedented challenges posed by the COVID-19 pandemic, and we now look forward to a promising 2021. More important, however, is that we continue to provide a safe and supportive working environment for our employees. On behalf of the Board of Directors, I would like to once again thank all our employees for their unwavering dedication throughout a very difficult year. All business segments remain well positioned for future growth and to benefit from operational improvements and from the expected increase in business activity. The government's positive and a short handling of the pandemic has resulted in the local economy returning to growth, and the IMF forecast 2.7% GDP growth in 2021. In particular, Aamal is well placed to benefit from an improvement in the Property segment's performance. As tenant support measures have ended. We also look forward to increased levels of industrial manufacturing activity as Qatar completes preparations for the FIFA World Cup and focuses on further infrastructure project as part of Qatar National Vision 2030. The Board and management team remain confident in Aamal's ability and strategy to deliver long-term growth and value creation. In 2020, Aamal demonstrated the resilience of its diverse business model, entering 2021 financially strong and with a very robust balance sheet. Having proven our ability to adapt effectively and with agility to external change, we now look forward to building on strong foundations in 2021. This concludes our presentation, and I now welcome any questions you may have.

Thank you, Mr. Imran. Thank you, everyone. [Operator Instructions] Mr. Zohaib Pervez from Al Rayan Investment.

Thank you, Mr. Imran for the presentation. I have a couple of questions. Firstly, you mentioned that in the Property segment, all the benefits that you have provided to your tenants are now completed. So just as a confirmation, they are all completely -- you're back to the normal pre-COVID period for the rents, correct?

Zohaib, thank you for your question. Yes, we've returned to pre-pandemic levels for the rental stream. And to answer your second question there, the management and definitely the Board of Directors feel that City Center will never be completed. So we will always be improving the offering. So whilst the Phase 2 development has been completed, we're now -- if you pass by City Center, we're working on the frontage. We're putting some cafes and restaurants in there, we're working on the landscape. We will, in the coming months, be working on bridges to the subway station and across the road to the business district and so on and so forth. We will be upgrading the car park as well.

Okay. Which assets were responsible for the impairment?

This -- we have a number of properties in our Property portfolio. There was some impairment across all the assets with the exception of City Center.

Okay. And this was primarily because of lower rentals?

No. This is basically because of the comparative prices in the market.

Okay. All right. Okay. If nobody else is on, then I'll come back.

Zohaib, Aamal values its investment properties on a land plus depreciated replacement costs. So when the independent valuer values, he values the land, and then there's a depreciation element on the buildings.

All right. Okay. Makes sense. Okay. I'll leave the floor and nobody else ask questions, I can probably come back.

Thank you, Mr. Zohaib. We have Mr. [ Munil ] from [ Axion's Consultancy ].

I have 2 questions. The first one is that the dividend proposed is about 200% of the earnings, right? So -- and it sums up to about 85% of the cash balance. So I mean, how would this show up on the balance sheet for other obligations? Are we seeing any addition of debt for short-term or long term?

In terms of the dividend, the dividend proposed is 4% of the share capital, which amounts to QAR 252 million. And as you correctly pointed out, so it's around 85% of the cash balance at the end of the year. We will also have another quarter of earnings and we have a sound financial position where we can pay that dividend from this year. And we're confident in our ability to perform strongly in 2021 and therefore, we did not want to reduce the dividend unnecessarily.

All right. So we're not looking for any -- I mean, additional debt to pay the dividends or any other obligations due to the fall in cash balances over the year?

We're not looking at any additional debt in 2021.

All right. So I have another question is that if you could provide some color on the occupancy levels and the income generation for the Phase 2 of City Center?

Okay. What I would say is Phase 2 of City Center amounts to about 9,000 square meters. And it would be difficult to provide you much color on that because there are many slices to the occupancy levels. So we have a large corridor that links to hotels. And quite a number of pieces of that corridor has a has already been leased. And we have, in the Gold Souq a number of units that have already been leased. I think that's pretty much what I can say about that without divulging commercially sensitive information.

All right. No problem. And if we could also get some guidance on the CapEx for the year 2021 and 2022, if that's possible?

Yes. The CapEx for next year, we're expecting to have CapEx of somewhere around QAR 100 million.

Okay. Mr. [ Munil ], any other questions? Or should we go to the next person?

No, that's it from my side, if there are any further questions, I'll be in the line.

Okay. Mr. [indiscernible] from, also, [ Axion's consultancy ].

I have one question, you have mentioned that Aamal Cable has won one in contract worth somewhere around QAR 694 million. And yes, it is the 3-year contract. So just can you have -- can you give more color on that in terms of when will you -- over which years the company will record the revenue from this because if I compare this with the total revenue from the industrial side, it is somewhere around -- it was somewhere around QAR 200 million, and this is quite a big number as compared to the total revenue for industrial. So can you give some color in terms of when will -- over what years will you book a revenue from this contract?

Well, thank you for the question. And yes, you're absolutely right. So we expect about 35% or QAR 250 million of the order to flow in 2021. Now as you can imagine, this can be subject to change based on Kahramaa requirements. And we're expecting the first major offtake at the end of Q1, start of Q2.

All right. All right. In terms of margins, so for this contract, are the margins in line with other -- not other typical projects, other projects within the Industrial Manufacturing segment?

