Makhazen (MKHZN) Earnings Call Transcript & Summary

Hello, and welcome to the Agility Q3 2021 Earnings Webcast. My name is Daisy, and I'll be coordinating today's call. You will have the opportunity to ask a question at the end of the presentation. [Operator Instructions] I will now hand over to Arqaam Capital to begin the call. Please go ahead.

Good morning and good afternoon, ladies and gentlemen, and thank you for joining us today. This is Rita Guindy. And on behalf of Arqaam Capital, I would like to welcome you to Agility's Q3 2021 Results Webcast. With me here today, I have Mr. Ehab Aziz, Agility's Chief Financial Officer, and Agility's Investor Relations team. Without further delay, I will now turn over the call to Soriana Borjas, Agility's Investor Relations Senior Manager.

Thank you, Rita, and welcome, everyone, to Agility's third quarter earnings webcast. As usual, Ehab Aziz, our Group CFO, will be presenting to you today Agility's performance and the major developments that happened in this quarter. After the presentation, we will open the floor for the Q&A. Please feel free to submit all the questions in the chatbox, and we will make sure to address those during -- towards the end of our call. Before we begin, I would like to draw your attention to the disclaimer available on the second page as this presentation may make forward-looking statements. Such statements are subject to risks and uncertainties. Please take a moment to read this, and then I will hand it over to you, Ehab. Thank you.

Good morning, and good afternoon, everyone. Thank you for attending our Q3 call. This is the agenda for today. We'll start with the Q3 highlights, what -- and particularly, we'll focus in that section on the DSV deal and its implication because now we have concluded the deal and closed the deal. So we will talk about that. And then we'll also highlight the shareholder return, the short term, the medium and the long term. Then we'll go to the Q3 financial performance, and then a final slide to remind you of our strategic priorities. So -- and then we'll try to run this through very quickly and then go to Q&A. So in terms of the key highlights, as you have maybe read in the news, we have -- our net profit for Q3 was KWD 927 million, and that is due to the onetime gain that we have realized from the disposal of the GIL assets, which now is considered discontinued operation and reported as such in our financials. Our EBIT is around KWD 19.6 million, which is 6.6% year-over-year. That figure is exclusive of the revaluation impact of some of the available-for-sale investments other than DSV. So if you recall, we had some of the investments in available-for-sale that was classified last year as available-for-sale through P&L. And as a result, the impact of the stock price going up and down is being reflected. So that is -- the EBIT increase is inclusive of that. There is a slide towards the end of the deck that it shows the underlying performance without that. And I think in hindsight, maybe that should have been classified similar to DSV as through equity, through comprehensive income statement. But again, it's small and the noise is not going to be material going forward. And then revenues, which is now given that GIL has been sold, the cyclicality and the seasonality of GIL revenue is eliminated. So revenue now becomes a very good metric on how the company is progressing. And as you can see, year-over-year, we are up almost 27.7%. So as a result of the sale of GIL and now it becomes a discontinued operation, we have realized almost $3 billion of profit, which has been reflected in the equity. So our equity went from about $3.8 billion at the end of 2020 to about $6.8 billion as a result of the disposal of GIL. Also something worth noting, when we could sign the deal back in April of 2021, the value was estimated as $4.1 billion. And now the stake in DSV is up almost 15%, which is about $4.7 billion. Of course, DSV now becomes a significant asset as we will see on the balance sheet and would require a different way of managing that stake going forward, which we are working very diligently around. Continuing the same theme, which is the disposal of GIL and replacing it with the investment in DSV. Today, DSV has -- stake is about $4.7 billion, a significant stake and a significant part of our balance sheet and also a significant part of our market cap. So hence, the need to look at that investment very closely and manage it in a different way. And I think we have been always been an operator. And now we have -- on that particular -- we continue to be an operator, and we continue to have what we call now Pillar 1, which is all the legacy businesses and all the operating entities, the controlled entities. But now we have a significant asset that would require different types and different mindsets than what we used to have in the past. There is also some confusion for some shareholders and some investors around KWD 200 million of cash flow that we get. As you know, DSV do not distribute significant amount of dividends for many reasons. And I think it's -- so far, it has been the right approach. So the dividend yield is about 0.3%, which is quite low. That would be about maybe $20 million roughly, our stake. However, DSV consistently and systematically returning capital to shareholders through shares buyback. So -- and as a result of that, if we decide to maintain our 8%. And the 8%, if we don't do anything, and DSV continues to buy their shares back, our 19.3% -- sorry, 19.3 million shares will represent a higher percent than the 8% of the outstanding capital. So which effectively means we are buying, implicitly buying DSV shares. So the alternative would be that we maintain our 8%, which