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

Good afternoon, everyone, and welcome to KIPCO's 2Q '24 Earnings Conference Call. This is Omnia Kadry from EFG Hermes, and it's a pleasure to have with us on the call today, KIPCO's management team; and Mr. Sunny Bhatia, Group CFO; Mr. Moustapha Chami, Deputy Group CFO; and Ms. Eman Al Awadhi, Group SVP, Corporate Communications and IR. I will now hand the call over to Eman to start with the presentation. Eman, please go ahead.

All right. Thank you, Omnia, and good afternoon, everyone. We welcome you to our earnings call for the first 6 months ended June 30, 2024. Please note that today's presentation is also available on our website along with financial statements for the period. 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 can be forward-looking. Such statements are based on KIPCO's current expectations, predictions and estimates and are subject to risks and uncertainties, which may adversely or otherwise affect the future outcome. They are not a guarantee of future performance, achievement or results. I will now hand over to Mr. Sunny to take us through some of the highlights for the period.

Thank you, Eman, and good afternoon, everyone. We are pleased to report that during H1 2024, KIPCO reported a net profit of USD 36.4 million, representing a net increase of 8% over H1 2023. This is primarily due to the enhanced performance of our banking operations as well as businesses in foodstuff, logistics, energy and oilfield services sectors. KIPCO posted a total revenue of USD 2.4 billion in H1 2024, which represents an increase of 22% compared to USD 1.9 billion reported in H1 2023. KIPCO's total assets at the consolidated level stood at USD 40.8 billion at the end of H1 2024, which is a 1.6% increase from the USD 40.2 billion reported at the end of 2023. Now on to Slide 5. Interest income from banking operations increased by 46% in the first half of 2024 to reach USD 1.2 billion compared to USD 797.5 million for the same period last year. Net fees and commission income increased by 30% to reach USD 186.9 million. Meanwhile, income from media and digital satellite income witnessed a 10% decrease to USD 114.3 million compared to USD 127.4 million for H1 2023, while hospitality and real estate income saw a drop of 11% in H1 2024 to USD 121.4 million. Income from energy sector saw a 3.6% drop to USD 65.5 million, while the industrial and logistics sector registered a 4.5% increase in income to USD 461.8 million. Total expenses, which include the interest expense as well, increased to USD 2.1 billion in H1 2024 versus USD 1.8 billion for the corresponding period in 2023, primarily due to an increase in interest expense by USD 303.1 million and in general and administrative expenses by USD 41.7 million. So on the interest expense, there is an increase of $303 million, whereas the interest income side, there is an increase of $366 million. So overall, the NIM has expanded by $63 million in the first half of 2024. Furthermore, the group's interim condensed consolidated financial information 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 recorded a net monetary loss of USD 41.4 million during H1 2024, which is compared to $23.9 million in H1 2023. This is due to Burgan Bank operations in Turkey. For further details, please refer to Note 2.4 of the published interim condensed consolidated financial information. I will now hand over to Moustapha to provide details on the financial performance of the group.

