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

Good afternoon, everyone, and welcome to KIPCO's Q3 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 third quarter of the financial year. Please note that today's presentation is also available on our website and together 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 to start the presentation.

Thank you, Eman, and good afternoon, everyone. I will start with the key highlights on the Page 3 of the presentation. We have reported a net profit of USD 19 million for the 9 months ended 30th of September 2022. In the following slide, we'll provide you with further details on key drivers of the performance. On the merger front, we have received all regulatory shareholders and other stakeholders approval to go ahead with the execution, the timeline for corporate actions relating to capital increase and share swap to execute the merger, our 13th of November, which was the comp date and 14th of November, which was the ex date and all the required actions have been completed in respect of both these important milestones and 16th of November is the record date and 23rd of November is the swap date or the date or the payment date or the settlement date. And thereafter, there will be one ticker, i.e., KIPCO and the merger would stand completed. Moving on to the liquidity. In terms of the liquidity position, KIPCO continues to maintain $353 million of liquidity with the committed facility of about $375 million, which moving on to another important thing to us, which is the ESG to strive and enhance our ESG performance, KIPCO has published its first sustainability report. The report focuses on our key achievements in 2021 in relation to non-financial and sustainability aspects. Our target is to enhance the performance of the key KPIs in this regard and report on the progress on a periodic basis. I will now hand over to Mr. Moustapha Chami to provide further details on the financial performance of the group.

Thank you, Mr. Sunny, and good afternoon, everyone. Let us move to Slide 5, covering consolidated financial performance of the group. 9 months 2022 revenue of $1.64 billion was 7% or $122 million less compared to the 9 months of 2021 revenue of $1.76 billion. Amongst the key components of total revenue, interest income from banking operations increased by $117 million or 16%, recorded at $833 million compared to $716 million in 9 months 2021. The decrease in total revenue was largely due to lower investment income, which recorded a decline from $185 million in 9 months 2021 to $48 million in the 9 months of 2022, primarily owing to one-time gain of $88 million of the recognition of our subsidiary in 9 months 2021 and due to adverse market performance in 9 months 2022. Additionally, the revenue of the 9 months 2021 was positively impacted by the group's share of the one-off gain of USD 163 million, which is equivalent to USD 75 million from Gulf Insurance Group's acquisition of AXA in the third quarter of 2021. Lastly, there was a decrease of $39 million in [ NIVEA ] digital satellite network services income during 9 months 2022. On the other side, total expenses of the group during 9 months 2022 were stable and recorded a marginal increase of 1% or $21 million as compared to 9 months 2021. There was a decrease of $36 million in media and digital satellite network services expenses and a decrease of $25 million in hospitality and real estate expenses. However, there were -- these were offset by an increase of $79 million of interest expenses. Below the operating profit line, provision for credit losses and investments reduced to $39 million in 9 months 2022 compared to $203 million in 9 months 2021. The group recorded a net monetary loss of $54 million during the period due to application of hyperinflation accounting for its banking subsidiary operating in Turkey. Hyperinflation loss also impacted our insurance associate in Turkey, and that was reported through share of results of associates. For further details, please refer to Note 2.5 and KIPCO's interim condensed consolidated financial information for 9 months 2022. As a result of these key revenue and expense line items, KIPCO reported an up-profit of $19 million in 9 months 2022 compared to a net profit of $88 million in 9 months 2021, which included a one-off gain of $75 million. This translates into an earnings per share of $0.01 per share or $0.32 per share for 9 months 2022 compared to earnings per share of $0.13 per share of $0.042 per share for 9 months 2021. We can now go to Page 7, which covers Burgan Bank's results. We would like to direct you to Burgan Bank's Q3 2022 earnings call held on October 25, 2022, for more details. And our presentation today will be covering key performance highlights of the bank. Loan book as of September 2022 was $13.2 million, recording a decline of $566 million, i.e., minus 4% compared to December 2021. The decline was primarily contributed by Kuwait operations -- they were less by $438 million or 4%, where in loan reduction was a result of optimized optimization exercise. Deposits declined by 10% in 9 months 2022 or $1.3 billion versus the full year of 2021 to reach $12.1 billion, driven the bank strategy to optimize deposit growth in tandem with growth trends in the loan book. The contraction in deposit base was majorly driven by lower deposits in Kuwait by 11% or $1.1 billion and Turkey by 4% or $74 million. The bank reported a strong liquidity coverage ratio of 127% and that stable funding ratio of 110%. The bank reported operating income for the 9 months 2022 at $536 million, which is similar to 9 months 2021. Net interest income grew by 13% to $340 million in 9 months 2022 versus $301 million in the 9 months 2021, driven by improvement in net interest margins by 20 basis points to reach 2.3% in 9 months 2022 versus 2.1% in 9 months 2021. However, the growth in net interest income was offset by lower noninterest income, primarily due to lower security gains compared to 9 months 2021 given the movement in the capital markets across the globe. Provision charge to income statement reduced significantly to $43 million in 9 months 2022 as against $152 million in 9 months 2021 on account of improvement across Kuwait and international operations. As a result of the above key movements, Burgan Bank Group posted a net income of $133 million in 9 months 2022 versus $130 million in 9 months 2021, an increase of 2% on a year-on-year basis. Non-performing loan NPL ratio was higher at 2.6% as of September 30, 2022, as against 1.7% on December 31, 2021. The bank reported a CET1 ratio of 11% and car of 17.3% as of September 30, 2022, well above regulatory requirement. Page 8, highlight performance of regional operations of the group. -- regional loan book declined by $122 million or 4% in 9 months 2022. The reduction in the regional loan book was mainly driven by cautious growth strategy in Turkey and TRY depreciation -- devaluation. This was partly offset by growth in Nigeria loan book by $23 million or 2% in the 9 months 2022. Similarly, deposits decreased by $93 million or 3% in 9 months 2022 versus as at the full year end of 2021, mainly contributed by Turkey and Nigeria. Overall, share of regional loan book and customer deposits was 24% and 30% of total Burgan Bank loan book and customer deposits, respectively. Net profit from regional operations was higher than 9 months 2022 by $32 million versus 9 months 2021 due to better-operating results and lower provisioning in Burgan Bank Turkey. Overall outlook for our banking operations remains sound with improving margins and improvement in cost of credit. Now I will hand over to Mr. Anuj to present GIG and other group companies' performance.

