Makhazen (MKHZN) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for joining us today. This is Sidharth Saboo. And on behalf of Arqaam Capital, I would like to welcome you to Agility's Second Quarter 2023 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 Soriana from Agility's Investor Relations team.

Thank you, Sidharth. I would like to welcome everyone to Agility's Second Quarter 2023 Earnings Webcast. As usual, Mr. Ehab Aziz Agility's CFO, will be presenting to you Agility's financial results and the major developments that happened during this quarter. Now before we begin, I would like to draw your attention to the disclaimer available on the second page of this presentation. As this presentation may contain forward-looking statements. Such statements are subject to risks and uncertainties. Take a moment to read this, and then I'll hand it over to Ehab. Thank you. Ehab over to you.

Good afternoon, everyone, and welcome to the second quarter analyst call. We'll start, as usual, with the business updates for Q2 and then we'll skin through the group financial performance, and then we'll open -- will address the Q&A that has been posted on the platform. For this quarter, we had I mean, 3 key highlights, main highlights. On the business side, we entered into a multiyear funded equity collar. The main purpose of which is to hedge our stake in DSV, which is, as you probably know, a significant stake and a significant part of our assets, and represent a significant part of our equity as well. And the markets have been volatile over the past almost 18 months. And I think the market presented a good opportunity to hedge to the levels and we took advantage of that and we hedged our position -- a big chunk of our position almost now we have about 14 million shares out of the 19.3 million shares has been hedged. And we believe that's a reasonable level given where we are and given the exposure to the stock. I'm going to reiterate that we are still very bullish on DSV and its management. We believe they will ultimately be the winner. There has been a lot of volatility in the market, in the free floating market. But DSV have proven by the results over the last quarter and the quarter before that they have been extremely resilient. They took appropriate measures to offset the decline in volume and in margins, freight rates. And we still believe that the story has a long way to go. That said, which also we have reiterated in our announcement, the exposure that we have, the single stock exposure that we have in DSV relative to our size required us to be and out of prudent to hedge the position. So the hedge is not -- we haven't sold any shares. We haven't disclosed any of our stake but we have been protecting our funds and while maintaining the upside. We have also issued our sustainability report and the legal dispute continues in Kuwait, and that's definitely concerning issues that we haven't quit, which we have been doing our best to mitigate the impact of which through diversification, which we have been doing over the past several years. But also, we are taking all legal steps to protect shareholders [indiscernible]. For the Q2, you can see that this quarter has been, I would say, relatively muted quarter. If you take out the impact of the acquisitions of John Menzies and HG Storage, which we have done during the end towards the Q3, Q4 of 2022 and the impact of which is definitely significant. You can see on an organic basis, we have been, I would say, high a single-digit revenue growth, a high single-digit EBITDA growth. If you factor the acquisition, definitely the improvement is quite significant, 137% increase in revenue, 177% in net revenue and 63% in EBITDA. You noticed that the net profit is declined and that's primarily due to the increase in interest costs. So one other strategic aspect of the funded collar that we have done is to obtain relatively cheaper financing. And pay back the debt that we have, which we have done. However, the benefit of that funded collar will start showing in the upcoming quarters in Q3, Q4 onwards. So that you will see a reduction in the interest expense. But also, I want to clarify that the increase in the interest expense, almost 2/3 of the increase in interest expense is due to the increase in rates and 1/3 is due to the increase in the debt. If you remember, when we acquired Menzies, we funded the acquisition through debt. We did not sell any shares of DSV, and we did not liquidate any of our assets to fund this acquisition. We basically took a debt. So the leverage went up significantly. And as a result of that, the interest cost as a result of the increase in the level of debt has also increased and that represents only 1/3 of the increase in interest and 2/3 came from the significant increase in interest rates which we have all seen over the past year or so. So going forward, we believe that this should be reduced because of the funded collar and also the level of debt, commercial debt will significantly be reduced in Q3 when the second tranche of the funded collar will get reflected on the financials. In terms of H1, it's relatively almost the same picture of Q2. So I would say both quarters have been quite consistent. Again, a high single-digit increase in revenue, double digit, actually 12% and about 19% increase in EBITDA. But when you factor the acquisition, it's a significant increase. And again, I remind you that all the movement in DSV stock, except for the dividends that we received, which is reflected in the Q1 when we received it, everything else is going through the equity and doesn't get reflected into our [ NPS ]. Again, this is the picture we started reporting since we disposed or exchanged our stake in GIL for a stake in DSV. We classify what we call controlled entities and investments. And you can see the significant increase in the control. That's basically the businesses that we run. We manage for the cash flow investments. We have a slide later that shows all the list of investments, but mainly DSV stake plus other relatively smaller investments. And you can see that the controlled business has been growing significantly. And we are -- despite the challenging environment on multiple firms, we feel proud that we managed to basically reshuffle our portfolio at such time during COVID and dispose GIL or basically exchange on GIL stake with a