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

Good afternoon, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to KIPCO's Q1 2021 Results Conference Call. It is a pleasure to have with us in the call the following speakers from KIPCO: 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 would like to hand over the call now to Mr. Pinak Maitra. Please go ahead. Thank you.

[Audio Gap] 2021 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 period. 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 uncertainty, which may adversely or otherwise affect the future outcomes. They are not guarantees of future performance, achievements or results. With the accelerated vaccination drive, Kuwait has witnessed around 1.5 million doses of vaccines so far. As we face the second and third wave of COVID-19 around the world, we are hopeful that the widespread distribution of vaccines, coupled with measures taken by our government, will help in curbing the spread of new cases. Our key subsidiaries continue to be resilient and have shown improvement in operational performance in quarter 1 2021. You'll note the impact when we discuss the performance of our key operating companies in a while today. I will now hand over -- and I guess Moustapha is having some technical problems. So I will continue with the financial performance update on Page 4 of the presentation. Referring to Page 4 of the presentation. Revenue decreased by 27% in quarter 1 '21 to reach USD 561 million compared to USD 769 million in quarter 1 '20. The year-on-year decrease in revenue is mainly due to a onetime investment income booked in quarter 1 '20 last year for the remeasurement of previously held equity interest in Panther Media Group Limited, as explained in Note 3 and Note 10 of the financial statement. In addition, we also recorded a lower interest income from our banking operations at USD 229 million in quarter 1 '21 compared to USD 310 million in quarter 1 '20. The decrease was partly offset by higher media and digital satellite network services income and foreign exchange gains. We have reported a net loss of USD 28 million for quarter 1 '21. This translated into a loss per share of 4.7 fils per share or $0.016 per share. The earnings per share for quarter 1 '20 was 15.9 fils per share or $0.053 per share. Now I'll hand over the presentation to Mr. Anuj.

Thank you, Pinak. I hope I'm audible.

Yes.

