Makhazen (MKHZN) Earnings Call Transcript & Summary

Hello, and welcome to the Agility Public Warehousing Company Q2 2024 Earnings Webcast. My name is Nadia, and I will be coordinating your call today. [Operator Instructions] Please note we will not be taking any audio questions on today's call. I will now hand over to your host, Aly Adel from Arqaam Capital to begin. Aly, please go ahead.

Thank you, Nadia. So good afternoon, ladies and gentlemen. Thank you for joining us today. This is Aly Adel, and on behalf of Arqaam Capital, I would like to welcome you all to the Agility Public Warehousing Company Q2 2024 Earnings Call. With us from Agility's team, Mr. Ehab Aziz, the CFO; and Ms. Soriana, the IR manager. So without any further delay, I will now turn over the call to the management team. Please go ahead.

Thank you, Aly and the team, and welcome, everyone, to Agility's Q2 2024 Earnings Webcast. Before I hand over to Ehab Aziz, our Group CFO, to discuss Agility's performance during this quarter, I want to remind you if you have any questions to write it down in the chatbox and we will address it after the presentation, which you can see on your screen. Also, 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. And then I'll hand it over to Ehab. Ehab, you can start.

Good afternoon, everyone. We'll start today's session with a short presentation about the quarter performance and the H1 performance, and then we'll take Q&A as much as possible. So Slide 5 shows the quarter, the 3 months ending June '24. And overall, the performance of the group has been relatively good, strong revenue growth of about 14.5%. Net revenue is higher than the revenue growth. So net revenue margin has expanded, resulting in about 19% year-over-year growth. EBITDA is up about 5% year-over-year. And the net profit is actually declined, and the reported net income has actually declined by a significant portion. And the main driver for that is the minority interest of Agility Global. As you may recall, we have done in-kind distribution of Agility Global and the company got listed in ADX in May 2. And as a result of that dividend in kind, the group Agility Kuwait, owns now 51% of Agility Global. And accordingly, the results which we used to consolidate fully before -- as far as the net income is concerned, will only take 51% of the profit of Agility Globe. And hence, there has been resulting minority interest as a result of the in-kind distribution and the listing of Agility Global, which as you may all know, has been distributed to Agility shareholders or effectively Agility shareholders today on the company through 2 shares, 1 in Agility Global in ADX and the other share is the Agility Kuwait K.S.C.P. So the accounting treatment for that requires that we exclude the minority interest, so the 49% of the results would go to Agility Global going forward. And the shareholders of Agility Global, which is predominantly today consist of Agility K.S.C.P. So that's an accounting treatment. And I think going forward, shareholders would need to look at the combined value of the shares in Agility Global and Agility Kuwait rather than only one share because the in-kind distribution was quite significant. Agility Global has an equity value today of about $5 billion, and that's basically what got distributed to our shareholders, 49% of that got distributed, the 51% is still owned by Agility Kuwait. So it could sound a bit confusing. In essence, what happened is that because of the distribution, we take a minority interest out, which would result in net profit going down. In terms of H1 performance, again, revenue is up roughly 10%. Net revenue margin has improved relative to last year, so grew at 19%. EBITDA is healthier here at 11% for the H1. And Q2 also had some one-off expenses like legal expenses, consulting expenses as a result of the listing. And also, as you may recall, we have a dispute with Korek so there has been -- and there has been lots of legal activities recently. So that has also contributed to the negative performance at the Agility Kuwait and the group in general. But that's one-off. And going forward, that should not continue to be the case. So -- and that's why also the increase in revenue and net revenue is not entirely reflected in the EBITDA. In terms of net profit, I think I have explained that, and you can see that the minority interest in 2024 has increased from KWD 11 million last year to about KWD 19 million this year, and that's, as I explained, a function of the in-kind distribution of Agility Global. In terms of balance sheet, I think the key theme here is we still -- the company has KWD 3.8 billion of total assets. But if you look at the equity, you realize that the equity compared to June, which is for the last 12 months have gone down by about KWD 1 billion, and that's mainly due to the in-kind distribution, which again, all the shares and all the stake of this company has been distributed pro rata to our shareholders. So -- and as a result of that, the equity of the company has gone down, the equity of the company of K.S.C.P. has gone down to about KWD 876 million. The main difference is representing the shares that have been distributed. So shareholders today will have a part of their equity in the shares of Agility K.S.C.P. and the other