Ezdan Holding Group Q.P.S.C. (ERES) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Ezdan Holding Group ERES Q2 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Roy Thomas. Please go ahead.

Hello, everyone. This is Roy Thomas from QNB Financial Services. I want to welcome everyone to Ezdan Holding Group's Second Quarter 2021 Financial Results Conference Call. On this call, we have Tamer Fouad, the Group Chief Financial Officer; and Taha Moursi, the Financial Controller and IR Officer. We will conduct this conference call with management first reviewing the company's results followed by a Q&A. I will turn the call now over to Taha Moursi. Go ahead, Taha.

Good afternoon, everyone. Thanks, Roy. First, we will start with a disclaimer that some of the information discussed here might contain projections or other forward-looking statements regarding future events or future financial performance of the group. These forward-looking statements include all matters that are not historical facts. Any forward-looking statements, it speaks only as of the date on which it is made. Ezdan undertakes no obligation to publicly update or publicly revise any forward-looking statements, whether as a result of new information, future events or otherwise. We will discuss today the financial performance and the financial position for the group for second quarter 2021, and the investor presentation for the conference call is now available at Ezdan website, www.ezdanholding.qa under Investor Relations section. First, for financial performance of the group for this second quarter. Ezdan achieved a net profit to its [ own up ] was around QAR 172.2 million during second quarter 2021 compared to QAR 172.4 million during second quarter 2020. Net profit was almost the same compared to second quarter 2020 with the following changes. Rental income increased by around 1%. Other operating revenue increased by around 44%. Operating expenses increased by around 21%. General and admin expenses increased by around 9%. ForEx losses increased by around QAR 10 million. On the other hand, dividend income has decreased by around QAR 23 million compared to second quarter 2020. Decrease in [ financial support ] by around 50%. Regarding components of profit or losses statement, Ezdan recognized a rental income of QAR 600 million during second quarter 2021 compared to QAR 595 million during second quarter of 2020, with an increase of QAR 5 million, representing around 1%. Rental revenue from residential and the commercial segment, representing about 87% from total revenue for Ezdan has been slightly improved by around 1%, representing around QAR 3.7 million compared to second quarter 2020. Considering the following effects, average monthly rental rates in second quarter '21 was QAR 45,000 compared to QAR 46,000 in Q2 2020. And the average occupancy rate was around 83% during the second quarter 2021 compared to 84% during the second quarter 2020. Rental revenue from hotel segment, representing around 9% from total rental revenue, Ezdan has decreased by around QAR 15 million. Average occupancy rate for hotel sector was around 47% during second quarter 2021 compared to 53% during second quarter 2020. Rental revenue from mall segments, representing 4% from total rental revenue, Ezdan has improved by QAR 15 million. The main reason behind such increase was the decision from Board of Directors during 2020 to waive all tenants in malls from rent during the March, April and May 2020 due to COVID-19. In addition, average occupancy rate in malls increased from 61% in second quarter 2,020 to 75% in second quarter 2021. For other operating revenue, during second quarter 2021, Ezdan achieved other operating revenue of QAR 44 million compared to QAR 30 million during second quarter 2020, with an increase of QAR 14 million, representing around 44% compared to second quarter 2020. Other operating revenue from residential segments increased by around QAR 6 million, from hotel segment increased by around QAR 2 million, and from more segments increased by around QAR 6 million. Regarding operating expenses, operating expenses incurred during the second quarter 2021 were QAR 127 million compared to QAR 105 million during the second quarter 2020 with an increase of QAR 22 million, representing 21%. The main components of operating expenses were [ SUB ] benefits of QAR 51 million during second quarter '21 compared to QAR 24 million during second quarter '20. Electricity and water charges was QAR 40 million during second quarter 2021 compared to QAR 30 million during second quarter 2020. Maintenance expenses was around QAR 14 million during second quarter 2021 compared to QAR 9 million during second quarter 2020. Other categories of operating expense mostly decreased during the second quarter '21 compared to second quarter 2020. Operating expense from residential segment increased by QAR 25 million, for hotels decreased by QAR 5 million, for malls increased by QAR 2 million. As a result, operating profit from main operations was around QAR 517 million during second quarter '21 compared to QAR 521 million during second quarter 2020, with a gross margin from main operation of 80% during second quarter of 2021 compared to 83% during second quarter 2020. Operating profit from residential and commercial segment was QAR 454 million compared to QAR 468 million with a gross margin of 84% in second quarter 2021 compared to 88% in second quarter 2020. Operating profit from hotel segments was QAR 38 million compared to QAR 45 million with a gross margin of 60% in both '21 and '22. Operating profit from mall segment was QAR 25 million compared to QAR 8 million with gross margin of 67% compared to 43%. Investment income, representing mainly in dividend income and the share of results of equity accounted investees was QAR 100 million compared to QAR 123 million with a decrease of QAR 22 million, as dividend income has decreased from QAR 93 million to QAR 70 million. General and admin expenses have increased by QAR 3 million, which was mainly due to increase in utilities expense by QAR 2 million and professional fees was around QAR 1 million. Regarding finance costs, during the second quarter 2021, finance cost was around QAR 357 million compared to QAR 379 million with a decrease of QAR 22 million, representing 60%. The main reason behind such a decrease was the modification in terms for specific borrowings and decrease of profit rates, the matter, which had started during second half of 2020. The main ratios for financial performance during the second quarter was as following: percent of operating expenses compared to rental income was 20% compared to 17%. Total gross margin was 82% compared to 85%. Net gross margin was 24% in both years. Earning per share was QAR 0.006 in both years. Now we will move to the financial position of the group. As at 30 July '21, the group has total assets of QAR 49.9 billion, equivalent to USD 13.7 billion with an increase of QAR 515 million, equivalent to USD 140 million compared to December 2020. Total liabilities were around QAR 17.7 billion, equivalent to USD 4.8 billion, with an increase of QAR 328 million, equivalent to USD 90 million compared to December 2020. And total equity, including non-controlling interest was around QAR 32 billion, equivalent to USD 8.8 billion, with an increase of QAR 185 million, equivalent to USD 51 million compared to December 2020. Cash and bank balances have increased by QAR 289 million resulted mainly from net cash flows from operations. Investment properties have increased from QAR 44.5 billion to QAR 44.8 billion, with an increase of QAR 259 million, representing mainly capital expenditures during the period. Equity investments has been increased by QAR 14 million, with a balance of QAR 2.6 billion as at 30 June 2021. That increase was mainly due to changes in market value of equity investments. Investments in equity accounted investees and the joint venture has decreased by QAR 4 million as a result of offset between dividends received by QAR 35 million and the share of results of QAR 31 million. Due to related parties increased by QAR 2 billion. Such movement in balances was related [ bonds ] representing mainly in development to [ courses ] charged by main contractor and the related [ bonds ] SAK Holdings with around QAR 200 million in addition of borrowings of QAR 1.8 billion through other related parties. Islamic borrowings have decreased by QAR 1.7 billion. That decreased result is mainly from net payment of around QAR 2 billion and the finance cost of around QAR 344 million. Retained earnings have increased by QAR 174 million, which represents a net profit of QAR 172 million and begin with [ disposal ] [indiscernible] investments of QAR 2 million. Revaluation reserve has been increased by QAR 12 million as a result of increase in share value of equity investments. The share capital of the group was QAR 26.5 billion, equivalent to USD 7.3 billion as of 30 June 2021. Regarding cash flow, net cash flow from operating expenses were QAR 478 million compared to QAR 413 million. Net cash flow from investing activities was QAR 92 million compared to QAR 99 million. And the net cash flows used in financing activities was QAR 243 million compared to QAR 54 million. Thanks. Operator, start questions now.

