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

Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to KIPCO Q4 2021 Earnings Conference Call. It is a pleasure to have with us the following speakers from KIPCO, Mr. Moustapha Chami, Deputy Group CFO; Mr. Anuj Rohtagi, Group SVP, Financial Control; and Ms. Eman Al Awadhi, Group SVP, Corporate Communications and Investor Relations. I would like to hand over the call now to Ms. Eman. Please go ahead.

Thank you, Elena, and good afternoon, everyone. On behalf of the new management team at KIPCO, we welcome you to our earnings call for the full year ended December 31, 2021. Please note that today's presentation is also available on our website, along with the financial statements for the period. Please refer to Page 2 of the presentation, which reads a brief disclaimer. Some of the statements that we will be giving 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 will be made virtually or otherwise affect the future outcome. They are not a guarantee of future performance, achievement or results. On Page 3, please refer to the macroeconomic updates. The current Russian-Ukraine conflict is expected to slow global growth and great inflation primarily due to the destruction in Russian energy supply. The region is expected to experience a mix impact, while hydrocarbon-driven economies will benefit from rising prices, the impact of global inflation and the disruption of the food supply will be felt across all countries. And the challenge will be doubled for non-hydrocarbon countries where slower growth and rising inflation will likely have a negative impact on the GDP. This is evident to some extent in the year-to-date changes in the market data shown on this slide, which actually I am -- there we go. Okay. Additionally, as the business environment recovers from the impact of COVID, Kuwait shows positive signs of recovery with the majority of the population already vaccinated and GDP growth is expected to improve, supported by oil price levels. This is expected to be a key driver for 2022. I will now hand it over to Moustapha to provide you with KIPCO's recent updates and financial performance.

Thank you, Eman, and good afternoon, everyone. Let's move to Slide 5, which shows KIPCO's financial performance. Revenue was marginally lower than last year, representing a decrease of 2% in 2021 to reach $2.351 billion compared to $2.394 billion in 2020. The year-on-year decrease in revenue is mainly due to higher investment income booked in 2020 from the remeasurement of previously held equity interest in Panther Media Group Ltd. as highlighted during our previous quarter earnings calls. In addition, the group also recorded slightly lower interest income from our banking operation at $1.0013 billion in 2021 compared to $1.086 billion in 2020, and that's due to a reduction in interest rates. The decrease was offset by a $49 million increase in share of results from associates mainly driven by excellent results of GIG. Operating income before provisions for credit losses and investments increased to $410 million during 2021 compared to an income of $380 million during the same period last year. Provisions for credit losses and investments amounted to $347 million in 2021 compared to $369 million in 2020. We have reported a net profit of $24 million in 2021 compared to $4 million reported in 2020. This translates into an earnings per share of $0.07 per share or $0.02 per share for 2021. The loss per share for 2020 was $2.5 per share or $0.08 per share. Moving to Slide 6 of the presentation. As many of you may be aware, KIPCO has recently announced reaching a preliminary agreement to merge by amalgamation with Qurain Petrochemical Industries Company, QPIC. It would be a completely noncash transaction. The merger