part is the shares in Agility Global, the total of which would be the value of Agility ex in kind dividend. Net debt has increased. And you can see on the bottom right, the movement of the net debt from KWD 868 million to KWD 963 million. And you can see that there has been a significant increase of operating cash flow of about KWD 197 million. That was offset by about KWD 111 million in CapEx and investment. We distributed dividends of about KWD 77 million, so that added to the net debt. And then the lease payments, because the operating cash flow do not include the lease payments that we pay because of the accounting treatment to IFRS 16. So you add that back and then we go back to the KWD 963 million. So I would say, overall, no surprises here. I think dividends, we paid a little bit more dividends this year, if you account for what we paid through Agility K.S.C.P., the in-kind dividends and also the cash dividends that we paid so far through Agility Global, 51% of that came back to Agility Kuwait. The following slide is about the cash flow statement, pretty much stable, I would say, KWD 80 million of cash from operating activities. And that's after the working capital. Working capital increased a bit as a function of the increased revenues. But overall, I think it's pretty stable. On the right side, we continue to track how much of that CapEx and the investment is going to the investment segment, which if you recall, that's the DSV, Reem Mall and the tech investment versus the operating entities, which are Tristar, Menzies and ALP Kuwait and non-Kuwait. I mean over the performance of all segments being Menzies, Tristar and ALP have performed extremely well year-over-year. I think Menzies has proven to be a good acquisition, and the timing of the acquisition of Menzies, I think, proven to be a very good timing. We continue to focus organically growing Menzies, but also through tuck-in acquisitions, small and medium-sized acquisitions that we have been looking at in Menzies. And we have seen significant growth as a recovery -- as a result of the recovery from COVID and the aviation sector has recovered quite nicely. And Menzies is very well positioned to benefit from that, and we see that reflected in the Menzies results. In terms of -- and just to draw your attention, there is another full presentation about the Agility Global, which has all the international assets. That's Menzies, Tristar and ALP outside Kuwait. So you can have -- I think you have access to that through our website, and there are all the details that I'm trying to explain here in that presentation. So in terms of Tristar. Tristar also continues to perform extremely well year-over-year. If you recall, we sold a minority stake to GIC a few years back. And that, I think, was to crystallize the value of Tristar and also to change the capital structure. But we continue to look at ways to unlock the value for our shareholders in Tristar. And currently, we have -- we are conducting a strategic review. We appointed an adviser to explore options and advice us on the best path forward and we are proactively looking at how to maximize value through our ownership in Tristar and ways to unlock value for our shareholders in that particular asset. Operationally, Tristar has performed extremely well. EBITDA, revenues have shown year-over-year growth, significant growth. But that said, we -- I think it is prudent that the management look at how we can unlock value in that asset. The scale and the scope of that company has reached a level where we believe the capital structure of the company, they would need to cope with that size of the company. Roughly, the company generates about $1.1 billion of revenues. To remind you, this is an acquisition that we did almost 20 years back and it was a very, very, very small local transportation company. And today, Tristar is a significant fuel logistics player. So we continue again to look at ways to optimize and unlock value for our shareholders. And we have appointed advisers to advise us on the best way to do that and if what options the shareholders would have on that front. ALP in Kuwait, as you know, the situation in Kuwait remains the same. We have a full disclosure on the legal cases in Kuwait in all our financial statements, and pretty much the situation remains the same. Outside Kuwait, I think Saudi continues to perform extremely well. We continue to add more customers to our customer base. We also started operation in Jeddah. So we got roughly 500,000 square meters of land in Jeddah, and we started the operation there in terms of construction, and we have a very strong pipeline of customers. So ALP in Saudi, industrial real estate in Saudi is, I think, is one of our best bets that we made 5 or 6 years ago. And I think it's paying quite nicely, and we continue to see that is performing very well in the next several years. I think with that, I have covered the presentation. It is a short presentation. And today, we have this session, which we explained the financial performance from Agility Kuwait perspective. As I mentioned, there is also another presentation that you would find on Agility Global website, where you can see all the details of the relevant assets under Agility Global. I think with that, there might be a few questions.

