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

Ladies and gentlemen, welcome to the KIPCO Full Year 2020 Earnings Call. My name is Simona, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Elena Sanchez from EFG Hermes to begin. Elena, please go ahead.

Thank you, Simona. Good afternoon, everyone. This is Elena Sanchez, and on behalf of EFG Hermes, I would like to welcome you all to KIPCO's Full Year 2020 Earnings Call. It is a pleasure to have with us the following speakers from KIPCO, Mr. Pinak Maitra, Group Chief Financial Officer; Mr. Anuj Rohtagi, VP, Group Financial Control; and Mr. Moustapha Chami VP, finance and accounts. At this point, I would like to hand over the call to Mr. Pinak. Please go ahead. Thank you.

Thank you, Elena. Good afternoon, everyone. Thank you for joining us in our full Year 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 the financial statement for the year. As usual, 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 can be 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 their future outcomes. They are not guarantees of future performance, achievements or results. With the rollout of the COVID vaccine in most parts of the world, we are hoping that globally, economic activity will gradually move towards pre-COVID operation level. During the last quarter of 2020, Kuwait continued to show a good level of consumer spending, increased trading activity in capital markets and real estate sales. And they all returned close to pre pandemic levels. At the same time, oil prices have crossed $60 in December, and many forecast it is expect to stay around this level in 2021. While some uncertainties related to the pandemic still remain due to fresh cases emerging in different parts of the world, we continue to execute against our plan for value creation in this current environment, while hoping widespread distribution of vaccine will help in scrubbing the spread of new cases. Our key subsidiaries continue their improvements in operational performance in quarter 4, 2020 in line with trends they had shown in quarter 3, 2020. You will note the impact when we discuss performance of our key operating companies in a while today. I will now hand over to Mr. Moustapha to provide you with KIPCO's financial performance update on Page 4 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. Where OSN became a subsidiary of the group in Q1 2020 after an increase in ownership. While in our originally published 2019 financials, we had treated OSN as held-for-sale asset, the restated financials capture our share of results from the operations for 2019, which were not included before as per the classification then. Please refer to Note 2 and 3 of our annual financial statements for details on this statement. Referring to Page 4 of the presentation. Revenues increased by 8% in 2020 to reach $2.482 million -- $2.482 billion compared to $2.302 billion for the year 2019. The increase in revenue 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's revenue. Increase in investment income was a result of fair value gain on increase in KIPCO's stake in OSN. We have reported a profit of $22 million for the year 2020. This translates into an EPS of $0.04 per share or $0.13 per share. The restated EPS for 2019 is negative $0.332 per share or negative $0.11 per share. Now I will hand over the presentation to Mr. Anuj.

