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

Good afternoon, everyone. First of all, thank you very much for holding, and apologies for the delay in starting the call today. I'm welcoming you to today's presentation, KIPCO's Q3 2021 Earnings Conference Call. It is a pleasure to have the following presenters on the call today: Mr. Anuj Rohtagi, Group Senior Vice President, Group Financial Control; and Mr. Moustapha Chami, Group Senior Vice President, Finance and Accounts. I will hand over now the call to Mr. Anuj to begin with the presentation. Thank you.

Thank you, Elena. Apologies once again. We had some technical issues. So good afternoon, everyone. On behalf of KIPCO team, we welcome you to our earnings call for the 9-month period ended 30th September, 2021. Please note that today's presentation is also available on our website, along with financial statements for the period. We'll be supported by our colleague, Rahul, during our Q&A session. Please refer 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 the future outcomes. They are not guarantee of future performance, achievements or results. As the business environment shows recovery post-COVID impact, our group company, particularly in financial services, continued to show stable or improved operating performance during the 9-month period ended 30th September, 2021. As done in previous calls, we'll discuss performance highlights of our key companies 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, Anuj, and good afternoon, everyone. Referring to Page 4 of the presentation, which shows KIPCO's financial performance. Revenue was marginally lower than last year, representing a decrease of 2% in the 9 months of 2021 to reach $1.84 billion, compared to $1.879 billion in 9 months of 2020. The year-on-year decrease in revenue is mainly due to higher investment income booked in 9 months 2020 from the remeasurement of previously held equity interest in Panther Media Group Limited, as highlighted during previous quarter earnings call. In addition, the group also recorded lower interest income from our banking operations at $735 million in 9 months 2021 compared to $799 million in 9 months 2020, due to reduction in interest rates. The decrease was offset by $50 million increase in share of results from associates, along with full 9 months consolidation of media and digital satellite network business during 9 months 2021. Operating income before provisions for credit losses and investments increased to $312 million during 9 months 2021, compared to an income of $206 million during the same period last year. Provisions for credit losses and investments amounted to $209 million in 9 months 2021, compared to $214 million in 9 months 2020. We have reported a net profit of $55 million for 9 months 2021, compared to $38 million for 9 months 2020. This translates into an earnings per share of 7.6 fils per share or $0.025 per share for 9 months 2021. The earnings per share for 9 months 2020 was 4.8 fils per share or $0.016 per share. Now I will hand over the presentation to Mr. Anuj.

Thank you, Moustapha. Let us please move to Page 5. This covers Burgan Bank financial performance. We would like to direct you to Burgan Bank's 9 months 2021 earnings call transcript and presentation, which can be found on Burgan Bank's official website to get more details. The call was held on 8th November. In our presentation today, we'll be covering key highlights, as usual. The loan book remained stable at USD 14.4 billion as of September '21 compared to financial year 2020. Kuwait book has grown steadily by USD 220 million during the 9 months. And in addition, we also witnessed Algerian book growth by around USD 116 million. On the other hand, we saw a decline in Turkey loan book by around 13% on its stand-alone base amounting USD 326 million, mainly due to currency devaluation. This meant that overall consolidation loan book remained almost similar to beginning of the year in U.S. dollar terms. Deposits grew at a healthy rate of 6% as of September '21, or USD 846 million versus financial year-end 2020 to reach USD 42.4 billion as on 30th September, '21. The increase in deposit was driven by Kuwait, which grew by around 7%. That is USD 667 million, and Algeria by USD 260 million. As Bank of Baghdad has been classified as asset held for sale, its operations are not consolidated in the income statement for 9 months ending 30th September '21 compared to the corresponding period in 2020. If you see operating income for 9 months 2021, it was USD 552 million, higher by USD 7 million compared to 9 months 2020. This increase is attributable to higher noninterest income of $55 million, driven by higher fee and commission income and security gain. Net interest margin for 9 months 2021 decreased to 0.1% versus 2.3% in 9 months 2020, due to impact of interest rate cuts that were implemented in 2021 quarter 1 and volatility in Turkish economic markets. Provisions charge to income statement decreased to USD 156 million in 9 months 2021, as against USD 178 million in 9 months 2020, mainly driven by improved economic outlook. As a result of the above-mentioned key movements, Burgan Bank Group posted a net income of USD 134 million in 9 months '21 versus USD 108 million in 9 months 2020, which is an increase of around 24%. If you see nonperforming asset ratio, it adds up to 3.8% in quarter 3 '21 as against 3.5% as on December 2020. This was mainly due to higher NPAs in Kuwait and Algeria. The bank reported a CET1 ratio of 10.2% and a capital adequacy ratio of 16.3% for 30th September, '21. As you know, this is against a minimum required ratio of 8% and 11.5%, respectively, for CET1 and CAR. Moving to Page 6. The regional loan book declined by USD 209 million. The reduction in regional loan book was driven by currency depreciation in Turkey, as stated earlier, and this was slightly offset by growth in Algerian operations. Deposits increased by USD 178 million in 9 months 2021 as at financial year 2020 versus as FY -- financial year 2020, mainly contributed by Algeria. Overall, share of our regional loan book and customer deposit was 25% and 27% of total Burgan Bank consolidated loan book and customer deposits, respectively. The net profit from regional operations is higher in 9 months '21 by USD 3 million versus 9 months 2020. This is due to lower provisioning in Burgan Bank capital. We can now go to Page 7 of the presentation, which summarizes Gulf Insurance Group performance. In fact, as we speak today, Gulf Insurance Group has not released its results as yet. Hence, we have not included and we're not able to include 9 months 2021 results in our presentation. We expect them to continue their positive performance for 9 months 2021, which is in line with their first half '21 performance. I will now hand over to Moustapha to take you through United Gulf Holding's performance update.

