Muscat Finance SAOG (MFCI) Earnings Call Transcript & Summary

[Foreign Language] and good afternoon, everyone. Most of the participants have joined. Yes, maybe we can start now. Well, thank you. Thank you, everyone, for joining this MSX session, which is basically regarding the financial performance for the financial year ended 31st December 2024. I would like to thank you, and it is our privilege to welcome you all on board. We would like to thank you for the continued trust and a partnership with us. Our focus remains on delivering the sustainable growth and enhance value for all our stakeholders. Today, in this session, we will take you through the journey and history of Muscat Finance, along with the branch network through which we are operating in Sultanate. Then we will take you through the snapshot for the year-end performance than the overall financial performance for the financial year ended 31st December 2024, and what are the way forward. So maybe let's begin the presentation. This starts with a normal standard disclaimer. This presentation basically contains statements relating to Muscat Finance business, financial condition and results of operation from the published information, which is already available in the public domain. Any statement or commitment, which has a meaning of prospects and forward-looking [ are only predictions ] and are not guarantees of future performance and does not constitute any solicitation to buy or sell any product, service, stock or to engage in any trading strategy and should not be relied upon or considered as advice for making any investment decision. As due caution must be exercised that any such forward-looking statement or comment are and will be subject to both known and unknown risks, uncertainties and factors relating to the operation and business environment of the company that may cause the actual results of the company to be materially different from future results expressed or implied in such forward-looking statements. This presentation and discussion are for information purposes only. Any recipient of this presentation and discussion media must not be communicated, reproduce, distribute, or disclosed through the media or refer to them publicity or privately in whole or in part any time without written consent of the company. So first of all we would like to bring into the attention the journey of Muscat Finance and the history of the company. Muscat Finance was incorporated in the year 1987 as first NBFC of Oman. The company is engaged in vehicle and equipment financing for retail and corporate customers. The company is in operations almost for 38 years, approximately 4 decades. After 8 years of operation in the year 1995, the company was listed on the stock exchange and year after, in the year 1996, the company launched debt factoring and working capital schemes for its SMEs customer. In the year 2013, the company raised OMR 7 million through nonconvertible bond issuance. In the year 2019, Muscat Finance was one of the first company in the FLC sector to partnership with Omantel to offer seamless payment capabilities to its valuable customers. In the year 2024, the company has introduced the new drive-thru experience for customers which is first in the FLC. The company also set up and introduce fully automated kiosks, which is available 24/7. In the previous year, we also moved to a newly acquired head office in Bawshar. This is a brief history of Muscat Finance and the journey that we have covered over the period of 4 decades. Muscat Finance is operating through its 6 branches, which are located in different wilayat of Oman. Our branches are located in Sohar, Barka, Sur, Ibri, Nizwa and Salalah. We are having 124 employees as at year-end. We have achieved 90-plus percent of Omanization out of which 43% are female staff. We can say that we are an Omani company as most of the shareholding, like more than 97% are held with the nationals. In the year 2024, the auditors have given us an unmodified clean audit opinion. The company followed the high level of corporate governance standards. There were no penalties or fines by the regulators or any other authority. Muscat Finance understand its responsibility to work the corporate social responsibility and accordingly, the company has contributed towards CSR. The payments were made to the shareholders in terms of cash dividend based on the performance of the year 2024. The profit of the company was increased by approximately 3x as compared to the previous year 2023 in the year '24. We have drastically increased the gross loan book in the year 2024. Now we will talk about the snapshot of the year-end 2024 performance, which will give you a glimpse of the overall performance of the company. The net investment in finance sector has OMR 101 million as at 31st December 2024, which has increased from OMR 92 million of the previous year. Our product include vehicle equipment financing, working