much stronger platform, which is DSV. It's a smaller state, but it's much more valuable stake and we are very proud of that. But at the same time, as a result of that transaction, we became a regional company and then it took us less than a year to regain our position as a global player in the infrastructure space. So we did meant this and as a result, you see the numbers on the controlled entities growing significantly. Revenue, as you can see, going from KWD 270 million to KWD 650 million. Net revenue from KWD 139 million to KWD 387 million and EBITDA from KWD 76 to KWD 182. A significant improvement in the controlled segment. On the Investment segment, as we said, we're also managing that very diligently and with the hedge funded collar, which I think would protect the stake of DSV and give some comfort or a minimum level of comfort on the value of that stake, while maintaining the upside. In addition to that, we managed to get also the -- as I explained earlier, achieve the financing. So overall, I think we are very pleased with where we are despite the different challenges that the company faces. Balance sheet. Again, we continue to have a strong balance sheet with strong equity. You can see that the total assets controlled is about 47%. Investment is 54%. That also reflects the increase in value of DSV over the past year. But it's, I would say, 50%, 50-50 is the asset value -- side -- from a valuation perspective and from a shareholder and investor perspective, that 53% of investment would have to be valued differently because it contributes very little to the P&L, as we have seen from the previous slide. And the 46.5% coded for the seek of argument, we have 50% of our assets, which is under control. is what you see in the P&L. So I think we have a very good, a very balanced portfolio of businesses and very strong equity base. The debt profile, this picture will change significantly over the past -- I mean next quarter, you'll see a totally different picture because the funded collar will kick in. And most of the debt will be paid by that time. But I think it's worth mentioning that the debt that we have taken is mostly in euro, it's the euro-based debt. And again, I'd like to remind you that DSV is a euro-based asset and the hedge is in euro and also our debt predominantly be in euro going. We still have some portion in U.S. dollar and KD, and we believe the current portfolio of debt in terms of maturity and currency is appropriate to our asset base. The graph on the right shows you from quarter 2, 2022 to quarter 2, 2023, where the money has been invested and why the net debt has increased. So you can see where the difference is coming from, and you can see KWD 416 million increase over the past 12 months, of which KWD 335 million is in the acquisition, another almost KWD 100 million in CapEx and investments that is funded by operating cash flow and other sources of cash. So I think you can see clearly that most of the cash that has been generated and borrowed have been reinvested, and that's basically the acquisition that we have made over the past year or so. We move to the cash flow. I mean, if you are following the company from a long time ago, 2015, we started moving from a net cash position to a net debt position and also from the positive free cash flow to a negative free cash flow to fund the investment program that we had back then started in 2015. By now, I think most of the major investments are done. We are seeing positive cash flow -- free cash flow of KWD 52 million. KD's strong operating cash flow of almost KWD 90 million for the H1. And I think we continue to focus on cash management and the usage of cash. Now that we have rebalanced our debt portfolio with the funded collar, we believe we will have some flexibility to do some investments. We are very cautious about what investments we do, and we are making sure that whatever we -- there is a very high level of scrutiny to investment opportunities. And we are only focusing on things that would move the needle for the company and its shareholders. So again, we are pleased to start seeing positive cash flow back. We are diligently studying how we deploy that cash between how much should go to the shareholders, how much should go back into investments. And I think as the environment settle down, that will give us more confidence or more clarity on where and how this cash will be deployed. This is just a snapshot of the key entities. And you can see revenue growth in the Aviation Services is quite significant, and that's primarily driven by the Menzies acquisition. But more importantly, also about the recovery of the aviation industry. If you remember, we did the Menzies acquisition towards the end of COVID and the aviation industry was quite still not recovered. We are seeing very strong recovery now, and that's reflected in Menzies and also our legacy NAS operation. And you can see that in the numbers. So the numbers here are driven by both the strong acquisitions, the acquisitions that we have made, but also by strong performance due to the recovery in the aviation space. We are very pleased with that acquisition. We believe it's a strong platform from which we intend to grow and probably do more organic and inorganic growth to maximize shareholder value, similar to what we have done with the GIL business. Fuel logistics, that Tristar, again, very strong momentum in revenue and EBITDA. And then all the collective other controlled business, decent, I would say, growth in revenue and flat EBITDA growth versus Q2. ALP continues to be okay. I think we are very, very bullish about Saudi. We have invested early on in Saudi real estate, industry real estate. And I think we will start seeing some significant growth and opportunities going forward. Africa is reasonable. It's not due to the currency and the current situation. It's not, I would say, the best investment, but still a reasonable and decent investment. And I believe given the nature of the investment and its infrastructure play in Africa over time that will start being optimized. But I think the big chunk of the investment that we have done in that space in ALP was in Saudi and I think that, that is staying handsomely, and we believe the potential is going to be even larger than what we have seen so far. I think that's the last slide. We'll address some Q&A and then end the call.

