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

Mr. Sunny Bhatia, Group CFO; Mr. Moustapha Chami, Deputy Group CFO, and Ms. Eman Al Awadhi, Group Senior Vice President, Corporate Communications and IR. I will now hand the call over 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 first 6 months ended June 30, 2023. Please note that today's presentation is available on our website, along with interim financial statements for the period in review. Moving on to the presentation, please refer to the brief disclaimer on Slide 2. Some of the statements that we will be making today and information available in the presentation will 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. Those statements are not guarantees of future performance, achievements or results. I will now hand over the call to Sunny to take you through some of the highlights for the period.

Thank you, Eman, and good afternoon, everyone. As you know, in July, we successfully completed our debut Sukuk issuance under the KIPCO's USD 2 billion trust certification program. The issuance were KWD 103.1 million, equivalent to USD 335.8 million and had a 6-year tenor. The transaction makes KIPCO the first-ever Kuwaiti incorporated entity to issue a KD-denominated Sukuk. And the proceeds were used to make a USD 330 million partial prepayment of the USD 525 million syndicated facility, effectively extending the tenor of our 3-year facility to a 6-year [ BOB ] Sukuk. Moving on to the Slide 5 for details of the first 6 months of 2023. We are pleased to report that in H1 2023, KIPCO posted a net profit of USD 33.9 million, representing a net increase of 89% over the same period of 2022. This is primarily due to the positive overall performance across our foreign banking operations as well as our businesses in foodstuff, logistics and oilfield services. KIPCO achieved a revenue of USD 1.9 billion in H1 2023, an increase of 81% from USD 1.1 billion achieved for the same period last year. This net increase is mainly attributable to increased income from banking operations as well as an increase in revenue from industrial and logistics sector that was consolidated in Q4 2022 following the completion of merger with QPIC. Total assets of KIPCO at the consolidated level stood at USD 38.8 billion at the end of H1 2023, up 4% from USD 37.1 billion reported at the end of 2022. Now moving on to Slide 6. Interest income from banking operations increased 53% to reach USD 796.4 million compared to USD 520 million for the same period last year. Fee and commission income increased 34% year-on-year to reach USD 143.7 million. Meanwhile, income from media and digital satellite network witnessed a 6% decrease to USD 127.24 million compared to USD 135.3 million during the same period last year. While the hospitality and the real estate income increased, saw a small drop in income -- and there was a small drop of 1.5% year-on-year to USD 135.9 million. Post the merger with QPIC in November '22, the energy and industrial and logistics segments were consolidated, hence, the increase in revenue and expenses in these 2 sectors. With that being said, the total expenses increased to USD 1.8 billion in H1 2023 versus USD 951 million for the same period last year due to higher interest expense by USD 323 million and higher general and administrative expenses by USD 46.8 million as well as the increase in energy and industrial and logistics expenses by $394 million. Furthermore, the group's consolidated financial statement include the effects of hyperinflation in accordance with IAS 29 financial reporting in hyperinflationary economies stemming from our Turkish operations. As a result, the group reported a net monetary loss of USD 23.9 million in H1 2023 due to Burgan Bank operations in Turkey. For further details, please refer to Note 2.4 from the published interim financial statement. Provisions for credit losses on a consolidated basis reduced to USD 28.3 million in 2023 compared to USD 38 million. This was due to credit improvements and recoveries. I will now hand over to Mr. Moustapha Chami to provide details on the financial performance of the group companies.

