Al Fajar Al Alamia Company SAOG (AFAI) Earnings Call Transcript & Summary

[Foreign Language]

Good afternoon to all, who is attending with us in this, live in this session and for whom who will see this recording on the company's website in due course. I start by thanking all for joining, and it's a pleasure to have this every 6 months meeting to give the investor and the market in general, a glance of what's progressing and what's happening in Al Fajar Al Alamia. This year was exceptional for us. It's the year of operational recovery for Oman at least. We are very delighted to report that the company have achieved most of its targets for the Oman, and we can officially now see that the operation in Oman through the 3 business units that we are operating is on for recovery and have achieved the turnaround. On a group level, we are still lagging behind a little bit because of the delay of the completion and the plans for the UAE, which is undergoing. And as we speak now, we achieved most of the targets, and we are very optimistic about the overall performance for this year. To throw some light on the major numbers that have achieved for this year, the revenue will grow by almost 60%, 59% to OMR 16.3 million, and this is a very good level compared to what we saw over the past 3 or 4 years. It recovered -- a very good recovery with the quality earnings that we are achieving and enhancing the gross margin at 19.3%. The operating profit for the group was almost OMR 1.75 million. Omani riyals, while was under 1 million of OMR 878, 000, mainly due to the financial burden. At Oman only, including the Finance and all we achieved a letter profit for the Oman operation of OMR 1.4 million, and this is why we are saying we are very much on that track over this. So revenue scale and the cost observation and the management did very well for the financial results, the drilling and the bursting, explosive mining, the 3 divisions were at bottom line. In Oman, the gross profit has reached almost 20%, which is very good and very optimistic margin that reflects a very solid business model and a very good cost control. Still, we are not in full completion of our plan because we need to complete the turnaround and the UAE. And more important, the finance cost, which is the most on the company, and this is what is the biggest burden of the full operating recovery. And this is something that we are working on. We hope by then this year we will stabilize and we will be on good performance. The next piece will be very in line with what we are predicting because we started already the production of the fuel oil in the UAE. This is a very long awaited milestone after completing our facility of geodynamics at the UAE. We started the production. So now we are servicing our own company, our own drilling and blasting company and the market we are servicing it through our locally manufactured in the UAE production of Al Fajar. This significantly impacted logistics cost, which compromise a very good portion of our overall cost. In addition, we have received our first mobile explosive manufacturing unit, which is a very important milestone given that the UAE is shifting towards a connection and fall. So we will start within this month of October, doing bulk blasting, which is a significant change to the market and put us on the leaders on the sector in the region and in the UAE. And Oman, we are still very optimistic about the full recovery of the operation and the continuous progress and grow and infrastructure projects in particular. I look at 5 years revenue and net profit. We can see that since the week that we had in 2021, 2022, that was mainly attributed to significant projects that we were doing in the UAE. After that due to the 3 major setbacks that we have received, resulting from and the extended security measures and costs associated with that for the facilities of our client. The Russian Ukraine war, which has resulted in boost hike and raw material prices, and that's impacted and a surprise and the availability of the raw material, and this is reduced. And of course, there is a cadence impact for the COVID that had put the company. But looking at this last 5 years, we are now in a very good position, and we achieved the progress that we have target, and we are back into the hoping that within the next year or the current with a full recovery of the UAE operation, we will be give a much better position than what we were at. So the recovery is and the next forecast, we need to convert this recovery and this and the revenue and the suit of the business into operation -- from the operation into cash and to bring the company back into approve our financial balance in terms of leverage and other measures. I look at the major items. We can see that it's almost doubled year-on-year, with net results being below the OMR 870,000 of loss, due mainly to the financing costs, which exceeded to OMR 1 million. Gross margin of 19.3% and net margin was negatively due to this. More look into other particulars of the income statement, that show that the growth is double digit in most of the criteria, and we are very much in track. So we have a clear operating turnaround, a strong revenue growth and positive operating profit. The group is still to from the UAE. And while the UAE complete recovery will be -- and overall profitability. So again, the margins and the breakdown of where we are loss, we have achieved an operating profit on the group level of OMR 1.7 million. The finance cost was the major contributor to us resulting into the loss. Our priority for the next stage is to strengthen the capital structure and the cash conversion so the operating recovery reaches to