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

Good afternoon, everyone, and welcome to KIPCO's Full Year 2023 Earnings Conference Call. This is Ahmed El-Shazly from EFG Hermes. It is 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; and Ms. Eman Al Awadhi, Group Senior Vice President, Corporate Communications and IR. I will now hand the call over to Eman to start with the presentation. Thank you.

Thank you, Ahmed. Ramadan Mubarak, and good afternoon, everyone. We welcome you to our earnings call for the full year ended 31st of December 2023. Please note that today's presentation is also available on our website along with financial statements for the year. 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 the 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 take you through some of the highlights for the period.

Thank you, Eman. Ramadan Kareem, and good afternoon, everyone. As you know, 2023 has been an eventful year for KIPCO, where several key transactions of strategic significance were executed. These transactions have been reflected in the 2023 financial statements, in particular, the sale of our stake in Gulf Insurance Group, realizing a net profit for KIPCO Group of approximately USD 238 million. In addition to strengthening the financial performance of our key portfolio companies and developing strategic revenue and cost synergies among our portfolio investments, a key area of focus for us continues to be proactively managing and lengthening our debt maturity profile and maintaining adequate levels of liquidity. In third quarter 2023, KIPCO made a partial prepayment of USD 313 million of the USD 525 million syndicated facility. In early 2024, which is actually a Q1 2024 event, we fully repaid this facility by settling the remaining balance of USD 195 million. In November 2023, KIPCO had also repaid the remaining portion of its 5-year 2023 KD bond amounting to USD 92.5 million (sic) [ USD 92.9 million ] equivalent, thereby fully settling the 2023 bond. During fourth quarter '23, we announced the signing of a binding agreement to combine OSN's streaming business, OSN+, with Anghami, which we will talk about in detail later in the presentation. As part of our efforts to streamline our operations and unlock value, KIPCO's wholly owned subsidiary, Al Rawabi, purchased a 52% stake in Burgan Bank Turkey. Our oil services company, NAPESCO, bought KIPCO's 52.92% stake in United Oil Projects. Now moving on to Slide 6, where we cover KIPCO's consolidated financial performance for the year 2023. We are pleased to state -- to report that KIPCO posted a net profit of USD 97.9 million, representing a net increase of 19% over full year 2022. This is primarily due to the overall performance across our foreign banking operations as well as businesses in foodstuff, logistics and oilfield services. KIPCO posted a revenue of USD 4.2 billion in 2023, an increase of 24% compared to USD 3.4 billion reported at the end of -- reported for the full year of 2022. The net increase is mainly attributable to increased income from banking operations as well as increase in the revenue from industrial and logistics sector that was consolidated in fourth quarter of '22 following the completion of the merger with QPIC. Total assets of KIPCO at the consolidated level at 31st of December 2023 stood at USD 40.2 billion, which is 8% increase from USD 37.1 billion as of 31st of December 2022. Now moving on to Slide 7. Interest income from banking operations increased by 46% to reach USD 1.9 billion compared to USD 1.3 billion for the same period last year. Net fees and commission income also increased by 40% to reach $307.7 million. Meanwhile, income from our media and digital satellite network witnessed a 5% decrease to USD 256.6 million compared to USD 269.9 million for the year '22. Meanwhile, hospitality and real estate income saw a drop of 6% in '23 from $274.5 million. Post the merger with QPIC in November '22, the energy and the industrial and logistics segments were consolidated, hence the increase in revenue and expenses in these 2 sectors. So 2022, we have only a very small portion of the accounting period, whereas 2023 is the full year of 12 months. Total expenses increased to USD 3.7 billion in the year 2023 versus $2.4 billion due to higher interest expenses by about $550 million, primarily driven by increase in the interest rates and the higher general and administrative expenses by USD 47 million as well as increase in the energy and industrial and logistical expenses due to the consolidation of full 12 months in 2023 compared to only for a small period in 2022. Furthermore, the group's consolidated financial statement include the effects of hyperinflation in accordance with IAS 29, the financial reporting in hyperinflationary economies stemming from our Turkish operations. As a result, the group reported a net monetary loss of USD 105 million during the full year of 2023 due to Burgan Bank's operations in Turkey. For further details, please refer to notes 2.7 from the published consolidated financial statements. I now hand over to Mr. Moustapha Chami to provide details on the financial performance of the group.