Thank you, Mr. Chami, and good afternoon, everyone. We can now go to Page 9 of the presentation, which summarizes Gulf Insurance Group's performance. The group reported gross premiums of USD 2.1 billion in 9 months 2022, which were about 73% higher than the gross premiums reported during the same period last year, which were at USD 1.2 billion. The 9-month results also include impact of acquisition of AXA's operations, which was completed in September 2021. The increase was driven by growth of both conventional as well as Takaful insurance premiums with significant contribution from newly acquired AXA Gulf businesses. On the bottom left chart, you can see that the combined ratio has improved to 92% for 9 months 2022 from the 93% in 9 months 2021. And the net investment income for 9 months 2022 increased by 69% to USD 71 million from USD 42 million last year. The investment income increase was driven by higher volume, which was driven partially by AXA acquisition. The company booked USD 38 million net monetary loss on account of hyperinflation adjustments in relation to Gulf Sigorta, its subsidiary in Turkey. GIG reported a net profit of USD 75 million for 9 months 2022. During the 9 months 2021, GIG reported a net income of $219 million on a restated basis. During that period, it booked USD 163 million of one-time gains related to acquisition of AXA Gulf operations. Excluding this item, the normalized net profit of GIG grew by 34% in 9 months 2022 versus same period last year. Moving to Page 10. United Gulf Holding reported revenue of USD 124 million for 9 months ended 30th September 2022, reflecting a 6% decrease from USD 132 million during same period last year. This is largely on account of reduced investment income from USD 26 million in 9 months 2021 to USD 6 million in 9 months 2022 as the markets witnessed a negative impact on account of macroeconomic environment. However, the decline was partly offset by increased interest income that was by USD 7 million or 22% and an increase in share of results from associates by USD 4 million or 15%. Fee and commission income in 9 months 2022 remained stable at USD 52 million. Expenses during the period increased marginally by 4% to USD 127 million in 9 months 2022 compared to USD 122 million in 9 months 2021 primarily due to increased interest expenses. Overall, UGH reported a loss of USD 14 million during 9 months 2022 as compared to a loss of USD 7 million during the same period last year. We can now move to Page 11 that shows URC's results. Operating profit for the company increased by 33% to USD 43 million in the 9 months ending 30 September 2022 from USD 33 million during the same period last year. URC also reported an increase in net profit during the period to USD 26 million from USD 8 million in 9 months 2021. The improvement in operating performance resonates with improving market conditions during the year. post the lifting of oil-related restrictions. The growth in net profit was further supported by foreign exchange gains of USD 7 million versus loss of USD 1 million in 9 months 2021 and gain from sale of an associate, Kuwait Hotels Company, of USD 4 million in 9 months 2022. On to Page 12. OSN continues to maintain its focus on enhancing the user experience on its digital platform and bringing high-quality content to the region. House of driving pulled in record viewership OSN+ and became its largest release to date. The cities led to unsurpassed growth in users and trialists since the premiere. On the linear front too, audience reach grew by 50% on the channels. OSN continues to improve its streaming product, packaging and pricing with the new lower price packages launched in emerging markets to enhance customer reach. The company has performed broadly in line with its plans, including optimization of the operational costs during the 9 months of 2022. Moving on to Page 13. As QPIC has its financial year start on April 1, we have shown results for the 6 months period ended 30th September 2022. The QPIC reported a net profit of USD 51 million during the period compared to a profit of USD 11 million for the same period last year. The growth in net profit is primarily attributable to significantly increased profits and dividend income from its investments in petrochemical sector and higher share in income from SADAFCO, its food and dairy subsidiary. Page 14, driven by improving market conditions and the bank's growth strategy, JKB, Jordan Kuwait Bank, reported notable improvement in its operating results. The loan book grew by 10% to USD 2.6 billion as of September 2022 versus USD 2.4 million as of December 2021, while the deposits increased by 19% to USD 3.2 billion during the same period. Operating income grew by 32% to USD 145 million in 9 months 2022 compared to USD 110 million during the same period last year. Further, the bank reported a net profit of USD 16 million in 9 months 2022 as compared to a net profit of USD 6 million in 9 months 2021 due to higher operating income. We now hand over to Ahmed to invite our listeners to raise any questions they may have.