capital and home plan. The corporate deposits has also increased as in relation to the previous year 2023, which stood at OMR 24.45 million, the increase is approximately by 44%. In contrast to it, the bank borrowings have dropped from OMR 37 million to OMR 34 million. We have a strong equity base of OMR 39 million and the leverage ratio stands at 1.93x as compared to the regulatory ceiling of 5x. This represents that we have ample space to grow. The total income has increased from OMR 9.26 million in the year 2023 to OMR 9.97 million in the year '24. Accordingly, the net interest income has also increased by -- from OMR 4.79 million to OMR 5.56 million (sic) [ OMR 5.62 million ], representing 17% growth in the net interest income. The net profit after tax has increased by approximately 3x and stood at OMR 828,000 as at year-end. The company has been prudent in providing the provision coverage in accordance with IFRS 9 and CBO requirement. Accordingly, the company has provided the provision coverage of 78%, which have increased by 9% as in relation to the year 2023, which stood at 69%. The total provision has amounted to OMR 32.97 million against the provision what we had in the year '23, which was amounted to OMR 29.83 million. Now we can discuss about the overall financial performance and how the number has basically improved as compared to the previous year. The net investment in the finance sector has grown up by 9.2%, which represent approximately OMR 8.5 million. We have increase in the corporate deposits by OMR 7.4 million. We have been prudent in providing the ECL provision coverage. Our overall provision coverage ratio stands at 78%, and the NPA coverage ratio stands at 72% as at year-end 31 December '24. The operating profit has also increased from OMR 1.9 million to OMR 2.8 million. The prime reason for the increase in the operating profit is the increase in the gross income, controlled expenses, which has made us to achieve an operating profit hike by 45%. The net profit also increased by 3x as compared to the previous year. In the year 2023, we have reported a net profit of OMR 275,000. And in the year 2024, the profit has grown to OMR 828,000. The dividends at 1.62% were paid to the shareholders of the company after opening the regulatory approvals. The next slide basically tells us about the profit and loss statement at a glance, which will help us to understand the trends that how we have improved as in relation to the previous year. If you see the net interest income was amounting to OMR 4.8 million, which has grown up by OMR 820,000, representing 17% and stood at OMR 5.6 million. The interest expense has reduced from OMR 3.7 million to OMR 3.5 million, which represents a dip by 4%. The overall operating expenses almost remains at a similar level with a slight decrease by 0.7%. The operating profit has improved, as explained in the previous slide. However, the ECL has increased from OMR 1.6 million to OMR 1.9 million approximately. In absolute terms, it was OMR 1,000,862 which is in accordance with IFRS ECL model. The net profit has again increased by OMR 553,000, which represents 201% of the growth year-on-year basis. We have been consistently profitable over the last 3 years due to diversified and resilient business model. If you look at this -- the diagram which basically shows that the interest income has increased from OMR 9.2 million to OMR 9.9 million. Our operating profit has continuously increased year-on-year basis from OMR 1.1 million in the year 2022 to OMR 1.9 million. And from OMR 1.9 million to OMR 2.8 million in the year '24, with an increased profit by 3x in the year 2024. Now what is the way forward? The company is focusing to grow the loan book, specifically in the vehicular retail portfolio and to regain its market share. We are working together to book the clean loans with improved yields. Muscat Finance is also focusing on its collection and recoveries. Simultaneously, our teams are working in managing the stressed accounts efficiently. Our focus would remain to keep the cost to a minimum acceptable level in order to generate profit for its shareholders. We are working to diversify the funding options by deposit mobilization and different venues at what the company is currently working. This is the overall picture of the performance of the company. These are the annexures for statement of financial position and statement of profit and loss. If you look at the balance sheet, the total assets has increased by 9% approximately as compared to the year 2023. Our equity has shown a positive impact, overall basis, by 2%, whereas the liability has also increased by OMR 7.9 million in all together. This is the abstract of the audited financial statements, which are available on the MSX and shows the comparison between the profit and loss item for the year '23 and '24. Now we will open the floor for any questions, and we will try to respond to the queries raised.

