National Central Cooling Company PJSC (TABREED) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Tabreed's Second Quarter 2020 Earnings Call. I hand over the call to your host, Ms. Souad Jamal Al Serkal, Vice President, Strategic Communications. Madam, please go ahead.

Hello. Again, this is Souad Jamal Al Serkal, Vice President of Strategic Communications at Tabreed. On behalf of Tabreed's management team, I would like to welcome you all, and thank you for joining us for the second quarter 2020 results conference call. Hope you are all keeping safe and healthy. Given we are all working remotely, kindly excuse us for any technical issues on the call. Before we begin our presentation, I would like to remind you that some of the statements made in today's conference call may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to Slide 2 of the presentation for the detailed disclaimer. I would now request you to turn to Slide 3 for today's agenda. On today's call, we have with us Mr. Adel Al Wahedi, Chief Financial Officer; and Richard Rose, Senior Vice President of Finance. Adel will first provide an overview of the second quarter 2020 performance and key events. Following that, Richard will discuss the financial performance in more detail. I will then conclude the presentation, and we will open the lines for your questions. Thank you, and over to you, Adel.

Thank you, Souad, and thank you, everyone, for joining us today. Before moving to the performance update, I would like to inform that the integration of Downtown District Cooling acquisition has mostly largely completed and as per schedule. Also, our overall operations has been normal despite the limited workforce availability and COVID-19 preventive measures undertaken. I would like to begin with highlighting our first half 2020 performance. Despite the COVID-19 scenario, chilled water business grew by 7.4% and total revenue grew by 5.7%. During the same period, EBITDA growth was 13.5%, and as a result, our EBITDA margin expanded from 54% of last year the same period to 59%. Net profit during the first half increased by 12.5%, and margin improved from 30% to 32% of this year. On an organic basis, connected capacity addition during the first half was 13,262 tons. We remain positive about our outlook and confident of achieving our target of delivering 25,000 RT of new capacity over 2020 and 2021. Moving to the next slide, please. Tabreed is contributing to the region's growth through efficient and environmentally friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We currently operate 83 plants across the region, delivering about 1.35 million tons of cooling. Our operations saved over 2 billion kilowatt hours of energy consumption in 2019, enough to power 117,000 homes for a year and equivalent to reducing over 1.2 million tons of CO2 emissions. Next slide. Tabreed is the only publicly traded and regional district cooling company in the world. The U.A.E. is our base of operations where we have a presence in 6 emirates providing 947,000 tons of cooling to our customers through 70 plants, and this is including 3 plants of Downtown of Dubai. This transformational acquisition significantly enhances our market positioning in Dubai, the largest district cooling market in the world. In addition to the U.A.E., we work with key strategic partners in 4 other GCC countries. We have a total of 13 plants outside U.A.E. providing around 400,000 tons of cooling to customers. Around 70% of our capacity is consolidated, while the rest is equity accounted as associates or JV. Moving to the next slide. This slide outlines our capacity growth trends across the region. At the beginning of 2020, we announced that we expected to add at least 75,000 RTs of new connected capacity by end of 2021. During the first half of this year, we added 13,200 RTs of capacity across the region. Of this capacity, 6,300 RTs were added to the consolidated level and 6,800 RTs through JVs and associates. This is over and above the 150,000 RT added on acquisition of Downtime Dubai district cooling assets from Emaar group. Tabreed continues to demonstrate its ability to deliver a steady increase in connected capacity in the region driven by growth in our key markets across the GCC and by successfully leveraging our regional network to take advantage of commercial opportunities as and when they present themselves. The next slide. This slide outlines our capacity growth trends across the region. At the beginning of 2020 -- so this slide now recaps the evolution of our performance over the years. To summarize it, Tabreed is a stable utility infrastructure business with long-term contracts with high-profile customers. This provides us clear visibility of future earnings and cash flows. We currently have 90% of capacity contracted for at least the next 10 years. About 80% of our revenues are derived from fully government-owned and partially government-owned organization, therefore, limiting the counterparty risk. Tabreed has a track record of delivering profitable growth. EBITDA has increased by 10% per year since 2017. Our acquisition of Dubai Downtown District Cooling assets and the concession agreement with Emaar Group is a significant step towards penetrating the largest district cooling market in the world. I would like to reiterate that -- about the resilient business model of Tabreed, which is evident from our performance of the first half of this year despite the prevailing turbulent times. Given the utility nature of our services, there is limited direct impact of COVID-19 on our business. I will now hand over to Richard to talk about our financial results in more detail. To you, Richard.

