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

The 22 earnings conference call. This is Ahmad [indiscernible] from EFG Hermes, and it's a pleasure to have with us on the call today from KIPCO's management, Mr. Sunny Bhatia, Group CFO; Mr. Moustapha Chami, Deputy Group CFO; Mr. Anuj Rohtagi, Group Senior Vice President, Financial Control; and Ms. Eman Al Awadhi, Group Senior Vice President, Corporate Communications and IR. I'll now hand over the call to Ms. Eman to start with the presentation. Thank you.

Today's presentation is also available on our website, along with the financial statements for the period. I'm pleased to say that our new group CFO, Mr. Sunny Bhatia, who joined us last month is here with us, and we welcome him to this important quarterly forum. With over 30 years of experience that largely focused on financial services sector. Mr. Bhatia has held leadership positions in several leading organizations in the region. We look forward to having him with us as we continue our interactive IR journey. Moving on to the presentation, please refer to Page 2, 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 outcome. They are not a guarantee of future performance, achievement or results. Page 4 provides an overview of the operating environment in Kuwait, whereby all COVID-19 restrictions are now lifted, which should be positive for commercial activities. KIPCO's economy -- or sorry, Kuwait's economy is expected to grow during this post-pandemic phase, supported by healthy consumption rates, hike in oil prices and strong real estate activity. We believe that rising interest rates would not adversely impact operating and financial performance in the near term. It is positive for our banking entities. And S&P has indicated that this may result in improving -- improved ratings for Kuwaiti banks. Given the level of oil prices, Kuwait's state budget is expected to register a surplus this year. And if that happens, it will be the first since 2014. I will now hand over to Sunny.

Thank you, Eman, for a warm welcome, and good afternoon, everyone. Moving on to Page 5. During the annual Shafafiyah Investors Forum held on 25th of April, our CEO highlighted that 2021 was a year of recovery for our group companies post COVID. We are looking forward to 2022 as a year of transformation. On the guidance from our Board of Directors, the management team will work towards accomplishing the new vision for KIPCO, by formulating and executing strategies and plans that set a stage for a stronger business model. Upon completion of the proposed merger, the entity would benefit from a balanced and a diversified portfolio of assets that would include a bigger rate for petrochemical and oil services, banking, food stuff, insurance, others, and this would create more stable income streams. A larger scale of investment portfolio as well as the investment capabilities will bring typical advantages of schemes and synergies, meeting the new KIPCO ready to embark to a new and a more sustainable journey in 2023. On the liabilities management front, we continue to make good progress on exploring the most cost-efficient alternators for proactively refinancing the 2023 debt maturities. We have made significant progress. And in the subsequent calls, we would be providing you with greater details. On the financial performance, for the first quarter of 2022, we reported a net profit of USD 10 million compared to a loss of $28 million in the first quarter '21, which has actually come from the improvement in the overall performance of the various core operating group companies. I will now hand over to Moustapha to provide more details on the financial performance of the group.