proposition combines the 2 companies to form a larger investment holding that would rank among the largest in the MENA region. Additionally, combined entity would benefit from a balanced and diversified portfolio of assets that includes petrochemical and oil services, banking, food staff, insurance and others, creating a more stable income stream. The merger is subject to a detailed process as per Kuwaiti laws and regulations. This includes due diligence, valuation of both entities and fairness opinion by licensed independent adviser, in addition to regulatory approvals and the approval of shareholders and the extraordinary general assembly. We will continue to provide you updates on the transaction as it progresses. We can now go to Slide #7 that covers Burgan Bank's. results. We would like to direct you all to Burgan Bank's 2021 earnings call transcript and presentation, which can be found on Burgan Bank's official website for more details. The investor call was held on 10th of February 2022. In our presentation today, we will be covering key performance highlights of the bank. Loan book slightly decreased in 2021 by $200 million and stood at $14.1 billion in comparison with the full year 2020. The decline in Turkey loan book by 18% or $442 million mainly due to currency devaluation, was offset by an increase in Algeria and Kuwait loan book by $70 million and $176 million, respectively. Deposits grew by 2% in 2021 or $233 million versus full year 2020 to reach $13.8 billion. The increase in deposit base was driven by Algeria, which increased by 13%, which is $203 million and in Kuwait by $111 million. We would like to, once again, remind you that Bank of Baghdad remained classified as asset held for sale as at 31 December, 2021. Operating income for 2021 was $767 million, higher by $73 million compared to 2020. This increase is attributable to higher noninterest income of $112 million, driven by higher fee and commission income and security gains. Net interest margin for 2021 decreased year-on-year to 2.1% versus 2.3% in 2020, mainly due to the impact of interest rate cuts that were implemented in Q1 2020 and interest rate volatility in Turkish economy. Provisions charge to income statement increased to $280 million in 2021 as against $255 million in 2020, mainly driven by Kuwait operations. As a result of the above-mentioned key movements, Burgan Bank posted a net income of $150 million in 2021 versus $111 million in 2020, an increase of around 35%. Nonperforming asset ratio decreased to 1.6% as of 31 December, 2021, as against 3.5% on December 2020, largely due to write-offs where the bank utilized excess provision buffers. The bank reported a CET1 ratio of 11.4% and CAR of 17.5% as on 31st December 2021. This is against the minimum required ratios of 8% and 11.5%, respectively. Moving on to Slide 8. The regional loan book declined by $371 million in 2021. The reduction in regional loan book was driven by currency depreciation in Turkey as stated earlier, slightly offset by growth in Algeria operations. Deposits increased by $121 million in 2021 versus -- for the year-end 2020 mainly contributed by Algeria, which has increased by $203 million. Overall, the share of our regional loan book and customer deposit was 24% and 28% of total Burgan loan book and customer deposits, respectively. Net profits from regional operations is higher in 2021 by $25 million versus the full year end 2020, primarily due to lower provisioning in Burgan Bank Turkey. In December 2021, Burgan Bank successfully completed its site issue, which was oversubscribed by 2.25x. This will lay the foundation for desired growth in Kuwait and increased investments in digitizing the bank's operation. Now I will hand over to Mr. Anuj to present GIG and other group companies 2021 performance.

