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

Good afternoon, everyone, and welcome to KIPCO's Q2 2022 Earnings Conference Call. This is Ahmed El-Shazly 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.

Thank you, Ahmed, and good afternoon, everyone. We welcome you to our earnings call for the 6 months ending June 30, 2022. Please note that today's presentation is also available on our website, along with the financial statements for the period. Page 2 of the presentation 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, achievements or results. I will now hand over to Sunny.

Thank you, Eman, and good afternoon, everyone. We will start with the key highlights of the second quarter of 2022 or the first half of 2022 on Page 3 of this presentation. We have reported a net profit of U.S. dollar equivalent, USD 18 million, for the first half of the year '22. In the following slide, we'll be providing you with further details on the key drivers of the performance, including the performance of our core operating companies. Another thing is on the transformational merger. KIPCO has progressed well. We have achieved a major milestones relating to the merger transaction. The Capital Markets Authority, or CMA of Kuwait, has approved the merger agreement. They have been -- including the swap ratios, and the fairness and the valuation opinions were also approved. Now CMA has 2.4 billion shares. The -- all numbers are the rounded numbers, to execute the merger. Now this actually would increase our authorized and paid-up capital by around 91% to $1.6 billion in the nominal terms, from about $860 million. So a very significant capital increase as far as the merger transaction is concerned. Another important milestone, what has happened, is the Competition Protection Agency in Kuwait. They have also approved the whole merger transaction, which, basically, there are concerns on all the economic concentration relating to the merger. And the Competition Authority, after going through and making all the deliberations, have come to a conclusion to approve this. So we are currently in the process of completing the regulatory steps for holding the Extra-Ordinary General Assembly of the KIPCO shareholders, so that the merger transaction and the share capital increase can be approved and taking the merger transaction to the next level. On the third subject, as far as the liquidity position of the companies concerned, towards the end of second quarter, we entered into a $375 million senior unsecured facility with a group of 6 regional and international banks. In fact, the facility got oversubscribed, and we scaled it back to our requirements of $375 million. This committed line, along with our cash balance at the parent co-level fully covers our next 12 months of debt maturities, which include also the [ 2023 months, in 2023, $500 million EMTN ]. And with the support of our increase in the capital base, consequent to the merger and the new pool of assets which comes, and also by securing the sufficient liquidity for our 12 months maturity, we have actually strengthened and diversified our funding profile. Now I'll hand over to Moustapha to provide further details on the financial performance of the group, including the core operating company's performance.

