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 Third 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'll now turn over the call to Soriana from Agility's Investor Relations team.

Thank you, and welcome, everyone, to Agility's Q3 earnings webcast. Our CFO, Ehab Aziz, will be discussing the presentation you have on your screen, and we'll be ready to answer all your questions at the end of the session. Before we begin, I would like to draw your attention to the disclaimer available on the second page of this presentation. If you can take a moment to read this, and then we'll hand it over to Ehab. Thank you over to you.

Good afternoon, everyone, and welcome to Agility's -- Third Quarter Update. As usual, we'll start with the Q3 business update and the financial performance, and then we'll end with any questions -- answering any questions you might have. On the major events that happened during the quarter, as you have probably seen, Menzies got over [ 7 ] Ground Handling contracts in Spain, which we believe is a very important win, and it's actually to add to the success and the recovery of the industry and Menzies in particular, in that industry on the medium and long-term. So we are very pleased and very optimistic about the outlook in that space. Also, we have signed in Saudi, an MOU with MISA, which we -- as you know, we are very active in the Saudi market, and we believe the Saudi market has a lot of potential -- tangible potential. There are many things happening on the ground, and we believe we are very bullish on the Saudi markets and the future of that market. And then we have the legal dispute with the government in Kuwait, which we have a full disclosure in our financials about all the details and the progress to date on that front. In terms of number, we had a very strong quarter this year and the Q3 2023 is driven by the M&A that we did last year, particularly the Menzies acquisition but also the HG Storage. If you remember last year, we closed around this time, 2 deals and the impact of those deals are reflected in the numbers here. But also organically, the business has shown significant growth year-over-year. So we are very pleased that our controlled business, as we will see later on in the slide, is doing very well and executing very well in a relatively tough environment. So revenue is up almost 41%, net revenue about 46%. EBITDA 28%, the net profit is [ 123% ]. Net profit is impacted by one-off also, which we have mentioned in our disclosure. But despite that, if you take that out, we are still on a good trajectory. EBITDA doesn't include that one off. So you can see that very healthy year-over-year growth for the 3 months ended September '23. For the 9 months, it's a similar picture, but revenues are much higher because the first 2 quarters of last year did not include the impact of the acquisitions. So in the 3 months, you see decelerating growth but still a significant growth as we have seen in the last slide. For the 9 months, revenue stood at about KWD 1 billion, up 91%. Net revenue about KWD 600 million, 110%, significant growth in EBITDA, 54% stood at KWD 180 million and net profit is at KWD 57.5 million, a growth of 39%. This is the -- since we sold GIL and now we have a significant asset, which is predominantly DSV that is classified as investment. We started reporting our numbers into controls and investments. And as you can see, the controlled business, which is almost the wholly owned or controlled operations that we have, have seen significant growth year-over-year. And that is driven through organic and inorganic growth that we have been able to accomplish over the past several years. So I think we have been able to reshuffle our portfolio by selling GIL, getting an asset classified as an investment so it doesn't get included in our controlled business. But then we have rebuilt successfully our controlled business to go back to significant levels for the 9 months, KWD 1 billion. And also in terms of scale and scope, the scale and scope operation is back to an international operation [indiscernible] given to Menzies acquisition. The balance sheet, I think it's -- we -- as you probably know, during last quarter, we managed to enter into the funded collar to hedge our stake in DSV. And as a result, we had to reshuffle our prepaid the debt -- existing debt from commercial banks. We got that from -- on the back of the collar -- from the collar and our financial position and financial -- the balance sheet has been strengthened relatively by that because now the maturity, as you will see in the next slide, the maturity that has been extended. I think the only thing I would throw attention to here is when you look at the assets, currently, what we call investments, predominantly DSV, Reem Mall because it's a convertible debt, so we treated the investment for the time being. It represents about 43% of our total assets, and the control business is about 57%. I think that is key when you value the company and look at the valuation of the company, the figures, the operating results that you have seen in the previous slide, only comes from the 57% which is the control. There is 43%, which is the investments that have to be looked at differently because the earnings are not reflected in our results. Our net debt to EBITDA improved a little from last year, and that's due to the