Thank you, Mr. Sunny, and good afternoon, everyone. Moving on to Slide 8, where we cover key performance highlights of our banking operations. We start with Burgan Bank Group's results for H1 2023. I would like to note that Burgan Bank held its earnings call on August 2, and you can refer to the transcript for more details. Operating income during H1 2023 came to $351.7 million, slightly down from H1 2022. Net income dropped 34% to $59 million in H1 2023 versus $88.7 million during the same period of last year, driven by higher operating expenses and proactive provisioning. Burgan Bank's loan book dropped 4.3% from the end of 2022 to $13.2 billion in H1 2023, while deposits increased 10.2% to $14.1 million for the same period. The bank reported a strong liquidity coverage ratio of 188% and net stable funding ratio of 120% in comparison to 133% and 108%, respectively, reported during the same period of last year. Provisions charged to income statement significantly increased 66% year-on-year to $58.8 million in H1 2023 against $35.5 million in H1 2022 due to provisioning by the bank on certain exposures. The bank also recorded a net monetary loss of $23.9 million in H1 2023 compared to $36 million in H1 2022 due to the application of IAS 29 accounting standards for hyperinflation on the back of its operations in Turkey. Burgan Bank Group posted a net profit amounting to $59 million in H1 2023 versus $88.7 million during the same period of last year. NPL ratio significantly declined to 2% as of H1 2023 from 2.6% in H1 2022, mainly due to Burgan Bank Turkey NPL improvement. The bank reported a CET1 ratio of 11.5% and the CAR ratio of 17.8% as of H1 2023, well above regulatory requirements of 10.5% and 14%, respectively. We move on to Slide 9 to cover JKB's performance of -- for H1 2023. JKB reported a notable improvement in its operating results during the quarter. During the 6-month period, JKB's loan book grew by 11% to $3 billion in H1 2023 versus $2.7 billion at the end 2022. Deposits also increased by 29% to $4.4 billion compared to $3.4 billion at the end 2022. Total income grew in H1 2023 by 69% to reach $169.5 million versus $100.5 million in H1 2022. JKB's net profit for H1 2023 came to $51.3 million, 379% up from the $10.7 million reported during the same period last year. It is also worth highlighting that JKB completed the acquisition of a 77% equity stake in the UAE-based brokerage and investment management company, BHM Capital Financial Services, for which the bank has obtained the necessary regulatory approvals. Furthermore, in June, JKB issued perpetual Tier 1 capital bonds for $125.5 million, which is the first issuance of perpetual bonds on the Amman Stock Exchange. The bank reported a total capital adequacy ratio of 17.95% as at June 2023. On Slide 10, we can see the performance of SADAFCO. The foodstuff company reported a 7.6% increase in revenue for Q1 '23, '24 at USD 181.1 million compared to $168.3 million for the same period the previous year. Operating profit was up 16.7% for the quarter registering $28 million compared to $24 million for the corresponding period in the previous financial year. SADAFCO posted a 99% increase in net profit to $28.9 million compared to $14.5 million in Q1 '22, '23. It is worth -- worthy to note that SADAFCO signed an agreement to export and sell products in Oman as part of its regional expansion plans. United Gulf Holding, UGH, is featured on Slide 11. UGH incurred a loss of $25.7 million for H1 2023 compared to a net loss of $2.5 million in H1 2022. Total revenue was down 4% to $88.5 million in H1 '23 compared to $92.2 million for the same period last year despite the 91% increase year-on-year in interest income. This decline is mainly attributed to the inflationary pressures and rising interest rate environment. On Slide 12, we have the results of United Real Estate Company, URC. The company registered a visible improvement across key industries of the business, reporting an increase of 49.3% year-on-year in rental income and 23% in -- 23.7% year-on-year increase in hospitality partially offset by 17.3% year-on-year decline in the contracting and services revenue, resulting in a 5.8% increase in revenue for H1 2023 at $140.3 million compared to H1 2022. Operating income increased by 30.8% to reach $41.6 million versus $31.8 million during the same period last year. URC's net profit posted a decrease of 38.3% for H1 2023 at $13.2 million versus $21.4 million during the same period last year. It's also worth noting that in April, URC partially settled bonds issued in April 2018 worth $196 million. Moving on to Slide 13. Starting with our logistics and power rental business, Jassim Transport & Stevedoring, JTC. JTC reported a total revenue of $46.8 million for H1 2023, 10% higher than the $42.4 million reported for H1 2022. This increase is mainly attributed to our 24.3% year-on-year growth in revenue from port management services. Gross profits for the 6 months increased by 23.6% year-on-year to reach $15.2 million versus $12.3 million during the last -- the same period last year. As such, JTC registered a net profit for H1 2023 amounting to $9.4 million, 27% higher than the reported $7.4 million for the same period last year, and that was due to higher revenue and margins. Moving to National Petroleum Services Company, NAPESCO, our oilfield services provider. NAPESCO's revenue for H1 2023 increased 17% to reach $63.2 million versus $53.9 million during the same period last year. This was supported by the additional service contracts that were secured in the last 12 months on the back of the improved business environment and margins across both oilfield and non-oilfield segments. NAPESCO posted a net profit of $12.5 million for H1 2023 versus $9.7 million during the same period last year. Moving on to the health care sector with Advanced Technology Company, ATC. ATC Witnessed a 0.6% decrease in revenue to reach $264.4 million in H1 2023 as compared to $266.2 million in 2022. ATC achieved a net profit of $16.7 million in H1 2023 compared to $19.1 million for the same period of last year, representing a 13% net decrease. Finally, Slide 14 shows the recent business update on OSN. OSN continues to focus on growing its streaming business through the optimal use of technology, digital marketing and content diversification. In June, the dishless OSNtv box was launched, a plug-in box that users with or without a dish subscription can plug into. The new product reflects OSN's strategy towards streaming TV with a linear environment. In April, OSN signed an exclusive deal for first run content with NBCUniversal, including Sky Studios and Universal Studio Group. Additionally, OSN continues to improve its streaming products, consumer packages, pricing and expanding the distribution network through its network-wide partnerships. I will now hand over the call to Ahmed to invite our listeners to raise any questions they may have.