would require us to participate in the share buyback program. And if we assume that we will participate in that program, the company, on average, buys back 4% to 5% of its outstanding share capital. Of course, it depends on the stock price and it depends on the approval of the Board. But if you look historically, what they have been able to do, they have been utilizing most of their free cash flow to buy back shares. And if you look at their free cash flow, that is roughly $2 billion to $2.5 billion over the past several -- several years, they have been submitting the free cash flow. But also, they have -- now if you factor the free cash flow in the future, assuming the consolidation of GIL, then you do the math, we will probably get around 200 million between the dividends and between the share buyback. So we expect to get the cash flow back from DSV investment on a regular basis and that our estimate is around $200 million. This is a slide that highlights the shareholder return over the years. And if you look at the amount of shareholder value that the current management have been able to achieve -- can I ask everybody to be on mute because I can hear background noise. So if I look at the shareholder value over the past decades from 2011 and since privatization -- and to remind you, the company was privatized in around 1997. So what we have done to calculate that, which the data is not easily available. We have taken -- and the calculation also is quite tricky, we have taken the average weighted average price over the past 3 years preprivatization, and we have based our calculations accordingly. So the conclusion is we have created about $7 billion, which is 5x the value of the company at that time from 2011 and about 50x, which is $9 billion since privatization. Of that $7 billion, we have distributed, over the past 10 years, about $880 million of dividends, of cash dividends. And over the past whatever, 24 years, we have distributed about $1.9 billion. So shareholders have been able to realize a significant return over the years. So a $10,000 invested in 2011 would have been $50,000 today, including dividends and $10,000 invested in 1997 would be around $500,000, including dividends as of today. So I think the focus has been always, since privatization, is to create value to our shareholders. And I think throughout the years, despite the ups and downs and despite a few missteps here and there, I think the overall picture show that the management has been able to create significant value to its shareholders. In terms of returns, we have been -- since 2011, our -- the IRR, the annual return has been 24%. We compare that to the premier market. And we -- again, this is based on internal calculation. There aren't any readily available calculation for that. But roughly, we estimate that this group of companies in Kuwait generated about 9% for the same period, which is -- our return is about 2.6x the return of the premier market, including dividends. And as a result, our market cap, as a percent of the total market capitalization of Kuwait, has been increasing over the past 10 years. Now we move to the Q3 financials. And I mean, the key theme is growth is accelerating relative to 2020, which was a COVID year, so we have to keep that in mind. And we are getting closer to the pre-COVID levels. So you look at revenues. And again, this is without discontinued operation, which is GIL. So revenues are up 27.7% for the 3 months. Net revenue, which becomes less relevant today, because if you remember, we used to focus on net revenue because of the GIL pass-through and the volatility and the variability in the rates, freight rates. And now that's not effective anymore, but grew at 30% EBIT before adjusting for the available-for-sale investment evaluation is about 6.6%. So it's definitely at a lower rate than revenue, but that's driven by this one-off item. And net profit, because GIL is still reported in Q3 as in one line, which is -- impacts only the net profit, we see this huge jump. If you look at the 9 months, you -- revenue is still growing at 18%. So the last quarter, Q3 is at 27%, which shows that the growth in the underlying business is accelerating in terms of revenues compared to the previous 2 quarters and net revenue is at 15% growth. EBIT here is higher because the impact is -- of the one-off is lower. And then the net profit again is impacted by that. So for the 9 months, if you look at the continued operation, the net profit is up 43%, adjusting for this one-off, standing at around $35.5 million. And then the discontinued operation is, for the 9 months, the disposal of GIL, the profit from GIL, which is now classified as discontinued operation, is around KWD 953 million. So that is the underlying picture. Going forward, it's the continued operation that would -- with us, and the focus will primarily be on it. We are working on how to present the numbers and the segment reporting, so you can get a clearer picture of the underlying earning power of the company, but also the value of the assets that do not contribute to the earning power, i.e. DSV, because DSV now is -- would have a 9%, 8% that would be classified as available for sale. It's only the dividends and as I explained, that would be reported in the income statement, and it's -- the dividends that they distribute is very minimal, so you won't see a lot of impact on the P&L. However, the value of the asset is measured differently. It's based on the fair value of the asset, which is DSV is a publicly listed company, and we can easily figure that out. So going forward, we'll try to segment the reportings. We can get that -- you can get the value. And there is one slide towards the end that would give you an idea of how we