Makhazen (MKHZN) Earnings Call Transcript & Summary

Hello, and welcome to the Agility Q2 2020 Earnings Webcast. My name is Lauren, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host Sidharth Saboo with Arqaam Capital to begin. Sidharth, please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us today. This is Sidharth and on behalf of Arqaam Capital, I would like to welcome you to Agility's second quarter 2022 earnings 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 Awrad from Agility's Investor Relations team.

Thank you, Sidharth. Good afternoon, everyone, and welcome to Agility's second quarter 2020 earnings webcast. With me today Mr. Ehab Aziz, our Group CFO, who will take you through Agility's performance and present the major developments in this quarter. After the presentation, which we should have available on your screen, we will open the floor for the Q&A. Please feel free to submit all your questions in the chatbox and will recur to address them during the call or after, in case we don't have time to answer all your questions. We will get back to you directly and answer them. Before we begin, I would like to draw your attention to the disclaimer available on the second page as this presentation may contain forward-looking statements. Such statements are subject to risks and uncertainties. Please take a moment to read this, and then I'll hand it over to Ehab. Thank you.

Good afternoon, everyone. Welcome to our Q2 review of the financial results. As you might probably know, we have closed the acquisition of Menzies in August. To remind you, we also closed in August 2021, the sale of GIL to DSV. And we are very excited to have shuffled our portfolio over a period of 1 year. After selling GIL, we became kind of a big financial investors with a local and regional presence. And now with Menzies, we are back to the global platform. I will touch base on the key highlights of the Menzies acquisition, then we'll give you -- remind you of the company overview and how the company is structured today in a couple of slides and then we'll move into the Q2 and year-to-date financial performance, and then we'll open the floor for Q&A. So Menzies is a very exciting deal for us and a landmark in the history of the company and reinforces the fact that we continue to perform well and to perform at a global scale. As I mentioned, the anniversary of selling GIL was in August. As you remember, the transaction of selling GIL was August 2021. We sold GIL to DSV, which was also a landmark transaction. And now with Menzies, almost 12 months after, we managed to close menses as well. We are very excited about this opportunity. Menzies is truly a global platform in airport services. It's #1 by market, the number of markets it serves; #2 by airports; and #3 in revenues. Our objective of buying Menzies is to: one, to accelerate and the scale and the scope of our controlled business segment, which we'll talk about later in this presentation, but also to inject the required capital and required resources to really take menses to the next level and build a story bigger and better than GIL. That's our ambitions and our goal acquiring Menzies. So Menzies is the amount -- the capability that Mentis provide is immense. As I said, it's #1 in terms of market serve. It's very attractive given the synergy play with NAS and the complementary aspect of the geographical presence of NAS and Menzies are very well. As you probably know, we paid about GBP 571 million for the equity of Menzies and about GBP 763 million in terms of enterprise value. Our goal is to create value through Menzies through injecting capital, provide the capital required to grow Menzies and to basically capitalize on the fragmented nature of this space. This space is very, very fragmented and there is huge room to grow in that space, and we intend to focus on that segment in the next 3 to 5 years and take it to become the dominant player in that space in the next 3 to 5 years. If -- just to give you -- remind you of what we highlighted in the previous presentation, particularly after closing GIL transaction, the company today is divided into 2 segments: controlled businesses and investments. Investments are minority stakes, significant stake. It represents -- the investment segment represents about 55% of our total assets. However, we believe the value creation in the future will be driven primarily by the control segment. This is where the Menzies acquisition and the NAS merging with Menzies is taking place. As you can see from the numbers from 2019 to H1 2022. The gross revenue EBITDA almost recovered to the same level, a little bit higher to the 2019, which is the pre-COVID crisis. I want to remind you that these numbers do not include the GIL figures, which has been excluded fully from this presentation. And that's why there could be some noise in the Q2 and H1 results. But you can see that we have recovered, and that's before the full results of Menzies being included because the transaction took place in Q3. So the numbers of Menzies are not included in H1. As a matter of fact, even the initial investment that we made in Menzies, about KWD 44 million is classified under segment 2. Since the closing has taken place, we will move that from Q3 onwards to segment 1 and you will see the numbers reflect. So the key highlight here is that the numbers of the controlled businesses have recovered to the pre-COVID level and a little bit exceeding in terms of revenues and in terms of EBITDA. Also to remind you, we tried to segment the net debt position by business. To give you a little bit of an insight how to look at the business and how to value the company going forward, we -- because cash is fungible and debt is also fungible. We tried our best to allocate that. And as you can see, as of H1, we have about net debt of KWD 149 million under the control businesses and about KWD 317 million under the investments. In the investments, we classify listed and unlisted. And under listed, you can see the largest stake here is the DSV stake; NREC stake, which is 20%; GWC, which is a minority investment; Hyliion and Swvl are the 2 listed investments in the U.S. And then on the right side, the unlisted, the