Thank you, Moustapha. We can now go to Page 5 that covers Burgan Bank's results. We'll be focusing on the key highlights in our presentation and you can refer Burgan Bank's full year 2020 earnings call transcript and presentation on Burgan Bank's official website to get more details. This was held on February 17, '21. Before we begin, I would like to once again remind you that during the year 2019, Burgan Bank's results included a 1-month lag in terms of its subsidiary's financial reporting, excluding Bank of Baghdad. As such, financials should be read within this context for comparison purpose as 2020 numbers are for 12 months. In addition, Bank of Baghdad has been reclassified as asset held for sale in 2020 financials, like in 2019 financials. The reclassification in the last quarter of 2020 was driven by ongoing discussions with potential buyers for the sale of Bank of Baghdad. Loan book increased by 1.4% at the end of 2020 versus 2019. Loan book growth in Kuwait, which increased by USD 435 million or 4.7% in 2020 was driven by the bank's strategy to focus on growth in Kuwait and was offset by reduced loan book in Turkey by 11.4%. That is USD 320 million compared to 2019, primarily due to Turkish lira depreciation. Deposits for Burgan Bank Group grew by 2.5% in 2020 versus 2019 due to increase in deposits in Kuwait operations by 4.5%, that is USD 424 million. The growth in deposits in Kuwait was offset primarily by reduction in deposits in Burgan Bank, Turkey by USD $77 million or 3.9%, again due to currency depreciation. Operating income for 2020 was USD 702 million, lower by USD 117 million compared to full year 2019. As highlighted earlier, this decline is attributable to Central Bank of Kuwait discount rate cut of 25 basis points in November 2019 and 125 basis points in March 2020. And reduced levels of economic activities during the year. This also impacted fee and commission income for the year, which declined by 14.8%. Following the rate cut, net interest margin for the financial year 2020 decreased by 36 basis points to 2.1% versus 2.4% in 2019. The bank reduced its operating expenses by USD 16 million to partially compensate for the lower operating income. Provisions charge to income statement increased by USD 92 million to USD 254 million in 2020 as against USD 162 million in 2019, driven by precautionary provisions of USD 56 million and USD million higher provisions in banking operations in Turkey. As a result of the above-mentioned movements, Burgan Bank Group posted a net income of USD 111 million in 2020 versus USD 279 million in 2019, a decrease of 60%. NPA ratio increased to 3.5% at the end of 2020 as against 2.1% in 2019, primarily driven by higher NPAs in Turkey. The bank reported CET1 ratio of 10.5% and capital adequacy ratio of 18.1% as of December 31, 2020, against minimum required ratios, which are 8% and 11.5%, respectively. The bank's capital adequacy ratio was supported by successful issuance of USD 500 million subordinate debt in quarter 4, 2020. The drop in CAR is expected to be around 157 basis points to reach 16.5% after exercise of call option to redeem the maturing subordinate debt of KD 100 million expected in quarter 1, 2021. Moving on to Page 6. Regional loan book declined by USD 310 million. The reduction in regional loan book was driven by currency depreciation in Turkey, as stated earlier. Deposits declined by USD 93 million or by 2.5% in 2020 in comparison with 2019. Overall, share of our regional loan book and customer deposits was 26% and 27% of total Burgan Bank loan book and customer deposits, respectively. The net profit of regional operations was lower by 86% during 2020 versus 2019 due to impact of interest rate, change in fee income regulation in Algeria and increase in provisioning. We can now go to Page 7 of the presentation, which summarizes Gulf Insurance Group's performance. For the 12 months ended December 31, 2020, GIG posted strong results. Gross premium written was USD 1.466 billion, registering a healthy growth of 13% over USD 1.299 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 1.5% year-on-year improvement. This improvement is majorly driven by lower claims incurred in medical and motor segments, which resulted in a 1.2% reduction in overall loss ratio. If you look at the top right-hand side chart, net investment income for 2020 reduced marginally by 4.8% to USD 33 million from USD 35 million last year. The impact of lower returns on investment portfolio as a result of subdued capital markets was, to some extent, offset by increased investment book volume in normal course of operations. As a result of revenue growth and positive Jaws ratio, GIG reported a net profit of USD 54 million for financial year 2020, a 22% growth over a profit of USD 44 million in 2019. Additionally, as you all must be aware, Gulf Insurance Group announced the acquisition of AXA's Middle East operations towards the end of 2020. The acquisition is expected to be completed subject to regulatory approvals during the year, which will place Gulf Insurance Group as third largest insurance by gross premium written in the MENA region. I will now hand over to Mr. Moustapha to take you through UGH's performance update.

Thank you, Anuj. Moving on to Slide 8, which has United Gulf Holding Company. You can see on the top left chart, revenue for the year 2020 was $139 million, which was reduced from $224 million in 2019. This is partly on account of a sharp decrease in investment income, owing to adverse market movements along with the reduction in share of results from associates to $9 million in 2020 from $41 million in 2019. Investment income decreased from $48 million in 2019 to $2 million in 2020. On the top right chart, provisions for credit losses increased to $37 million compared to $8 million during last year due to higher provisions in Finbank driven by COVID-19 pandemic. On bottom left chart, you can see UGH reported a net loss of $70 million in 2020 as compared to a profit of $10 million in 2019. The decrease in profit was a combination of lower revenue and higher provisions considering uncertain market conditions. UGB's total consolidated capital adequacy ratio stood at 17.5% and as of December 31, 2020. Moving on to our real estate company, United Real Estate. They are expecting to announce their results later this week. We have, therefore, not disclosed their full year numbers in this call. From the consolidation process where we include URC and KIPCO financial statements, you can see that hospitality and real estate income reduced by $64 million during 2020. This was offset by a reduction in expenses for the segment by $21 million during the year. The real estate sector in general was impacted by rent waivers and temporary shutdown of hotel businesses during lockdown and otherwise. However, the industry is now recovering, and we expect URC to benefit from this trend in 2020 -- sorry, in 2021. I will now hand over to Mr. Pinak to cover the remaining pages.