Thank you, Anuj. United Gulf Holding released their results this morning reporting an improvement over last year's performance. Revenue for 9 months 2021 was $132 million, which increased by 29% from $102 million in 9 months 2021. This is largely on account of recovery and investment income, which had fallen sharply last year, owing to adverse market movements along with increase in share of results from associates to $27 million in 9 months 2021 from $9 million in 9 months 2020. Investment income increased from negative $2 million in 9 months 2020 to $26 million income in 9 months 2021. In line with improved market conditions, provision for credit losses decreased from $28 million during 9 months 2020 to $4 million in 9 months 2021. Overall, UGH net loss declined to $7 million in 9 months 2021, compared to a loss of $46 million in 9 months 2020. The decrease in loss is a combination of higher revenue and lower provisions. As we move to Slide 9, United Real Estate has just reported their results now. Hence, we have not included the 9 months 2021 results in our presentation. However, I'll give you a brief on their results announcement. They have reported -- URC reported an operating profit of $33.4 million in the 9 months 2021, compared to $15.4 million for the 9 months of 2020. That's a 117% increase. They have reported a net profit of $8.2 million in the 9 months of 2021, compared to $16.2 million loss in the 9 months of 2020. The positive results show a gradual recovery given the easiness of COVID measures in Kuwait and the region. Bottom line results showed an increase in rental -- were driven mainly by an increase in rental income, hospitality income and also other real estate income. I will now hand over to Anuj to cover the remaining pages.

Thank you. We are now on Page 10. This covers OSN. In line with its strategy to focus on streaming product segment, OSN is showing healthy growth with around 612,000 subscribers in this segment as of September 2021. OSN also continues to carry one of the best mix of exclusive Western and Arabic content portfolio in the region with movies and series from well-known quality brands, thematic and kids channel and increasing number of originals. Our 3 originals were launched in 2020, 5 have been launched so far in 2021, and the company plans to strengthen this proposition in coming years. OSN also strengthened its management team with addition of new experienced talent during last quarter, while it continued to progress on technological advancement of its distribution platform. As we have highlighted in the past, the focus remains on achieving best-in-class user interface, user experience and seamless integration with our business partners, supported by a strong data analytic engine behind it. Moving on to Slide 11. As Qurain Petrochemical Industries Company has March ending financial year, we have shown results for the 6-month period ended 30th September, 2021, where QPIC reported a net profit of USD 7 million during this period. This is compared to a profit of USD 9 million for the same period last year. The 8% year-on-year decrease in the net profit is primarily attributable to lower revenue of SADAFCO, its food and dairy subsidiary and lower share of income from its associated with Kuwait Aromatics Company, TKAC. If you see Jordan Kuwait Bank, it reported a steady operating performance, where net interest income remained largely stable in 9 months 2021 versus 9 months 2020, while both deposits and loan book showed similar levels as financial year-end 2020. Further, the bank reported a net profit of $6 million in 9 months 2021 as compared to a net loss of $5 million in 9 months, and this was due to -- 9 months 2020. And this was due to reduction in total provisions of USD 33 million in 9 months '21, and this was reduced from the USD 57 million in 9 months 2020. With this, we have reached the end of today's presentation deck. And we'll now hand over to Elena to invite our listeners today with any questions that they have.