Thank you, gentlemen, for the presentation. We will now open the floor for Q&A. [Operator Instructions] We already have our first question from Ali Dhaloomal. Please go ahead.

I have 2 questions. The first one is about cash flows. I wanted to ask you about -- I mean, have you injected any cash into any of the subsidiaries in the second quarter? And also the BHM Capital acquisition that you -- JKB did, have you provided any funding for that? Or was it fully funded by JKB. And the second part of this question about cash flow, is about dividends. How much have you received basically from -- in total dividends in the second quarter between associates and subsidiaries? And do you expect a bit more to receive dividends in the second half.

Thank you. So I will start with the cash flow question. As you know, during the first half of 2023 -- and I will give you some color on the publicly available information given the prevailing government framework. So the first half 2023, KIPCO parent has received a dividend of around $90 million. And that's through Burgan, Gulf Insurance, SADAFCO interim dividend, NAPESCO, KARO, EQUATE Group, JTC -- EQUATE, also it was like the final dividend of the last -- of the 2022 year, JTC, ATC and UOP as well. So that's the total dividends. We are still expecting dividends maybe from SADAFCO and also EQUATE, but this is subject to their Board and AGM approvals. So the remaining dividends, we can still give a fair assumption that will be in line with what other -- we gave the indication in Q1, which would be around $120 million for the year. Now given the second part of your question, so as a holding company and as shared by the Group CEO on the company's vision, we will remain dedicated on bringing our current portfolio to the next level of growth and value creation while looking also for some new opportunities particularly in some sectors like the health care sectors and the education sector. As a result, we are working closely with our portfolio companies, management and their Board to strengthen their operating performance. And we are checking closely as well with them the areas of risk and opportunities and whatever investment is required for any growth potential, which would lead to a long-term value creation and making sure the companies are performing as planned. The overall governance framework is being enhanced and now there is much closer monitoring of those operations. We will not be able to share specific details about the injections because of the recent transactions and the overall governance framework. But it is in line with the plan, which was approved. And of course -- and this is all for -- to create value at that -- at the level of the companies. In terms of BHM Capital, it was fully funded by JKB. There was no capital increase raised. JKB, they have issued perpetual Tier 1 bond, which -- at their level in both dollars and Jordanian, totaling $125.5 million, and that was used for both acquisitions, the first acquisition of Bank of Baghdad that was completed earlier this year. And the second one is for BHM Capital and also using their own internal sources given that they have a good capital ratio as well.

Understood. If I may with 2 additional questions, I mean, understanding now that you have repaid $300 million of your syndicated loan facility, I mean, how much is still outstanding there? Because I remember it wasn't fully drawn, the 2 plus 1 facility. And is the plan to have it fully repaid by year-end? And finally, just the last question on your current LTV, if you can provide us the latest number, that would be great.

Yes. Thank you, Ali. In terms of the remaining balance of the syndicated facility, it is $95 million. And of course, our intention is always to replace the medium or short-term facilities with the long ones or with our own cash flow. So -- and we have the proceeds from the exit of GIG, which we had announced earlier in April this year, so we intend to prepay the remaining balance as well. Now coming to your second question on the LTV. The LTV by the Moody's methodology or more or less by the methodology followed by some major rating agencies, we are in the closer to an LTV of 45% range. And you know that in our investment portfolio, about 2/3 of our investments are actually listed investments. So it depends on the market values. But considering that the proceeds of GIG, we intend to exit from GIG, we intend to use to delever, we consider that as an LTV positive event, and we should see some improvement in our LTV compared to the current level going forward once we have completed the sale process and utilized the proceeds of the sale to delever.

We have a question from the chat, from [ Fahad Al Mishal ]. I'm not sure if this has been covered or not. Regarding the GIG acquisition by Fairfax, did you apply to the Competition Protection Agency to get the approval for the acquisition?