Thank you, Sunny, and good afternoon, everyone. Let's move to Slide 7 where we cover key performance highlights of our banking operations. We start with Burgan Bank Group's results for H1 2024. I would like to note that Burgan Bank had their earnings call on August 1, and you can refer to the transcript for more details. Net operating income for H1 2024 came to $360.6 million, up 19% from the $302.4 million reported in H1 2023. Net income increased 17% to $69.3 million versus $59.1 million for H1 2023. Burgan Bank's loan book went up 4.9% to $14.5 billion, while deposits increased 3.8% to $15.1 billion in H1 2024 when compared to year-end 2023. The bank reported a strong liquidity coverage ratio of 170% and a net stable funding ratio of 113%, above the regulatory requirements of 100% for both metrics. Provision coverage ratio remained strong at 174%, while the NPL ratio slightly increased to 2.5% for the period compared to 2% for H1 2023. The bank reported a CET1 ratio of 13% and CAR of 19.3% for H1 2024, well above regulatory requirements of 10.5% and 14%, respectively. In May, Burgan Bank issued KWD 150 million, equivalent to $488 million perpetual Tier 1 capital bonds in accordance with Basel III regulations. The proceeds will enforce the additional Tier 1 AT1 capital for the purpose of supporting the bank's capital adequacy ratio under the Basel III framework and for general corporate purpose. Burgan Bank redeemed in July its outstanding $500 million perpetual Tier 1 capital securities issued in July '19. In June 2024, the Central Bank of Kuwait granted approval to Burgan Bank to communicate with the regulatory authorities in Bahrain with the intent of obtaining the necessary approvals to acquire 100% of the Bahrain-based United Gulf Bank. The execution of the acquisition is conditional to the completion of the necessary studies and obtaining final approvals from relevant regulatory bodies in both Kuwait and Bahrain. We move on to Slide 8 to cover JKB's performance for H1 2024. JKB's net profit for the first 6 months of 2024 came to $72.2 million, 41% from the $51.3 million reported for H1 2023. Total income grew 54% to reach $261.4 million versus $169.7 million in H1 2023. During the period, JKB's loan book dropped 1.9% to $2.78 billion versus $2.83 billion at the end of 2023. Deposits increased 9.3% to $5.72 billion from year-end 2023. It is also worth highlighting that JKB continues to conduct the technical, financial and legal due diligence on a possible merger with the Jordan-based Bank al Etihad. On Slide 9, we can see the performance of SADAFCO. The foodstuff company reported a 6.9% increase in revenue for H1 2024 at $383.8 million compared to $359.2 million for the same period of last year. Operating profit was up 28.8% for the period, registering $67.3 million compared to $52.2 million for the corresponding period in the previous financial year. SADAFCO posted a 27.7% increase in net profit to $67.7 million compared to $53 million in H1 2023, primarily driven by increased sales and improved gross margin. SADAFCO continues to dominate the market in its three main product lines, UHT milk, tomato paste and ice cream. In Q2 2024, export and out-of-home sales registered a year-on-year growth of 66.5% and 36.3%, respectively. SADAFCO was recognized among the top 20 nonfinancial companies traded on Tadawul in the Corporate Governance Index and received an A+ rating from the Saudi Food and Drug Authority. The company has plans to establish a warehouse in Jazan over an area of 15,000 square meters. United Gulf Holding is featured on Slide 10. UGH incurred a loss of $15.3 million in H1 2024 compared to a net loss of $25.7 million in H1 2023. Total revenue increased 29% to $114.3 million in H1 2024 compared to $88.5 million for the same period last year. AUM grew 11% to $15.8 million in H1 2024 compared to $14.2 million at the end of 2023. On Slide 11, we have the results of United Real Estate Company, URC. Across its key income streams of the business, the company reported a 5.3% increase in rental and hospitality income, offset by a 19.2% decline in the contracting and services revenue, resulting in a 6.7% decrease in revenue for H1 2024 at $131.2 million. Operating income dropped 5.9% to reach $39.3 million versus $41.7 million in H1 2023. URC's net profit posted a slight drop of 0.9% for H1 2024 at $13.1 million versus $13.2 million for the same period in 2023. It is worthy to note that in April, the URC's BOT development, Marina World, received a 1-year extension from Kuwait Authority for partnership projects. The extension ends on August 2024 -- on 24th August 2025 and the rental income for this period will thus be reflected in the financial statements of the company. Moving on to Slide 12, starting with our logistics and power rental business, JTC, reported a total revenue of $45.7 million for H1 2024, 2.4% lower than the $46.8 million reported for H1 2024 (sic) [ 2023 ]. The drop is mainly attributed to the port division with a slight decline in contract logistics and power rental, partially offset by an increase in the warehouse segment and equipment leasing. Net profit for H1 2024 amounted to $10.6 million, 12.6% higher than the reported $9.5 million for the same period of last year. On to the National Petroleum Services company, NAPESCO, our oil field service provider. NAPESCO's revenue for H1 2024 went up 1% to reach $64 million versus $63.3 million in H1 2023. NAPESCO posted a net profit of $16.8 million for H1 2024, 34% up from $12.5 million for the corresponding period in the previous year. This was supported by operational efficiencies. Moving on to the health care sector with Advanced Technology Company. ATC witnessed 7.7% increase in revenue to reach $285.1 million compared to $264.8 million in H1 2023. ATC achieved a net profit of $2.9 million in H1 2024 compared to $16.7 million in H1 2023. Finally, Slide 13 shows the recent business updates on OSN. On April 2, OSN successfully closed the merger between Anghami and OSN+. The deal involving an injection of $38 million has created a media tech company with AI at its core. The MENA streaming powerhouse now has 120 million users, more than 2.5 million subscribers and $100 million combined revenue. OSN continues to negotiate its content and studio deals with the aim of optimizing costs. It constantly works to enhance the dishless OSNtv box experience. The plug-in box reflect OSN's strategy towards streaming TV with a linear environment. I will now hand over the call to Omnia to invite our listeners to raise any questions they may have.

