Makhazen (MKHZN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for joining us today. This is Sidarth Sahoo, and on behalf of Arqaam Capital, I would like to welcome you to Agility's Full Year 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, and welcome, everyone, to Agility's Full Year 2020 Earnings Webcast. With us today, we have Mr. Ehab Aziz, our Group CFO, who will present you Agility's full year financial results and the major developments that happened during the year. We will be more than happy to take your questions after the presentation. [Operator Instructions] Now before we begin, I would like to draw your attention to the disclaimer available on the second page of the presentation. 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 Ihab. Thank you.

Thank you Awrad. Good afternoon, everyone, and welcome to Agility's earnings call for the year-end 2022. We'll give you an usual overview on the business for the year 2022, and then we'll try to spend some time addressing your Q&A. So the first slide is about the business update, and it has been a very busy year for us, as you can imagine. The year started with multiple challenges. Interest rate environment has changed significantly. We did two acquisitions during the year. We closed two acquisitions. Menzies -- John Menzies, which -- the aviation company that we took private from London Stock Exchange and also we try [indiscernible] in HG storage. And so it has been an extremely busy year on that front. And as a result, also, we had to refinance our financing facilities, and we raised about KD 3 billion of credit facilities as part of the financing program. We also signed on the E&P side in Saudi, which we are very optimistic on new concession of [our land] in Jeddah, 576,000 square meters. Also on the legal front, we had many activities happening, particularly on the government front in Kuwait. And we entered into a dispute with the Kuwaiti government pertaining to some of the leases that we have in Kuwait. So I think in a nutshell, 2022 has been an extremely busy year for us as management, as Board but also in a very, very challenging market environment, which amplifies the amount of IFRS, the amount of volatility, the amount of risk and the challenges that the company is facing in such environment. With that said, I think we believe today, Agility is a much better diversified business. [Indiscernible] geographically, the response from a business sector perspective -- and I think we have been positioning ourselves for the next phase of growth, as you will see in the later [indiscernible] last line. If you remember this slide since we sold GIL to DSV in exchange for shares, fundamentally, the structure of the company has changed. And accordingly, we started looking at the company as controlled businesses and investments. So on the left side, you see all the investments. Managers [indiscernible] is included on that side. And you can see all the investments that we have. And this is management accounts for that segment, because that segment didn't exist in 2019 and 2020 so, the reported numbers and the audited numbers are not presented in this way, but we have carved out the GIL business and have carved the investments that we had in prior years. To give you a view of how the business now on that segment on the control business segment has been evolving since 2019. And as you can see, the business has expanded significantly, and it's expected to expand even further in 2023 when we have the full year impact of Menzies and HG storage. So you can see revenues went from KD 455 million in 2019, almost doubled by 2022. EBITDA went from KD 125 million to KD 195 million, a significant increase. EBIT again. And mind you, this is only the controlled business, excluding GIL, excluding everything else. So EBIT from KD 100 million roughly to KD 143 million. But also as a result of the acquisition, the net debt has increased from -- on that segment, which is, again, a management accounting segment and went from KD 74 million almost KD 0.5 billion. On the right side, you can see the investments and these are listed among the investment. And the -- our estimate of the net asset value of that segment is about KD 1.1 billion -- the reason, as we explained previously, while we look at the business this way is that you can no longer look at the earning power of the company, the reported earning power of the company and get the full picture of the value of the company, because of the magnitude of the investment side. Because the result of any fluctuation in the investment side is reflected mainly in the equity and not through the P&L. And that's particularly the DSV shares. And hence, we need to give you more visibility on our estimate of the net asset value of that segment for the purpose of valuating -- valuation purpose. Now we go into the key financial highlights for 2022. And as you can see, this year has been a continuation of the recovery from COVID and the subsequent year. And you can