are thinking around how we are splitting the reporting going forward. In terms of balance sheet, as we said, the now assets and our equity have been -- have gone up. Equity is up by almost $3 billion. So total asset is roughly KWD 3 billion and equity is about KWD 2 billion, big numbers. You can see on the right-hand side that the financial assets at fair value, which is predominantly DSV, is roughly 50% of the total assets. And that's back to my comment that now we have an asset that is significant, very valuable. We have full trust in the way the company, DSV, is managed as an -- from an operational perspective. But from our perspective, we would need to manage that stake given the significant size of the stake and the -- its importance to our shareholders. Today, this asset represent probably 2/3 of our market cap, and it's a significant asset that would need prudent and proactive management, which we are very conscious of and working diligently to do. In terms of cash flow, I mean, the cash flow will be a little bit noisy this time because of the discontinued operation. So we have tried to take that out. And also on the CapEx side, we have tried, for the 9 months of 2021, to take GIL out to give you the picture. But I think, as you can see, almost consistent CapEx is around KWD 96 million for the quarter. The majority of that, 69% is in others. And others, as you can see, the small footnote is predominantly Reem Mall, which is coming to an end. So we expect our CapEx spend to go down. In terms of cash from operations, we generated about KWD 94 million of cash from operations. But for the 9 months, and most of it was consumed by the CapEx, which going forward should be at a lower break, which means a higher free cash flow from continued operations. Then this is just a flavor of the continued operation and the quarterly -- where the growth is coming from. ALP has been flat. We remind you that we lost the Amghara land, and that had an impact. So we more than compensated for that in ALP. However, the overall revenue growth for the quarter was flat. So it's not due to -- the other assets in Saudi and Africa and also in Kuwait is growing. However, due to the loss of the Amghara land, we have -- our revenues have been going down, and that was compensated by the growth of the other sectors. And as a result, the overall sector is actually flat. At Tristar, very strong growth, year-over-year growth, 26.5%. UPAC is recovering 11%. As we know, the airport in Kuwait's open, but not in full capacity. But slowly, we are seeing recovery. Revenue is up 11%. NAS is significant year-over-year growth, 77.6%. And that is -- NAS is not only in Kuwait, but also in other -- many other markets. So they have done extremely well. And also GCS, which is the customs, is 48.6%. So you can see, across the remaining businesses, a very strong and substantial year-over-year growth, which gives us confidence that we will get back in terms of profitability for that remaining business, the continued operation business to the level -- the pre-COVID levels. This might give you, like, a flavor of how we are thinking about the company going forward. I'll share this with you. But I reiterate it because I think it's a critical slide. The company is basically 3 pillars now, and that's how we are thinking about it. So Pillar 1 is what we call strategic control businesses, and that's the 5 businesses that we highlighted in the previous slide. The ALP, NAS, Tristar, GCS and UPAC. Now we have also small other entities, but they don't move the needle by much, hence, we don't mention them here, but these are the key. That segment, pre-COVID, generated an EBIT of about KWD 104 million. So around $350 million of EBIT. So that's one sector, and that pillar will be the dominant pillar on our P&L. So the revenues that we expect to see in profitability in terms of EBITDA, EBIT and net profit will predominantly be driven by that sector, okay? Then the second pillar is all the investments that we don't control but we classify as strategic. So it's the DSV stack, which is the largest. It's NREC stake. We have 20% stake in NREC. We have stake in GWC in Qatar. And also, we classify the Reem Mall under this category because we do not consolidate the Reem Mall in that yet. There are -- we have the option to convert the convertible debt and consolidate it. So far, we did not because the mall is not yet ready. But also, we have the option to do that. So it is classified under that category because it's more of a strategic, but noncontrolled investment. And then all the tech investments that we have done in terms of like Hyliion, Queen's Gambit, et cetera. We estimate based on fair value and based also on allocating some of the debt that are -- amount of debt that is related to these assets. The net asset value of that pillar is about KWD 1.5 billion. So going forward, when you think about the market capitalization, I think you would have to look at Pillar 2, call it Pillar 2 for simplicity. And you say, okay, this is the value of the asset, the underlying assets. It depends on the market value of the underlying shares like DSV and GWC, et cetera. And that would be KWD 1.5 billion for now, for the time being. Then if the market cap is trading at KWD 2 billion, which I think is roughly what the market is trading now, then that's basically what the market is implying that the Pillar 1 on the left, which generates about KWD 100 million of EBIT is worth KWD 0.5 billion, net of debt, of course. So -- and I think we would -- what we will try to do going forward and as the noise gets eliminated, the year-over-year comparison gets eliminated and becomes more stable after the GIL exclusion from our financials, I think we're trying to clarify that. So