Thank you, Sunny, and good afternoon, everyone. Let us move to Slide 5, covering the consolidated financial performance of the group. H1 2022 revenue of $1.1 billion was 6.7% or $79 million less compared to the first half of 2021 revenue of $1.177 billion. Interest income from banking operations increased by $43 million or 9% recorded at $521 million compared to $478 million in the first half of 2021. Share of results from associates also increased by $21 million to $57 million in H1 2022, mainly driven by improved results of GIG and QPIC. The overall revenue decrease was largely due to lower investment income, which decreased from $155 million in the first half of 2021 to $48 million in the first half of 2022 due to adverse market performance, and also in H1 2021, it includes a onetime gain of $89 million on the derecognition of a subsidiary. Additionally, there was a decrease of $28 million in media and digital satellite network services income. On the other side, total expenses of the group during H1 2022 were also lower than H1 2021 by $9 million. There was a decrease of $34 million in media and digital satellite network services expenses and a decrease of $20 million in the hospitality and real estate expenses. These were offset by an increase in expenses across other expense line items. Below the operating line, provisions for credit losses and investments reduced to $38 million in H1 2022 compared to $184 million in H1 2021. The group recorded a net monetary loss of $36 million during the period due to the application of hyperinflationary accounting for its banking subsidiary in Turkey. For further details, please refer to Note 2.5 in KIPCO's interim condensed consolidated financial information for H1 2022. As a result of these key revenue and expenses line items, KIPCO reported a net profit of $18 million in H1 2022 compared to a profit of $10 million in H1 2021. This translates into an earnings per share of KD 0.08 per share or $0.26 per share for H1 2022 compared to earnings per share of KD 0.02 per share or $0.07 per share for H1 2021. We can now go to Page 7, which covers Burgan Bank Group's results. We would like to direct you to Burgan Bank's H1 2022 earnings call held on the 3rd of August 2022 for more details. In our presentation today, we will be covering key performance highlights of the bank. Loan book as of 30 June 2022 was $13.7 billion, recording a marginal decline of $281 million, i.e., minus 2% compared to December 2021. The decline was contributed by Turkey, negative $114 million or 6%, Kuwait, negative $91 million or 1%, and Algeria, negative $67 million or 5%. Deposits were stable at $13.6 billion as of 30 June 2022. Higher deposits in Kuwait by $228 million or 2% was partly offset by a decline in deposits related to Turkey operations by $89 million or 5%. The bank reported operating income for H1 2022 at $360 million, which is similar to H1 2021. Net interest income grew by 8% to $217 million in H1 2022 versus $201 million in H1 2021 driven by improvement in net interest margins by 10 basis points, to reach 2.1% in H1 2022 versus 2% in H1 2021, largely driven by lower cost of funds in the Kuwait franchise. Increase in net interest income was offset by lower investment income. Provisions charged to the income statement reduced significantly to $36 million in H1 2022 as against $127 million in H1 2021, reflecting the improving operating environment and stringent risk practices in subsidiaries. The bank applied IAS 29, which is the Financial Reporting in Hyperinflationary Economies for its Turkish operations in the first half of 2022, which resulted in recognition of net monetary loss of $36 million in its income statement. As a result of the above-mentioned key movements, Burgan Bank posted a net income of $89 million in H1 2022 versus $78 million in H1 2021, an increase of 13% on a year-on-year basis. Nonperforming loans percentage improved to 2.6% as of 30 June 2022 as against 4.5% on 30 June 2021. The bank reported CET1 ratio of 11.1% and CAR of 17.2% as of 30 June 2022, well above regulatory requirements. Page 8 highlights the performance of regional operations of the group. Regional loan book declined by $183 million or 5% in the first half of 2022. The reduction in regional loan book was mainly driven by cautious growth strategy in Turkey, Turkish lira depreciation and reduction in Algeria loan book. Deposits, on the other hand, decreased by $58 million or 2% in Q1 2022 versus as at the year-end of 2021, mainly contributed by Turkey. Overall, share of regional loan book and customer deposit was 23% and 27% of total Burgan Bank Group loan book and customer deposits, respectively. Net profit from regional operations was higher in the first half of 2022 by $26 million versus the first half of 2021, primarily due to lower provisioning in Burgan Bank Turkey. Overall, the outlook for our banking operations remains sound, with improving margins and improvement in cost of credit. 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 9 of the presentation, which summarizes Gulf Insurance Group's performance. Gulf Insurance Group, or GIG, posted significant growth in the first half ended on 30 June of 2022. The group reported gross premiums of USD 1,496 million in the first half of '22, which were about 81% higher than the gross premiums reported during the same period last year, which were at USD 825 million. The first half results also include impact of acquisition of AXA's Gulf operations in September 2021, in comparison to the first half of 2021 versus '22. The increase was driven by growth of both conventional as well as Takaful insurance premiums, with significant contribution from the newly acquired AXA business. On the bottom left chart, you can see that the combined ratio stands at 93%, in line with the corresponding period last year. The net investment income for H1 2022 increased by 62% to USD 47 million from USD 29 million last year. This was driven by increased investment book volume, which was driven partially by the AXA acquisition. GIG booked USD 19 million net monetary loss on account of hyperinflation adjustments in relation to Gulf Sigorta, its subsidiary in Turkey. Driven by all these factors, GIG reported a net profit of USD 49 million for H1 '22, a 28% growth over a profit of USD 38 million in H1 2021. Moving to Page 10. United Gulf Holding reported revenue for first half ended 30th June 2022, in line with H1 2021, at USD 92 million. There was a slight decrease of around 3% from the $95 million it reported in last year, same period. Now this is largely on account of reduced investment income, from USD 22 million in H1 2021, to USD 8 million in H1 2022 as the markets witnessed a negative impact on account of an unstable macroeconomic environment. However, there was an increase in share of results from associates to USD 22 million in H1 '22, from USD 19 million in H1 '21. Fee and commission income also grew by 17% during H1 '22 to $40 million from $34 million during the same period last year. Expenses during the period remained stable, with USD 84 million in H1 '22 compared to USD 85 million in H1 '21. Overall, United Gulf Holding reported a loss of USD 3 million during H1 '22 as compared to profit of $0.5 million during the same period last year. We can now move to Page 11 that shows United Real Estate or URC'S results. Operating profit for the company increased by 52% to USD 32 million in first half ending 30th June '22, from USD 21 million during the same period last year. URC also reported an increase in net profit during the period, to USD 21 million from USD 4 million during the first half last year. The improvement in operating performance resonates with the improving market conditions during the year, post the lifting of COVID-related restrictions. If you move to the next page, OSN continues to maintain its focus on enhancing the user experience on its digital platforms. This is further underpinned by keeping its position of a premium content provider in the region, offering a variety of channels and streaming content. The company has performed in line with its plans, particularly in managing the operational costs during the first half of 2022. Moving on to Page 13. As the QPIC had its financial year start on April 1, we have shown results for the 3 months period ended 30th June 2022, where QPIC reported a net profit of USD 21 million during the period compared to a profit of USD 5 million for the same period last year. The growth in net profit is primarily attributable to USD 8 million segmental profit from investments in the petrochemical sector versus a segmental loss in the same period last year and a higher share in income from SADAFCO, which is the food and dairy subsidiary. Let us please move to Page 14. In line with improving market conditions for the banking sector, Jordan Kuwait Bank reported better operating results. Loan book has increased to USD 2.5 billion as of June 2022 versus USD 2.4 billion as of December '21, while deposits increased by 10% to USD 3 billion during the same period. The operating income grew by 33% to USD 100 million in H1 '22 compared to USD 75 million during the same period last year. Further, the bank reported a net profit of USD 11 million in H1 '22 as compared to a net profit of USD 4 million in H1 '21. And this was due to higher operating income and lower provisions. We now hand over to the moderator to invite our listeners to raise any questions they may have.