Thank you, Moustapha. Good afternoon, everyone. We can now go to Slide 9 of the presentation, which summarizes Gulf Insurance Group's performance. Gulf Insurance Group continued its strong performance for the 12 months ended 31st December, 2021. In addition to its own performance stand-on basis, it completed the acquisition of AXA's operations in the Gulf region on 6 September, 2021, following which, AXA Gulf's results were consolidated within Gulf Insurance Group's financials. The group reported gross premiums of USD 1.8 billion in financial year 2021, registering a healthy growth of 23% over USD 1.5 billion reported last year. The increase was driven by positive contribution from all business lines, with notable increase in medical and motor business. On the bottom left chart, you can see that the combined ratio stands at 94%, in line with the corresponding period last year. If you look at the top right-hand side chart, net investment income for financial year 2021 increased by 89% to USD 80 million from USD 42 million last year. This was driven by improved returns on investment portfolio and increased investment book volume, which was supported by the acquisition of AXA's operations. On 6 September 2021, AXA Gulf had also acquired additional 18% equity interest in AXA Cooperative Insurance Company, a Saudi joint stock company, AXA KSA. Upon this acquisition of 18% stake and obtaining control, GIG, through AXA Gulf, has fair value in its previously held interest in AXA KSA, which resulted in a onetime remeasurement gain amounting to USD 85.5 million that has been recorded in the consolidated statement of income for the year 2021. As a result of underlying revenue growth, combination of acquired business of AXA Gulf and a onetime gain on remeasurement of AXA KSA stake, GIG reported a net profit of USD 166 million for financial year 2021, a 207% growth over a profit of USD 54 million in financial year 2020. Coming to Slide 10. United Gulf Holding reported an improvement over last year's performance. Revenue for financial year 2021 was USD 182 million, reflecting a 31% increase from USD 139 million in financial year 2020. This is largely on account of recovery in investment income as the markets improved post the negative impact of COVID pandemic in previous year. In addition, there was increase in share of results from associates to USD 26 million in financial year 2021 from USD 9 million in financial year 2020. Investment income increased from USD 2 million in financial year 2020 to USD 34 million in financial year 2021. In line with improved market conditions, provisions for credit losses declined from USD 42 million during financial year 2020 to USD 3 million in financial year 2021. Overall, UGH net loss declined to USD 8 million in financial year 2021 as compared to a loss of USD 70 million in financial year 2020. The decrease in loss is a combination of higher revenue and lower provisions. We can now move to Slide 11, that shows URC's results. Operating income for the company increased to USD 19 billion in 2021 from a loss of USD 11 million last year. URC also reported a reduction in net loss during the year to USD 16 million from USD 54 million in 2020. The improvement in operating performance resonates with our improving market conditions during the year post COVID restrictions. Recently, on 30 March, 2022, URC announced reaching our preliminary merger agreement between Al Dhiyafa Holding Company and United Towers Holding Company through a signed memorandum of understanding in which URC is the merging entity while both companies become the merged entities. The merger is expected to enhance URC's portfolio of income-generating assets, creates an added value and strengthens shareholders' base. Moving to Slide 12 on OSN. As part of OSN's efforts to capture the growth potential in the MENA regions subscriber video-on-demand market, it continued its efforts towards strengthening the streaming platform, led by the new team in place. OSN has recently rebranded its streaming product as OSN+. The rebranding is coupled with newer content and newer user interface of U.S. OSN+ attract target audience in the segment and retain its growing customer base. OSN+ is a home for both premium international entertainment as well as world-class Arabic original content. Recently, OSN extended its long-term exclusive partnership with HBO and strengthened NBCU relationship to include more premium content from Peacock and Sky Studios. New deals signed for premium series from Endeavor Content and All3Media. OSN is further strengthening the OSN originals proposition with launch of star-studded local adaptation of hit series Suits in quarter 2, which is OSN original film, which in addition to OSN original film Yellow Bus in quarter 4 and more series and moves lined up for the year. On technology front, it continues to improve user interface and user experience of its application with many new features added like seasons, episode navigation, improved recommendation engine, profile selection and management, including improved look and feel. Moving on to Slide 13. As QPIC has March ending financial year, we have shown results for the 9-month period ended 31st March, 2021, where QPIC reported a net profit of USD 17 million during the period compared to a profit of USD 25 million for the same period last year. This 34% decrease in the net profit is primarily attributable to lower share in income from SADAFCO, its food and dairy subsidiary, despite positive sales movement during third quarter 2021, and lower share of income from JTC, Jassim Transport & Stevedoring Company. Reduction in income from JTC was due to lower margins during the period under review, even though there was marginal improvement in sales revenue. The decrease was marginally offset by increase in profit from associates following consolidation of QPIC's new investment that is Advanced Technology Company from September 2021 onwards. Jordan Kuwait Bank reported a marginal improvement in operating performance, with 3% year-on-year growth in operating income in financial year 2021. The loan book grew by 8% to $2.4 billion, while the deposits increased by 3% to $2.7 billion as on 31 December, 2021. Further, the bank reported a net profit of USD 11 million in financial year 2021 as compared to a net loss of USD 6 million in financial year 2020 due to reduction in total provisions to USD 46 million in financial year 2021 from USD 76 million in financial year 2020. JKB reported a strong capital adequacy of 18.9% as on 31st December, 2021. With this, we have reached the end of today's presentation. We now hand over to Elena to invite our listeners to raise any questions they may have.