Thank you, Sunny, and good afternoon, everyone. Let us move to Slide 7, which shows KIPCO's financial performance. Q1 2022 revenue was in line with Q1 2021 at $533 million. Interest income from our banking operations increased by 7% to $243 million compared to $228 million in Q1 2021. At the same time, share of results from associates also increased by $22 million to $41 million in Q1 2022 mainly driven by improved results of GIG and QPIC. This increase was offset by lower revenue from media and digital satellite network services and real estate operations as well as slightly lower investment income. Operating income before provisions for credit losses and investments increased to $80 million during Q1 2022 compared to an income of $47 million during the same period last year. This was mainly due to lower expenses in media and digital satellite service -- satellite network services and real estate. Provisions for credit losses and investments reduced to $49 million in Q1 2022 compared to $68 million in Q1 2021. Resultantly, KIPCO reported a net profit of $10 million in Q1 2022 compared to a loss of $28 million in Q1 2021. This translates into an earnings per share of [ $1.35 ] per share or $0.043 per share for Q1 2022 compared to a loss per share of $0.045 per share or 1.48% per share for Q1 2021. We can now go to Page 9, which covers Burgan Bank's results. We would like to direct you to Burgan Bank's Q1 2022 earnings presentation and call transcript, which can be found on Burgan Bank's website for more details. In our presentation today, we will be covering key performance highlights of the bank. Loan book increased in Q1 2022 by $152 million, i.e., 1% compared to December 2021, and stood at $14.2 billion. The increase in loan book was driven by higher loans in Kuwait by $345 million, circa 3%, which was offset by lower loans in Turkey by $125 million or 6%, and Algeria by $68 million, i.e., 5%. Deposits grew by 6% in Q1 2022 or $855 million versus for the year 2021 to reach $14.5 billion. The increase in deposit base was due to higher deposits required by $965 million or 10%, offset by lower deposit base in Algeria by $111 million. Operating income for Q1 2022 was 10% higher at $173 million compared to Q1 2021. This increase is attributable to higher net interest income, which was up by 22% or $19 million in Q1 2022. We Net interest margin improved by more than 30 basis points to reach 2.1% in Q1 2022 versus 1.7% in Q1 2021, largely driven by lower cost of funds. Provisions charged to income statement decreased by -- decreased to $46 million in Q1 2022 as against $67 million in Q1 2021, reflecting the improving operating environment. As a result of the above-mentioned key movements, Burgan Bank Group posted a net income of $40 million in Q1 2022 versus $17 million in Q1 2021, an increase of around 140%. Non-performing assets ratio increased to 2.3% as of 31st March 2022 as against 1.6% on December 2021, largely due to one significant NPL in Kuwait operations, which the management expects to normalize soon. The bank reported CET1 ratio of 11% and guide of 17% on -- as on 31st March 2022. This is against minimum required ratios of 9% and 12.5%, respectively, with gradual winding down of forbearance measures for capital requirements. Page 10 highlights performance of regional operations of the group. Regional loan book declined by $193 million in Q1 2022. The reduction in regional loan book was mainly driven by cautious growth strategy in Turkey and Turkish lira depreciation. Deposits decreased by $110 billion in Q1 2022 versus at the full year-end 2021 mainly contributed by Algeria. Overall, share of our regional loan book and customer deposits was 22% and 25% of total Burgan Bank loan book and customer deposits, respectively. Net profit from regional operations was higher in Q1 2022 by $30 billion versus Q1 2021, primarily due to lower provisioning in Burgan Bank Turkey. Now I will hand over to Anuj to present GIG and other group companies' performance.

Thank you, Moustapha, and good afternoon, everyone. We can now go to Page 11 of the presentation. which summarizes Gulf Insurance Group's performance. Gulf Insurance continued its strong performance during the first quarter ended 31st March '22. The group reported gross premium of USD 765 million in quarter 1 '22, which was almost double the gross premiums reported during the same quarter last year. That is USD 393 million. The increase was driven by positive contribution from all business lines with notable increase in medical and motor business. The quarter 1 also includes impact of acquisition of AXA's operations. That was done in September 2021 in comparison to the results of quarter 1 of 2021. On the bottom left chart, you can see that the combined ratio stands at 94%, in line with the corresponding period last year. The net investment income for quarter 1 2022 increased by 50% to $25 million from $16 million last year. This was driven by improved returns on investment portfolio and increased investment book volume, which was also driven partially by AXA acquisition. As a result of organic revenue growth, and as well as due to acquired business of AXA Gulf, GIG reported a net profit of USD 32 million for quarter 1 2022, a 79% growth over a profit of USD 18 million in quarter 1 2021. Coming to Page 12. United Gulf Holding has reported an improvement in its results over quarter 1 2021 performance. Revenue for first quarter ended 31st March 2022, was USD 56 million, reflecting a 57% increase from USD 36 million during the same period last year. This is largely on account of recovery in investment income as the markets continued to improve post the negative impact of COVID. In addition, there was an increase in share of results from associates to USD 16 million in quarter 1 2022 from USD 4 million in quarter 1 2021. Investment income increased from USD 8 million in quarter 1 '21 to USD 13 million in quarter 1 '22. Fee and commission income also grew by 34% during quarter 1 '22 to USD 18 million from $13 million during the same period last year. Overall, United Gulf Holdings reported a profit of USD 5 million during quarter 1 2022 as compared to a loss of USD 4 million during the same period last year. This was on the back of strong revenue growth. We can now move to Page 13 that shows URC results. Operating income for the company increased by 7% to USD 12 million in quarter ending 31st March 2022 from USD 11 million during the same period last year. URC also reported an increase in net income during the quarter to USD 5 million from USD 4 million during the first quarter last year. The improvement in operating performance resonates with the improving market conditions during the year, post COVID restrictions. Page 15 summarizes key updates regarding OSN's performance. During quarter 1 2022, the rebranding of OSN streaming product as OSN+ in mid-March was completed. OSN+ is the home for both premium international SV only content from major studios as well as world-class Arabic original content. The company has continuously focused to improve and deploy user interface and user experience supported by strong analytical capabilities for optimal customer enjoyment. OSN+ subscriber base continues to grow steadily. The company is further strengthening its origins proposition to illustrate Suits Arabia was launched during Ramadan, and received good reception. Movie Yellow Bus is in plan for launch during the year, along with many more series and movies in the pipeline. Moving on to Page 16. UPIC has its financial year-end as 31st March. It has not yet released audited results for financial year at 31st March 2022. Thus, we have not shown results for the 9 months period ended 31st December 2021. We have shown, in fact, in the presentation. On the 22nd March 2022, UPIC also announced its share of annual dividends of KWD 20 million from its investment in [ Greater Equate ]. This will be included in its results for year ended 31st March 2022. Let us please move to Page 17. In line with improving market conditions for the banking sector, Jordan Kuwait Bank reported better operating results, loan book was largely stable at USD 2.4 billion as of March 2022 versus December 2021, while deposits increased by 7% to USD 2.9 billion during the same period. Operating income grew by 7% to USD 39 million in quarter 1 2022 compared to USD 36 billion during the same quarter last year. Further, the bank reported a net profit of USD 1.9 million in quarter 1 '22 as compared to a net loss of USD 1.5 million in quarter 1 '21 due to higher operating income and lower provisions. I will now hand over to Eman to provide concluding remarks and a summary.