[Operator Instructions] We'll take our first question from [ Mustafa Amir ] from [ Olayan ] Investment.

This is [ Zaheer ] from [ Olayan ] investment. You have -- I can see that your borrowing from other related parties increased by QAR 1.8 billion, which was primarily to pay of this COVID [ follow up]. So this related party is not SAK Holdings. Could you give us more detail on the related parties? Plus you said that the borrowing are at a commercial rates. Could you tell us if these rates are comparable to this group outstanding that was paid off or they're less or high? If you can't tell us the exact range, just an indication of where these rates are?

Thanks, Mustafa. As we mentioned in our disclosure, disclosure #12. During [ COVID ] Ezdan has settled to Sukuk that has been matured in last May 2021, with around QAR 1.8 billion. This QAR 1.8 billion has been obtained from a local bank through other related parties. And regarding the first questions, whether it is SAK Holding or no, it is not SAK Holding.

We'll take our next question from the line of Alex Ayoub from Waha.

I just had a follow-up about the borrowings. So do you have concrete plans about the repayment of the '22 bond? That's one. And two, you have a lot of unencumbered assets. I was wondering, is the equity -- are the equity investments you have unencumbered or not? And it looks like about more than a half of your investment properties are unencumbered. I was wondering, wouldn't it have been cheaper to just borrow some debt secured on these assets to repay the Sukuk?