[Operator Instructions] We have a question from Zafar Nazim.

I have a couple of questions. One was, if you can just remind us or tell us what your cash balance was at the end of the year at the holding company level? And also if you can provide us a bridge regarding the cash at the end of 3Q because at the end 3Q, I believe you were at $477 million. So if you can tell me and there's been a few transactions in the fourth quarter, your rights offering, your investment in Burgan and so on from asset sales. If you can just give us a broader view of the cash flow bridge between 3Q culminating in the cash balance at the end of 4Q?

Thank you, Zafar -- there is a bit of echo. Yes, it's okay. Thank you. So we -- as I understand, you are looking for cash balance at the parent level. So as of 31st December, 2021, the reported cash balance was USD 409 million. Your second question is with regard to understanding the movement between September '21 balance of $477 million and $409 million. As you know, we had rights issue done in quarter 4, and that raised around $260 million. And in addition to that, we had provided you guidance with regard to investment in our subsidiaries. And when it came to quarter 4, we went ahead and utilized investments in our subsidiaries, particularly OSN and Burgan Bank. And the investment in Burgan Bank basically, as you know, has provided us good movement in the market price. So that has been a good investment. If you see the numbers, if you are looking for the high-level breakdown, the investments in OSN were around $90 million. Investment in Burgan Bank was around $120 million. There was a loan repayment of around $80 million. And then we had our regular interest and general and administrative expense of around $40 million. If you combine all these, you'll reach a number of around $410 million, which we mentioned.

Can you provide us some indication of what kind of investments are you thinking of in respect to the current year into OSN and any details on what -- where the money will go into?

So we are going to have our AGM in later part of this month. We would prefer to give any further guidance after that.

Got it. And then this URC transactions, so the merger with Al Dhiyafa and United Tower. Can you give us some details on what are -- what's going on, what are the assets involved in. What does the end of the -- given what's the benefit of going through this transaction?

Thank you, Zafar. So the assets -- the underlying assets on -- so there's 2 mergers over here. So URC announced also a plan to start discussing and also exploring the merger of United Towers as well as the Al Dhiyafa. Both of them have -- they have asset yielding components from commercial towers to hotels as well. The main objective of such transaction is mainly simplifying the structure by elimination of the underlying entities or the entities in between, reducing the redundant cost, also upstreaming the income and creating a new income stream. And that's the main -- those are the main objectives for such transaction.

[indiscernible] asking for KIPCO?

Can you just repeat your question.

Does this result in increasing the dividend inflow for KIPCO from URC.

Okay. Okay. Zafar, this transition definitely strengthens the capital structure of URC. As you know, URC is focusing on enhancing the operating performance of its operating properties as well as it is kind of strengthening its balance sheet at the same time. It has a significant amount of assets, which are nonoperating at this stage. So it will be kind of looking at the options how it can basically relook into those and monetize them in the coming period. That's the broad outlook of URC. So definitely, this transaction helps them to basically get to a right capital structure, which I think, in the medium to long term, should give them more visibility to give dividends to the shareholders.

Yes, about the forthcoming debt maturities in 2023, so we have roughly $830 million of debt falling due. Given your starting cash balance and I guess your estimated cash usage, it's fair to, I guess, say that by the end of the year, your cash balance would likely be less than $400 million? And we already told you that following next year, I was wondering if you can just walk us through what your plans are with respect to meeting those debt maturities?

So, Nazim, we always look at several options to cover our short-term debt. Now we are evaluating those options, and we are quite confident that as we get closer to those maturities they will be fully covered. So we'll not like to comment on any view with regard to year-end cash balance so early in the year. We do have several options, as I said. And I would not like to or we would not like to kind of pinpoint on one particular option as these are several options. And these include the tools that are always available with us. We see there are investments that we can always monetize because of the quality of assets that we have. Definitely, we have existing cash balance, and we have a very good track record of kind of reaching out in several markets, be it international market or Kuwaiti Dinar local markets. So we'll be exploring all these options, and we'll keep you further updated as we progress on these.

We will take now question from Rakesh Tripathi.

Hello. Am I audible?

Rakesh, Yes.

I guess one of the questions I had, I think you've reiterated this earlier that you would not prefer to share guidance on potential cash flows at the parent level as of now, right? So we should expect more clarity on that at the end of Q1, perhaps?

That's correct, Rakesh. So we would like to get the Annual General Meeting behind us and then take the guidance from the Shafafi Investor Forum that's a starting point of giving any new guidance for the year.