Thank you, Sunny, Moustapha and Anuj. As you can see on Page 18, the key takeaways from today's presentations are: firstly, we are witnessing an improved operating environment that should be positive for our operating businesses. We expect performance of our core companies to continue to register growth. Secondly, we remain focused on the implementation of the merger that will set the stage for the launch of a stronger and more sustainable business model. And thirdly, we see 2022 as the year of transformation. I will now hand over to Ahmad to advise our listeners to raise any questions they may have.

[Operator Instructions] We have our first question from Divya Pujari.

Yes. I had a couple of questions. First, could you talk about what are the plans on refinancing '23 maturities, given that it is now -- it's kind of less than a year now wherein those will get mature? So some color on that. And the second one was, if you could provide some color on holdco-level financial details specifically, I'm looking at what is your LTV ratio? And what were the dividends that you received from investment companies?

Thanks, Puja -- thanks, Divya, sorry. So we will answer the two questions one by one. The first one is as with regard to 2023, debt maturities -- Sunny covered this briefly during his portion. We do obviously have existing cash balance that we are maintaining, that's a liquidity for the ultimate plan to basically cover the repayment. In addition to that, we have also progressed very well on our other options. That will boost the liquidity during the remaining period. And much ahead of the time, we will be able to have fully covered the entire maturities. We will be sharing further updates on these as we come to the future earnings calls. We -- as you know, we always are planning ahead in terms of being prepared to basically look at the various demands in the market. So we'll be prepared to kind of -- and monitoring the market conditions closely and optimize our debt profile as for an initial demand in the market. So that is a broad answer as of now. We hope we'll be able to give you more precise answer in the coming quarters. But as of now, we are quite confident that we have progressed very well.

Sorry, just a follow-up. So when you say you have different options. So what I understand is you would be coming -- like you're primarily looking at refinancing it, rolling your debt over right? Or are you also considering some kind of asset monetization also as a potential option?

So we typically look at all options, Divya. We are -- we do not want to be kind of be hostage to one particular situation. Obviously, market conditions are not in our control. So we do not want to rely fully on that option, but that remains as one of the options as well. Correct.

Okay. And if you could provide -- if you could give some color on my second question as well.

Yes. Sure. So we had a reported cash balance of $359 million, gross debt of $2.2 billion. And basically, as you know, we have an ongoing merger evaluation process. So apart from the disclosed reviewed consolidated financial information as well as the cash and debt number that we have already shared at portable level, we are unable to disclose further information during this period. We'll obviously reassess our consolidated financial position related to disclosures once we have completed the merger evaluation process, and that reassessment will be done some time in quarter 4 2022. So you'll have to bear with us in the meantime because we are bound by the merger evaluation process as of now.

Okay. Sure. But just some color on the dividends that you received for this quarter, were they kind of -- would it be fair to assume that they were in line to previous year or previous quarter? Or do you see some kind of...

So typically, the dividend receives happened in quarter 2 of each year. So that will not be in quarter 1, which we are covering. And with [ regards to ] interest expense, you have seen the run rates in past, so you can make high-level assessment for those. And then there are normal ongoing activities of operating investment company. I mean the general will not help you at this stage, but I think there is the -- KIPCO's financials are pretty straightforward. If you look at the historical trend, we are maintaining pretty much the same trend. The specifics we'll not be able to share for the reasons I've already given you.

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

To be in with -- just to clarify, the $359 million cash balance and $2.2 billion gross debt. This is as at the end of March, right?

That's correct.