Well, firstly, I would say, Aamal Cables, we're elated that we've won this significant contract with Kahramaa. However, confidentiality clauses and commercial considerations would preclude me from answering that question.

Does anyone else have any questions? Varun from Decimal Point Analytics.

I have a couple of questions. One is on the CapEx that you mentioned of QAR 100 million. Where are we spending this? That is my first question. And the second question is on the balance sheet with respect to the equity accounted investees. I see a sharp fall in Q3 from basically QAR 323 million by end of Q2 to QAR 247 million by end of Q3. So has there been an impairment as such with any of the investee companies?

Okay. So to deal with the CapEx question first. Essentially, a large part of that CapEx is going into City Center. So as we said earlier, we're completely redeveloping the frontage. We're building 2 bridges. We're redeveloping the car park, and there will be some CapEx that will be a spillover from the year 2020. In addition, we are building -- we are putting in new robots in our warehouses, and we we're building fresh warehouses for Ebn Sina Medical and the Aamal Medical, so that's where the majority of the CapEx is being spent throughout 2021. Varun, I think your second question related to the share of profit of equity accounted investees. You're saying, if I remember correctly, it fell from QAR 62 million to QAR 50 million.

Not exactly. So what I'm trying to see is that if I look at the balance sheet, by end of Q2, the equity accounted investees stood at around QAR 323 million. And if there was a sharp fall to QAR 247 million in Q3?

Yes. Okay. Now the reason why you see the sharp fall is, basically, we took a significant dividend out of Senyar Properties in the year to upstream that dividend to the headquarter company. And that ensured that there was appropriate liquidity throughout the group that the headquarter company could fund any area of the business that required to be funded. Fortunately, all areas of business are well funded, and that was not required. But on the basis of the theory of liquidity preference, we prefer to get the money upstream to the Aamal corporate headquarters sooner rather than later.

Okay. Okay. My last question is on the Industrial segment. So the kind of pipeline that is there, what kind of growth are we expecting -- I mean, besides -- just one clarification, Kahramaa, you were expecting around QAR 235 million in 2020, if I'm right?

Sorry, could you repeat that question?

With respect to the -- what you call, the contract with Kahramaa, are you expecting QAR 235 million of revenue in this year?

We're expecting about 35% of the contract value or around about QAR 250 million. And however, that's an estimate because Kahramaa sometimes pulls its deliveries forward or delays its deliveries depending on how its project goes. But from our cables business, that's the expectation that they have at the moment.

Okay. If I exclude this contract, what kind of growth are you expecting on the Industrial segment, both in terms of revenue? And are you -- I mean, on -- excluding the associates profit, are you expecting any turnaround in the net profit level of the Industrial segment?

In fact, we are expecting an improvement in the profit in Industrial segment for 2021. As I mentioned earlier, the pipelines look healthy across all the industrial businesses. Also, in particular, if we look at Aamal Maritime and Transportation, that was very hard hit in 2020 after the pandemic. Not only did rental rates for shipping crash, but also we had one of our ships out of commission having an upgrade to it for 40 days. So that shouldn't be there this year. So we're expecting an improvement in the profitability of our Industrial segment.

Okay. So if I -- I mean, I get it right. So the Industrial segment, if I -- I mean, are you still expecting the Readymix and Cement divisions to post losses because of this competition? And will the turnaround happen only from the Maritime business?

Actually, we're expecting all units to contribute to the profits of Aamal.

We have Mr. Zohaib again from Al Rayan Investment.

So I have a question regarding the net margin. So your net margins for 2021 were actually about 8-- sorry, looking at it into [indiscernible], my bad. About 18 -- 10%, right? Now historically, your margins have remained at much, much healthier level, like 34% in 2018, even 25% in '19. Would it be fair to assume that considering the big order considering the clawback of your rentals. Would it be fair to assume that your net margins are going to go back to the 30% level in '21?

I think if you -- Zohaib, we certainly expect a significant improvement in margins. And you can do this by taking -- we don't expect there to be fair value losses on investment properties in 2021 as the local market picks up steam. So we won't -- so it's expected there will be no losses there. Then if you say that the revenue from City Center will get back to normal, and we expect to also start leasing additional space. So if you start adding these numbers back to the profitability, you'll see that there will be a considerable improvement to those profits.

Yes, definitely. But just as a ballpark idea, you think it should be north of 25%, which is about like 2019 levels?

Well, it's -- we don't normally provide guidance in terms of future earnings, Zohaib. So if you would excuse me, I would pass on that question.

My other question is regarding the amount due from related parties. So in 2020, your related party receivables increased significantly. Could you give us some color on what is the rationale? And why this happened? And you just mentioned that dependent company provide needed liquidity and then there was some dividend, which went from your equity for the investees and the company. So is this related to less Al Faisal Holdings and the reason and when do we expect this to normalize? Because historically, it's been at a much lower level.

This was an advance made to the parent on commercially agreed terms, and we don't expect this to continue.

This was advance for what?

Actually, this was just an advance to the parent.

Okay. So it was kind of loan to the parent?

Yes, exactly. It was an advance on commercial and market rate terms.

Does anyone have any other questions? [Operator Instructions]. I think this is it. There are no further questions. Thank you, everyone. This concludes today's conference call. You may now disconnect. Thank you.

Thank you, Mira.