improvement in EBITDA. I think this is a slide that is important from a risk management perspective, given the inflationary environment and the high interest rate environment we operate in, I think it has been a nightmare for many companies and the burden of debt and servicing of interest has been very good for many companies. What we have done, as I mentioned, we built the collar. We got the funded collar. We got the money on the back of that. We set into all the commercial loans or most of the commercial loans, and we got almost fixed interest rate for the next 3 to 4 years. So a few things I would draw your attention to here. One is our -- currently our debt profile in terms of currency. And that is at the corporate debt, which represents about 80% of the total debt that we have, the rest are embedded in the business. The currency is now 89% of that debt is denominated in euro, and that was a major shift from what we had before. What we had before was the U.S.-based borrowing. Now we have 89% of our debt is in euro, and that is mainly to match the asset -- the main asset that we have, which is the deals we share. So there is a natural hedge now between -- on the currency side. And I think that gives us some peace of mind because the movement in currency would not impact us as much as it used to be in the past from a balance sheet perspective. Now P%L might be different according to the accounting treatment. But from an economic value perspective, now our debt mirror our asset and then that gives us some, I would say, like stability from a currency perspective. On the maturity side, as you can see, the debt profile, almost 37% is now will mature in '26 so that's about 2 years -- 2 quarter -- year. Now we can also -- because of the flexibility in the hedge that can be extended further if we want to, and it's not -- so I think from a debt profile, 52% is -- will mature by 2027. So overall maturity, I think, has improved. And in today's market environment where interest rates and inflation is unpredictable, I think we feel more safe having a little bit medium-term maturity for the next 3 or 4 years until things settle and then maybe we can look at the maturity profile further as and when the hedges mature. If you look at the net debt bridge, throughout the year, you can see that we generated significant operating cash flow, as we will see on the next slide. But you see this interest in lease payments, the KWD 158 million, a big chunk of that, I believe it's about KWD 100 million, is a prepaid interest because we got the loans from the banks on the back of the hedge. We have to prepay the interest upfront. Of course, the interest rate is much lower than what we used to pay, but also we have paid about KWD 100 million worth of upfront interest. That interest if we prematurely settle the debt or prematurely close the hedge, we will be able to recover the proportionate amount. But from a cash flow perspective, I think you have seen it now as one-off, but then going forward, we are not obliged to pay physical cash to settle the interest on an ongoing basis, which would free up our cash capacity in the future. In terms of cash flow, I think there has been a significant improvement for the 9 months compared to last year. You can see our operating cash flow, about KWD 144 million compared to KWD 46 million last year. You can see that's mainly from cash from operations before the changes in working capital has almost -- 2/3 of the improvement is coming from there. And that's the operating cash flow from -- as a result of the acquisitions and the organic growth and the recovery in multiple industries. And then also the free cash flow was about KWD 80 million. Now last year, if you look at the KWD 250 million, that's the acquisition impact. But again, even if you take that out, still the free cash flow significantly improved. On the right side, you can see the CapEx and investment between how much of that went to control and investment. And you can see the absolute amount is lower than last year and lower than the average of the last 4, 5 years. 61% invested in the investment sector, and that's predominantly the funding for Reem Mall and the rest is on the controlled, which is organic CapEx and small acquisitions. So overall, you can see on the aviation service sector, our revenues were up 66%, and that's a function of the M&A, acquiring Menzies, but also it's the recovery of Menzies and recovery of NAS as the broader industry recovered last year, the EBITDA growth is 50%. Again, that's the recovery from [ COVID ] plus the acquisition. On the fuel logistics that is a very strong growth year-over-year. It's predominantly Tristar, 15% growth in revenue, 22% in EBITDA. And Tristar has been consistently growing its business. It's been a very rewarding success story, and we feel very proud of what Eugene and the Tristar team has been able to achieve. And then everything else, again, is on the [ ALT ], UPAC, GCS and few other smaller entities have also shown significant growth year over year. So across the board, you can see that very strong performance in the controlled business and which gives us a lot of optimism about next year and the years to come. I think that was the last question. I will see if there's any questions to be addressed and then...

As a reminder, you can submit any questions via the Q&A chat box on the right.