you can look at the winning power of Pillar 1 and make your own estimates and assessment of how much that should worth and what is the progress, et cetera. But then you would need to use the net asset value for the Pillar 2 because most of these assets have value. However, that value is not -- for accounting reasons, do not get reflected into the P&L. So the PE ratio, just using an example, using a PE ratio and say the company has a PE of, I don't know, maybe 40x or 50x would be misleading because big chunk of the value, almost 2/3 of the value of the company today is in Pillar 2, which doesn't have any impact or very minimal impact on the P&L. Now the last pillar on the further right, which is in gray, it is future investments. Today, we are embarking on a strategic exercise to think what could potentially be the next GIL for agility. What -- which sector and what type of geography and company would be attractive enough for us to invest so that we can build the next GIL. And that could be in digital logistics, ESG-related infrastructure or anything. And that is quite -- it's gray because we don't have any substance yet, and it's still under discussion and under, like, being very diligent about how we look at it. We are in several studies and trying to segment the market, understand what is our competitive advantage when it comes to these sectors and these geographies, and how can we deploy capital. As we have proven over the years, our main focus is to create value for our shareholders. I think so far, with the numbers, we have been able to do that. However, the task gets bigger and harder because today, our market cap is $7 billion, $7.5 billion to double that in the next 5 to 10 years. That's a significant amount of value that needs to be created from the current base. So I think we are quite -- Tarek is quite visionary and he has proven throughout the years that he makes investment, and the management team is working with him and through him to basically take the company to the next level in a similar way to what the management has been able to do after the privatization in 1997. I think that was my last slide. I think there are a few questions, which I will try to address, and then we can conclude.

Yes. So there is a question around -- I want to understand the revenue lines post the GIL deal. Logistics revenue related to Tristar, rental revenue to ALP and UPAC and other services related to everything else, NAS, GCS. Yes, that’s broadly the right characterization. We did not spend a lot of time, to be honest, trying to reorient our financials because there is noise in comparative years. But as I said, probably starting from 2022, we will be announcing how we -- a definition of the lines, clear definition of the lines of revenues, how we should look at the company and the segment reporting, so you have more visibility on the underlying value drivers for the company. But for now, your characterization is probably correct. Another question around NAS and GCS, I think. I think NAS and GCS next year will be -- they are very close to pre-COVID levels. And I think going forward, they will be at the record levels, if not higher. And they have positive margins. Yes, they do. Very positive margins, I would say. Yes. I mean, Discovery Mall was a very small mall within UPAC. I think it generated about -- if I'm not mistaken, about KWD 1 million of revenue. So I mean, if you assume that our run rate of revenue is about KWD 500 million or KWD 550 million, KWD 1 million in Discovery is insignificant. So it's immaterial investment tax. Okay. So guidance on CapEx. We will, again, go with some guidance. We gave you guidance in 2015, when we embarked on this growth phase, and we knew that it would be CapEx heavy. I don't think next phase is going to be as heavy as the last phase, but it all depends on how we are going to position the company strategically and whether we will do M&A or not. So there is a lot of work on the strategy side and a lot of work on the capital allocation side, which we have not yet done. And accordingly, I wouldn't give you -- be able to give you a very clear and crisp guidance. So bear with us, and we'll definitely give you some guidance on the CapEx going forward. But as you can imagine, it's still up in the air. We just concluded a major strategic and financial deal for the company, and we are trying to figure out what is next. And what is next is not going to be insignificant in terms of the task and the magnitude of that task to take the company from $7 billion, $8 billion to maybe $15 or $20 billion going forward. It requires a different mindset and a different management and a different capital allocation philosophy, which we are diligently working on now. Another question, in your explanation of the $200 million from DSV, 20% comes from -- via dividends, the remaining implied buybacks, 4% of share per year. Secondly, what do you do with the $200 million assuming you sell finally plans to list any subs? Tristar didn't work out. Any thoughts on this space. Okay. So that's a multi-question in one question. So the $200 million, yes. The remaining $180 million is basically our rough calculation of our share if we participate fully. So today, we have about 19.3 million shares. If DSV buys back around 4% to 5%, that means we have about 800,000 to 1 million shares that we need to sell every year. So if it's 1 million shares every year, you multiply that -- you have to make some assumptions on the price, but that's roughly the remaining amount, the $180 million to the $200 million maybe. Now how are we going to use that $200 million? Again, it goes back to the previous question about CapEx and capital allocation. We are very conscious about capital allocation and where