Great. Just a couple of questions from my side. One, if you could give us a broader view of any material -- any large investments planned into any of the operating companies for this year, the kind that we saw last year, something -- anything of that sort into OSN or any other group entities? And secondly, if you could talk a little bit about the strategic plans for OSN, what are -- how are things progressing? Where are we in terms of arriving at the EBITDA breakeven? And what are your plans with respect to the business? If you could talk a little bit about that.

Thank you, Rakesh. The -- given the ongoing merger evaluation process, we are not able to disclose anything else apart from reviewed consolidated financial information and the numbers that we have already shared. Once this process is completed, we'll definitely reassess our position based on the guidance that we have on the consolidated financial position of the group, and [ lately ] disclosure. So that process will be completed in quarter 4 2022. So -- KIPCO is an investment holding company. In a normal course of operations, we do make investments and the related divestments. So that process continues. Unfortunately, because of the current situation we are in, we are not able to disclose further.

Okay. Yes, that's fine. So can you talk a little bit about OSN's performance? Or that is also like something that cannot be discussed in greater detail as of now?

I mean we did cover. I mean the direction of the company is very clearly to focus on the streaming segment. As you may be aware, I mean, the media industry trend is more towards diversification of the supply chain, where original production is one of the key things, and that's where OSN is also focused. At the same time, it continues to benefit from its long-standing content relationships with the core suppliers internationally as well as in the region. So, so far, I mean, during the year, it has done as per the plan with regard to its targets in terms of enhancing the subscriber base on the streaming segment as well as looking at -- relooking at its cost structure, which is more aligned to the streaming segment rather than the legacy businesses such as direct to home and cable. So that process continues. The management is basically very much focused on customer experience, enhancing the applications features. So those are the key focus areas for us at the time. In terms of the strategic options, we have communicated in past that we are a key player in the market. And likewise, there are several potential partnerships that are always an option. We'll be open to those but nothing as of now that we can specifically pinpoint and discuss. So that's a stage of basically the state of play in terms of this industry. OSN is nicely positioned as we have always maintained because of its long-standing relationships, and it's understanding of partially the content position.

Great. In terms of financial performance, is it in line with what you have been budgeting? Are you seeing the progress in tandem with what's happening in terms of the market position?

Yes. We are very comfortable that the plan so far has been met for the year. So that's a good trend to see. And as I said before, the positioning of OSN continues to be very strong in the market, and we'll keep you updated as we progress through the...

We have another question from the chat. The first question is, can you share some color on QPIC merger? And at what stage is it currently and expected completion time line?

So the progress is as per the plan so far. The state we are in is the due diligence, and the evaluation process is moving forward. We expect the process to be completed later during the year. And as and when further milestones that we are able to disclose publicly, we'll do so. So that's a very brief update.

[Operator Instructions] We have another question from Dmitry Ivanov.

I hear you that you have some limitations in terms of the disclosure of forward-looking indicators. But I just try to understand, is it possible just to give us more color on this latest cash balance, like you mentioned 300 -- almost $660 million, and I think it was some decrease from the Q4 results. So if it's possible, just to give us kind of color what explained this decrease like is it G&A, interest expense and et cetera? So it's like my first question. And the second one if I understand correctly that at the holding co level, you attracted like a small loan for almost like USD 66 million. Is it like -- can you give us more color? Is it like a loan from commercial bank, is it like long-term secured loan or et cetera? Like whatever color you can give us would be very appreciated.

So we had a cash balance of around $410 million. We are around $360 million now. So there's a movement of around $50 million. We do have relationship banking. And time and time again we kind of draw those working capital related lines as part of our relationship. So that is one that you are referring to. These are typically long dated. So that's the answer. The use of cash for the quarter 1 is primarily basically into the normal course of activities of investment holding company, which is a combination of investments, servicing of basically the interest cost on its debt as well as G&A. Unfortunately, we'll not be able to give a breakdown of those, but we can confirm that these are the three line items led the cash balance.

So this interest cost, G&A expenses and some investments, right? So like if we talk about these three items, right?

Correct.

Understood. And the small loan was related to working capital facility, just is the course of your like normal activity.

It's -- yes, it's -- I mean it's a nomenclature where, as you know, we have cash balance. So it's more of a relationship-related bank loan, yes.

We have another question from the chat. Would you need to draw $50 million for working capital and pay interest on that when you have $359 million of cash on the balance sheet?

As we mentioned, this is relationship-driven at very attractive rates. I mean so as part of treasury activities, we do this.

[Operator Instructions] Okay. So we have no further questions at this point. So I'd like to hand over the call back to KIPCO's management for any concluding remarks.

Well, we thank you all for joining us on this call, and we look forward to talking to you again on the next one. Thank you very much, and good afternoon.

Thank you.

Thank you. Goodbye.

Thank you.

Thank you.