[Operator Instructions] We have our first question from Rakesh Tripathi.

Can you talk a little bit about the cash levels at the end of Q2 at holdco level? And what were the key transactions that led to the changes during the quarter as well?

Thank you, Rakesh. So we have a reported cash as of June-end 2022 of equivalent to U.S. dollar, USD 364 million. As you can see, this is pretty much in line with what we have been kind of guiding towards, that we will be kind of maintaining sufficient liquidity, and that's what we have achieved. Due to basically the merger process, we are unable to disclose the full details of all the transactions. Anyways, it's a combination of the usual line items, interest expenses, G&A expenses and the cash flow from dividends typically.

Sure. That's understandable. The next thing was, you have mentioned about the regulatory approvals having come in for the merger. Can you just help us understand a little bit what else would really be pending, say, for the merger to go through at this stage? Or you see no further pending approvals, and this is just a matter of time when you tentatively see the merger getting completed.

So basically, we have received several approvals, as you rightly said. The Capital Markets Authority has approved the merger. The Competition Protection Agency has approved the transaction, the merger. We have also received approval from basically both the sites, that is KIPCO as well as QPIC. And the next step is basically setting up of Extra-Ordinary General Assembly meetings, which we expect to be held during the early part of September, say, week 1 of September. So that's the next step. And I think that that's the step, yes.

Right. So once the Extra-Ordinary General Meetings happen and the shareholder approvals are there in place, then you just have to go ahead and finish the merger exercise, right?

Yes.

Okay. That's perfect. Yes. I'm sorry. You were saying something?

No, I think it's fine. It just got completed by Anuj, There was a lag in the line.

We have another question from Zafar Nazim. Hello, Zafar? Okay, Zafar, I think there's a problem with your mic. If you can doublecheck that, and we'll get back. [Operator Instructions] We have a question from Dmitry Ivanov.