see, excluding the impact of the acquisitions, it has been very impressive year-over-year performance. Revenue grew by 21%, net revenue, about 15% and EBITDA is up 44%, excluding the acquisitions, Menzies and HG Storage, and net profit has increased again by 153% excluding the acquisitions and almost 180% with the acquisition land. Again, that's mostly the controlled businesses with some impact of some investments that are classified as available for sale and under this classification the impact of that goes to the [indiscernible]. And that's what this slide shows. So here, we try to eliminate the noise of the investments because that goes up and down depending on the markets and markets have been quite [indiscernible] in the past couple of years, particularly last year. And you can see the control what is the performance of the control and as you can see, it's quite impressive results, and we are extremely satisfied by what we have been able to achieve, particularly after selling the GIL business. And now we position our control businesses for further growth in the future. Balance sheet. I think what I would like to highlight here is that you can see that on the asset side, the control business controlled about the controlled business contributed about 56% or -- could [indiscernible] 56% of our assets today and 44% is attributed to the investment segment. The decline that you see in equity is due to the -- mainly due to the decline in DSV shares. And we realize that the market has been extremely volatile, especially with higher interest rates as a result of the higher inflation. And since we only own 8.8% in DSV, we can take the movement in the stock price, which has been subject to some significant volatility over last year, we can only take that to the equity. And what you see here is the client. As maybe you have heard, we have entered into hedge -- to hedge point of our stake in DSV, and that to minimize the impact of that volatility. That said, DSV, although we only own 8.8%, we consider it as a long-term strategic investment. And we are still very, very bullish on the management ability to create value and the company to continue to grow in the future. That is becoming a major topic for management. And this is just to give you a flavor of how the debt has evolved over the years and also where we stand today. So one point -- roughly 1/3 of our, what we call corporate debt, which is almost 80% of the group debt, is in Europe, denominated in Europe and 2/3 is in U.S. dollars. And then the maturity after the refinancing, as you can see, we have a reasonably spread maturities over the next 5 to 6 years. And I think we're comfortable today with that, and I think it's well managed. On the right side, you can see the group net debt bridge. So where we started back in the end of Q4 2021 until end of Q4 2022, there has been an increase of KD 476 million in our group net debt position. You can see that most of that debt is not all, is attributed to the acquisition which had KD 378 million impact and also the CapEx and investment that we have made during the year. So if you combine these two elements, it's almost explains the entire debt increase from last year to this year. Going to the following slide, which is the cash flow. Again, we continue to have a strong operating cash flow, almost KD 100 million. But you can see that the change in working capital has been negative last year, and that's not due to any bad debt or any mismanagement, but it's due to the recovery in the businesses, and it's linked to the increase in net revenue and -- net revenue. So again, we continue to deliver strong operating cash flow. But as you can see, most of that cash flow has been consumed by the investments and the acquisitions. You can see on the right side of Slide 11, that's 85% of the investments that we have made in 2022, one [through] the controlled business. So management and the Board is focused on putting more investments in control, which is effectively the operating entities that we manage and control. And that sector, as we have seen in the previous slides, continue to perform well year-over-year, and we expect it to continue to grow significantly in the near future. This is just to give you a flavor of the major entities within that segment, and Aviation is becoming one of our largest and key segments. Grew 400% in revenue year-over-year, and that's definitely due to the acquisition, but also due to the recovery in the aviation sector in [NAS]. EBITDA, 169% year-over-year. Fuel logistics, [indiscernible] and that's mainly due to the acquisition, but also due to organic growth year-over-year and 0% and revenue and 39% in EBITDA. But also everything else under the control that is the ALP, the UPAC, the GCS, all of them continue to grow nicely. The combined growth rate for revenue on that segment and that's part of the control segment is about 14% and 42% in EBITDA. Moving to dividends, which I think has been very sensitive subject, and we are very conscious of the