the stallholder through sustainable net earnings and over time to dividends. In terms of a look into the capital discipline, our zooming into the balance sheet for the company, total assets of OMR 51 million with equity of OMR 6.5 billion and high leverage of OMR 26 million, which we are working to reduce that exposure through the divestment initiative that we are working. We'll talk about one of them, which is approximately completed. The divestments -- divestment of the mining in our Gypsum query. And these other divestment initiatives are undergoing that were reserved to bring our total date and our total leverage into the reasonable levels and that will give us more financial stability. We talked about the numbers, about the recovery in terms of profitability and revenue, but also there was -- sorry, I'll jump to that later. But now it's very important for us to highlight that we had this year and also the previous year, a qualified auditor opinion. The clarification is very important for the shareholders and for the other market participants to be acknowledged and to be aware of it. We -- the qualifying basis was that there was uncertainty or there is not enough clarity for the auditor to conform themselves with the recovery of the operation in the UAE, which is a view that understand, and we agree to some extent with that, given that it took longer than expected. But as management, we are still very believe that UAE platform will bring the strategic value and any reduction or impairment of the goodwill resulted from the operation there will be negatively impacting the shareholders, not by reflecting or an accurate situation. It can be a value negative, value impact on them. So we are in discussion with the auditors that within this year, with the addition of the UAE, we are under intense and detailed study and assessment of the goodwill and the NPAT. And within this fiscal year, we will be convincing and showing and restating for the external auditor that the basis for the business are still solid and are achievable and that will not require any impairment for the goodwill based on the impairment test that we have conducted. So the qualified on is acknowledged by us as management. We wish that all the shareholders and market participants to be aware of it. But we are confident that next year, it will not be there, and we are working towards illustrating this and put it into the perspective with the auditors. Now it's important here to highlight the string business model that we have in Oman. We are seeing that almost doubled on the parameters for most of our production and the manufacturing in the drilling and blasting and in the mineral or mining sector through mainly our quarry in gypsum. So we are any profit on the 3 segments. We are on good growth for both of them. And even for this fiscal year, we are expecting that the growth will be also significant, and we will achieve even much better results for Oman. Zooming into sector, the service. We have manufactured or traded around 10,000 tonnes of explosives this year, resulting to a revenue of around OMR 8 million and achieving a net profit of almost OMR 0.5 million. This is a growth of 11% of our budget, our initial budget, and the profitability is within the norms or within the budget targets, with a very good solid and important visible growth platforms and the growth potential. Also, our priorities on this for enhancing and keeping this progress as it through the focus on the suppliers that are more that there are a procurement and the management, we are focusing towards achieving better contribution. The drilling and the blasting also was the flagship operator and -- for this year between all the sectors, achieving a very good and strong revenues of OMR 10.6 million. And I think for Oman, this is one record high that is achieved, and this is 51% more than the previous year. And the result of net profit of a little bit under OMR 1 million. This happened through the solid and launching of several infrastructure projects, which Al Fajar was honored to take part of it being the leader, and of course, this requires us and lead us to enhance and renew our fleet of drilling rigs, which is the core of revenue and value generator for us, and we achieved for this segment more than 5% revenue over the budget that we have achieved. So we are very much alert within that. Third business segment is the mining through our division, our gypsum quarry, the our minerals. This year, we have produced around 1 million metric ton of gypsum and pure gypsum, achieving a revenue of around OMR 2.6 million and a very good profitability to that. We are targeting to increase our capacity to 120 to 150, which is our current sources can do this. There is a very strong demand for the product and the prices are very good. so we can operationally keep achieving on it, but we have a different plan for , which is our partnership with Saint-Gobain International. Saint-Gobain is one of the key players in the building material and gypsum production, we have signed with them an agreement we've been discussing with them for some long time about a partnership and they're coming into that next slide. And they're coming into partnership with us, this end of June or early July of this year. We have signed with them memorandum of understanding, global memorandum of understanding for cooperation and the mining and in particular for them to acquire 80% of our gypsum quarry, our minerals and to undertake or the full production and the full exports of risk for the operation in different parts of the world. And this is -- we are in the final stages of the sell and purchase agreement and the shareholders' agreement and