Bishen. This is Rashad, the CEO.

Just a more sort of a chat than sort of queries and I'll come to the query part towards the end. So a decent set of numbers. If I look at the journey of Muscat Finance, and of course, I understand the comparison and the numbers are year-on-year, but we've seen sort of some improvement over the last couple of years. '21 was better off in terms of net profit. '22 and '23, which were still muted, but we've seen some sort of improvement in '24 and the first quarter of '25. Just want to touch upon sort of some of the key sort of metrics as an organization that you would look at. So if you could just touch upon sort of -- you mentioned about loan growth being one of the priorities, bringing cost of funding down sort of -- and I wouldn't link it to a sort of market share because each company has its own journey. But in general, if I look at where sort of Muscat Finance stands in the leasing space, in terms of market share, it's among the lowest, I think sub-10%. And whilst profitability isn't directly linked to market share, if you could just sort of explain in terms of strategy, how would you link loan growth or sort of a higher share of the pie with regards to some of the other things you spoke about, bringing cost of funding down. And that's, again, something everyone says, but how would you actually make that happen? Or what signs are you seeing in the market that gives you confidence that our actual cost of funding will come down because that's also on the higher side for you as an entity? If you could just start with that and your sort of views on the same?

Okay. Maybe, Tammar, I'll take the -- probably on the strategy side, and then maybe on the cost of funding, you can take that up. Okay. Thank you very much for the question. Okay. In terms of strategy, our strategy for last year was very clear. We wanted to grow the loan book, but we wanted to go granular. We are looking for sustainable growth. Predominantly on the retail side, which is a lower risk, and you are able to get higher yields. But it takes time to grow from that angle. But I think this is a sustainable model for the company. That's on the growth side. At the same time, we looked at the current processes, the workflows. We've done a complete sort of transformation internally to address speed, efficiency, accuracy on the customer experience point of view, we've launched a new platform that is integrated to a number of third-party service providers, providing our staff a more enjoyable sort of work environment. In addition, we -- to be more efficient, less errors and ultimately, culminating in a better customer experience. That's for the internal side of it. Additionally, we looked at also certain segments in the market. And we've analyzed where are pockets of probably untapped market segments. And we've designed certain products or revamped certain products to really capture a profitable, good quality, steady growth segment. That's generally. There's many other things that we could talk about. But our strategy is crystal clear. We focus on retail. We're trying to do it as most cost efficient as possible while we automate, while we add control and while we focus on streamlining our collection and managing our NPAs. Ultimately, it's a simple recipe, but difficult to get right. This is basically on the overall strategy of 2024. Maybe now, Tammar, do you want to pick up the outlook on funding and how you think prices are going to go. Obviously, this is a forward-looking comment, but I'll leave it to you.

Thank you for the question. I'll try to respond to the question what you have raised. Yes, you are absolutely correct. The understanding of the market was that once the Fed rates are dropping, then obviously, we will also be getting a benefit of that, and the overall interest cost would drop. In our case, yes, that is true that the interest cost has reduced as compared to the previous year. But as of now, in the year 2024, we could not see that there was a clear sign in the market that -- the market of Oman has not basically reduced the interest in that regard what we were expecting, actually. But having said that, we have tried to control the interest expense on the overall funding. And that's why basically we had a mix between the bank borrowings and the deposits, what we have. So that's how basically we have managed to have the reduction in the overall interest cost as compared to the previous year. And obviously, at the same time, we are working from a different perspective in order to increase the funding lines where we are working towards enhancement of the facilities. We are working on the deposit mobilization. We are working with different avenues in order to generate more funds from different venues. So yes, I hope that answers your question.

Okay. No, fair enough. Because if I look at your sort of funding mix, I think you have the highest percentage of corporate deposits in the funding mix versus your peers who pretty much predominantly rely on banking -- on bank loans. So in terms of -- does that diversification help and between the two, which is the more expensive source of funding? Is it banks? Is it corporate deposits? I would margin corporate deposits, but if you could just clarify on that?

Look, it's a mix of both basically. I cannot say that which one is more expensive for us as of now. But as of now, we are using a moderate approach for the funding, which is basically a mix of both. At the same time you would have noticed -- yes, yes.

Go ahead, go ahead. You were saying something?

Yes, yes. If you would have noticed that in our directors' report in the annual report, we have basically mentioned that we are working on a bond program, for the issuance of that. So there could be different venues in the near future that you might look into in terms of funding diversification on an overall basis. Yes.

Fair enough, Tammar. I take that point. But my sort of -- and this is again my just absolute observation of the market, I don't claim to know probably even a fraction of what you guys do day in, day out. But a bond program, if it's based on the market, would probably initially attract a slightly higher sort of cost, unless I'm mistaken over there. A, because in terms of you would have to link that with the financial performance of the company. And in general, sort of the market sentiment. Now, we are in a declining interest rate environment or at least direction is downwards, which is helpful. But overall, what are your initial thoughts in terms of not getting to a price by a number, but in general, overall that program would -- apart from diversification on cost side, how do you see that?