Thank you, Adel. Let me start by highlighting the key points on our income statement for the first half of 2020. Total revenue grew by 5.7%, primarily driven by chilled water business. Chilled water revenue itself increased by 7.4% in the same period last year, and key factors driving that movement were the acquisition of Downtown DCP, which added 12%; and the new capacities that Adel described added 1%. These additions were partially offset by an increase in finance lease amortization driven by that negative CPI from last year and some volume impact due to COVID-19. Value chain business revenue was down but accounted for only 4% of consolidated revenues and less than 1% of EBITDA. DCP's noncore business continue to be profitable. EBITDA the first half of the year grew by 13.5%, again reflecting the acquisition of the Downtown cooling plants. Finance cost for the period was higher due to the debt incurred to acquire Downtown DCP. During the period, the group signed an amended agreement with an existing customer, which removed CPI indexation from the contract and extended the term of that contract by 3 years. This resulting difference is recorded as a finance lease modification gain by the group under other gains and losses. The shared results of associates and JVs was lower due to subdued performance by some of our equity accounted entities and a one-off gain received in the first half of 2019 that was not repeated so far in 2020. Overall, net income increased by 12.5%. We'll now look at the statement of financial position on the next slide. Significant movements in the balance sheet as at the 30th of June this year compared to the end of last year were broadly attributable to Downtown DCP consolidation. This consolidation increased fixed assets and debt significantly as well as increasing equity reserves due to the recognition of noncontrolling interests. The increase in receivables is also primarily due to downtown DCP consolidation. Receipts in the quarter from major customers have improved significantly when compared to Q1. Turning to the next slide, we'll now look at the cash flow statement. Cash flow from operating activities was down 11% on prior year. However, that is a significant improvement over Q1 when we were down almost 80%. Cash collections in Q2 were generally strong with our major customers contributing well. Given the current difficult economic scenario, cash flow generation during the period has been encouraging and DSOs remain under control. Capital expenditure reflects the acquisition of Downtown DCP, which also explains the movement on debt servicing, and the balance in others primarily reflects dividends paid to shareholders. Our cash-generating ability remains resilient driven by our long-term [ price certain ] contracts. Let me now turn to our normal summary of debt and return ratios. So this slide provides the usual background on Tabreed's debt portfolio. As of June this year, Tabreed has AED 5.5 billion of net debt and a gearing ratio of 51%. As you're aware, the acquisition of Downtown Dubai district cooling was 100% financed with a fully underwritten corporate facility with a tenure of 5 years and 100% bullet payment of maturity. This facility does allow free -- penalty-free prepayments, which will allow Tabreed to manage refinancing risk over the life of the facility, and it will be our intention to refinance the term loans before the sukuk repayment becomes due in 2025. We're confident that our resilient cash flows will enable us to manage the leverage profile and bring it back in line with the guidance provided by the rating agencies during 2021. Tabreed continues to enjoy investment-grade status with both Fitch and Moody's. That completes the detailed review of our results for the first half of 2020, and I'll now pass back to Adel for closing comments.

Thank you, Richard. Before we open the line for Q&A, let me make a few closing comments. As a stable utility business model, Tabreed continues to deliver strong financial and operation -- operating performance with rising profitability and stable margins. We had a strong start to the year with strong organic growth and a very strategic transformational acquisition. Tabreed has a flexible capital structure to fund future growth. As we have mentioned before, we will look at the opportunities -- other opportunities within and beyond DCP, and we'll provide you with updates as and when such opportunities materialize. Today, Tabreed is stronger than ever before. We have a stronger shareholder base and a management team with significant industry experience. We are working on various fronts from business development to operations to help drive growth and improve profitability. I will now request the operator to open lines for Q&A.

[Operator Instructions] Our first question from Jonathan Milan from Waha Capital.

Regarding the comments on potential further acquisitions, from a debt-to-capital perspective or net debt to EBITDA, what would you consider to be the ceiling for Tabreed's leverage? And when it comes to valuation metrics, would you be looking at something similar to the recent acquisition whereby, arguably, on current multiples, it's expensive but could end up being cheap once capacity -- once utilization ramps up?