the technical support agreement. We are anticipating within the next quarter or the quarter that we are in now to conclude and to finalize the deal. This will give us a very strategic value for Al Fajar in general. In terms of that, it release or some of the equity that we need to infuse again and to reducing our leverage, and of course, a partnership with a company of the size of Saint-Gobain will bring so many synergies and so many cooperation on different other layers. The second geographical platform that we are operating at in the UAE. We are moving -- now we are moving from the investment and imported supply where we used to service to local production. In July of this year, we started the production of the fuel oil in the UAE and in the state of importing it from Oman and be utilized for there. So we have increased our production to more than 600, 700 tonne per month, and we are signing solid and long-term contracts that will lead for good turnaround and production, having the production directly in the UAE will result in significant cost cutting. And this is why you can see that with low volume of reduction, we are achieving significant losses in the UAE, mainly because of the fixed cost associated with the increased volume definitely it will be in a very good position, and we saw that already in the first quarter results. So our milestone for completing the turnaround in the UAE to catch up with Oman will be this June, we have started with the production of. We have received our first exclusive manufacture in. We are planning to start the bulk blasting or the bulk production of bulk explosive within the first start before the end of this year. And within the first quarter of the next year, we will have additional other business unit that we are adding by manufacturing the detonators or the initiating system for the blast locally as the import from international market for this product is very expensive and that we will then see is not very high, especially in the situation that we are in. So we believe that within this fiscal year '26/'27, we will complete rebuilding our market share and the UAE, building on our historical track record there and our integrated supply of the full product range. It's very important that our recovery for the UAE coming within this year because the geopolitical situation that geopolitical distribution have accelerated so many of the related UAE infrastructure projects. All of these are publicly announced in the media, and we are zooming in into the realization of all these major projects and seeing how the impact will be for us directly, which is very, very significant. We have in our day to day talk, we expect that 10 years amount of jobs will be required to be completed by us within 2 to 3 years. Of this major project is the enhancement and increased investment for the Eastern port, major expansion for the existing ports in Fogera and Diba and that includes to make more dependency and avoid the impact of Straight of Hormuz on the overall flow of trade. In addition to that, by line carrying the oil from the West to the East, which is existing now with a capacity of 1.5 million per day is on the plan to increase it to 5 million and that would require a lot of bridging and that's the core of our business. already announced a concession of 50 years to extend and to enhance part of its operations supporting from directly. And they both already a very aggressive execution or construction completion of the of 24 to 30. Building a port or new base of this size would require too much of cut and fill that is very, very significant and we know that this will be very impact. All these mega projects announced recently and now they are in the planning and finalizing and awarding for the main contracted stages definitely will be a ground for a very strong solid demand that will support the overall strategy of geodynamics and its sister company Engineering in doing the drilling and the blasting and the supply of explosive for the market leading to the full market signal. For the next page as management, we are very optimistic, and we see the 4 engines of the growth they are on very solid and all in our favor with it's the growth, the continuous growth in Oman Infrastructure and Mining, a cycle that we expect that it will take 6 to 7 years. And we are already in the first and second year of it. So we are very optimistic about more projects and extension of the existing projects and more reliability on the dependency on the mining sector that will lead for good demand for our explosive and drilling and blasting. We have started aggregate and solid fleet renewal and better asset utilization, and this was reflected very solidly in our taking of the megaprojects that we take as a subcontractor and the renewal of our fleet. The UAE, and solid growth that we are receiving. And I mentioned at the beginning of the presentation that 2021 was one of our best year because at that time, we were working on the storage of oil projects in the UAE and at that time, all the manufacturers and operators in the UAE have benefited from it. Now within the plan for this coming year, we are talking about could be double the size of. So the strong and solid demand in the UAE is also coming as a main engine for growth for the next state. And of course, the mining and the Gypsum scale and market demand and the partnership with Saint-Gobain, we are looking at it very positively, but it will be Oman in general recovery. Okay. Now numbers show an illustrated very solid convertable living off, which we are still completing and going. But with that enhancement the better of the numbers, there was some qualitative achievements that and