Thank you, Moustapha. Now let us move on to Page 10, which talks about OSN. We'll be using the terms of OTT and streaming in our discussions interchangeably. During 2020, OSN has transformed itself from a linear or pay-TV operator to a digital operator. It has launched its digital on demand products successfully, while retaining the capability to provide premium pay-TV service to its long-standing loyal customers in the premium segment. OSN continues to have leadership position in the region, a strong content lineup, which is one of the strongest in the region having first pay digital rights and exclusive relationship with 7 major studios while also carrying premium Arabic content and original content. OSN Streaming, our OTT platform, which is growing steadily with 450K subs as of February '21. More direct sell as well as telco partnership across the MENA region have contributed to this growth. With a number of OSN Arabic originals launched and many in pipeline, OSN has the best mix of exclusive western and Arabic content portfolio in the region. Further, OSN continues to see good traction on social media. OSN app rating has improved over the last 6 months, and its iOS and play store ranking remains in top 20 in entertainment sectors in all key markets. OSN's originals launched in the last month, 5 months include Aa'det Rigala, Arabic version of Come Dine With Me, No Man's Land and Kayd Majhool, a thriller drama series with a big pipeline for 2021. Further OSN recently launched the OSN Women channel, it's first ever content lineup dedicated to women in the region available on OSN Box as well as an on-demand and on OSN Streaming app. OSN was affected by the pandemic situation in 2020 leading to delay in launch of OTT partnership with telcos and slower-than-expected DTH sales due to lockdowns and slower footfall in our point of sales. However, OSN was able to achieve planned EBITDA levels in 2020, and we remain hopeful that in second half of 2021, OSN will deliver a financial breakeven. Moving on to Slide 11. United Industries reported USD 5 million net profit during financial year 2020, which is 78% lower than financial year 2019. The reduction is attributable to decrease in its share of income from Qurain Petrochemical Industries Company during the year, which was impacted due to volatility in oil prices. Jordan Kuwait Bank reported a steady operating performance. Deposits grew by 0.6%, whereas loan book declined by 1.1% during financial year 2020. However, the bank reported net loss of USD 6 million for the full year 2020 compared to the profit of $42 million during the last financial year. This is largely due to higher provision due to macroeconomic conditions which increased -- with increased difficulties. These were our key highlights for our 2020 results. Our group companies are slowly coming back to normal just like the rest of the world. As we mentioned before, our group companies are at various stages of digital transformation. We expect this to gather further momentum during the year as this is fast becoming a customer need, and in turn, is a great opportunity for our regional platform of companies to serve the 4 million customers that provide nearly $2.5 billion of revenue to the group. I now hand over to the moderator to invite our listeners to raise any questions they may have. Thank you.

[Operator Instructions] Our first question comes from Ali Dhaloomal of Bank of America.

I have just a few questions. I mean, the first one in regard of your balance sheet. Can you remind us how much cash do you have at the holding level? And also, if there is no debt maturing still until your Eurobonds in 2023. And then also, if you can tell us if there is any outflows, cash outflows planned this year for your various subsidiaries? I mean maybe to fund the acquisition of the AXA business in the insurance business or other subsidiaries? I mean, overall, how much have you budgeted in terms of cash injections that are needed for your subsidiaries? And then my other question will be related to OSN. Can you remind us what -- I mean, on a like-for-like basis, do you have the performance either on revenues and also on maybe earnings of OSN just because there was a lot of restatement, as you mentioned, I mean on goodwill and the fact that you reclassified the exposure from AFS? And I think that's broadly on my side, yes.

Thank you, Ali. I'll take them one by one. So the cash balance was $624 million as of December 31, 2020. In terms of your second question, which was how we are thinking about the cash flows to our group companies and you specified AXA acquisition. We are going through the process. I mean, we have -- obviously, have a broad idea of the range, and we plan for that range. The work is still going on because it has a lot of capital model implications. Broadly, we keep around $50 million to $75 million for this, and that is what we have kept in our planning. For the similar amount is kept for OSN as well. And since the company is expanding into more digital products, and also, as Pinak mentioned, into the original productions, we are keeping that pot for OSN as well for the remainder of the year. So these are the 2 main ones. I think in addition to that, Burgan Bank will be evaluating its capital levels during the year. And as and when that discussion happens, we'll be kind of supporting that increase in capital. We are looking at options how we can basically optimize that capital outflow, particular to the Burgan Bank deal, at this co-parent level. The last question is related to OSN performance. We are stating what we can state in our financial -- disclosed financial statement. As you know, it's a private company. It has -- it's been going through a lot of streamlining processes. So yes, there is a bit of noise and which is getting reflected as for IFRS. At the same time, we are giving you hints that the business achieved its targeted EBITDA levels in 2020. It is going to -- we are hopeful that it is going to achieve in second half of 2021 financial breakeven. Apart from that, you can see an indication of the numbers in the segmental information of KIPCO and in the notes to accounts. So I would request you to basically refer to those notes to accounts for the information.