Hello, can you hear me?

Yes.

Yes.

I have like a quick question on this, credit facility, $375. Can you remind us of the maturity of this facility? And what is the availability of the facility, it's like available for 1 year? And after you draw down on the facility, what is the maturity, final repayment for this credit facility? And this is the first question. And the second one, and -- is it possible to elaborate on other liquidity sources, other kind of credit facilities you have which are undrawn at this stage, but you might also be available for any like liquidity kind of exercises going forward? So like 2 questions on the maturity and liability on the facility and any other facilities available for the holding level.

Thank you, Dmitry. Answering the first question, the facility was signed end of June with 18 months maturity. So it is until the end of 2023. And in terms of availability, it has -- if I recollect, it's for the 9 months from the signing...

31th March of...

31th March of 2023. So it -- as you can see, the restructuring has been done in a way to kind of fully cover the immediate [ like ] maturity and along with the cash balance we have sufficient. We do not -- obviously, we endeavor to always strengthen the overall funding profile, liquidity profile. At this stage, we believe it's adequate, and we keep looking at all our other options and keep ourselves ready to kind of utilize those options as and when needed.

Understood. So the facility can be used explicitly to repay any other outstanding facilities, like, for instance, this outstanding bond for 2023. So use of proceeds of this facility allows you to do it directly, right?

The use of the facility is basically linked to, basically, the maturity in 2023, that is March, in maturity.

I think we have a question from Zafar again. Can you please try again this time?

Yes, can you hear me?

Yes.

Okay. Great. Sorry about that. So I have a couple of questions. Just since you're talking about this facility, so the facility as, [ in a sense ], if you want to, you can draw it down tomorrow, right? Is there any condition that you have to satisfy? Are there any material adverse [ macro ] clauses that we should be aware of? But as since then, if you want to draw in the facility, [ $315 million ], you can try it tomorrow.

So Zafar, these are the typical [ standard ]. There is no onerous condition, that basically we have to make some kind of drawdown.

Okay. Got it. And I guess, the understanding that these lenders is that because it's a short-term facility, if you draw it down, you need to, I mean, to pay back very quickly, so that I'm assuming it would be that you will do some transaction to repay it. My question is, generally, the markets [ doing where we are ] and in KIPCO's financial condition, markets are not very reliable. I would think what this can be. Because [ as sure as the bond ], right, you've got the Kuwaiti dinar, local bonds, so if you add it all up, [ $315 million ], you can [ have some cash bond ] as well. So [ that could be as high as $1 billion result coming in ], so that will help. [ But if some do ] weaken the facility, what is the plan?

Zafar, what this facility does is that it does -- gives us 2 objectives. One is to ensure, irrespective of the market access and market conditions, the 2023 EMTN bond is fully covered, if the need arises to draw down on this facility, plus the available cash at the parent co-level. And then as Anuj mentioned, that in accordance with our funding strategies, we are working on various aspects of it to strengthen our liquidity position and take care of all the '23 maturities, both through the DCM as well as the loan capital market. So we are -- as we said, we are working on all of these. And as and when we have reached a situation where the transaction has been concluded, we will be making the public announcements of these, but definitely, on both the dimensions of EMTN as well as the Kuwaiti bond. And when it comes to the loan capital market, we are getting ready to ensure that we have multiple sources of funding available to take care of the maturities, which are in 2023 and beyond.

That's very helpful. And just a question on your cash flow and cash balance. You mentioned that your holdco cash balance is around $364 million. It's up actually $5 million during the quarter. And I guess, I can't quite reconcile it just on the basis of the regular cash flow because you've got -- I guess, you collected most of the dividend that you get during the quarter, except for Qurain. So that [ as soon as that ] dividend that you receive was [ with an interest that is going to be ] probably between $35 million and $40 million. And against that, you're settling a dividend payment of $42 million to your shareholders. Your interest expense is around $25 million. Your G&A is another $10 million. So the cash have gone down by like $40 million, but it's gone up. So I'm thinking where your -- you had some asset sales or you raised some more debt. But I don't see any additional debt at the holdco level. So I know you were [ accounting for any ] cash that you would have put in into OSN, so this is just a regular item. So I'm trying to figure out where is this delta coming from. And maybe your answer is asset sales. I mean I can't think of anything else. But I know that you can't go into detail, but can you generically try to answer this?