to invest that capital and what kind of return and risk we take. So we will definitely -- so let me give you a little bit of insight of what's going on. So definitely, we are conscious about the capital issue and where that capital should be deployed. We realize that investing that capital only within the Middle East has some limitations. So definitely, it would have to be -- if we really want to create significant value in a relatively short period of time and 7 years, creating $7 billion or $8 billion additional value to the shareholders within the next 7 years is a significant path. So the Middle East would definitely have part of that, but it's not going to be enough to create $7 billion additional value. So it would have to be in high-growth markets and high-growth sectors. So that's on one side. So the capital that we will get, the $200 million, we -- if we have identified opportunities, we will definitely deploy that. If not, we are also very conscious to reduce our WAC, and we can do that through a moderate amount of leverage or reasonable level of leverage at the lower rate and maybe distribute some of that cash back to the shareholders, which would effectively reduce all. Why? Because we are increasing the debt and reducing our equity base. So that could be another use of the cash to -- from the sale and maybe through different borrowing mechanisms, we can return some capital to the shareholders. However, the final decision on how much cash should go to the new projects and the new strategy versus how much should go to the shareholders and the timing of it is still up in the air, and we would need to think through it, put it -- discuss it with the Board and agree and then start communicating and executing. So I'm just trying to give you a flavor of the thinking process rather than give you specifics about what we are going to do. Finally, plans to list and any subs. Now I mean, I think the GIL deal proved that we are active -- strategic active managers of assets. We don't have emotional attachment to assets. We will do anything and whatever it takes to unlock shareholders value. So that could be listing of some of our assets elsewhere, where -- in different markets where things can actually be better understood and unlock value for our existing shareholders. So that's definitely one of the things that we are considering and one of the things that we are actively looking at today. Now whether it will materialize or not depends on if we can prove that there will be a value creation as a result of this move. So that's on the table. Tristar didn't work out. Any thoughts on this, please? The IPO didn't work out, but the company, as you have seen, is growing at 27% year-over-year. So the company is still doing very well and still very well run, and we believe that it has a good management and a good future. So -- and again, we are actively working on unlocking value for shareholders on that front. Last question is, does Agility have any plans to participate in the DSV share buyback program? Or would you keep your stake as is? Okay. So it's actually -- the answer is if we don't do anything, it means we are buying back, we are actually participating -- increasing our stake in DSV, effectively increasing our stake in DSV. Because if the number of shares that we have are fixed and the number of outstanding shares of DSV is going down, the effective percent of ownership that we have in DSV is going higher. And my inclination is that we already have enough concentration, not because the company is not very well run. DSV is one of the best-run companies, in my opinion. And I think many analysts and many investors would share the same view. However, if we look at it from Agility's perspective, shareholders' perspective, there is a concentration risk, which we would need to actively manage. And it's prudent that we actively manage that. So definitely, DSV investment is a strategic investment. However, on the other side, it is high concentration for Agility shareholders. It's 60% roughly of our market cap, which is significant. And hence, that would dictate certain parameters and certain actions that we would need to at least consider seriously. So I'm sorry, I cannot give you specific answers, but I hope I gave you enough color around our thinking process, but also because no decision has been made yet, but given the concentration and given the size and given that if we don't do anything, we are effectively buying DSV, then more than likely, we would have to do something about that. I think there is another question around why didn't the Tristar IPO work. I think the market conditions at the time and the appetite from investors at the time wasn't there. And that's, I would say, normal. Tristar is still -- you can see revenues are growing year-over-year significantly. So there is nothing wrong about the company itself. But just like any other IPO, it could work, it could not work an IPO. And I think -- Tristar also, you have to keep in mind, it's not like a tech company or a company that is growing, having a growth rate similar to tech or whatever. So it's a traditional company, very well-run company. It's a value company. And I think the market was not ready for it. And we didn't get what we wanted in terms of valuation, and we were very pragmatic and we moved on. So I think that doesn't mean this is the end of the story for Tristar operationally, the story continues. On the monetization and the value unlocking, we are various options. I think that was the last question. Thank you very much. And if you have any more questions, you can reach out to our IR team or to me by e-mail, and we'll try to address any questions you might have.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.