And when you say breakeven financially, is it at the EBITDA level or net income level?

EBITDA level.

Our next question is from Rakesh Tripathi of Franklin Templeton.

A couple of things, mostly at the HoldCo level. I'm sorry, I missed the cash balance number that you said. So if you could repeat that once and also talk a little bit about the typical cash receipts and outflows for 2021 and the HoldCo level that is in terms of what sort of the dividend receipts do you see? And what kind of typical OpEx, interest payments and other outflows that you see happening this year?

Sure. Thanks, Rakesh. The number -- reported number is $624 million as of December 31, 2020. In terms of the next part of the question, we expect, based on the announcements so far done, $16 million our share of dividends from Burgan Bank.

2020, yes?

No, '21, I thought he asked -- Rakesh, your question was 2021 or 2022 -- 2020?

Yes, my question was in terms of receipts in 2021.

Sure. Yes. So that's -- I was mentioning that only based on what the proposal has happened in Burgan Bank. We can only state that. The rest of the companies are in process of that. So we cannot state more than that as of now. In terms of operating expenses and interest expenses, we expect the total is around $150 to $160 million. That's our expectation for the year at this stage. In addition to that, I had answered in -- to response to the previous question, the provisioning for the funding that we have done for our investments basically that I gave for Gulf Insurance Group, for OSN and for Burgan Bank as well. So does that answer your question?

Yes, yes. So you said $50 million to $75 million for OSN roughly for this year and a similar amount for the Gulf Insurance Group, right? So we are looking at around $100 million to $150 million in terms of -- basically cash support to these subsidiaries altogether, to all the subsidiaries, right?

Correct.

Excluding anything in Burgan?

Correct.

Fair enough. And I'm assuming, I mean, probably, you could give more idea on this. But my expectation is that you had expectations of around $19 million in terms of dividends received last year, overall from all the group companies. And I suppose it could be a bit lower than that this year. Even if we don't have exact numbers, it's likely to be a little lower as some of these might want to conserve cash, right?

What we told you about the $19 million number, my recollection is that, that was for 2020.

Yes, yes.

For 2021 because, as you can see from the results, there is an impact of COVID all across the group. So naturally, that will impact the dividend upstreaming to KIPCO level. And we are being conservative and very -- in our estimate that as of now, we only have information of around $16 million inflow at KIPCO parent level. Gulf Insurance Group, as you know, is looking at an acquisition. So that decision will be made. And in addition to that, you can see other entities have kind of been impacted by COVID. So we are being conservative based on the information that we have.

Right. Right. That's fair. And just 1 last thing I wanted to check on your cash balance, assuming things are the way we have sort of budgeted as of now. I assume your cash balance could go down somewhere around $400 million to $450 million or $500 million, maybe by the end of this year, assuming things stay as they are as we see them now? In that case, I understand that you typically prefer to keep enough cash to be able to finance the next debt maturity. And I know it's still pretty far away 2023, but in that context and in the context of the outflows that might happen this year, would you be looking at a possibility to say raise further debt sometime this year?

The likelihood of that is low. We believe that the interest rate cycle is going to be volatile in 2021, and we expect stability to return in 2022. So from a purely cost of funds point of view. That's our view today. Obviously, it's been quite dramatic that we were close to around 1%, and now we are [ 160 ], [ 170 ]. And yesterday, we closed at around [ 159 ] on the 10-year. So clearly, our view is that we don't need the money, the markets are not helpful, and therefore, it is going to be a second half 2022 from a planning point of view. That's how we see the projections going forward. We are saying that we'll take below $400 million during that time. But we clearly have -- that is on a fairly conservative basis that we are projecting those numbers from the $624 million that we have currently. And let's see where we go because there are a number of initiatives that are in the works. And therefore, we don't want to speculate too much about plan A, plan B, plan C, that we always continuously keep evaluating to make sure that we're in a very good place in second half 2022 when we'll be approaching the market. That's the broad planning thinking currently.

[Operator Instructions] We currently have no further questions registered, so I will hand back over to Mr. Pinak. Apologies. We do have a follow-up question from Rakesh Tripathi.