Thank you for the presentation. [Operator Instructions] We have a question from Zafar Nazim.

I had a couple of questions. The first one I had was, I was wondering if, Sunny, you could provide us some kind of a cash flow bridge for the second quarter cash balance. So you ended last quarter with cash balance of slightly below $600 million and then at the end of the current quarter, the cash is slightly above $600 million. So there's an increase of $5 million, but I'm wondering what the cash flow bridge is because your debt went up at the holdco level by roughly $167 million. And in the second quarter, I think we see most of the cash dividend as well from your investments. So I'm just intrigued as to why the cash balance only went up by $5 million, it would be pretty helpful. I know that you have the Anghami acquisition that was $38 million. But even after accounting for that, it's not clear why the cash went up only $5 million.

Thank you, Zafar, for your question. Actually, our cash flow is presented on the Page 5 of the interim condensed consolidated financial statements. But at a very high level, you would have noticed that during the quarter, we had contributed $38 million for investment in the OSN Anghami transaction, which we had disclosed in the month of April. And then there would have been some other operating companies where there could have been an investment made. So generally, as far as the cash is concerned, the deployment of the cash has been for investing activities as represented in our operating cash flows and also the interest expense also remains elevated as a result of the higher interest rate cycle. And effectively, 51% of our debt as is evident in the notes to the financial statements, is actually the variable rate debt. So it is poised to benefit from the future expected declines. But in the first half, the interest rates remain elevated. There were no changes to the Central Bank of Kuwait discount rate for which our KD floating rate bonds as well as the KD bank debt is repriced. And also, there were no changes to the U.S. dollar rates where the other debt is priced. So it is a factor of all of those factors. And then from quarter-on-quarter, the dividend outflows can also impact the situation. And as we said earlier, the best way to look at the company's cash flow would be to look over an extended period of a year rather than just quarter-on-quarter.

Just -- thanks for that, Sunny. Just on the interest expense, your debt at the holding company level is now around $3 billion. So at the current rates of interest, what is the annual interest expense?

Yes. Actually, Zafar, we are disclosing all of the -- as we said in the previous call, on the Note 6 and the Note 7 of our financial statements, all of the debt with their cost of debt is also disclosed. We're on an average about -- for the 6 months is around $90 million is our interest expense. So $175 million to $180 million, that is the running rate for the holdco level debt.

Got it. And just on the media segment, in your income statement, you gave the revenue line and the operating expense line for each segment. And the media segment loss in the quarter actually increased quite a bit from the previous quarter. I think it was around -- if I just subtract the operating expenses from operating revenue, is around $26 million to $27 million just for the quarter. So I was wondering why did this jump so much? Is this because of the Anghami consolidation in the numbers? Or is there something else going on?