Thank you very much, Anuj and Moustapha for the presentation. We'll open up the question-and-answers round. [Operator Instructions] We have our first question from Zafar Nazim.

I had a few questions. So I was wondering if you can an update us on what the cash balance is at the holding company level at the end of the third quarter?

Zafar, our cash balance as of 30th September is $477 million.

This does not include the rights offering that KIPCO has launched, right, that's going to close in the fourth quarter?

That will happen in Q4.

Burgan's equity offering as well as the investment in Gulf Insurance, are those already reflected in this number or that's also fourth quarter?

Can you repeat the question, please?

Yes, I was asking if the Burgan rights offering as well as the Gulf Insurance equity offering [indiscernible]. Is that already in the number or that's going to be in the fourth quarter?

Gulf Insurance rights has already been completed in Q3. So it is after those -- our share of investment in the Gulf rights issue. For Burgan Bank, the right issue offering would happen in Q4. So obviously, then it will come in December period.

And I also wanted to ask about, I don't know if you announced it or you complete a transaction after the quarter in that, that you show your shareholding in United Education Company. And it seems that you sold this at book value. Can you please tell me if United Education Company had any debt?

Zafar, this is a privately-held company. I mean, the transaction is of private nature. We are not able to share. This is the net entity below KIPCO level, we are not required to share for anything.

I guess the book value, you can still -- the read from your statements because you did disclose that this company, your shareholding in the company at book was valued at $23 million in 2016, and then you bought another, I think, 20% or so, for another $10 million. So it seems that, correct me if I'm wrong, but the book value for the shareholding should be around KWD 33 million for the 64%, because that's really what you reported as well.

So I'll refer to basically the reporting head, Moustapha. But the information that we are required to disclose is already there in financial statements.

Yes. Zafar, as you know, this is a subsequent event transaction that took place post-Q3. And we have limited disclosure about this because according to the compliance load, we disclosed what should be disclosed. And given the private aspect of that entity, we cannot disclose currently any additional information other than what was disclosed in the financial statement. And in Q4, the transaction will be reflected, and you will be having an answer, and we might give you more light about any clarification you might require.

[indiscernible] public information because you already have in your stock information give the book value and you stated in the disclosure that you sold the stake at the book value. So I just want to confirm whether that is a logical conclusion because you've given the values of -- the value of which you acquiring the stake is 2016 and the value, I think, you acquired an additional stake in 2017.

So the book value, I'm not able to hear you well. I didn't hear well the question. But what I'm saying, the book value is not disclosed in the financial statements of 2020 for UEC.

This is referring book value disclosed in 2016 because in 2016, this was still an associate for you. So you had...

Yes. Then it became a subsidiary. And yes, you have to add to that particular cost any particular share of income less than the dividend. And that particular -- those particular informations are lying within the subsidiary because it's not directly held by KIPCO.

And just one another question on this. When you sold -- this was sold to a related party, did you appoint an adviser? Did you have a bidding contest for the stake?

Well, the transaction took place at -- definitely, there were some fair valuation and transaction took place at fair value, and we disclosed that there was no gain or loss for the transaction, an independent fair valuation.

So this was a one-on-one transaction with the related party?

It has been done with an independent fair valuation.

We will take now a question from the chat from Sidi Shatku. Can we have some more detail on Burgan Bank's performance and if there's any change of the -- for the strategy of the bank.

Thank you. So if -- as I mentioned during the presentation, there are a lot more details available on Burgan Bank's website when they did their own investor call. If you have any specific questions on performance, I'm happy to answer that. On the direction as such. I mean if you see where the bank is today, basically, the focus remains on opportunities in Kuwait. If you hear the management and see where the transcript as well, the focus of over year, the focus has been to kind of be risk averse in countries such as Turkey because it is going through its own economic cycle and challenges. So we have been cautious in geographies beyond Kuwait. Algeria keeps surprising us. It has performed much better. The currency is not as volatile as it appeared to be initially, whereas Turkish lira everyone has seen, have depreciated further. As I mentioned earlier, Kuwait seems to be the focus area in the medium term. And the management is basically looking at growth opportunities, and that's why one of the reasons for boosting the capital structure. That remains the core strategy. I think we have alluded in the past that the digitization is something that is key and important aspect for any acceleration of any line item within P&L, be it on the revenue side or on the cost optimization. So those initiatives are going very well. We then have an annual budgeting process, which happens to be in the December, January period, typically. And when we come back to you for the full year earnings call, we should be able to provide you more guidance. As Burgan Bank itself, we do during its Annual General Meeting.

