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

Hello, again. My name is Souad Jamal Al Serkal, the Vice President of Strategic Communications here at Tabreed. On behalf of Tabreed's management team, I would like to welcome you all and thank you for joining us for the third 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 Salem Al Wahedi, Chief Financial Officer; and Richard Rose, Senior Vice President of Finance. Adel will first provide an overview of the third quarter 2020 performance and key events. Following that, Richard will discuss the financial performance in more detail. Adel 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. I would like to begin by highlighting our 9 months of current year 2020 performance. Chilled water business grew by 13.6%, and total revenue grew by 11.5%. During the same period, EBITDA growth was 20%, and as a result our EBITDA margin expanded from 50% to 54% for the same period. Net profit during the 9 months increased by 12.6%, and the margin remained flat at 29%. On an organic basis, connectivity capacity addition during the 9 months was 170,000 RTs. We remain positive about our outlook and confident of achieving our target delivering 75,000 RTs of new capacity over 2020 and 2021. In October 2020, we successfully raised $500 million with a 7-year 2.5% coupon bond issuance. The initial issue of $400 million was oversubscribed by almost 5x, demonstrating strong investor confidence in Tabreed's solid credit fundamentals. Despite current global economic uncertainty, the 7-year bond was particularly well received by international investors who accounted for 90% of the final geographical allocation; with 49% from Europe, 21% from Asia, and 20% from offshore U.S. funds. The bond will be listed on the London Stock Exchange alongside Tabreed's existing 2025 sukuk. During the quarter, we also closed the syndication of $692 million loan successfully, which was prefunded by HSBC Middle East. Going 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 over 117,000 homes for a year and equivalent to reducing over 1.2 million tons of CO2 emissions. Moving to Slide 7. 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 RTs of new connected capacity by end of 2021. During 9 months, we added more than 23,000 RTs of capacity across the region in addition to the Downtown DCP acquisition. Of this capacity, 16,000 RTs were added to the consolidated level and 6,875 RTs is through joint ventures and associate entities. This is over and above the acquisition of Downtown District cooling assets from Emaar Group. The grid continued 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. Moving to the next slide, please. This is a slide recall the evolution of our performance over the years. To summarize, 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 86% of our capacity contracted for at least the next 10 years. Also, about 80% of our revenues are derived from fully government-owned or partly government-owned organizations, therefore, limiting counterparty risk. Tabreed has a track record of delivering profitable growth. EBITDA has increased by 13% per year since 2017. Our acquisition of Downtown DCP Cooling assets and the concession agreement with the Emaar Group is a significant step towards penetrating the largest district cooling market in the world. I would like to reiterate the resilient business model of Tabreed, which is evident from our performance for the 9 months 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.

Thank you, Adel, and thank you, everyone, for joining us today. So looking at Slide 10, let me start by highlighting the key points on the income statement for the first 9 months of 2010. Total revenue grew 11.5%, primarily driven by the chilled water business. Chilled water revenue itself grew by 13.6% over the period. The key factors driving that growth were the acquisition of Downtown DCP and new capacity additions, offset to some extent by an increase in finance lease amortization as a result of the negative CPI and some lower consumption, particularly in Q2, as a result of the COVID pandemic. Value chain business accounted for only 3% of consolidated revenues and less than 1% of EBITDA. EBITDA for the first 9 months grew by 20.3%, and the margins for the period were 54% compared to 50% in the same period last year. This margin enhancement was primarily driven by a change in the consumption capacity mix of the business due to COVID. The finance cost for the period was higher due to the new loan for the Downtown DCP acquisition, offset in part by lower LIBOR rates this year. The share results and joint ventures were lower, for 2 reasons really. One was some relatively poor performance coming out of QatarCool and also the results for 2019 were boosted by a one-off gain in a UAE joint venture. Overall net income increased by 12.6% with the same strong margins as the previous year. We'll now look at the statement of financial position on the next slide. The acquisition and consolidation of Downtown DCP earlier this year has increased fixed assets, receivables, equity, debt and other liabilities. So it's responsible for most of the major movements we see on the balance sheet. Receivables are up. That's partly due to Downtown DCP consolidation, as I mentioned. It's also partly a seasonality factor. We normally see an increase in receivables compared to the year-end in Q3 because there are some billings at the peak of our business. But there is also some slowdown in receivables from customers, which I'll come on to again in a few moments. Turning to the next slide, we'll take a look at the cash flow statement. Cash flow generation during the period has remained resilient to the current difficult economic backdrop. Many of the customers are directly impacted by COVID. And we did see a drop in the consumption during Q2 of the year, as I mentioned. However, this has recovered strongly in Q3. And as I think you all know, consumption doesn't drive the EBITDA and net income of the business. So it doesn't have a significant impact on the bottom line. The customers are continuing to pay their bills. And overall, we have seen -- however, overall, we've seen a small increase in DSOs but we do remain in a strong working capital position. Our cash flow generating ability remains robust, driven by the essential nature of the services that we provide and by the long-term price and contracts that we have. And this has enabled us to grow significantly so far in 2020. Let me now turn to the next slide, which shows our debt portfolio in a bit more detail. We currently have AED 5.4 billion of net debt and a gearing ratio of 51%. The acquisition of the Downtown district cooling concession was financed earlier this year by AED 2.5 billion through corporate facility, with a tenure of 5 years and 100% bullet structure. That facility does allow penalty-free prepayments, which will allow Tabreed to manage its financing risk over the life of the facility. We do plan to repay the liabilities up to 2023 before the end of this year. Both Moody's and Fitch have reaffirmed our investment-grade ratings, which is a testament to our strong financial position and resilient cash flows. Coming on to the next slide, I'll just say a little more about the bond issuance that we completed last month. So we issued a $500 million conventional bond that's now listed on the London Stock Exchange alongside the 2025 Sukuk. The bond has a tenure of 7 years and a coupon of 2.5%. The bond is rated Baa3 by Moody's and BBB by Fitch, both in line with Tabreed's corporate ratings. The issuance was heavily oversubscribed. And as Adel mentioned earlier, it attracted investors globally. And the final allocation saw 90% going to investors outside the MENA region. We plan to utilize those funds to acquire existing operational cooling assets in the UAE and also to refinance our corporate debt facility, as I mentioned, which was due to mature in 2023. With that, I'll hand back to Adel.