Thank you, Mr. Sunny, and good afternoon, everyone. Let us move to Slide 9, where we cover key performance highlights of our banking operations. We start with Burgan Bank Group's results for the year 2023. I would like to note that Burgan Bank had its earnings call on February 20, and you can refer to the transcript for more details. Operating income for the year 2023 came to $723 million, down 2.7% from $743 million reported in the year 2022. Net income dropped 16.5% to $142 million versus $170 million for 2022, driven by high operating expenses and hyperinflationary-related monetary loss, along with proactive provisioning. Burgan Bank's loan book maintained its position at $13.8 billion, while deposits increased 14.1% to $14.6 billion for the year 2023. The bank reported a strong liquidity coverage ratio of 151% and a net stable funding ratio of 117% in comparison to 151% and 110%, respectively, reported at the end of 2022. Provisions coverage ratio remained strong at 220%, with a considerable reduction in annual provision charged to $16.3 million at the end of 2023 from $68.5 million, owing to improved performance in the bank's Turkey operations. NPL ratio significantly -- NPL ratio slightly increased to 2% at year-end 2023 from 1.9% the previous year. The bank reported a CET1 ratio of 13.5% and a CAR of 20% for the year 2023, well above regulatory requirements of 10.5% and 14%, respectively. We move on to Slide 10 to cover JKB's performance for the year 2023. JKB reported a notable improvement in its operating results. During the year, JKB's loan book grew by 4% to $2.8 billion versus $2.7 billion at the end of 2022. Deposits also increased by 53% to $5.2 billion compared to $3.4 billion at the end of 2022. Total income grew 102% to reach $397 million versus $196.9 million in 2022. JKB's net profit for the year 2023 came to $83.4 million, 216% up from the $26.4 million reported for the year 2022. It's also worth highlighting that in October, JKB successfully sold 66.97% of UAE-based BHM Capital Financial Services to Ethmar International Holding for JOD 30.6 million, equivalent to $43.2 million. JKB retained a 10% stake in BHM. JKB also announced that it has commenced the technical, financial and legal due diligence on a possible merger with the Jordan-based Bank Al Etihad. On Slide 11, we can see the performance of SADAFCO. The foodstuff company reported a 7% increase in revenue for 9 months '23-24 at $563.1 million compared to $528 million for the same period the previous year. Operating profit was up 21% for the period, registering $90.5 million compared to $74.6 million for the corresponding period in the previous financial year. SADAFCO posted a 50% increase in net profit to $87.4 million compared to $58.2 million in 9 months '22-23, primarily driven by increased sales and improved gross margin. SADAFCO's financial cash position remains strong with $273 million cash balance. The company has changed its fiscal year from March end to December end, and as such, has posted 9 months results at the end of 2023. It's worthy to note that the Makkah depot became operational during the quarter and that construction of the new depot, Yanbu Depot, has commenced. United Gulf Holding Company, UGH, is featured on Slide 12. UGH incurred a loss of $41.9 million in the year 2023 compared to a net loss of $21.3 million in the year 2022. Total revenue increased 1.7% to $189.8 million in 2023 compared to $186.7 million for the same period last year. On Slide 13, we have the results of United Real Estate, URC. The company registered visible improvement across key income streams of the business, reporting a 36% increase in rental and hospitality income, partially offset by a 20% decline in the contracting and services revenue, resulting in a 3% increase in revenue for 2023 at $285 million. Operating income increased by 244% to reach $82 million versus a loss of $57 million in 2022, mainly due to reversal of provisions for impairment and lower G&A expenses. URC's net profit posted an increase of 27% for the year 2023 at $14 million versus $11 million in 2022. Moving on to Slide 14 and starting with our logistics and power rental business. Jassim Transport & Stevedoring Company, JTC, reported a total revenue of $93.9 million for 2023, 5% higher than the $89.5 million reported for 2022. This increase is mainly attributed to a 15% growth in revenue for port management services. Gross profit for 2023 increased by 20% to reach $30.6 million versus $25.5 million for 2022. As such, JTC registered a net profit for 2023 amounting to $19.6 million, 37% higher than the reported $14.3 million last year, and that was due to higher revenues and margins. Moving to National Petroleum Services Company, NAPESCO, our oilfield services provider. NAPESCO's revenue for 2023 increased 6% to reach $129 million versus $121 million in 2022. This was reported 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 $28 million for 2023, 27% up from $22 million in the previous year. Moving on to the health sector -- healthcare sector with Advanced Technology Company. ATC witnessed a 2% increase in revenue to reach $550 million compared to $540 million in 2022. ATC achieved a net profit of $16.4 million in 2023 compared to $23 million last year, representing a 29% net decrease. Finally, Slide 15 shows the recent business update on OSN. OSN continues to work on closing the merger between Anghami and OSN+. The deal, subject to regulatory and antitrust approvals, will create a streamlined powerhouse in the MENA region with 120 million users, more than 2.5 million subscribers and $100 million in revenue at closing. The ultimate goal is to transform OSN into a media tech company with AI at its core. OSN continues to improve the dishless OSNtv box that was launched earlier in the year. This is 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. OSN continues to achieve cost optimization through obtaining long-term content contracts as well as operational day-to-day overheads. I will now hand over the call to Ahmed to invite our listeners to raise any questions they may have.