Thank you so much for the presentation. We will now open the floor for questions. [Operator Instructions]. We have a question from Zafar Nazim.

Hi, sorry, can you hear me?

Yes.

I had a couple of questions. One was on -- I know that you have this interim bridge facility in place, but you're also talking about converting this into a longer-term financing. Can you give us an update on how that's going along and what a facility should we expect on the size?

So we have disclosed a $375 million committed facility. In addition to that, Zafar, we keep looking at several options to enhance our liquidity and maturity profile, which is a work in progress that is something that the company does not disclose unless they have progressed significantly on any of these matters.

Got it. Okay. And then on OSN, if I look at the income statement details, it seems that the operating loss in OSN actually increased in the third quarter. So I was wondering if -- what's going on over there? When should we expect these -- like do you have a trajectory for when this business will be EBITDA neutral? And if you can give us some idea about what cash burn are you experiencing right now? And what should we expect for next year?

So Zafar will avoid giving any forward-looking statements. This is a function of the budget process that we go through, which we are currently in. At the same time, we believe that we are going as per the plan in OSN, as we provided before, there is a seasonality in these numbers. So it's hard to compare 1 quarter versus previous quarter. All we can say right now is that it has -- the cash infusions that have happened are continuously reducing on a period-to-period basis. And we believe that the plan we have is working well without going into further details of how we go into the future because of the private nature of investment.

Got it. And then last question I had was on your dividend policy going forward post the merger. Both yourself and Qurain pay a decent amount of dividend between the 2 of you, you paid something like $105 million in dividends. And with the merger in place, how should we think about dividend for next year or going forward in general? What's your policy at least in the near term?

So this is the dividend decision. We do not have a stated dividend policy, and the dividend issues are taken based on several factors, and it is too early to comment on those as of now. We'll be considering that as we get closer to that decision and it will be then up to the Board and the shareholders' representatives to take the final decision.

Again, if you'd like to ask a question, you can just click on the raise hand function and we'll unmute your microphone -- we have our next question from Rakesh Tripathi. Rakesh, can you hear us? I'm sorry, Rakesh, we can't hear we can't hear you. So if you have a question, maybe you can send it in the chart. Again, if anyone would like to ask a question, -- just click on the raise hand function Okay. We have the question from the question on the chat. Can you please share the holding company cash levels at the end of Q3 and any major cash spend during the quarter?

Thank you. So we had a reported cash balance of USD 353 million, which is broadly in line with basically our expectation and the quarter 2 balance. So I didn't get the second part. Was it a -- it is a previous quarter question or the going-forward question. Can you clarify? In any scenario, let me answer that. We are still going through the merger process. So we'll be not disclosing any further details of the financials. Hopefully, when we are complete in the next year, we'll be sharing more granularities. Thank you.

Thank you. We will pause for a moment to see if we have any more questions. Okay, so as we have no further questions at this point, I'd like to hand over the call back to KIPCO's management for any concluding remarks.

Thank you, Ahmed, and thank you, everyone, for joining us on this call. We look forward to talking to you again once we have our year-end results. Have a good day.

Thank you so much. This ends our call today. Thanks, everyone, for joining, and have a good day.