Thank you. We can now go to Page 5 that covers Burgan Bank's results. We'll be focusing on key highlights in our presentation as you can refer Burgan Bank's quarter 1 2021 earnings call transcript and presentation on Burgan Bank's official website to get more details. This was held on 5th May 2021. Before we begin, I would like to once again remind you that Bank of Baghdad has been reclassified as asset held for sale in 2020 and quarter 1 2021 financial statements. The reclassification was driven by ongoing process with regard to potential divestment of this asset. Our loan book declined in quarter 1 2021 by 2% versus financial year ending 2020, amounting USD 293 million. The key driver was reduction in Turkish loan book base by 15.7%, that is USD 390 million, due to lower loan volumes and Turkish lira appreciation. This was partially offset by a growth of USD 67 million in Kuwait. Deposits grew by 1.2% in quarter 1 2021 versus financial year ending 2020, amounting USD 158 million. The key drivers were: one, increase in deposits in Kuwait operations by 3%, that is USD 298 million; two, the reduction in deposits in Turkey deposit base by 9.8%, that is USD 185 million, due to currency depreciation. Operating income for quarter 1 2021 was USD 158 million, lower by USD 42 million compared to quarter 1 2020. This decline is attributable to lower net interest income of USD 50.8 million, driven by lower interest rate that came into effect on 16th March 2020, reduced by 1% then. Now NPLs recorded in Kuwait and reduced level of economic activities compared to quarter 1 2020. The current expectation of the management team is that new NPLs recorded in Kuwait are expected to be largely resolved by quarter 2 2021. As a result of these factors, net interest margin for quarter 1 2021 decreased year-on-year by 100 basis points to 1.7% versus 2.7% in quarter 1 2020. Fee and commission income, on the other hand, showed an improvement in quarter 1 2021 versus quarter 1 2020, as it increased by USD 2.4 million or 7.7% year-on-year. The bank reduced its operating expenses by USD 9 million in quarter 1 2021 to partially compensate for the lower operating income. Provisions charged to income statement increased to USD 67 million in quarter 1 2021 as against USD 55 million in quarter 1 2020, mainly driven by Kuwait operations. As a result of the above-mentioned key movements, Burgan Bank Group posted a net income of USD 17 million in quarter 1 2021 versus USD 57 million in quarter 1 2020, a decrease of 60%. NPA ratio increased to 4.9% at quarter 1 2021 as against 3.5% at the end of 2020, primarily driven by Kuwait, which is understood to be a short-term feature, and actions to reverse this increase are already underway. The bank reported CET1 ratio of 10.5% and capital adequacy ratio of 16.7% as on 31st March 2021, against minimum required ratios of 8% and 11.5%, respectively. Moving on to Page 6. The regional loan book declined by USD 378 million in quarter 1 2021. The reduction in regional loan book was driven by currency depreciation in Turkey, as stated earlier. Deposits declined by USD 140 million or by 3.8% in quarter 1 2021 versus financial year ending 2020. Overall share of our regional loan book and customer deposit was 24% and 26% of total Burgan Bank loan book and customer deposits, respectively. There has been a net loss from regional operations during quarter 1 2021, primarily due to high provisioning in Burgan Bank Turkey and impact of interest rates. Overall, the focus of the bank remains on maintaining the quality of its assets, enhancing the noninterest income and operating cost optimization through regular and new digitalization processes. We can now go to Page 7 of the presentation, which summarizes Gulf Insurance Group's performance. For the 3 months ended 31st March 2021, Gulf Insurance Group posted strong results. Gross premium written was USD 395 million, registering a healthy growth of 11%, that is USD 38 million, versus USD 357 million reported in quarter 1 2020. The increase is majorly driven by increase in medical business. On the bottom left chart, you can see that the combined ratio stands at 94%, which is an increase of 2% over the corresponding period. This is driven by higher claims incurred in medical and property segments, which resulted in a 1.1% increase in overall loss ratio along with higher expenses in property and motor segments, leading to an increase of 0.9% in overall expense ratio. If you look at the right-hand side chart, on the top, net investment income for quarter 1 2021 increased significantly to USD 17 million from investment loss of USD 3 million last year. This was driven primarily by increase in income from quoted held for sale investments as well as increase in income from unquoted unit-linked funds held by Gulf Insurance Group Kuwait as compared to quarter 1 2020. As a result of revenue growth and higher investment income, Gulf Insurance Group reported a net profit of USD 18 million for quarter 1 2021, a 79% growth over a profit of USD 10 million in quarter 1 2020. 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, of course, during this year, which will place Gulf Insurance Group as the third largest insurer by gross premium written in the MENA region. Moving on to Slide 8, which has United Gulf Holding Company. You can see on top-left chart, revenue for quarter 1 '21 was USD 36 million, which increased from USD 19 million in quarter 1 '20. This is largely on account of recovery in investment income, which had fallen sharply owing to adverse market movements along with increase in share of results from associates to USD 4 million in quarter 1 '21 from USD 2 million loss in quarter 1 '20. Investment income increased from minus USD 14 million to -- in quarter 1 2020 to USD 8 million in quarter 1 '21. On the top-right chart, provisions for credit losses declined from USD 8 million during quarter 1 2020 to a reversal of USD 2 million this quarter. United Gulf Holding net loss declined to USD 4 million in quarter 1 '21 as compared to a loss of USD 26 million in quarter 1 '20. The decrease in loss is a combination of higher revenue and lower provisioning considering improved market conditions. UG has total consolidated capital adequacy ratio stood at 18% as of 31st March 2020. Moving on to our real estate company, United Real Estate on Slide 9. The top-left chart shows USD 75 million of revenue for first quarter ended 31st March 2021, representing a decline of 34% versus the same period last year. The majority of the decline is from contracting and services revenue, which reduced to USD 52 million in quarter 1 2021 compared to USD 74 million in quarter 1 2020. Further, the hospitality segment also recorded lower revenues of USD 4.9 million in quarter 1 2021 compared to USD 11 million in quarter 1 2020. The impact of lower revenues was offset by lower costs in Contracting & Services segment and lower hospitality costs. And as a result, company reported an operating profit of USD 11 million and a net profit of USD 4 million for quarter 1 2021. If we now move to Page 10, which talks about OSN. We will be using terms OTT and streaming in our discussions interchangeably. OSN has transformed itself from a pure linear or pay TV operator to a digital operator. Today, it has 3 key segments. One was in home, which provides premium pay TV services and has always been a key pillar of OSN brand for many, many years. Two, OSN streaming, our OTT platform with over 30,000 hours of on-demand content and happens to be amongst top 3 OTT platforms in the region. The third segment is B2B segment, which includes a range of telecom and other commercial partnerships. While OSN continues to enhance its premium pay TV services for its customers across the region, OSN streaming is growing steadily with around 500,000 subscribers as of April 2021. With Western movies and series from 7 major Hollywood studios, thematic and kid's channel and a number of OSN Arabic Originals, OSN has one of the best mix of exclusive Western and Arabic content portfolio in the region. During 2021 May, OSN has upgraded its streaming platform, which now has a superior user interface, user experience, search and recommendation engine, smooth customer journey and many other experience-enhancing features compared to before. OSN Originals launched in the last 5 months include Aa'det Rigala, Arabic version of Come Dine with Me; No Man's Land; and now Kayd Majhool, a thriller drama series with a big pipeline for 2021. Further, OSN launched a new pop-up channel, Howa w Heya, focused on classical Arabic content. OSN has been affected by the pandemic situation. However, as mentioned before, it continues to grow its subscribers numbers and, in the process, streamline its cost base to deliver the targeted financial performance. OSN met its expected EBITDA level in 2020, and we remain hopeful that in second half 2021, OSN will deliver the financial breakeven. Moving on to Slide 11. United Industries reported USD 4 million net profit during quarter 1 2021, which is 55% lower than same period last year. 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 price. Jordan Kuwait Bank reported a steady operating performance, with net interest income improving slightly in quarter 1 2021 versus quarter 1 2020, while both deposits and loan book showed similar levels as of financial year ending 2020. Further, the net loss declined from USD 4 million in quarter 1 2020 to USD 2 million in quarter 1 2021, largely since higher provisions were made in 2020 due to macroeconomic conditions, while in quarter 1 2021, there have been provisions reversal of around USD 2 million. These were our key highlights for quarter 1 2021 results. Our group companies are positioning themselves to reverse the impact of pandemic, though the risk remains. These companies are at various stages of digital transformation, and we expect this to improve our customers' experience and yield the desired result for the group in the future. I now hand over to the moderator to invite our listeners to raise any questions they may have.