Thank you, Anuj. We'll take now a question from Alexandre Ayoub.

Okay. Great. I just wanted to follow up on some of Zafar's questions. We have -- like us as well as many of our partners we're bondholders into KIPCO, we would like to have a bit more color on what's happening at the holding level, please. And what's your strategy, especially as within a few quarters, one of the bond will become a short-term debt. So I understand now as of Q3, your cash on balance sheet is around -- at the holdco is around $477 million. Can you give us a feel about where do you expect this amount to be at, at the end of this year?

So Alex, for this call, which happens during the subscription period of our rights issue, we are avoiding any forward-looking estimates. Once the subscription period is over, when we get into the next earnings call and by the time, obviously, I think we'll get a better sense. But at this time, we are -- we'll leave it to you, the available information is there, to make your own judgment. There is a rights issue happening. We have given you in past the guidance for the year. All we can say is that we are broadly in the same guidance with regard to investment in our group companies. And then there is a transition that's coming up to increase basically the capital. So with these available information, we'll request you to make your own assessment. At this point of time, we will avoid any...

Okay. But then can we just clarify some of the assumptions? So okay, you had $477 million. How much do you think is likely to go into the Burgan right issue?

Again, this is forward look, we are not able to give any estimate at this stage. We have given you the full year guidance for the capital investment in our group companies. We can confirm that.

So everything is still in line with what you had indicated to us when you released your June numbers? It's like overall, the guidance remains. Is that fair?

Yes. We mentioned during the year $150 million to $200 million, we are within that range.

Sorry, the $150 million to $200 million, that's the capital infusion for Burgan, correct?

All the group companies, including Burgan.

I think that's where there was a confusion because there was a call where you had $150 million to -- $150 million for Burgan, and then you had another $100 million for OSN and others. So it was more like $250 million rather than $150 million for everything. So I wonder whether there is a confusion on that front from our side, and if you could clarify that would be very helpful.

So for all the group companies, our range has been $150 million to $200 million, and that is the case.

Okay. And the cash balance decreased about $100 million in Q3. What was mainly -- what was that related to mainly?

Rahul, do you want to provide the detail?

The major driver is the subscription to the Gulf Insurance group rights issue, which was completed in September 2021. That is one of the major chunk of the revenues versus the last quarter numbers.

Okay. Got it. And can you give us a feel about how you're thinking about refinancing for the bonds in 2023. Do you expect potentially another right issue? Or you're quite comfortable with your asset disposal strategy? Have you made some progress on your asset disposal strategy?

We are not able to disclose any development on these options. These are all viable options, and we are evaluating those and we'll be able to share [indiscernible].

Okay. And you're not able to share, is that because it's too early, you think or? Like you know, for bondholders, it's quite important to have some color. And when we hear the company saying, no, we cannot share information, it's hard for bondholders and investors to know what's really happening and what could be the scenarios.

So Alex, we are looking at all the options. We are in November '21. And you raised the concern that it will become short-term debt in 5 months from today, and we hope to provide much more clarity before you.

Okay. That would be very helpful. And sorry, last one before I hand it over to the other investors, around ratings. So the ratings took quite a hit. And it's still on negative outlook. Are you -- is that something which is still important for you and for management to stabilize the rating? If not, to hopefully have it at a higher level? Or at this stage, that's not a priority?

So it is basically driven by several financial factors as well as the business factors. Some of them we are working on. Some of them are basically slightly longer term. So pinpointing an exact timing where all the impacts will come into play altogether to make a change in the rating is difficult for us to predict at this stage. Whatever is in our control, we are trying to basically assess those options and taking up the right option in our assessment to basically improve those financial metrics. And these are exactly basically what you just alluded to in previous questions. So those become an important part. The second one is basically improving the operating performance of these companies, improving the overall business profile, which essentially means better and more returns from our underlying entities, Burgan Bank, OSN, Gulf Insurance Group and United Gulf Holding. So these are -- this is our bread and butter. I mean, this is what we do. That's the budgeting process that will be held in the coming 2 to 3 months. And there, we stress upon basically what is required to improve in terms of performance. So we are following a due process and then it's up to the rating agencies to take their call.