No, it would have been some ongoing impairments to some of the assets. And because we do not wait for the year and for the impairments, it could be as a result of that. But the Anghami -- it is not linked with Anghami because we have still time to complete the assessment of the full fair valuation and the assessment of the acquisition, but our preliminary estimates are there, but we would be completing the whole exercise in a year's time. There is actually a disclosure of the transaction, Anghami transaction on the Note 17, which is the business combination transaction. And you can see here in the note, Note #17, the total gross assets acquired is KWD 47.5 million. The net assets -- after the liabilities, the net assets acquired is KWD 36 million. The consideration, which is paid in cash, KWD 11.7 million. KD, all the numbers I'm referring to are KD because I'm quoting them from -- straight from the financial. The consideration which we have transferred in kind is 30%. And then the minority because our acquisition was 55.45%, so the value of the noncontrolling interest is this much. And then we -- our current assessment is that the goodwill on this transaction is KWD 21.43 million, which is again provisional because we would be doing the more comprehensive review as permitted under the IFRS 7 for -- we don't think it will take a year, but we would try to do as soon as we can finish. So we have some time to do. So it is a provisional number.

Got it. And Sunny, you mentioned that during the quarter, you have invested other than the $38 million in Anghami, there's other investments that you made as well. Can you give us some idea about the amount of investments that you made during the current period?

Zafar, those would be the private, nonpublic thing but our deployment in the operating companies which are not listed, there won't be any disclosures, but there are those small amounts invested in the various subsidiaries, depending upon their business plans and strategies. [Technical Difficulty] significant or material, we would always obviously be disclosing which is, for example, the Anghami, but this would be the routine -- investments of a routine nature. And many times, the information is proprietary. It won't be appropriate to discuss this, which is a nonpublic information. But definitely in consolidated financials, you can see in the cash flow, what would be the investments made in our various operating subsidiaries.

Right. And just one last question. If you can just confirm United Gulf Holding, what percentage of UGH is owned directly by KIPCO, the parent, not indirect and direct, just the direct portion?

Actually, Zafar, we disclose the -- publicly, we disclose what is the group level holding in the UGH and the transaction of the acquisition of UGB by Burgan Bank, as you can see, it is still undergoing the regulatory approvals and the due diligence and the valuation assessment. So it won't be appropriate for us to discuss what is the implication of -- on each of those operating subsidiaries. But at the group consolidated level, we do not envisage any material change, except the fact that UGH is -- we don't expect any material impact at a group consolidated level, except the fact that there would be better synergies when UGB is under Burgan, and that's precisely the driving factor of this acquisition. The driving factor of the acquisition is Burgan's own strategy to focus their businesses within the GCC region and to develop their wealth business because UGB actually owns -- has a majority stake in KAMCO. So that brings the banking and the asset management together, in lines with their wealth strategy. It has -- UGB has operations in Bahrain. It has a conventional wholesale license apart from an Islamic window license. So all those factors put together are completely aligned with Burgan's own strategy of expanding their corporate and expanding their wealth business. So for a group perspective, it has a strategic rationale and it is accretive to the value addition, to the shareholders' value creation and to the profitability. But it's not -- from an accounting point of view, we do not envisage a major day 1 event because it still remains within the group. And at the group level, we will continue to consolidate UGH and even UGB because UGB eventually, if the transaction proceeds, would be held by a subsidiary, which is Burgan Bank.

Right. Actually, I was only interested in the shareholding, not so much the rationale because in the EMTN prospectus that KIPCO published in 2022, you had mentioned that KIPCO owns 32.2% of UGH directly and 90.5% directly plus indirectly. So is that still the case? That is my question.

That number is materially correct. So there won't be any -- we did not have any major changes in the shareholdings till a particular point of time, yes. As of 30th of June, there are no major changes.

We have a question from the chat box from [ Dhanol ]. Could you provide some color on your strategy in converging into a private equity model?

Sorry, Omnia, your voice was not very clear. Could you repeat the question, please?

Yes, sure. A question from Dhanol from the chat box. Could you provide some color on your strategy in converging into a private equity model?