[Operator Instructions] We have a question from Rakesh Tripathi from Franklin Templeton.

I wanted to check a few things at the parent company level, at the holdco level. If you could confirm, first, about the cash levels at the end of Q1.

Cash balance reported as of 31st March 2021 was USD 724 million.

Right. So that's a healthy increase because there was -- it was USD 623 million, right, end of last year. So what drove this increase?

The increase from 31st December 2020 balance is due to a combination of several initiatives and steps that we also mentioned in our previous call. So we can share the details separately with you.

Sure. I read that there are plans -- there is an approval to go ahead and raise fresh equity capital, right? Can you talk a bit about what kind of time lines do you see? What sort of tentative amount that could be raised?

So we have done the preparatory step. That is going to the EGM and increasing the authorized capital. As we mentioned, it will be evaluated on a quarter-on-quarter basis. As of now, we do not have any update with regard to the initiation of the formal process. As it happens, we'll definitely basically following the compliance protocols and communicate it to you.

Sure. Sure. And I believe in the last call, you provided a lot of details on the breakdown of the kind of costs that could be there at the holdco level. You mentioned about $150 million, $160 million in OpEx and interest and about $100 million, $150 million in the form of investments in subsidiaries to support the acquisitions or maybe capitalization at Burgan if needed. Just one thing I wanted to check, what are the kind of dividend receipts that you expect for this year?

Our numbers that we shared with regard to dividend expectation for 2021 remains unchanged from the previous call. So far, we had visibility on dividends from Burgan Bank of USD 18 million, and that remains same as of today.

Right. So USD 18 million, yes, you mentioned that on the previous calls, yes. So regarding the other entities, there -- do you have any visibility on whether the dividends could be similar to last year or lower than that?

Most of the entities have reported their financials, and they are doing various business initiatives. In case of Gulf Insurance, they are acquiring a company, for example. In case of other entities, they are coming out of the pandemic in general. So as such, we will be looking for dividend upstreaming as a plan for the next year, not this year.

Thank you. We have a question that came to the chart from [ Budi Suharto ]. Can you share your cash flow forecast for full year 2021, both inflows and outflows?

So [ Budi ], this will require a lot of details, actually. And can we take this separately with you? We did share the building blocks of cash flows in our previous call. And those remain same, the building blocks, broadly for the year. And you can refer to the transcript of full year 2020 earnings call for the details. If you have any follow-up questions, please let us know, we can touch base with you and provide clarity.

[Operator Instructions] We have no further questions at the moment. So I'll hand over the call to Pinak and Anuj for any closing remarks.

I want to thank each of you who participated on this call. And Elena, thanks to you for helping us make this call happen. Again, as usual, we make the same message, please be safe, continue to be on guard. COVID has not gone past us, so we have to be disciplined in 2021. With that, thank you very much, everybody, and have a good day. Bye-bye.

Thank you. Buh-bye.