give this. As the shareholders, it's not a management -- we don't want just to deliver for our shareholders a profitable company. We want to deliver or to achieve a profitable and solid business model that make the company stand and overcome any future disturbances if it sees again. So there was a very good enhancement for the leadership of the company through M&A harmonization at the top level through a new high go to qualify the stuff to enhance the existing brilliant stuff that we have. They have been a very full and enhanced recovery -- restudy of all the policies and the procedures under the guidance of our Board of Directors to enhance and to get a very solid and solid company structure within the group. Also reporting the audit was given a very big attention for the company to make sure that we are in full compliance. And of course, for the operation, we have committed and still committing to our competitive competition receiving the leasing of the market to maintain quality earnings and the quality production than price wars and just reduction. So our operating principle is we want sustainable recovery that will be supported by disciplined system by a market policy that protect value, reliability and safety. And this is -- will be the key for a continuous growth, quantitative and qualitative. As management, our targets for this year and what we want to deliver and hopefully in the next year, like this time, we will sit with the shareholders, and we will check audit ourself what we have achieved on this. So in terms to our first superiority is to protect Oman profitability by achieving the margin discipline and enhance it to a better level, the fleet productivity, which we are cutting a very good of it and also the mining, increasing the mining support to the operation. For the UAE, our biggest target and this is where much of our efforts will be about is to complete the UAE turnaround through the completing the product range that we have started to making the production directly and they are making sure that we have the most integrated supply in the market of supplying all the needs locally from there. And of course, make sure that we achieve quality earnings through good customers and not our profit to be taken by a nonpayment of the customers. And of course, since we started 3 or 4 years the turnaround, our peers, our main concern is always to strengthen our financial resilience through enhancing our working capital, improve our capital structure, reduce the exposure this and leverage and of course, make sure that we have a broad CapEx governance to make sure that we achieve the best return on assets. This is approximately all what we want to say today. And we are hoped that -- confirm that the recovery is visible. The next milestone is to translate this into sustainable profitability and more shareholders value. This year, I tried -- we tried to do this presentation, and within the time to give as much as we can give of information to the market, to the shareholders, and we are happy to receive any questions or any queries from any of our participants now and for the people who will be seeing this recording in due course, the contacts channels for the company are listed in our Muscat Stock Exchange, and we'll be delighted to answer and to address any issues by any shareholders or market participants. Thank you. We leave the floor now for the questions and answers. If there's anything just tell your name and what you want to enquire about. Thank you.

Thank you very much. Is there any questions from the attendance?

Mr. , my name is Saad. So question, first of all, I think you're making very good progress on all the underlying metrics. When do you envisage the company being cash flow positive and dividends being restored?

Thank you, Saad. It's a pleasure always to hear your voice. Saad is a very old friend, and he's one of the oldest shareholders with us since 2009, I think, Saad, you have your stake in the company. And to answer to the question, as management side, our major concern is to maximize the shareholders' value. Of course, by protecting their investment and protecting their company. Our role is to make sure that our operation is within the most efficiency level and within the most profitability level. The consequence of this is the creation of that. To answer the first question, the first part of the question, we believe that this year, we are already cash positive when we exclude the impact of the financial leverage. So once we achieve our financial restructuring through the announced and the other exits in the pipeline, we believe that we will be able to do. Issue for us with dividends will be the accumulated losses and to recover, and that's on the accounting but this will be overcome by more strategic interest when we have a solid business profitable and to create more liquidity and that will give room for the shareholders to divest or to aim through the sale of the shares. But this is our role is to make sure that we deliver or we achieve a profitable company with high standards that will be attracted. Our target is for the dividend. I think that we will not be able to pay dividend before next 2 years after we return to the foreign solid situation. But definitely, there will be room for other ways of encashing or achieving partial exit for our shareholders from 1, 2. And we thank them for being patient and for being support. And I take this question or this point that you have raised Saad, to thank our shareholders for their patience and for their support. And above all, also thank our Board of Directors who extended all the support for the company and always behind us. to achieve or deliver the results.