About the one-off expenses. As I reflected, the one-off expenses are related to the cost that we incurred for the listing and the preparation for the listing. This was a major undertaking and a major effort to do the listing of Agility Global. There is increased legal fees for Korek activities. And that's, as you have seen several -- we had several disputes and several events, and there has been an increased legal expense. We don't expect the legal expenses to continue going forward. These are the 2 main -- and there are a few other one-off related expenses related to ALP in Kuwait as well. . There is a question about the rental income and us accounting for it. Adjusted for the proportion share of profit from Agility Global -- Agility Kuwait reported loss during H1. Yes. Okay. So it's a multiple question. I think Agility Kuwait, the -- we continue to report the revenue of the disputed lands because this is still a legal dispute. However, we have a qualification in the financial statement. So I think all the shareholders and all the investors are aware of the extent of the potential losses in case we lose the legal cases. So that's, I think, how it's covered. But we continue to account for the revenues. If you exclude the one-offs during H1, Kuwait would be and should be profitable. So going forward, excluding the one-offs, Agility Kuwait should be profitable going forward. And also the progress on the S2, which is a project of about 1 million square meter, is ongoing well, and that should contribute to the profitability opportunity in Kuwait in the near future. Construction already started and the infrastructure is there. There is a question about listing of the wholly-owned subsidiary part of strategic plan for Agility Global. Yes. I mean we might -- as the situation evolves and as we see ways to optimize and maximize value for our shareholders, we might be either listing or opening the capital structure. As I explained earlier, for Tristar, for example, we are proactively looking at ways to unlock value for our shareholders. So that's ongoing. That could be -- that might take different shapes and forms. But for now, without assessing and evaluating that, Menzies is definitely an asset that would qualify for potential listing, its size. But I think that decision, whether to list some of our subsidiaries or not, whether to sell similar to what we have done with GIL before or not, I think time will come where, first, we need to create the value and enhance the performance and unlock basically the operating value from these assets. And then once we are comfortable that this is the right time to unlock that value to our shareholders, we will definitely be considering other things, listing and maybe trade sale or other possible scenarios like merging or selling the assets. I think there is a question about taxes overseas doubled. Yes, I think taxes will normalize. And I think most of the taxes that you see is coming from Agility Global. And as we said, Agility Global is still, because of the change in the capital structure and the numbers and everything, I think it will take some time to normalize. But I would say our tax, effective tax rate in Agility Global and just take Agility Global because that's most of the international assets and most of the taxes that are coming from overseas are coming. I think it should stabilize at 25% of effective tax rate. So that's if you look at Agility Global independently and you look at the effective tax rate, it should be hovering around 25%. Now this is still a little bit tricky because Menzies, for example, has global operation, and it depends where the growth is coming from and whether these jurisdictions are -- have tax -- tax favorable or not, the overall tax expense will be determined. So that's ongoing. But also because we have Tristar and ALP, where they have a lower tax rate than Menzies, the $1 increase in Tristar would have, from a tax perspective, a positive impact. So I think it will evolve over time. Our expectation, it should hover around 25% effective tax rate at Global level, not at Agility Kuwait level. As far as the buyback program, I think today, our capital allocation is more focused on regular dividends to our shareholders and investment and managing our debt. I think as and when the situation permits, let's say, we monetize some of our investments, the entities in the investments pillar or monetize maybe or create liquidity event for one of our operating entities, probably there will be either expect dividends or a share buyback. I think it will depend on the stock price at the time. As we explained in Agility Global call, the decline in the stock price is, in our view, purely technical because some of the shareholders who are -- who cannot -- don't have the mandate to own