board and management of the importance of dividends to our shareholders. And as you can see throughout the year, we have been consistently paying dividends. But I think the Board this year has decided to shift from an annual dividend to an interim dividends. So -- and the reason behind that is when you look at the context of the current environment that we have, we see that interest rates have increased significantly year-over-year. And there is a big question mark on how long interest rates are going to continue to be at these levels. And as a result, the environment and the liquidity environment in general has been under pressure. We have seen several brands going bankrupt. We have seen some companies under pressure. And I think it's only prudent to manage liquidity in a very measured way. Also, as we discussed last year, the company did two major acquisitions, which consumes almost KD 0.5 billion when you look at the investments and you look at the acquisition, it's about KD 0.5 billion that we put into investment to augment our growth in the future. So that also has put further pressure and further limitation on what we can and what we can't do. And it's a trade-off that we have to manage. But also, we have a big dispute with the government in Kuwait. And it's unknown what would be the outcome. We hope that we get a positive outcome out of that dispute. But again, it adds to the uncertainty and add to the question mark of the environment we operate in today. So if you look at the macro environment, it's very uncertain. And if you look at the micro -- the company-specific environment, it has some risks and some limitations -- and hence, the Board has decided to shift from an annual dividend to an interim dividend where the board every quarter would look at the environment, look at the situation of the company and then decide if they are going to distribute dividends or not and how much the dividend is going to be and the form of that dividends as well. So I think it's only prudent for the company and its shareholders to manage liquidity in that manner. It doesn't mean that the Board has decided to cancel dividends altogether, but it meant that the Board wanted to have more flexibility in the way we distribute dividends over the next year. And I think that's only prudent given the current environment and given the current situation. As you can see from the next slide, we have consistently created shareholder value over the years. We have consistently paid dividends. If you go back 10 years ago, we have consistently paid dividends almost every year. And nothing has changed as we are very conscious about our shareholders. And we believe it's a balanced act, that we need to have and we need to be conscious about the current environment that we operate in. So I just want to reiterate because maybe there has been either misunderstanding or hyper sensitivity about dividend that the Board is only asking in being prudent and shifting the dividends from an annual dividends to maybe an interim dividends, which gives the company and its board as well as its shareholders the flexibility to manage the current situation. I think the last slide is just -- I know maybe it's not clear or maybe it's not well understood by some people and what we have done recently. What we have basically done with DSV share is that we have entered with some international banks into a funded color. And that funded color -- the main objective was is to provide some hedge to part of our stake in DSV. This funded color does not mean that we have sold any of our shares because we did not sell any of our shares in DSV. We have only hedged part of our stake up to 7.5 million shares. That gives us some protection on the downside. So if the markets go back and become volatile and there is another correction in the market, which we have seen last year, and it was very painful for everybody. Then we have that kind of protection on the downside. And that's the put option strike that we have here. And then on the upside, we have sold the [indiscernible] above certain price. We will capture any upside in the stock price up to a certain limit. And then about that limit we do not retain that. But mind you that we have -- that's only part of our stake. We are protected on the downside for that KD 7.5 million or up to KD 7.5 million and also capturing some of the upside if the stock continues to go high from here. This is for 3 years. And then after -- within the 3 years, we'll see how the markets behave and how the market -- what kind of -- how the stock price will behave and then we would actively manage that and manage the stake. As we have seen, it has a significant impact on our balance sheet, and it's a significant part of the market capital agility, and it is an important and strategic investment for us. And I think we have to do everything possible to protect and optimize that investment to our shareholders. I think that was the last slide. I will take some of the questions and then conclude.