Yes. Okay. So there is one question about the one-off. The one-off -- so when we had the loans, the commercial loans, we entered into part of those loans, we entered into interest rate hedge. So we had the hedge and the hedge was reported in the equity at the time. Now when we close the loans, we have to close the hedge. And the result of that hedge closure has to be recycled through the P&L. The impact of that hedge was about $80 million profit, went through the P&L. So that was the result of the closure of the commercial debt and placing it with the funded collar debt that we've got. So I hope that explains the recycling of the hedge. So you will see on the equity side, the reduction on the P&L side, below EBITDA, you will see the increase, and then it goes back through the retained earnings. There is another question around the relationship with the government. And will it take -- more difficult to obtain new projects awards. I mean, I think that's a very subjective question. I don't know how to quantify the deterioration with the relationship with the government or not. I think we are a professional company. The government is following what they believe what is right. We also follow what we believe is right. And I think there is a full disclosure in the financial statement that explains in detail all the steps that have been taken from both sides. But I cannot assess or judge subjectively on whether the relationship deteriorated or not. Now what is the [indiscernible] net debt to EBITDA in '24 and '25. I think this is a very also tricky to a certain extent because optically, our net debt-to-EBITDA today is at 3.7x. I think if you -- but that doesn't consider a major asset, which is, as we have seen, investments represent about 43% of our assets. And I think if you allocate some of that asset to carry some of the debt that we have to [indiscernible] EBITDA will reduce significantly. So I wouldn't -- I mean, our target is to always maintain an investment grade, which should be around like 2x, maybe 2.5x maximum. I think if we adjust or you allocate some of the debt to the DSV shares, not just measure it as a function of EBITDA, I think we'll be at that level. So in the next 2, 3 years, I don't see our debt going either way in a significant way. So I don't expect it to go much higher. I expect it to go a little bit down as a function of growing EBITDA, not as a function of repayment of that, unless things change and we either sell something or we buy something which is not in the cards as of today. There is a question about if we consider further collar or outright sale in DSV to further improve your balance sheet, I think, I mean, in hindsight, we have been lucky to get 75% of our stake covered and hedged. Now we see the stock price going down. We are not as nervous. I mean we are also upset to see the stock price going down. I mean without the hedge, we're very nervous and very like on the edge because significant assets and the impact on our balance sheet is significant. But I think now at 75%, we are more relaxed. I don't think you will do any further collar in the short-term. Maybe if things develop in a certain way, we would always evaluate the situation. But I think from a risk management perspective, I think we are fine with what we have now. On the sale of DSV shares, I don't see us selling like a significant stake or anything. I don't think that's in the cards. As of now, we might participate in the share buyback. We haven't participated so far in the share buyback, but there might be a way into where we need to participate in the share buyback. But again, no decision has been made. I'm just thinking out loud, if and when there is a need for liquidity and we need to monetize part of our stake through the share buyback, we might be selling our pro-rata share in that share buyback. So far, we have not participated. And there is no plan to participate. I'm just explaining that there might be a situation where we need to do so. One more question about for the case of Agility fighting against PAI, how do the warehouses areas for these cases compared to total agility, warehouse space? What percent of rental revenues comes from the warehouse buses? I think we disclosed before the percentages. And I think it's, today, most of the revenues that come from the real estate in -- from the real estate in Kuwait, most of the revenue you see on the rental revenue, I would say, I don't have the figure, but it's the majority of the revenues. The rest is coming from Africa and coming from Saudi. So, it's still a significant state or a significant portion. And also, I think as we disclosed before, it will have an impact. And I think the stock price has reacted or maybe overreacted to the situation. But I don't see it as an existential threat to the company because, as you can see, the company has been able to diversify its assets. And I think we are in a much stronger position and a much stronger company than what it used to be several years ago. So it is painful to see these assets, God forbid, if the court ruled against us. But I would say it's not an existential threat to Agility. And I think we have diversified well. We have increased our -- the size of our operation and the scope of our operations geographically and otherwise. I think Saudi offers significant upside potential, particularly on the real estate side. And I think if we are forced to face the situation, it is extremely painful, but life goes on and I think the company will be strong even after, God forbid, if the court decides against us.

Yes, I think that is -- is all the questions, if I'm not mistaken.

Yes. Okay. So one more question about which business segments are you most excited about and can contribute high to EBITDA? It's by far Menzies. Menzies is our vehicle now to create significant value for our shareholders. That's for sure. It has the potential in terms of size and in terms of industry and in terms of our capability to generate significant value in the next 3 to 5 years. So Menzies is the highest EBITDA contributor and also high potential in terms of value creation in the next 3 to 5 years. I think I answered all the questions. So with that, thank you.