Kuwait Projects Company Holding K.S.C.P. (KPROJ) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the KIPCO 9 Months 2020 Earnings Call. My name is Katie, and I'll be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Elena Sanchez to begin. Elena, please go ahead.

Thank you very much. Good afternoon, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to the KIPCO's 9 months 2020 results conference call. It is a pleasure for us to have the following speakers from KIPCO today, Mr. Pinak Maitra, Group Chief Financial Officer; Mr. Anuj Rohtagi, Vice President, Group Financial Control; and Mr. Moustapha Chami, Vice President, Finance and Accounts. I will hand over the call now to Mr. Pinak. Please go ahead.

Thank you, Elena. Good afternoon, everyone. Thank you for joining us in our 9 months 2020 earnings call. We hope all of you are in good health. Please note that today's presentation is also available on our website along with financial statements for the period. We draw your attention to Page 2 of the presentation, which reads out a brief disclaimer. Some of the statements that we will be making today and information available in the presentation are forward-looking. Such statements are based on KIPCO's current expectations, predictions and estimates and are subject to risks and uncertainties, which may adversely or otherwise affect the future outcome. They are not guarantees of future performance, achievements or results. Before we start updating on our business performance, we'd like to highlight that we are very proud of our employees who have remained committed to deliver results and at this challenging time. To our employees, we thank you for all your efforts and sacrifice. We begin our presentation by highlighting through a couple of pages, our view of the external environment and how the KIPCO Group has responded to this. As we can see on Page 4, we continue to sail through uncertain times, bought on by COVID-19 and other external events shaping up the global economies. During the last quarter, the world has learned to live with a new normal. However, with gradual easing down of lockdown restrictions, global economic rebound in quarter 3, 2020, things seem to be looking better. Kuwait, in particular, witnessed good level of consumer spending, increased trading activity in capital markets and real estate sales also returned close to pre-pandemic levels, while oil price has recovered significantly from the lows of $1.15, it remains below pre-COVID level. Thus, expectedly, we saw a mixed bag of economic indicators. While some uncertainty related to the pandemic still remains due to fresh cases emerging in different parts of the world. We continue to execute well against our plan for value creation in this current environment. As you can see from Slide 5, our key subsidiaries depicted strong operation performance in quarter 3, 2020 versus quarter 2, 2020. We will discuss the performance of all the group companies in detail later. However, it is visible that both the top line and bottom line for our companies improved in quarter 3 2020. I will now hand over to Mr. Moustapha to provide you with cost financial performance update on Page 7 of the presentation.

Thank you, Mr. Pinak, and good afternoon, everyone. Kindly note 2019 financials were restated due to a change in the classification of OSN after an increase in ownership. Please refer to Note 2 and 3 of our 9-month financial statements for details on restatement. Referring to Page 7 of the presentation, revenues increased by 11% in 9 months 2020 to reach $1.852 billion compared to $1.67 billion in the same period of 2019. The increase in revenues was mainly led by an increase in investment income. The increase was partly offset by reduced interest income and hospitality and real estate income. Income from Media and Digital satellite segment in 2020 includes the consolidation of OSN revenue. While increase in investment income was mainly due to the result of remeasurement gain on KIPCO's stake in PMGL, post on -- post its consolidation in accordance with IFRS 3 rule on business combination. We have reported a net profit of $49 million for the 9 months of 2020. This translates into an EPS of $0.068 per share or $0.022 per share. The restated EPS for 9 months of 2019 is minus or a loss of $21.1 per share or a loss of $0.069 per share. Now I will hand over the presentation to Mr. Anuj.