So the first question, it's actually more than one question in the same question. So progress of [mall] and [indiscernible], and I think within Q2, we will have the main opening. So the mall is completed. You can go and see it in upper-body -- it's a very, I would say, very nice small, and we're very pleased with the ultimate product that we got. And I think it would be -- despite the many challenges in the sector, we believe that it is going to be a successful investment. It might not be our best investment, but definitely, this is going to be a successful investment. We can see now many investors are coming with the UAE -- the UAE economy is doing extremely well, and we are very optimistic. And again, this is not an investment that will get a return in 1 year or 2. But I think the difficult part now is behind us. Construction is done. The mall is delivered. I think we have a very reasonable and decent occupancy rate, and we will -- and also type of tenant. And I think in Q2, we will have the main opening. Within the same question, there is part 2, about some color on the 5 plus square case. I can't give anything other than what we have disclosed in our financial statement, and there is a full disclosure in the financial statement about the legal case and the [indiscernible] disclosure that we have made. So that's the extent of what we have. Point 3 of the same question is about the equity [indiscernible]. What will the loan be used for? I mean, the proceeds from the 100 color is -- gives us flexibility. So it will definitely reduce our net debt. So we will -- we are exploring now the optimal dose of the cash. And -- but for the time being, you should expect that this will reduce our net debt significantly. So -- and as you probably know, that [tranche] of financing will be -- would come at a lower cost than the current financing. And it would lower our financing very then, overall. So I think it was a good [trade]. It was a very, very difficult rate and a very difficult environment. But I think we have been successful to get that trade done and now the proceeds should reduce our net debt position. Part 4 of the same question is about the timeline for the logistics [indiscernible] in Jeddah. I think that is -- we already almost signed with one of the main customers and we are in negotiation with another major customer in Jeddah. And I think within the next 2 to 3 years, maybe that project will be done. We are seeing significant demand in Saudi, which we are very pleased with. We have been investing in Saudi for the past, I mean we had presence in Saudi 15 years ago. But in that ALP industrial estate, almost in the last 7 years when everything was quiet and everything was -- there wasn't many activities as we see today in Saudi. And we had conviction in the market and the potential. And I think we're seeing that playing out. Our vision in Saudi -- that space is quite big and quite bold, far exceed what we currently have, and we are working actively now to expand that. Moving to the second question, I think the presentation has got the year-over-year in revenue and EBITDA, excluding the new acquisitions, I think that's already covered in the presentation. Moving to the third question. Again, it's about the [PIA] and resolution. I can't answer that. There is nothing more than what has been disclosed in the financials and to the market. Yes. So this is a question about the demand outlook across the [GCC] and your key geographies globally. So across the [indiscernible] Saudi is definitely our biggest market potential today. And I think we are very well positioned given that we had an early mover advantage in that space in Saudi, and to take full advantage of our position in the market and expand and grow rapidly. I think we are taking every measure to allocate capital to Saudi in industrial estate and to grow the business. But not only in industrial estate, we want to expand in -- now with the endless capability and the Menzies strong global presence. In the aviation space, we believe there is a significant potential value to be created between what's happening in Saudi and the capabilities of Menzies. So we are working on multiple fronts in Saudi. So definitely, as a company, from the service offering and the capabilities that we have and the market potential of Saudi, I think there is huge potential and huge value creation for all the stakeholders. And certainly, definitely by far is our -- where we see demand and potential is given our size and also from our capabilities. Geographically, globally, the U.S. now because of the acquisition of Menzies, U.S. market, is becoming a very important market for us. And we are looking actively to expand and to further augment our presence in the U.S., in aviation. So that's on the [indiscernible] Saudi and globally, it's probably the U.S. What is the impact of potential on recession on Agility Group? And how is Agility preparing for this? I think that if there is a recession, definitely would be impacted because now we are a global company, a big part of our business is aviation, Big part of our the business is fuel logistics with price hikes. So definitely, there will be impact on us. Now -- we have gone through different cycles over the last 20 years. And you can see that we have been able to create value over the years. So there might be a challenge like what we have seen in COVID. But I think the management is well prepared from a mindset and corporate fitness perspective to tack in and manage any issue that might hit. But also, as you have seen, we have taken some measures to reduce the debt driven on our balance sheet by entering into this funded color, to also be able to have enough flexibility to absorb any shock in the system. And also take advantage of any opportunities that will present themselves as a result of the potential recession. So I think we have been actively working on increasing our resilience and the resilience of our balance sheet and the flexibility of the balance sheet in anticipation of, again, risks and opportunities, and I think we're in a very well positioned today. The arbitration -- about the enforcement of the arbitration. I think -- so the good news is that we got this decision and it's a major decision. And I think we have been relentless about protecting our shareholders right and making sure that we don't let go on any aspect. So I think this has been like a very long and painful [indiscernible], but has been ultimately successful. So we are pleased with that. We know that enforcement is not going to be an easy matter, but we also know that there are many ways where we can enforce. And I think we have a very good legal team who is working on the enforcement and connecting as much as possible of that big decision. So the good news is that we have the decision. Now there is another challenge, which we believe we can overcome where we can go and collect our money in different ways. And I think we are confident enough to do that. I think these are all the questions that I can see on my screen. With that, I would conclude the call. And if you have any more questions, you can send them to our IR team. And thank you so much.