Yes, definitely. It will be basic -- [ Bishen, ] it will -- it is going to be a mix of the funding ranges that we are going to work on. Again, you would see a mix basically between the corporate deposit, bank borrowing and the other line of the facilities.

Okay. Fine. So that's on the overall strategy on the funding side. I wanted to touch upon the risk side because as you would appreciate, the leasing sector from a risk perspective is riskier than the banking sector. Now, one of the things Rashad mentioned was the sort of focus on retail versus corporate. And like you said, you build the sort of building blocks, taking it one step at a time, making sure it's sustainable growth rather than having a drastic change there and then realizing it's not sustainable. We're currently at probably 35-65 or 33-67. Aspirationally, what sort of you bring -- you'd like to bring that to 45-55? Or is it sort of more in terms of quality of retail you're seeing out there and that will be the driving factor?

Yes, definitely...

Okay, sorry. Tammar...

Yes. Basically, when we say basically that we are going to have a [ granular ] and more risk averse and spreading the risk over the smaller portfolio in terms of the loan bookings, yes, we are pretty much sure that we would be able to manage our risk in that regard. At the same time, improving the yields overall. So that's going to be the strategy that you most likely going to see in the near future.

Okay, sure. And in terms of, again, I believe Rashad and the team are doing their best looking forward. There's a legacy that you've inherited, which is probably not your doing. But one of the things we've seen historically over the last few years is we've seen a high level of churn at the C level, at this sort of executive level you've seen sort of CFOs come and go, nonrenewal of contracts of CEOs. So is it safe to assume that the senior management team place is sort of steady, focused and has a sort of strategy for the next, I don't know, foreseeable future, next 2 to 3 to 5 years? Or sort of -- because that would be the basis for you to implement the strategy, right?

Yes, correct. You're right. I can't say -- but absolutely. I mean sustainability at the top allows you to roll out a strategy and see through. And I think together with the Board, I think we're fully aligned. 2024 was an example of the alignment and hopefully, better years are in front of us. [Foreign Language]

Excellent. That's encouraging to hear, Rashad. That's good to hear. Now with regards to risk, like I said, it's a legacy, but the NPA ratios are probably the highest in the sector. Muscat Finance, if you see probably 6,7 years ago, was probably right up there in the leasing sector. And then we saw a dip and now you guys are trying your best to revive that. From a risk perspective, we've seen even the banking sector, which is probably prime lending, go through its own pain in the COVID, post-COVID era. But now things have stabilized. Now just by definition, the leasing sector is a high-return, high-risk sector. How do you sort of see recoveries or your loan book today in terms of from a risk perspective, I'd like to start with that. What are your comments on that aspect?

Yes, [ Bishen, ] maybe I'll take that particular question that you have raised. Yes, you are right. We have some of the legacy accounts in our books. And if you will have noticed that the provision coverage that we have provided is probably the second highest in the peers, if you see at the comparison level. Having said that, yes, we are working towards the collection and the recoveries, as you correctly mentioned that we are working towards it, and we are pretty much hopeful based on the legal avenues that we have taken in the past that we would be able to recover from some of the NPAs. Apart from that, if you notice that our NPAs have a drop as compared to the previous year so which is basically a positive sign. If you just look at the stage 3 portfolio as in relation to the previous year, that has basically dropped down. And having said that, my ECL is -- keep on building up for the stage 3 accounts in particular. So as of now, we are very risk-averse. We are very prudent in that regard, and we have provided adequate provisioning for the stage 3 provisions, not only for that, but the overall portfolio, what we carry in our books.

Right. Because one of the key factors we saw across the sector was recoveries. And when I say recoveries, it doesn't mean directly sort of cash flow turning positive for entities because it's still a challenging market. One of the sort of endeavors we've heard from peers is to try and reach settlements with clients as and when there's an opportunity so at least you could sort of get some cash flows versus restructuring them indefinitely. So given an option between restructuring a loan, increasing the tenor versus settlement of loans, how do you see that sort of aspect?