Yes. I think here, we have got to that answer, I think, Zafar. We do recognize a tactical portfolio portion in our overall asset profile, and that is always there with us as a Plan B or we call it Plan C. And that is what we monetized during quarter 2 to generate cash.

Okay. And these details, you would be able to review after the merger is completed in terms of disclosure on what exactly with guidance that you -- that moved around to generate cash?

I think the overall disclosure typically happens in various ways. I mean we report the composition of our assets on a regular basis. I think because of, as you rightly pointed out, because of the ongoing merger process, we are a bit restricted. I think we'll resume that once that is completed.

And OSN, can you comment on [ whether the ] amount you had to make in EBITDA going into the amount, any investment into OSN in the current quarter?

At this point of time, I'll not be able to because we are monitoring it very closely. We will have to see the management request on those on month-by-month or quarter-by-quarter basis. And then -- and because of, again, apologies for the ongoing process, we'll not be able to give any forward look.

All right. Now I was [ looking at ] the consolidated financial statement, and in the income statement, there's a line which [ stretched ] your income by different segments. [ And no doubt, it has media and digital satellite network services income and has a few just related towards them ]. And correct me, please correct me if I'm wrong. But this line has been declining consistently and declining in the current quarter year-over-year and quarter-over-quarter [ or both ]. So just, [ if you ] can confirm this is the OSN revenue line and secondly, see that it is still on a decline trajectory? Am I reading this correctly? Is there something else that I should be looking at?

So this is the line that includes media business, true. And if you see the -- it -- the OSN business, as you know, has consisted of 2 portions, which is the [ satellite/cable, we call it, legacy ] business as well as basically the new business, which is the streaming business. So yes, there is a movement on -- in the other direction in one of the segments, but that the new segment, we are seeing more subscribers coming in. The line segment also includes results of United Networks company, which is a satellite business. So that's why satellite is there. We should also kind of note that there is a corresponding expense line, which is improving much more than the decline in the revenue, which gives a good indication that we are kind of controlling the cash in that business. So that's where, on the OSN section, the brief update was the company has been performing as per the plan for the year, and this is the known plan. I mean we have to kind of move from the conventional mode of distribution, to the more towards a streaming mode of distribution, which takes time. But at the same time, the second focus is to align the cost according to the change in the segmental revenue profile. So there's a good news in that, that the cost optimization work that we had kind of targeted for ourselves for the year, the business, it has achieved that and more than achieved that until June of this year. So that's the latest update on OSN.

Got it. [ I would say ] I didn't notice that expense line has been cut quite a bit. But even after cutting it, if I look at -- [ I mean, that is the expense item ] we should look at, that the expense line is still higher than the revenue line, despite being [ cut off ]. Am I reading this correctly, that [ just on the basis of ] operating revenue and operating expenses, the business is still in the red? And I guess, you're not talking financial expenses.

The line is not good, Zafar. I couldn't get the question.

Sorry. Can you hear me now? Yes, so I was saying that the expense line has been reduced quite a bit. [ I do so that -- as I didn't see that ]. But even after the reduction in the expense line, your operating expenses associated with this segment are still higher than your revenue line. So it means -- it suggests that the business is still in the red. Is that -- am I reading correctly, that it's improving, but still loss-making as far as operating are concerned?

Yes, that's based on the numbers. Yes, that's true. In -- the plan is, as I mentioned, to move and enhance from basically the historical or the legacy segments of distribution to a new one. So there is a set plan. The management focused on basically enhancing the content profile based on the new segmental focus, and that has been pretty much achieved in the first half. So that's it.

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

Thank you, Ahmed, thank you, everyone, for being on the call. If you have any further questions, you're welcome to send us an e-mail, and we wish you a very good day. Thank you.

Thank you.

Thank you for joining, everyone. This ends our call today.