assets in Abu Dhabi, and this could potentially be -- actually what we are seeing, there are foreign shareholders, but also some Kuwaiti shareholders cannot hold assets in Abu Dhabi. They don't have the mandate to do that. And I think they are basically liquidating their stake. And the positive news is that we have seen also buyers, foreigners as well as local buyers, buying -- absorbing some of that supply. But I think it will take some time until there is an equilibrium between supply and demand. And as we continue to report good numbers, which has been the case this quarter, I think the sentiment in the stock will be reflected, and then I think it will reflect the true value. I think today, the stock is trading at about 60% of book value, which I would say is relatively low. We don't expect -- we are hopeful also that this is not the case. And I think the management is doing everything on the operating side. And if you look at their performance [Technical Difficulty] and with the investment community going on roadshows and explaining. So whether we will complement that with a buyback program or not, I think that will be up to the Board to decide on the capital allocation going forward. But for now, the capital allocation is focused -- more focused on regular dividends, many special dividends if we monetize any of our assets and then also reducing our leverage and looking -- continuously looking at opportunities where we can invest the cash at the higher rates. Yes, I think on the legal front, we have the collection of the Iraq case and the Argentina collection case. We have disclosed that to the market and I don't have any further like update or anything extra than what we have disclosed in the market. The recurring on investment of DSV is very low. It depends how you look at it. DSV is a top freight forwarder, is one of the best freight forwarders in the world. They don't distribute dividends. They basically do a share buyback, and they distribute very small amount of dividends for various reasons. So I think overall, if you look at the investment and the potential and what's going on in the market today, we are very confident that DSV should perform in the short and medium term very well. And I think there is a clear path to create significant value for the shareholders of DSV, which we are one of the largest shareholders. Yes. So again, optically, if you look at the equity value of Agility Global, $5 billion or $5.5 billion and the net profit is $100 million, that you are neglecting about $4.5 billion of investment, which doesn't contribute to the P&L. So the P&L that you see in Agility Global, it is only driven by Menzies, Tristar and ALP mainly. And this is what we call the controlled segment. So the P&L only reflects the controlled segment due to the accounting treatment. But if we just look at that, then you would be neglecting about $4.5 billion of assets that do not contribute to the P&L. So for example, DSV, I think at the end of the quarter stood at $3.3 billion. And I think its contribution to the P&L is negligible, maybe $10 million or so. So if you take that $10 million and you divide that by assuming DSV, the $3.3 billion is equity, keep the debt, forget the debt for the time being, then the return is extremely low. So you either need to adjust for the $4.5 billion of net asset value in the Investment segment and then do -- or you allocate the debt and its interest to that segment and you look at the profitability without the same. And that's why we mainly focus on EBITDA and EBIT rather than the net profit because the net profit could be quite confusing if you just use these calculations. I think I explained the decline in the warehousing. These are mainly one-offs and not necessarily due to any other reason. There is the performance of DSV. There is an extensive coverage of DSV. And I think here is not the forum to comment or explain the DSV performance. But on the DSV website, there is an extensive coverage of their performance. Overall, DSV in Q2 has performed extremely well, I would say. The market has been going down for the last several quarters. And we can see now that they are turning the corner, and we started seeing some growth in air and ocean. And I think we have hit the bottom in terms of market in DSV and the market is recovering. So that, I think, is very good news. If the interest rate environment changes and goes down, interest are going down, asset prices should go up and DSV stock should benefit from that. And then also, there is an ongoing M&A activity with DB Schenker, which is a public news. I think I have covered the one-off items, which impacts Agility Kuwait. And I think with that, I think I've answered all the questions. Thank you.

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