Thanks, Jonathan. This is Richard for the question. I think we don't see that there is a ceiling for our ability to continue to grow and expand. I think the -- we do have some capacity within the current business. The -- we monitor and track the metrics that the rating agencies use for our investment-grade status, which is extremely important to us, and obviously, we're going to continue to maintain that. So I think it's very difficult to say that there is a particular value that we have available on our war chest. We certainly believe that we have capacity for further acquisitions and that the new facilities would be forthcoming from the banking community to finance such acquisitions. I think in terms of return metrics, I hear what you're saying. The Downtown transaction was an extremely strategically important transaction to us, and we're delighted with the way that, that has gone. The integration of that business into the Tabreed business has been extremely smooth and successful despite all of the issues around COVID and the pandemic. I think we would expect to see similar sorts of multiples, maybe slightly improved multiples, on any further future acquisitions.

Okay. So similar or cheaper multiples on future acquisitions, I mean, you had better multiples. But when I was talking about the ceiling, I was thinking about the debt. So today, it's AED 5.8 billion for an EBITDA of, say, AED 750 million or AED 800 million as Dubai entity ramps up. What is the ceiling in terms of dirham debt? That's what I'm trying to get to, debt to capital, debt to EBITDA. What's the ceiling in that sense? How many more billion dirhams of debt would you take for acquisitions?

I think with any new acquisition, we're acquiring new EBITDA. So it depends on that multiple as to how much additional debt we could take on. I think -- I don't think I can give a specific number, a specific dirham balance on that because it depends how much EBITDA that we're acquiring. And with any acquisition, and you'll see it with the Downtown acquisition, there's always an element you're acquiring immediately and an element which is going to come with future connections to that network or that system that you're acquiring. So I think it's just -- it's a simple question, but I think it's a very complex answer, I'm not sure I can give any precise number on it.

Okay. Fair enough. And last thing on the acquisition. Is it U.A.E. focused? Or would you consider acquisitions outside of the U.A.E.?

I think in the past, we've made it clear that we do have ambitions to grow beyond our current footprint, and that continues to be the case. I think that the -- however, having said that, I think that we do see opportunities in the U.A.E. as well. So I think that we're hopeful of both, I think.

Next we have Hazem Al-Jabaly from AB Invest.

Yes. My question is about the amendment of the contract. Can I ask why was the contract amended? And how does the amendment benefit Tabreed?

Which contract?

Yes. So we have amended a contract with one of our major customers. The contract has been extended by a period of just over 3 years, and CPI escalation has been removed from the contract. So it benefits Tabreed because the contract is extended. However, we have -- the counter to that is the CPI escalation has been removed. That contract is treated as a finance lease in our financial statements, and those changes under the standards mean that the existing finance lease was extinguished and a new finance lease is created. And in making those accounting adjustments, a one-off gain comes out of those numbers, which is the gain that you're seeing in the financial statements.

Next question, we have Michel Said from CI Capital.

I had a first question regarding the income from associates and JV. My understanding that it's mainly we're talking about Qatar and Saudi. So I wanted to understand what happened there different from what's happening in U.A.E. in terms of COVID and slowdown or in terms of type of contract which resulted in the decline in income.

Thanks for the question. I think it isn't just Qatar and Saudi. There are a number of JVs and associates, both within the U.A.E. and in the regions. But you are right, those 2 do form part of that group. I think that we're seeing some reduction in performance, in Qatar in particular. I think there are some discounts which have been offered there which we haven't reflected across the rest of the group to customers. And the other major movement that we see in this shared results is a one-off gain, which was recorded on a U.A.E. joint venture last year, in the first half of 2019, which isn't repeated again this year. So that is affecting the comparison year-on-year as well.

And it's something to expect in the coming quarter? I'm talking about the performance of Qatar.

I think it's difficult to say. I think that the -- that's like asking me whether the COVID situation is going to continue or not. I think it's very difficult to say. I think the -- it's a very solid business, the Qatar business. It's very cash generative and debt-free, just like all of our district cooling businesses across the region. So I think it's difficult to say that we'd expect to see exactly the same trend in the future quarter.