Thank you for the presentation. [Operator Instructions] We have our first question from Ali Dhaloomal.

Ramadan Kareem to you, Eman, Sunny and Moustapha. I have a couple of questions. The first one, maybe can you update us on the dividend income that you received in 2023? And how much do you expect this year to receive from your subsidiaries? Then my second question is about the maturities coming due. I think you addressed many of them, but how much is still left at the holdco level in 2024 and in 2025? And then my last question is just about the GIG sale. If I remember, you were guiding for $200 million to be received in fourth quarter and then to front load the installment of $165 million or so. So I was wondering if -- how much has been received so far in the fourth quarter? And how much do you expect to receive in 2024? That's it on my side.

Thank you, Ali, for your questions. Maybe I'll start with the dividend income projections. See, our companies are still in the process of declaring their results and holding their Annual General Meetings, so it won't be appropriate to say how much we will be receiving in 2024. And as such, we will not share our projections. But generally, you can see when Moustapha presented the performance of the individual companies, each of the 4 operating companies remains on the track to grow their profitability and grow their total shareholder return. And we expect that because of this part of the growth, they should continue to do well and we should see general improvements in the dividend income inflows to the company. Now as far as the debt maturity profile of the company and the GIG sale proceeds are concerned, when we look at the debt maturity profile at the end of 2023, on a standalone basis, we had the total debt equivalent -- total gross debt equivalent to $2.8 billion, which had bonds of $752 million and then EMTNs of about $1 billion, Sukuk of $333 million and bank loans of about $790 million. Now what we did is in the month of January, we fully settled our syndicated facility for the amount of $195 million. So if you view this settlement, then we end up with a debt of about -- gross debt of about $2.672 billion. So less than 1 year debt is $217 million equivalent in KD bonds. This is the bond which is due on 28th of December 2024 for a face value of KWD 66.5 million or about $217 million. Then we have our relationship banks loans equivalent of about $146 million, which are usually the revolvers and subject to the renewals. Then we have, in the 1 to 3-year bucket, the EMTN maturity of $500 million, which is due in 26th of October 2026, and again, some relationship driven bank loans of about $300 million. Our biggest actually, which is part of our strategy to extend the debt maturity profile, last portion of our debt actually is beyond 3 years. The KD bonds, KWD 165 million equivalent of $535 million, which are due in 28th of December 2028. Then EMTN, which is due in February of 2027. Sukuk, which is due in July of 2029. And some bank loans of about $125 million. So as far as our maturity ladder is concerned, you would see that the big maturity event -- the next big maturity event is actually the EMTN, which is in 2026 last quarter. Other than that, we are -- in terms of our less than 1 year debt, we are fully covered by the cash in hand or the receivables, which we had from the GIG sale proceeds. Now coming back to the GIG sale proceeds, as you may have tracked in our announcements made earlier, on the day of the closing, actually, we received the gross sale proceeds of $200 million less the GIG dividend income. So net-net, there was a gross receipt of $177 million for the group. 69% of that is parent loan and the remaining 31% is for the various subsidiaries of the group. So 69% of the cash flows are actually meant for the use by parent. And what we have done is we used these proceeds to do 2 things. Basically, settle the $195 million of the syndicated facility. As a result, now the $525 million syndicated facility stands fully settled. Then in the month of January, the 3 installments, which is the installment #2, installment #3 and installment #4 of $165 million each, we discounted them. And we received, as we have announced, around $427 million, less there would be some expenses which would accrue over the life of those 4 installments. So closer to $410 million, those will be the net proceeds at the group level, and 69% of these proceeds are for the parent company level. The usage of these proceeds are general corporate purposes. Part of it would cover, of course, the deleveraging strategy. And part of it would cover our general cash flow needs and also the needs for where we have the needs for investments into the various group entities. And as and when there are any decisions in terms of these -- how specifically these cash are being used, in accordance with our disclosure and transparency guidelines, we will be making the announcements on the Boursa Kuwait. I hope that answers your question. Thank you.