Got it. So just maybe last one on OSN. Any particular date on -- are you still looking for potentially selling a stake in OSN? What would be the time line? Or at this point, you're more focusing on bringing it to profitability and growing it organically before -- do you have any time line for potential sale or partner to come in and monetizing some of that stake? Or that's too early for now?

The focus has been to improve the operating performance, which is in our hand, I mentioned in the previous answer as well. We look at opportunities to basically take advantage of the market participants, competition in all our group entities, including OSN. So that is an ongoing process as and when any progress is made, which is something we are able to share with you, I will definitely make those.

We will take a question now from Rakesh Tripathi.

Yes, I'm sorry. I was speaking. I'm not sure why it wasn't coming through. So my -- most of the questions I had have been covered. I just wanted to clarify a little bit on the cash position again. I understand that you cannot share forward guidance at this stage. But just to get a sense, my understanding is that you should have around about $40-odd million in terms of your OpEx requirement and interest payments in the last quarter, about KWD 46 million for the Burgan rights issue considering that you maintain, assuming that you maintain the stake that you have right now. And then in terms of inflows, I'm looking at the rights issue that KIPCO is having, so $80 million. And the -- and on the stake sale in Al Ansar United Real Estate Company, I just wanted to confirm, has that process been completed? Or if not, when are we expecting the receipts from that stake sale exercise?

Rakesh, Rahul here on the other side. The good numbers that you have shared are correct. But as we said, we would not like to put in number on the forecast for the December period. But these are the 3 things, which one can -- people can figure it out from the public information. Coming to your second question on the sales of the United Al Ansar entity, so that already got completed in Q2. So -- and all the proceeds are already received in Q2 itself.

Okay. So broadly speaking, in terms of the inflows and outflows at the parent level, we are not looking at anything substantial that I would be missing here, right? These are mostly the things that I understand that would be the cash flows primarily for the parent in Q4.

Based on the current set of information, yes, these are the major inflows and outflows slightly.

We have a question in the chat from Vladimir David. How much have you injected into subsidiaries in the first 3 quarters of this year?

David, as my colleague, Anuj, shared, for the full year of 2021, our guidance was $150 million to $200 million. We will remain within that change. We are currently not providing the quarterly split of how much has gone into each of the subsidiaries. But you will have the information, the full year information available in the next quarter call.

Thank you, Rahul. We seem to have a follow-up question from Alexandre Ayoub.

That was an old question I had put in the chat. But thanks anyway for opening the line for me again. I just wanted to clarify what my previous colleague mentioned. So do you mind confirming the numbers again about the main outflows we should expect -- inflows and outflows we should expect in Q4? You confirm what he said, but I did not take note of it. If you could just mention it again.

Rahul, please repeat what you answered.

So what Rakesh shared was that there's close to $40 million interest in G&A he expects. Then he expects a rights issue of KWD 80 million, which is already in progress, and then he expects KWD 46 million outflow for Burgan Bank rights issue. So this is the number he shared using the public information that I said this is the public information. These numbers are the way he has said.

Got you. But I think the -- and did you mention that there are no other major outflows or inflows you expect?

We did not -- as I said, Alex, we are coming again to the same thing. We cannot provide the forward-look number or some estimate on the December position currently because of the ongoing rights issue, which is currently under progressing. So that has a restriction on -- for us to give any forward-look treatment.

Completely understand. And sorry, maybe a slightly different question, and please don't answer it if it's too much, is, how much would you expect to keep the minimum amount of cash in balance sheet? What would be the minimum amount of cash you are comfortable with keeping on balance sheet?

We are comfortable with keeping any amount of cash. That's the one way to think about it. It's very -- typically we have been kind of -- just on serious note, we have been maintaining for the short-term debt coverage. That has been our historical behavior, and we'll try to basically maintain that discipline.

Okay. But now you don't have short-term debt, but you have about over $800 million of debt coming due in 2023. So -- but -- so how should we think about it...

I answered that question, Alex. You asked me when it become short-term debt, we should have more clarity. We get your question. And we'll aim to basically get you more clarity on our liquidity boost considering those maturities as we get closer within that 12 months' time.

We do not have any further questions, so we can now conclude the call. I would like to hand over the call now to Anuj and Moustapha for any closing remarks. Thank you.

Thank you, Elena. We thank you, everyone. We once again apologize for the delayed start because of the technical issues. I see Moustapha also wants to say something. So hand over to you, Moustapha.

I just want to thank everyone. Thank you, Elena.

Thank you. Have a good day.

Thank you. Bye-bye. .