largest is our investment is Reem Mall, which is currently classified as convertible debt in Reem Mall. The net value of that segment is about KWD 1.1 billion. That value has decreased as of June -- end of June because of the decline in DSV shares, that decline in DSV shares has recovered. Later -- I mean, in the last month or so, there has been a quite nice recovery. We still believe DSV is performing extremely well and will outperform the market in the foreseeable future. However, as I mentioned, our main focus is on the controlled business. Starting Q3, Menzies will move there. We'll start consolidating menses numbers. Numbers of Menzies have been -- maybe there will be some noise in Q3 and Q4 because of the consolidation and the partial consolidation of the numbers. But hopefully, from 2023, you will see a run rate and a significant improvement in our operating results from the controlled segments. Again, the year-to-date numbers, we try because of the investment -- the way the accounting works on the investments, and just to remind you, some of our investments have been classified through P&L and some -- mainly DSV is classified under equity. So all the movement in the stock price of the listed investments will go through equity, predominantly DSV. And some have been -- we opted for a P&L and that's why you see this KWD 5.5 million negative performance in the investment. And that's due to the decline primarily in Hyliion and Swvl. But we tried to separate the P&L in this view to see how much the controlled business is generating versus the investment and then we consolidate that in the last box on the right. And as you can see, revenues for the controlled businesses for H1 grew by about 23%, net revenue 19%, EBITDA is 19% and EBIT is about a 25% increase year-over-year, which, of course, gives you a little bit different view if you consolidate with the investments. But again, we try to separate things to allow you to understand the different dynamics of the different businesses and the drivers of the numbers, and you have a better view of valuing the company and measuring its performance. Now moving to the quarter-to-date, the 3 months ending June. Revenues increased by 23%, which is an acceleration to -- of course, compared to last year, but also higher than Q1 of 2022. Net revenue is 22%, almost in line with the growth in revenues. And later in the deck, there is a slide that shows where that growth is coming from by entity. EBITDA, here, we have some nonrecurring items. We have excluded that to give you a cleaner cut and a cleaner view of the numbers. And you can see the quarter EBITDA is higher by 8.6% and the net profit by 43.5%, excluding the nonrecurring items and, of course, the GIL. So the reported numbers that you will see, the headlines will show a decline year-over-year and that's primarily due to the discontinued operation of GIL. But if you exclude that and exclude the nonrecurring, our underlying profitability has shown a growth of about 43.5% year-over-year. Same picture here, which we have discussed before for the year-to-date, the 6 months. But excluding the nonrecurring items, you can see that EBITDA has grown by 37% year-over-year and net profit is up 150% year-over-year, excluding the nonrecurring items. Moving to the balance sheet. As you can see, the -- on the asset side, almost 55% is the noncontrolled. And again, this is predominantly DSV stake, which is classified as noncontrolled and 45% control. Now this will change again in Q3 once the integration and the -- once we start accounting for Menzies and consolidate Menzies into our numbers, and we'll try to keep that picture as clear as possible. So you can follow how the evolution of the company and how the assets of the company are evolving through the different asset classes. You can see that the net debt has increased a bit to 3.3x relative to H1 last year from 2.6x. Again, the increase in net debt is due to the investment in different things, and we have a slide later on CapEx and where the money is being spent. In terms of cash flow, the key highlight here is that we have a lower net cash from operating activities and that's predominantly driven by the changes in working capital. You can see a negative KWD 42 million of change in working capital. And that is the impact of COVID recovery and the consumption of working capital in Tristar, in NAS primarily. And you can see later in the deck a slide that shows the revenue growth and you can see that the revenue in TriStar and NAS is high double-digit year-over-year growth and hence, the consumption of working capital. You can see on the -- also on the net investments, an increase to KWD 68 million and the KWD 68 million includes KWD 44 million paid for the initial stake we bought in Menzies and hence, the increase in net investment amount. And accordingly, we had a negative free cash flow of KWD 61 million as a result of the lower operating cash from operating activities, the investment in working capital, which is driven by the investment in working capital and then also the higher net investment that we paid during H1, which is primarily driven by Menzies. On the right side, you can see that we -- the evolution of capital and how capital has been deployed between controlled and noncontrolled. And you can see that during the 6 months, we spent KWD 87 million, of which KWD 44 million is for Menzies. Almost half of it was spent in Menzies initial stake acquisition. And hence, the overrepresentation in the split between controlled and uncontrolled. Moving to the next slide, which, again, the slide that shows the controlled entities and the revenue growth year-over-year. As you can see, TriStar and NAS significant increase in turnover and hence, the consumption of working capital. NAS is 40% higher than last year and Tristar is almost 24%. ALP, which is one of the largest contributor to revenues and EBITDA is only growing at 2%. But -- and that's primarily due to the loss of Amghara. So we are more than compensating for the Amghara loss and growing. So excluding Amghara, the growth rate would have been much higher than that. I think that concludes the short presentation, I would be more than happy to take questions.