We've got a few questions from the Q&A box. So the first one is, are you able to provide the time line around the OSN merger? And what valuations are attached to OSN?

See, as we announced the OSN+, Anghami merger is driven by growing the scales and diversifying the business of the OSN beyond media and adding the music to it. So in the OSN, the biggest challenge this company has is the lesser number of the fee-paying customers. And the OSN+, Anghami deal, as we have publicly announced, is going to increase the number of the fee-paying subscribers and would also be resulting in stabilizing the performance of this company. And we are in the process of still seeking the regulatory approvals for this transaction, and our expectation is that sometime in H1, subject to receiving all the regulatory approvals and completing the various steps associated with such a merger, we will be bringing those 2 companies together. It has the revenue strategies because of the increased number of fee-paying subscribers, and it definitely has the cost synergies. And on top of that, it converts OSN into AI and a more diversified media platform, thereby reducing the potential for not only improving the revenues but also reducing the cost and thereby stabilizing its EBITDA.

Our next question is, could you give any color as to the carrying value of OSN on your books now? And any impairments you may have to take stemming from the pending Anghami deal?

Yes. In terms of the specific financials, because this is a privately held investment, we do not disclose specifically the carrying value of the investment. But generally, you can see from our financial statements and more specifically in the segment information, where we have the disclosure on what impairments we have taken for our media satellite services on note #28. And you can see here what level of impairments we have taken generally in the media and satellite services in 2023 and 2024 -- 2022. And when we look at the media and satellite services, the OSN actually constitutes a very significant dominant majority of this segment. So it's not a very specific answer, but I have guided you to the published audited financial statement, note #28, where the more specific details on the impairments are there. And it kind of gives you -- when you compare the total assets versus the level of impairment, it kind of gives you a fair understanding on how we have been -- probably have been complying with the required IFRS framework for assessing the impairment of this asset for each of the accounting periods.

We have a question from [ Nikita Mehrali ]. What was the dividend income received during 2023?

Sorry, could you repeat the question? The mic is not very clear.

Yes. What was the dividend income received during 2023?

USD 106 million.

Okay. And we have another question from [ Nikita ]. Would you look to issue Sukuk in the dollar market?

Actually, what you would have seen is that we have established a $2 billion Sukuk program under UKLA, and we had its first issuance of KWD 103.1 million equivalent in July. And in our capital structure, we believe that the Islamic financing is an attractive asset class for our investors in our credit instruments. So we have nothing specific planned as far as the issuance is concerned because if we had, we would make a regulatory announcement. But generally, because it's a $2 billion program, we are -- we would be looking to use this instrument as and when the need arises.

So we'll pause for a moment just to give a chance if there are any other questions. Okay. So I believe we have no further questions -- sorry. Okay. So we just received a question. What is the LTV ratio by your calculation as of the end of 2023?

Can you repeat please, Ahmed, the question?

What is the LTV ratio by your calculation as of the end of 2023?

Yes. Actually, we do not specifically disclose our LTV ratios. But generally, from the rating agencies, you would have seen the reports were published in both the Fitch as well as Moody's sometime in December. And they had indicated that our pro forma computation for the LTV would be slightly above 40% but less than 45%.

Okay. Another question from [ Nikita Mehrali ]. What was the average cost of debt during 2023? And are you focusing on repaying floating rate debt?