Look, we work in the best interest of the company. If -- and maybe I cannot exactly give you the numbers. But yes, during the year 2024, we have collected a good amount from the NPA or 100% provided accounts. So we are in the process where basically we have not technically written off the accounts. And that's why you can see the legacy accounts are sitting in the books. But overall, if you see, despite of the fact that we were able to collect from the NP or 100% accounts, the ECL, we have been prudent and keep on providing the ECL in order to cover up for the stage 3 accounts. So it's not a one size fits all. It depends from customer to customer, client to client based on internal discussions and based on the legal avenues that what we would have exhausted in the past. So it depends on multiple factors, whether -- it is going to be beneficial for the company to restructure the account or to get a onetime settlement. So it depends on multiple scenarios. I would not comment on a single size that would basically fit for all the customers. But yes, we have collected a good amount in terms of NPA recoveries in the year 2024.

Okay. Great. And just the last segment I'd like to touch upon because firstly, I appreciate you and the team making this presentation and giving us the opportunity to interact with management, we basically fit in as the analyst or the investor community. And as a listed company, especially for one that's been listed as long as you guys have, stock market performance is eventually the key driver for investors. So if I look at the last 5 years, 7 years, the stock performance has been flat. Now of course, we had challenging times, so probably not the best time frame to look at stock performance. But beyond that, one, the encouraging signs was sort of announcement of dividend by the company. Now going forward, is that a sort of ongoing policy you'd like to sort of restart and maintain? What are your thoughts on sort of shareholder returns in form of dividend?

Look, thank you. Thank you, [ Bishen, ] for this particular question. Yes, definitely, as what we said at the beginning of our presentation that we would always love to have a sustainable growth where we can basically enhance the value for our stakeholders. So definitely, the company will try its level best in order to provide the maximum value to its shareholders. That's what the purpose of the business is, no doubt about it, but it goes without saying to -- in terms of any commitment. But yes, the company is working toward that only. But as of now to say anything for the futuristic, it's going to be difficult. But yes, by looking at the results, you can assume that the company is in the right direction under the leadership of the Board and Mr. Rashad. So we all are working together in order to achieve the desired result, which it used to be in the past probably.

Okay, sure. And the last point is on the return of equity, right? That's one sort of key metric that we look at as the analyst community. And if I look at the ROE, it's probably the lowest in the sector. Now I understand you have a different sort of challenge in front of you. Do you have at least any aspirations, without giving me a number, on at least where you would like your ROE to be? Because eventually, if I look at your equity base, and you mentioned that number, your equity base is around OMR 39 million. Any aspiration on what you would like your ROE to grow to even if in the next, let's say, 3 to 5 years? Any sort of comments on that? Or are you just taking it one step at a time and saying, it's too early to try and sort of deliver on that. Let's just go on the ground, start bottom up, and we'll see where we reach the next years in regards to the first sort of targets and then look at ROE? Or is that sort of you have a sort of goalpost there and you want to work towards that? If you could just comment on that?

No, definitely. Definitely, [ Bishen ]. Yes, that is the ultimate target and the task now, what has been -- what is the key focus from the management perspective in order to increase the share value of the investors and to increase the return on equity. No doubt about it. But obviously, it would be too early for us to comment on that. We are -- what I can say on the overall basis that, yes, we are on the right track. By small steps, what we are taking into consideration for the year '24, that will basically help us to continue the same journey in the year 2025 and definitely, then we will basically revive the numbers over the period, and you can see the results most likely in the next upcoming quarters. That's what I would maybe say. If Rashad wants to add up something, please.

Thank you, Tammar. I think you said it. I think ultimately, we want to maximize shareholder value. I mean -- and at the same time, produce sustainable growth. I think this is a key. Volatility is not good for investors. We would like to have sustainable growth going forward and provide the maximum possible return to our shareholders. And it will unfold as we go along. I think I saw some messages.

If Rashad allows, probably we can disconnect after 2 minutes. We'll wait for just 1 or 2 minutes. Mr. Rashad, it seems that there are no further questions. So probably we can end up this session.

Okay.

We would again like to thank everyone who has joined for this session and make it interactive. Thank you for your time. Mr. Rashad do you have to say anything?

No. Thank you very much. Very interactive. I enjoyed it, and I hope we will give you a bit of sort of the strategy for your company going forward. [Foreign Language] Have a good weekend everybody.

Thank you, Mr. Rashad. Ikhlas, thank you.

Thank you, Ikhlas. [Foreign Language]