Regarding your first part of your questions, regarding repayment of 2022. As we already disclosed, I think, in last Feb during the mid-year, that Ezdan would repay Sukuk 2021 through our borrowings, and that's what already happened. And regarding 2022, we will repay through our generating cash flow. And as you see, cash flow has been improved from QAR 650 million in December 2020 to 900 -- around QAR 1 billion in June 2022. So our estimation and our plans to repay Sukuk 2022 from cash generating. Can you repeat your second part of the questions, please?

Yes, sure. I was wondering like why you had a borrowing? Why you wouldn't -- like first, sorry, is equity you have or the equity investments you have, are they secured? Are they used as a security or you could sell them and repay the bond if you wanted? So the equity you have, the QAR 2.5 billion of listed equity. Is that already used as a security? Or no, you can just sell it whenever you want and you can generate more cash to repay the Sukuk, for example? And then the second follow-up is, why you didn't do that as opposed to take more debt? Or why you have also some assets, you have like QAR 45 billion of asset -- QAR 25 billion of assets, which are investment properties, which you could have used as a security to have cheaper debt. So why you didn't either sell equity or take secured debt, which would have been much cheaper than borrowing a 10 year loan?

Thanks for your question. It is a very good questions. And we already asked these questions many times in pervious conference call. But as you know, when we decide to, for example, use securities or use investment properties as a pledge for borrowings, for example, it is a matter of decision from the Board of Directors based on the strategic plan for the company, and whether this for using the investment properties or the equity investments as pledge for loans. And regarding the other part, which is why we didn't use investment property or invest -- our equity investments and repay our debts or repay our bonds. Again, as we mentioned, this matter is being studied when we make our strategic plan. But for the time being, there is no attention for the management for doing this one.

Okay. I got it. But the equity you could sell, so it's not used against other security, correct?

As you notice, this equity investments, we are talking about -- we have equity investments, and we have another equity investments created as equity investees. So to sell it or not to sell it, is also about of decision for Board of Directors based on the strategic plan. So it is not like, I will sell this equity investments and I repay my bonds because there is a strategic plan for this -- for holding this equity investments.

Okay. That's very clear. And sorry, how much debt you have maturing in the next 12 months? How much debt is short term? Apart from the Sukuk, how much more debt you have to repay?

As you would turn back to disclosure #12, you will find the QAR 2.1 billion that is the current materials from loans, out of it QAR 1.8 billion. So we are talking about QAR 300 million. It is the current portion from our loans during the coming year from 1 July 2021 to 30 June 2022.

Got it. So you have 2 -- roughly QAR 2 billion to repay in the next 12 months. You also have, like, call it, QAR 600 million of interest, so QAR 2.6 billion, QAR 2.7 billion of debt to be serviced. But like your cash flow are not going to be sufficient to cover that. Do you see what I mean? So if you have QAR 2.6 billion, QAR 2.7 billion of debts to be serviced and you're generating an EBITDA of around like QAR 1 billion per year is not going to be enough to repay your debt and service it. So that's why I'm wondering how will you reach that cap? The operating cash flow are [indiscernible] to be up and that's why I'm missing something.

No. As you know, it's -- now we have around QAR 1 billion now in our cash flow. In addition, all the economic news now, the economy start to be recovered from the COVID-19 outbreak. So we expect in the second half of 2021 and the first half of 2022, the cash flow to be generated from the operation to be sufficient to repay the Sukuk and repay the service for the debts. Considering this at [ the whole ] lookup 2022 occasion will be started in the second year 2022. So I think this one will have a positive impact on the financial position for the company and financial operations for it.

I understand. But can you just give us a feel about the numbers? Because when you look at the historical, so QAR 1 billion EBITDA, there will be a gap. So do you expect QAR 2 billion EBITDA for the next 12 months, for example?

I think -- no, it is not calculated like this. No, it is -- for the first questions of you, it is not calculated like this because the debt itself, it has matured over the next 12 months. This QAR 1.8 billion, that will be matured in next April 2022. And the other loans, I think we'll have sufficient cash to repay it. And regarding the CapEx, if you noticed from our previous conference call, most of the CapEx, it is related to SAK, the main contractor for us. And this capital commitments you are referring to, it is mainly regarding the [ partnership ] agreement with SAK that has been approved by AGM in 2013, I think. We are responsible for financing the construction against 32% from [ Zabrze ].