Yes. If there are no further questions I thought I will check on one more thing. This is not on the financial performance, but more on ESG. And I remember we had a discussion around this in September last year when we spoke about the way you are rated by MSCI [ sustainability ]. And you mentioned that as of now, these entities don't really see you as a holding company, but you would want to clarify that with them, get Burgan's rating to improve as well and for that to reflect in your whole co-level rating. So I just wanted to check where we are in terms of that and also in terms of articulating more on your ESG agenda and strategy?

Rakesh, thanks for that question. We -- interestingly, we recently commented on a request for comments process from Moody's on ESG, where we raise similar points. That -- The rating methodology is generally for ESG are not bespoke. They are very much cut in 1 manner, which may not be kind of suitable for an investment company. So it's a journey, I think we'll be engaging much more closely with all the rating agencies, particularly focusing on ESG and raise these issues much more. And our current plan is to do that in line with our overall debt funding plan. And we'll try to take it up in second half of 2020/'21 and accelerate that in first part of 2021. So that we have a very clear picture by the time we are ready for the next kind of issuance.

And on a macro basis, the broad comment is that there are 2 activities happening, or 2 global trends that are moving. And one of the -- and that for operating businesses, for instance, our dairy company, we are very actively engaged. We completed our Phase I study in the annual report, there will be a significant amount of ESG disclosure. So we are very active and taking steps to increase the exposure because there, the impact is real. Our ability to impact the environment to focus on sustainability is real benefit to mankind. So we will do that. In terms of the governance, we have been decent. We have to get more disclosures and fit it into more things. But there is also the issue of what is innovation and disruption doing. And from the evidence that we are seeing in financial markets, although ESG has got a large vocal voice in various media formats. But the money is still up in the air. And if you look at the performance of companies that have done very well in 2020 and up to now, they all seem to be favoring innovation and disruption. So the jury is out and so our process will allow one to take part in this global journey, be very thoughtful about it and take it from there.

Yes. That's fair. That's fair. In terms of disclosures also, should we expect something more coming around from KIPCO maybe sometime later this year in terms of disclosures, ESG disclosures?

We think that we will do, if it makes sense. Clearly, we are looking into it. From what I hear, Anuj say that the current disclosure is kind of 1 cookie that fits all, which in real-life doesn't work. So we have to figure out what is the best way to show our disclosure. And so there are lots of things that we do that we don't do a good job of talking about. For instance, we were the ones that really contributed to setting up the stem cell hospital in Kuwait. That is clearly environmentally and sustainability. We don't talk about it. So yes, there are lots of things, but we want to figure out what helps the investors really put the -- put it not as a virtual, but more as a substantive thing. So the answer is -- the long answer is what I gave, but the short answer is yes, we will have more disclosure in the second half.

We have a question from Willem Visser of T. Rowe Price.

Basically, just to follow-up to the previous question, you answered the question about cash flow dipping below [ $400 million ]. And then you have a number of initiatives in place, it would be great if you can elaborate a little bit on what you'd be taking on? And, for example, would it involve optimizing the portfolio as in disposal, disposals of certain assets. And also on the question, I think Ali raised on the maturities. Is it -- do you have any maturities falling ahead of the bonds that were due in 2023?

I can answer the second part. No. Our next maturity is in 2023. With regard to your first question, giving more color on the scenarios. It's -- I think, Pinak, I'm speaking under your guidance, but it's premature as of now. We are looking at a lot of options as and when they are -- they have reached a stage that we can talk about them publicly, we'll definitely disclose them.

And if you're looking for buckets just to put your head around, it is upstreaming, lots of cash that are there in their underlying entities. It is disposal of assets. It is all the capital instruments that shareholders should do, prudent companies should do when they're working to a long-term capital plan. So all the options, that's why I called it A, B, C. Those are the headings on which we'll do. But it's too premature for us to size it and size the buckets. Because we haven't reached the confidence where we want to talk about it precisely.

Okay. No, that makes sense. And just maybe lastly, you've been stating like on OSN on kind of divesting a scan there. Is there still discussions going on or kind of -- can you put a time line around that?

So it's -- I mean, we continue to have discussions for a lot of our assets. OSN happened to get a lot of attention because we announced it in 2018 as part of accounting process. So we keep having a lot of discussions. There's nothing specific that we can disclose at this stage.

[Operator Instructions] We currently have no further questions. So I will hand back to Mr. Pinak.

Thank you so much. And I want to thank all the investors and repeat the requests that we have been consistently making through the COVID, stay safe, maintain social distancing and wash your hands and use the mask. So that's it. Thank you. Good afternoon to everybody. Bye-bye.

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