That's fair. That's fair. On the planned merger with QPIC, a couple of questions I had. One is, this is still at a very initial stage, but what are your expectations: one, regarding the potential time lines? I mean, what sort of timing do you see for this transaction? Do you see it in Q3, Q4 of this year? Or do you think it might extend longer than that? That's one. Secondly, in relation to the same announced merger, have you had any discussion with the credit rating agencies as to how they look at it? My understanding would be that this perhaps would be beneficial move as far as your credit profile is concerned, the increase of assets and, correct me if I'm wrong, but my understanding is that QPIC itself carries relatively small net debt. So the merger would not necessarily add significant -- add to the debt level at KIPCO, the surviving entity post the transaction. So assuming the transaction goes through, that should support your credit profile. But have you had any discussions with S&P or Moody's around this?

Okay. So, Rakesh, I'll start by the first question. So we are today in the first stage of that particular merger transaction, where there is -- where we've signed us and QPIC memorandum of understanding to start the merger process and the merger due diligence. So now the next step is having 2 valuations for both companies and fairness of opinion that would take us to define -- to determine the swap ratio along the merger contract to go to get the regulatory approvals. So regulatory approvals, regulatory approvals in terms of CMA, MOCI, also the Authority of the Competition -- the Competition Authority, so those are the major authorities to approve that merger. And then later on, we have to get the approvals of the stakeholders and maybe the shareholders through the AGM. So that's in principle the process. As you know, we will be updating you for each particular milestone. Today -- each milestone has an expected time line, but however, given the required approvals from the regulators, we would be happy to give you the guidance once we progress in this particular process. For the second -- or regarding the second question, as you know, we are in continue with talks with our rating agencies who have already published 2 press statements post the merger announcement. And they have mentioned exactly, as you said, that they have mentioned what could be the implication of such merger on the group -- on the combined entity. I would close over here. I don't know, Anuj, do you have anything else to add?

I think that's the best we can state as of now, Rakesh. Our job as a management team is to provide information to these agencies, and we leave it to them to make their view. With regard to transition itself, I mean it's going through a regulatory process, so we'll not comment on any further details.

Sure. That's understandable. Perhaps a couple of more things just, a little bit if you could talk about the financial performance at OSN? How is the entity doing amidst all the operational improvements that are happening? What are your expectations? And with this big transaction now taking place with QPIC at the parent level, would it be -- would it be right to think that perhaps any strategic investments by a partner that kind of -- that kind of a transaction would take a backseat for now? Or how do you look at this whole thing?

I mean, OSN, if you speak of what is the current focus, the focus is clearly on the streaming segment. So before we used to operate OSN as a combined business, now there is definitely a segregation of focus areas. And as we all know, streaming is the way consumers like to basically consume the content. So that has been identified under the new management team. And Nicholas Forward basically is heading that vertical. So that is a clear focus. The other segment, which is legacy segment, we still see a lot of traction in that business. But as we all know, it's a matter of time. And we still believe we have -- in medium term, we'll continue to have revenue from the legacy business, which is direct-to-home through satellites as well as through cable. So that market still remains for us. So we will continue to focus on that, too. At the same time, we can -- as I mentioned to you before, the contracts with the studios, they continue to see us as preferred partner to distribute their premier content through our platform. So that's the operational advantage of we being in the region for so many years, knowing our customer base and what content works in the region. So that's on the operational side. With regard to the strategic optionalities, I think the transaction that we have announced will not have any impact. The distribution and the overall media distribution industry has gone a lot of changes globally, and we see the region is trending towards that, too. So we will see -- continue to see several announcements across the industry, and OSN, we believe, is well positioned to take advantage of any kind of consolidation or strategic partnerships that will happen in this space. So we are keeping all our options open, and we continue to be engaged with the interested parties that have approached us or vice versa, and that process will continue.

Sure. That's very helpful. The last thing I had is on ESG a little bit if you could talk about where you are in terms of the ESG progress? And also in context of, say, your merger going through, how that could impact the overall ESG profile as well? And the overall strategy as well, keeping the merger aside as well, if you could talk about the progress, what's happening within the company in terms of ESG?