[Operator Instructions]

Yes. So there is a question about the audit qualification. So actually, this is a positive event where the company had a dispute with the government. And as a result of that dispute, we got a court -- final court decision for around KWD 58 million. And the management is of the view that we did not want to take that KWD 58 million as profit for the time being, since the management is in discussion with the government on potential settlement. Of course, we don't want to -- we didn't want to take that profit in Q2. And until we conclude with the government, whether we will have a settlement or not, and hence, the auditors were of the view that we either take the profit that booked a gain or basically put a qualification and we opted for a qualification. But this -- if we take this, this should not have a negative impact on the financial. As a matter of fact, if we book it, our income, our net profit would be much higher by almost the same amount adjusted for the minority interest. So that's the first question. What are the reason to increase in that? I think I alluded to that during the presentation, but we had several investments. Menzies was one part of it. You can see that we consumed about KWD 40 million in working capital. So that's another part of it. The dividend that has been paid because of free cash flow is negative. The dividends also were taken from facilities. But as a matter of fact, we have refinanced our debt earlier this month. And now we have a longer tenure and we are actively working to reducing that debt. Not only because we believe it is prudent to have a lower level of debt, but also we want to have the flexibility to act on opportunities as they may arise. So we are working actively on reducing the level of debt. We are working on multiple fronts to do that and it is definitely one of the key priorities of the management. I'm not sure about the reason for reduction in investment revaluation reserve. But if you refer to the reduction in equity, that's primarily the -- we basically take any change in the value of DSV shares through revaluation reserve in the equity, not through the P&L. So if the stock price of DSV goes down, we will take that decline in value in the revaluation reserve. And if the stock price goes up, we treat it the same way and we take it through the equity. So -- and we opted for that treatment because DSV stake is quite significant. And also, it is a public listed company and is subject to massive changes as a result of the volatility in the market. So we have opted for that treatment to eliminate the noise on the P&L as much as possible. But that noise is being reflected in the equity. And as I said, the stock price of DSV went significantly down as of the end of the quarter. And you can see that by referring to any -- looking at the stock price of DSV and recovered by almost 20% since then. So hopefully, next quarter, you will see that revaluation reserve increasing and recovering. But fundamentally, aside the stock market, the change in the price and the stock market volatility aside, we believe DSV is performing extremely well. We are keenly following their results and following their numbers. And I think we have all the confidence in the ability to execute. And I believe the stock price should reflect that ability as and when the market stabilizes. But we have no worries about their performance. The profitability is increasing. They have increased their guidance in the short term as well as the medium long term. So we are very pleased with that investment, and we are very confident that it will pay significant dividends to the shareholders in the short and the medium term. Yes, the presentation will be available on the [indiscernible] website. Second question is about share buyback and DSV annual dividends. I think the stock price has been going up and down quite significantly. And it's quite difficult to assess that. But we estimate our stake of our -- a share of the share buyback is in the range of 150 to 200. But again, that is influenced by the stock price and where it is, when -- as and when we participate in the share buyback. Okay. So question about Menzies and how much we expect EBITDA and net income to be after Menzies. I couldn't -- I can't answer that question today. We are in the process of putting our execution plan together. The synergy since we closed, we are working very diligently on assessing and executing on synergy. And I think we will have a much better view on that, and we will be able to give you some guidance on that by the end of Q3 when we announced our Q3 numbers. Hopefully, we'll have some numbers for you about the run rate and the EBITDA of the combined group as well as Menzies on its own. Okay. A question about the growth in ALP and Kuwait and KSA and how much we expect to add. I mean KSA has been a great investment for us. And I think we have been invested in Saudi since a long time ago through GIL, but also started focusing on the ALP side of things in Saudi over the past 5 years. And by the end of this year, we will have our site in Riyadh fully developed and leased. And that's about 450,000 square meter leasable areas on a plot of land that is about 850,000 square meters. We are actively now looking to acquire land in Saudi, in Jeddah and Riyadh. And I think we have a very strong pipeline and very strong potential in Saudi. The key driving force in Kuwait is going to be S2, which is about 1.2 million square meters of land in Sabah [indiscernible] And currently, the infrastructure work is ongoing. And we see also a very strong demand on that side in ALP as well as in maybe data centers. So I think we are very optimistic, but I don't see that segment, the ALP segment, in general, growing at a double digit. I think it would be high single-digit year-over-year growth. It's very stable and very constant, and we continue to look at ways to optimize and monetize the assets within the ALP. I mean the POC contract legal case, that's a very small legal case that has been lingering for quite some time. So given the big scheme of things that we have in terms of assets, profitability and cash flow, the PCO legal case is very minor. I wouldn't expect any significant financial impact either way, positive or negative as a result of this case. Yes. I mean, currently, we don't split the numbers by entity. We only show the growth rates but we don't split it by business group and how much by entity is being -- how much contribution by entity. So maybe later on, we will do that. We'll try to do that for at least Menzies given its size and NAS combined. Then we'll see if we can add more in the near future. I think I have answered most of the questions, I'm not sure if there is any other questions, but I think that's it. Thank you.

This concludes today's call. Thank you for joining. You may now disconnect your lines.