Thank you, Richard. Before we open the lines for Q&A, let me make a few closing comments. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance with rising profitability and stable margins. Tabreed has a strong investor base and experienced management team. Solid corporate government and market-leading transparency is demonstrated by Board composition of over 50% independent directors, including the Chairman. Tabreed has a flexible capital structure to fund future growth. As we have mentioned before, we will look at opportunities within the beyond -- within and beyond GCC and will provide you with updates as and when such opportunities materialize. We continue to work on the 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 today comes from Divye Arora from Daman investments.

So before we take this newborn into the account, what we see is that currently your net debt to EBITDA it stands at around close to 5x. If we take into account the RCF, where we take into account the dividends that you've got from the associate, it goes to around 4.74 to 4.8x. So how are we reaching to EBITDA that we are trying to analyze the fourth quarter of the EBITDA that you have disclosed. So to understand now, you have already raised a bound of $500 million. This is being done to acquire more assets, plus you will be doing another $500 million other more because you have an approval for $1 billion in total. So when we take into account that if this $1 billion can generate around, let's say, 10% return on investment in EBITDA terms, what we see is that potentially your net debt-to-EBITDA is going to get stretched towards 6x in the next 6 months to 1 year, assuming that if you complete that -- those acquisitions. So is there a risk here of a further equity raise? I would not say a risk, but would you -- do you think that you will need to raise more equity or rather to cut the dividends for the next 1 year unless the EBITDA or the return on investment is much more higher than 10%?

Yes. Okay. Thank you for the question. First of all, regarding the bond issuance, although we took the approval from the shareholders for $1 billion, but it won't be exercised unless there is something on the ground and it will have the right returns as an investment case for Tabreed. So it is not a must, but if there is something, it will materialize. The second thing that in many occasions we were mentioning that the growth for Tabreed, it is the strategy for now, but subject to maintaining investment grade. Pending investment grade it is something very important and we will not turn away from this threshold. So whatever it takes the shareholders to take a decision how to maintain that, definitely they will take that call in the right time, in the right case.

What the question is, let's say if you today find an opportunity to invest that $1 billion, so we have heard of a couple of opportunities in the market. Dubai Airport has mentioned something yesterday. Majid Al Futtaim is also talking about it. I'm not saying that you're going to go and acquire them, but let's say, if the opportunities are available. And there might be because maybe a lot of developers, lot of other companies are seeing this district cooling plants as noncore assets in the current environment when they're stressed on the cash flow. So you might get some more opportunities. So if there is -- if there are enough opportunities available to invest that $1 billion and based on the math that, if you look at the returns that could be generated on that $1 billion, it appears that you will breach those covenants. For maintaining investment-grade rating, you might need to maintain 4.5 to 5x, but it looks like that it's going to go higher than that. So the question is that, you have said that it's shareholders' decision but then ultimately is there any chatter around that, will it be from the dividend side that you will rather take a call to not to give any dividends this year, next year or the dividend policy is sustainable, it's committed that you have to pay 50% to 60% of the earnings every year. And then it might be coming -- it might be a cash call on the shareholders in terms of right issue.