Eman, you want to answer?

Yes. ESG is something that we've very seriously started to look at. Our group companies have already taken certain steps to implement frameworks. Burgan Bank has just worked on their ESG financing or sustainable financing framework. Gulf Insurance have -- actually have their ESG framework in place, and they've appointed their committee and they started doing their work in that area. We ourselves are beginning our work in that area. We're a little bit behind, I must say, but we understand that these are -- the importance of this. And we're working very, very hard to make it happen. Yes.

So just -- thanks, Eman. Just to add to that, we are a holding company, and we are -- our ESG framework is driven a lot by our operating companies. Burgan Bank has taken a lead on that front, and they are a regular borrower in the market. So they have already come up with a sustainable financing framework, which is available on their website. Gulf Insurance Group is, again, relooking -- sorry, looking into this area, and they are targeting 2022 to complete their framework. I think similar steps will be taken all across the operating companies that will provide us a framework at the holding company. And that's what Eman was referring to.

I believe in that context, and this is just a suggestion from my end that with things happening at the operating company level, it would definitely be helpful if you could also start coming out with annual disclosures at the holding company level where if not framework right now, at least you could talk about the direction that's being taken, the progress that's happening at the operating companies, which gives a better sense to the investors as well as to what's going on and helps us track your progress as well periodically.

Yes.

It's a very good input, Rakesh. We will definitely take that into account. Thank you.

We have a few questions in the chat from [ Divya Pujani ]. I'll just go through those that have not been answered yet. There are questions about the holding company level financials. I think you mentioned before cash, but the question is also referring to short-term and long-term debt, LTV ratio as well as holding company level revenue and profits.

So with regard to the short-term and the long-term debt, I think I have already answered that we are looking at several options, and we'll be progressing those during the years. We are quite confident that by the end of -- much ahead of end of the year 2022, we'll have full coverage of the upcoming maturities. So that's our plan. Rahul, are you online? Because I don't have the LTV number. Are you available? Okay. Got it. So our LTV for year-end 2021 using -- and we are basically using methodologies by the rating agencies is around 52%.

Thank you. And another question from [ Divya Pujani ], do you have any strategy currently in progress to protect -- keep cost ratings?

So we are in continuous discussion with rating agencies. We refer you to their latest press releases that they have taken a view on the recent announcements at KIPCO. This is basically the strength of KIPCO Group that we have underlying assets that are quite strong, gives us ability to kind of optimize the balance sheet composition at the holdco level using these optionalities and that is evident from this transaction. We will, at this stage, because we are going through the transaction, we would like to not comment on the details, but we refer you to the 2 press releases done by the rating agencies.

Thank you. I think we have a follow-up question from Zafar Nazim.

I just have a question on OSN. So you mentioned that in the fourth quarter, you injected $19 million into OSN. That seems like a pretty big jump from the runway earlier in the year. I was just wondering if you can tell us what happened there? And also if I guess -- I know that you want to go for your Board meeting first. But just some direction if you can give us an idea of what -- how should we think about the investment that OSN [indiscernible]. I'm just wondering if one has to analyze that, it's a great item but I imagine...

So what I would add -- the line was really bad Zafar, what I understood from you is you wanted to understand the increase in the investment in OSN. Correct?

Just for 1 quarter and you say $19 million, that's a pretty large number, can't understand what's going on there.

So we have been -- add to this and then this is based on management input that we listened. So the management team has been having a continuous discussion with the suppliers. We are now obviously looking at the new segment, which is streaming and we wanted to strengthen our content portfolio for the future. And quarter 4 gave us an opportunity to kind of accelerate some of the content deals to align the content deals with the business transformation that we are going through. So this investment was aligned to that initiative.

We have no further questions at this time. So I will hand over the call to KIPCO's executive team for any concluding remarks.

On behalf of the team of KIPCO, I thank you for joining us, and have a good day. Thank you.

Thank you.

Thank you, everyone.

Thank you.