[Operator Instructions]

Yes. So there is one question about the quoted security amounting to KWD 1.3 billion. The increase is basically due to the increase in the stock price of DSV. So we did the first tranche of the collar. So it's not related to the collar. It's related to the increase in the price of DSV. The collar is classified differently. The value up or down of that collar would be reflected in the equity. So that increase that you are seeing in the equity in the quoted security is primarily driven to the evaluation of DSV shares, which is due to the increase in the stock price of DSV over the period. I think it's worth also mentioning that the collar will be valued every quarter. And then any gain or loss will be going through the equity. Now if the collar value is up, that means that the stock price is down predominantly, that would be the case. If we see increase in value in the collar that's basically the protection, then there will be a corresponding decline in the stock price. So net effect on equity should be minimized. Of course, it depends on the level of the collar and the protection and all of that. But you should expect some movement in the equity up and down as a result of valuing that collar every quarter. So just to give you a heads up. But again, back to your question about the value and the increase in the value, it's definitely due to the increase in the stock price of DSV from December 2022. Again, there is a question about why are you still accounting for revenue, suspended operation in Kuwait? I think this is a legal case and we follow basically what the legal advisers based on what we see as our position. So we are not doing any speculative. The management here, it's basically based on the legal opinion we receive. I mean we are still managing the facilities, the warehouses, and we still receive income, rental income. Collection, you can see is quite healthy. So I think it's business as usual. Of course, there is a legal case and there is development, and we keep the market update to announcement on the Boursa website, but also there is an extensive legal case note in the financials, where we can read all the details. But again, our revenue recognition here is based on the legal opinion and what they believe our position is. The question was, do you expect to hedge the rest of the DSV stake? I think we will -- we are monitoring it. As you know, the DSV stake is a significant stake. We have seen its impact on our equity when the stock price went down. But also, you see its magnitude to our assets. And when you look at our market cap, it represents a significant stake. So we cannot be complacent about managing the stake, and we will actively continue to manage it. But I think for the time being, we are almost -- we hedged, as I said, about 14 million shares out of 19.3 million shares. I think that's a very, very good level and a comfortable level for us for the time being. Now things might change. Market might change. There might be different scenarios that we are not anticipating or different opportunities that we are not foreseeing as and when these scenarios [indiscernible]. I'll take the appropriate action. But for now, I think we are in the, I would say, the shares are in medium term, I think we are hedged to the level that we are comfortable. I mean how should we think about the impact of the potential rent escalation for operation in Kuwait? I think we addressed the second part of the question. The first part, I'm not sure current escalation from the government. I mean it's a legal case. So I think it would be too early to start speculating how we will manage the escalation in the rent of the ALP operation. So I think what we would do is wait until the legal case settles. And then in the light of that, we will start strategizing around how we can optimize the income, how we can rationalize our expenses, including escalation of rent from the government. There is a question about global clearing? I don't think -- I think that all the related information about global clearing contracts is in the financial statement. There are legal cases with the government. I think we won a KWD 58 million court decision and all the information are announced and explained in the financial statements. I think I have addressed all the questions. So I close the meeting. Thank you.