Thank you, Moustapha. We can now go to Page 8 that covers Burgan Bank's results. As we have done in past since Burgan Bank held its investor call yesterday, we will be focusing on some of the key highlights in our presentation. Before we begin, I would like to remind you that during the year 2019, Burgan Bank's results included a 1-month lag in terms of its subsidiaries financial reporting, excluding Bank of Baghdad. As such, 9 months 2019 numbers should be read with this context for comparison purpose as 2020 numbers are for full 9 months. In addition, during 9 months 2020 Bank of Baghdad has been consolidated in the financial statements, which was earlier classified as asset held for sale during 9 months 2019. Loan book increased by 2.2% at the end of 9 months 2020 versus 2019, our loan book growth in Kuwait, which increased by USD 672 million or 6.7% in 9 months 2020 was driven by the bank's strategy to focus on growth in Kuwait and consolidation of Bank of Baghdad, was offset by reduced loan book in Turkey by 18.4%. That is USD 508 million compared to 2019 primarily due to Turkish lira's depreciation]. Deposits for Burgan Bank grew by 13.1% in 9 months 2020 versus 2019 due to increase in deposits in Kuwait operations by 12.7%. That is USD 1.2 billion. And consolidation of Bank of Baghdad, which led to increase of USD 726 million. This growth in deposits in Kuwait and Bank of Baghdad was offset primarily by a reduction in reported deposits in Burgan Bank Turkey by USD 144 million or 7.4%, again due to currency depreciation primarily. Operating income for 9 months '20 was USD 537 million, lower by USD 45 million, compared to 9 months 2019, this decline is attributable to Central Bank of Kuwait discount rate cut of 25 basis points in November '19 and 125 basis points in March '20, and subsequently reduced levels of economic activities during larger part of the stated period. This also impacted fee and commission income, which declined by 12% in 9 months '20. Following the rate cut, NIM for the period, 9 months '20 decreased by 33 basis points to 2.2% during 9 months '20 versus 2.5% in 9 months '19. 48 basis points decline, if we are just 9 months '19 for 1-month lag in reporting. Provisions charge to income statement increased to USD 176 million,during 9 month '20 as against USD 84 million in 9 months '19, driven by business as usual, higher ECL provisions in the backdrop of macroeconomic and business conditions, as well as countercyclical precautionary provisions mandated by CBK amounting USD 32 million that was booked in quarter 2 '20 and USD 23 million booked in quarter 3 '20. As a result of the above-mentioned movements, Burgan Bank Group posted a net income of USD 106 million in 9 months '20 versus USD 220 million in 9 months '19, a decrease of 52%. NPA ratio increased to 3.7% at the end of 9-month '20 as against 2.1% in 2019, primarily driven by higher NPAs in international operations, mainly Turkey, that contributed an increase by 100 basis points and Bank of Baghdad consolidation, which led to increase by circa 60 basis points. The bank reported a CET1 ratio of 10.7% and CAR of 16% as on 30th September, 2020, the minimum required ratios are 8% and 11.5%, respectively. Moving on to Page 9. Regional loan book declined by USD 347 million, the deduction in Turkey loan book was partly offset by Bank of Baghdad consolidation. The growth in regional deposit book was mainly driven by Bank of Baghdad consolidation as well. Overall, share of our regional loan book and customer deposit was 26% and 29% of total Burgan Bank group loan book and customer deposits, respectively. The net profit of regional operations was lower by 38% during 9 months '20 versus 9 months '19, due to interest rate cuts and increase in provisioning due to challenging macroeconomic conditions, as mentioned earlier. We can now go to Page 10 of the presentation, which shows Gulf Insurance Group's performance. For the 9 months ended 30th September, '20, Gulf Insurance Group posted strong results. Gross premium written was at USD 1.092 billion, that is $1,092 million, registering a healthy growth of 26% over USD 869 million reported last year. The increase is majorly driven by increase in medical business in Kuwait. On the bottom-left chart, you can see that combined ratio stands at 93%, which is a 1.6% year-on-year improvement over same period in last year. This improvement is majorly driven by lower claims incurred in medical, motor and general accident segments, which resulted in a 1.5% reduction in overall loss ratio. If you look at the top right-hand side chart, the net investment income for 9 months of 2020 has increased by 24.8% to USD 27 million from USD 22 million last year for the same period. It was mainly driven by foreign exchange gains recorded on GIG's foreign currency investment in Turkey and Syria. As a result of revenue growth and positive job ratio, GIG reported a net profit of USD 43 million for the 9 months 2020, a 22% growth over a profit of USD 35 million in 9 months 2019. I will now hand over to Mr. Moustapha to cover next couple of pages.