Yes. As a holding company, we have diversified investments and what we have been doing is from 2022 from the time our new group CEO, a new leadership team is there, to strengthen the engagement with our key operating subsidiaries starting from getting to know their strategies and aligning those strategies within the governance framework with KIPCO strategy. We have periodic meetings, we assess their strategies. We go through the periodic budgeting exercises, strategic planning exercises. And -- but we are not -- you would have noticed that many of our companies are listed. So within the corporate governance framework, they have their own respective Boards, they have the minorities. But nevertheless, our aim is to align these and steer the strategy of each of our core portfolio company to generate shareholders' value at an accelerated pace. And the examples of the concrete actions taken would be changes by the -- in the composition of the Board and then implementation of the strategies by the new Board, changing, in some cases, the management team by the Board's appointed of the whole operating companies. And then just as a group, we also promote the synergies and the advantage of the group synergies for the various cross holding, but we are not a private equity company. Our aim is generate more longer-term value, and our investments are of a more longer or extended period of holding. They're unlike a private equity, which may have a horizon of 5 to 7 years.

We have another question from [ Amanda ]. What's the reason for the big decline in ATC net income?

So ATC last year, they have acquired a new business and they have increased their ownership in hospital, Kuwait Hospital. And Kuwait Hospital, it is in its early phases, which will yet turn into profitability. They have increased their ownership to above 70%. And that was the main driver behind the decline in profitability. ATC on a stand-alone basis was more or less more than budget.

Thank you. Actually, we have no further questions at this point. So I'd like to hand the call back to management. Sorry, we have another question. Sorry, my apologies. We have a question from [ Rakesh ]. Can you please confirm if dividend receipts in 1H were around $100 million and whether further receipts are expected in the second half of the year?

Thank you, Rakesh. The number is around $120 million received in the first half. And we expect some more to come. In fact, EQUATE is distributing interim dividends, and there could be others as well -- other interim dividend. But we cannot quantify the number today.

A question from [ Dimitri ]. How do you plan to address the next maturities, for example, 2024 local bonds and short-term bank maturities? Do you plan to refinance or partially prepay from cash on hand?

See, in terms of the bond which is maturing on 28th of December, 2024, you will have noticed that we had done the liability management. The original issue was KWD 100 million. But in 2022 December, we had done the liability management and now the amount is closer to KWD 66 million. So we have the aligned liquidity events -- inflows, cash inflows, which would be used to pay the bond as and when it falls due. And then as far as the bank debt, which is of a short term, this is -- actually, these are the revolving facilities, which we have with our relationship banks, primarily in Kuwait and usually, the revolving facilities are subject to the annual reviews and roll over. But when we look at our tenor, even in the bank debt, we have sufficient amount of debt, which has a tenor in excess of 3 years. So it's part of the normal liability management, whereby we have been extending the tenor of our maturities, but at the same time, developing our relationships with the local or Kuwaiti as well as the regional banks by establishing attractive bond either through the revolving facilities or medium- to long-term facilities with the bank. We find that the -- both the local as well as the regional bank market is very liquid. And this is an interesting stack of liquidity to have in our capital structure.

Thank you. Another question from Dhanol. Any plans on new debt issuances or additional financing?

In terms of anything -- any big ticket or a major, no. As you would have noticed that our next major maturity -- of course, bond, we spoke about it briefly in the previous question, but the next major maturity is in October 2026 of KWD 0.5 million EMTN. And as we have done in the past, we would be doing the early start to address these maturities. But there is nothing in terms of any major issuances in the near future. As and when there are any material such events, of course, we would be making the required disclosures under the corporate governance guidelines of the company.

We have a follow-up question from Rakesh. Any plans to refinance 2026 maturity?

Of course, the '26 maturity should be addressed at the right time, but the early start would mean is probably 12 to 18 months and not 2 years or 26 months. So we would do an early start, but at the right time, definitely.

I guess we have no further questions. So I'd like to hand the call back to management for any closing remarks.

Thank you, Omnia. Thank you to everybody who is with us, and we look forward to having you in the next quarter. Have a good evening.

Thank you.

Thanks a lot, everyone.