Actually, in terms of our fixed versus floating profile, you would have noticed that around 51%, 52% of our debt is now floating and around 49%. So in fact, fixed and floating now for the parent's standalone debt is half-half. And that means that in the event of the change in the interest rate environment post the stabilization of inflation, our debt profile is poised to benefit from the reduction in the interest rates. When you look at the bank debt from the -- which is primarily from the Kuwaiti banks, it reprices without any lag because as soon as Central Bank of Kuwait changes their rate of interest, the debt is repriced. In case of bonds and Sukuk from their interest payment date, which are usually 6 months, you can see the -- there will be some repricing lag of getting the advantage of any reduction in the U.S. dollar rates. In terms of the average cost of the debt, we haven't specifically disclosed the effective yield and the cost in our risk section. But generally, you would have noticed that whatever actions we have been doing have worked to reduce the cost of the debt. For example, our Sukuk issuance, which had a significant fixed tranche, was at the all-in-one pricing of 6.5%. And the expensive syndicated facility, which was a SOFR plus 375 basis points, we actually made sure that we repaid on an as-soon-as possible basis. And the total amount drawn down from under the $525 million facility, we actually settled literally in 1.5, almost 2 years ahead of its maturity. Actually, you can refer to the notes #13 and 14 of our financial statement, which has the specific information about all our debts at the period from [indiscernible].

We have another question from Ceki Aluf Medina. I see KWD 114 million loss in the media business and KWD 38 million is due to a provision. Does this mean the rest is mostly cash? And can you comment on any cash necessity this raises on the parent company?

Actually, as we said that on the -- because of the private nature of this investment, we do not specifically discuss and disclose the components. But as you can see from the note on the segment information, there is some information on the repayment, and there is some information on the total results, total segment revenues and the total loss for the year. But as you may be aware that any segment information would have some intergroup pricing, which gets eliminated through the intersegmental eliminations. So therefore, although it will be a starting point to look at what is the cash loss by looking at the segment profit or loss with the impairment, but there is some element of the intersegment. So the -- but what we can see is that when you compare 2023 with 2022, even the reported loss has halved. So as a result of the 3 things which we are doing in this line of business, the cash losses have been literally significantly reducing on each accounting year.

Another question from [ Nikita ]. Other than the $50 million that you plan to inject during the OSN merger, are there any other operating costs that need cash injection?

I think we have discussed OSN in all its possible details by guiding you to the -- specifically to the top-down strategy, how we are working towards stabilizing this business, what is the rationale of OSN+ and Anghami merger, the high-level qualitative information on the revenue and the cost synergies. And we have also guided you to the direction, and the direction is to the reduction in the losses. So therefore, we may not like to specifically disclose that apart from the $50 million investment in Anghami would there be any other cash injection into the business. But in general, as we said earlier, any cash injection into the business is reducing significantly as a result of our significant efforts to stabilize the business, reduce its operating costs, try whatever possible synergies exist through the M&A route and grow its revenue and subscriber base.

Another question from Jad Rayes. Any upcoming plans to support Burgan Bank other than the acquired stake in Turkey?

I mean as you would have seen from Burgan Bank's early release and their audited financial statement, their CET1 has now improved from 10.5% to 13.5%. And yes, as against the minimum regulatory requirement of 10.5%, now their CET1 stands at 13.5%, which means that they have sufficient headroom to grow their core areas of focus. And as you would have seen in the earnings investor's call they had, Kuwait and the rest of the GCC remains an area of focus. So they have now sufficient capital headroom related to the regulatory minimum capital requirement. And the bank seems adequately capitalized.

Our next question comes from [ Adige ]. Can you please give us a clue on what is the amount of administrative and interest expenses on a standalone basis that we can expect in 2024? And do you expect that dividends will cover these expenses?

So we're expecting a number of -- $20 million to $25 million of G&A expenses.

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

Thank you, Ahmed, and thank you to everybody who joined us today. We look forward to meeting with you again in our first quarter earnings call. And we wish you a pleasant evening. Thank you.

Thank you so much. Ramadan Kareem and [indiscernible].

Thank you. Thanks for everyone for joining, and this ends our call today. Have a good day, everyone.