Thank you, Anuj. We can move on to United Real Estate on Page 11. The top-left chart shows $243 million of revenue for the 9 months ended September 30, 2020, representing a decline of 14% versus same period of last year. This was a result of decline in rental and hospitality revenue by 40%, due to rent waivers and a temporary shutdown of hotel businesses during lockdown in different regions. The market conditions also resulted in lower contracting and services revenue. Operating profit declined by 69%, driven by lower revenues and lower margins. On the bottom-left chart, you will see net loss stood at $16 million during the 9 months ended September 30, 2020, from a profit of $10 million in the same period last year. The net loss was driven by a decrease in revenue, as I mentioned earlier, and revaluation loss on investment properties of $10 million. Moving on to Slide 12, which has United Gulf Holding Company. You can see on the top-left chart, revenue for 9 months of 2020 was $102 million, which reduced from $169 million in the same period of 2019. This is largely on account of a sharp decrease in investment income, owing to adverse market movements along with reduction and share of results from associates to $9 million in 9 months of 2020 from $35 million in the same period of 2019. Investment income decreased from a profit of $34 million in 9 months of 2019 to a loss of $2 million in 2020. On the top-right chart, provisions for credit losses increased to $25 million compared to $3 million during the same period of last year due to higher provisions in some bank, driven by impact of COVID-19 pandemic. On bottom-left chart, you can see UGH reported a net loss of $46 million in 9 months of 2020 as compared to a profit of $11 million. The decrease in profit was a combination of lower revenue and higher provisions, considering market -- uncertain market conditions. UGB's total consolidated capital adequacy ratio stood at 18.7% as of 30 September, 2020. I will now hand over to Mr. Pinak to cover the remaining pages.

Thank you, Moustapha. Let us now move to Page 13, which talks about OSN's growth and outlook. We will be using the TAM, OTT and streaming in our discussions interchangeably. 2020 has been the year of completion of OSN's operational turnaround with first day digital rights that is used for streaming products, secure from major studios, content cost rationalized, organization made leaner and stronger and OSN streaming, our OTT platform with exclusive Disney+ content receiving good customer response. With many telco partnerships already launched and others in the pipeline across the MENA regions, OSN is expected to accelerate its OTT growth in both key markets as well as low-income markets. Direct OTT sales is also showing accelerated run rate and increasing ARPU trends due to Original -- OSN Originals, along with contents like Disney+, HBO, NBCU, Paramount, et cetera. MENA market continues to be underpenetrated, and thus, OSN with its long-standing experience in the region, its brand and exclusive content is well positioned to capture substantial portion of the growing MENA OTT market share. Social media reaction is a testament as OSN is in good -- has been seeing good traction on all key parameters, such as followers, applause rate, conversion rates, amplification rates and views, et cetera, across all the social media platforms. Further, OSN app rating has improved over the last 6 months, its ranking remains in top 20 entertainment sector in all the key markets. In quarter 3, 2020 alone, OSN has launched 2 Original nonscripted Arabic shows, Yalla Neta’asha, Come Dine with me, the English name and A’adet Regala. In November OSN launched a new series called No Man's Land in partnership with global distributor, Fremantle. Furthermore Arabic Originals are in pipeline in quarter 1 2021. OSN Originals both scripted and nonscripted released and in the pipeline have added further depth to OSN's existing strong content base, making the OSN streaming and OSN home pack more attractive. OSN has been affected by the pandemic situation due to delay in the launch of OTT partnership with telcos and slower-than-expected DTH sales due to lockdown and slower footfall in our point of sale. However, OSN has been able to achieve EBITDA levels in year 2020 as planned, and we remain hopeful that in quarter 1 2021, OSN will deliver positive vessels. Moving on to Slide 16. United Industries reported $10 million net profit during 9 months of 2020, which is 61% lower than 9 months of 2019. The reduction is attributable to decrease in its share of income from Qurain Petrochemical Industries Company during the period under review, which was impacted due to volatility in oil prices. Jordan Kuwait Bank reported a steady operating performance. Its operating income remained sound, driven by healthy net interest margin, up 3.4% during 9 months of 2020, slightly below 3.5% reported in the same period of 2019. In the third quarter of 2020, the bank reported a net profit of USD 3 million, recovering from a loss of USD 8 million reported in the first half of 2020. Overall, in 9 months of 2020, JKB reported a net loss of $5 million compared to a profit of USD 29 million during the same period of last year, largely due to higher provisions by the bank in the wake of the macroeconomic conditions. These were the highlights for the 9 months of 2020. Our group companies are slowly coming back to normal, just like the rest of the world and business activities are picking up as we speak. We are cautiously optimistic that we'll end the year in a much better position. And I now hand over to the moderator, Kate, to invite our listeners to raise any questions they may have. Thank you.