As far as the GIG acquisition, we are the seller and the acquiring party is Fairfax Financial Holdings. Their legal team has initiated to the -- all the required regulatory approval processes. And our current indication with our discussion with the acquirer and their legal and the deal execution team is that we remain -- we all remain hopeful and confident that this would get executed, as stated earlier, in Q4 of this year.

[Operator Instructions] Okay. We have a question from [ Dmitry ].

Can you hear me?

Yes.

I have my few kind of follow-up questions. First, on GIG proceeds, could you please remind us of the expectation around payment schedule? Because if I remember correctly, you expect to receive some payment by the closing of the date and like in 4 installments. And I think you mentioned that you planned just to sell these remaining proceeds and get some kind of cash inflows. So if it's possible just to shed some light on the expected amounts from the GIG proceeds. And second question, maybe just to clarify. You mentioned that expected dividends will be around $120 million for the year, if I got it correctly. And does it mean that like with your interest expenses of around $150 million, $160 million and G&A expenses, you will be like in net cash negative position for the year. Like excluding these GIG proceeds, just like this, to clarify that on this level you are net cash negative position with these this expected dividends for the year.

We would not like to make any forward-looking statements. As we have said that we remain committed to improve and strengthen our overall company's liquidity position. And as a holding company, we are subject to our key flows on the dividend income. My colleague is giving you an indication of that. And then the interest expense, as you would have looked at our capital structure, we aim to manage our capital structure in a manner that we are -- so we have an element of the fixed debt in our borrowing and also the floating. So of course, the floating gets impacted by the current market rate interest environment. But having said that, the GIG transaction is going to positively impact our overall cash position. And as we had disclosed in April, it would also result in a profit to the extent of depending on the number, finally, which we conclude at the final closing somewhere close to -- exact number, I think [ 7 ] we have given and -- something like USD 240 million. I was just waiting to convert the KD number to dollar for your convenience so USD 240 million to USD 250 million. I hope we gave you a color of our key events in terms of our cash flows and the ability of our company to continue to meet our cash obligations as and when they fall due.

This USD 240 million to USD 250 million expected inflow, the first like tranche and your expectation is just to use this money to reduce like the leverage, right, to prepay some of the debt. You mentioned syndicated loan and other debt and the capital structure, so will be like kind of mostly deleveraging use of proceeds from this tranche, just to confirm.

Correct. So use of proceeds is primarily for deleveraging, but also we -- as a holding company, we are always looking for investment opportunities to create shareholders' value. And as my colleague mentioned, we are looking at health care, education and in the food business. So if there are any opportunities, we would definitely look for making such investments to create the overall long-term shareholders' value. But at the same time, capital structure remains an area of focus for us, and we would be using to delever. So it's primarily deleveraging. But also, we are always open to look for new investment opportunities to create the long-term value, and some of the proceeds will actually get utilized for making such investments if the opportunities arises.

And may I please ask a final quick question on -- also a follow-up on LTV. You mentioned that your LTV calculations according to Moody's methodology is around 45%. And I guess it includes like both listed and unlisted investments, like your direct stakes in the companies. And is it possible just to kind of provide any color on how much OSN contributing to this 45%? Maybe to put it another way, what is LTV excluding OSN contributions?

Because the information on the OSN actually because it's a private company, and we specifically do not disclose the carrying value of one specific investment because it would not be in the interest of our various things, which we are doing in respect of OSN. For example, not only improving the operating performance of the company, not only making the product attractive to its customer, growing their customer base but also looking for the alliances and M&A opportunities to diversify the customer base and strengthen the cash flows of the company. So it won't be appropriate to specifically highlight the one specific value. But as we had disclosed in our earnings call, probably at the event that generally we have every year, we -- and move frequently when needed, we look at all the carrying values of our investments; and where needed, we've made the required impairments and, of course, the listed things are subject to the fair valuation based on the IFRS framework. So we have looked at the valuations of all our unlisted investments, including OSN. And where needed, the required impairments were made and would continue to be assessed on an -- at least on an annual basis in accordance with IFRS framework.

I believe we have no further questions at this point. So I'd like to hand over the call back to management for any concluding remarks.

Thank you, Ahmed, and thanks to everyone who joined us on this call. We look forward to having you again with us on our next earnings call. In the meantime, if there is anything we can help you with, please feel free to reach out to us. Have a good day. Thank you.