[Operator Instructions] Our first question comes from Alex Ayoub from Waha.

Congratulations for the results. Just wanted to ask like the classic questions really. How much cash you have at the holding company, the HoldCo currently? That's the first one. And then the second one is, how much cash inflows you expect in Q4 and in 2021 and cash outflows at the holding level as well, please?

Thank you for the questions. I can confirm that as on 30th September, 2020, our cash balance is USD 632 million. The inflows at the HoldCo level remained pretty much the same for the year as we -- our main inflows are in the form of dividends, which typically happens in first half. Due to the COVID period, some of them got delayed, but the number for 2020 remains around $90 million, and that has been received.

What about 2021, how much inflow and outflow you expect?

We are going through our budgeting process of group companies, and we'll be in a better position to give more color in our next call. A lot of moving parts in there. So we have to assess those and be able to come back to you.

Got it. But it seems like, like given the COVID, I think a lot of companies are going to pay less dividends. So ultimately, like there would be some attrition at the cash at the holding level. I was wondering what kind of minimum cash you think you would keep at the holding level?

We clearly told you that we -- given the fluidity of the COVID, we are not comfortable. Typically, we would give you a direction. But we believe that we have significant amount of cash, given the maturities that are there in March 2023. So for us, we want to give a number that we are comfortable about. So directionally, you can use history as a trend. Yes, we will get these lower dividends, that's for sure. We'll see what we can do to mitigate the effect of that. But it's early days. All group companies have been requested to give us input, and we'll finish our budget process by middle of December, and then we'll be ready to answer that question. Thank you.

Okay. And -- but sorry, what's the minimum amount of cash you think you would keep on balance sheet? Because I think, ultimately, it's -- I think it was like the next bond maturity. The notional of the next bond coming due. But I think now you have less than that, no?

No, in March 2023, we have got a $500 million bond there. We believe that we will always have cash sufficient and more than that to pay that maturity. So our policy position remains intact. Our planning suggests that we are going to maintain that. But we are saying to you that it may be that things can get better. And so let's hold that. And as soon as we have visibility, we'll give you color.

[Operator Instructions] Our next question comes from Vladimir David from Muzinich.

Just a clarifying question. Did you say cash at HoldCo is $632 million, did I hear that correctly?

That's correct.

[Operator Instructions] We currently have no further questions.

Thank you so much, and we appreciate all of you to -- in participating in this KIPCO's third quarter call. We wish you all well, particularly people living in Europe. And we hope that by quarter 2 2021, we all will be in a better place than where we are. Thank you so much, and good evening, and good afternoon. Bye-bye.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.