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

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

[Foreign Language] and hello to you all. This is Souad Jamal Al Serkal, the Vice President of Strategic Communications at Tabreed. On behalf of Tabreed's management team, I would welcome you all, and thank you for joining us for the full Year 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. Bader Al Lamki, Chief Executive Officer; and Mr. Adel Al Wahedi, Chief Financial Officer. Bader will first provide an overview of the full year 2020 performance and key events. Following that, Adel will discuss the financial performance in more detail. Bader will then conclude the presentation, and we will open the lines for your questions. Thank you, and over to you, Bader.

Thank you, Souad. Thank you, everyone, for joining us. Good morning, and good afternoon from wherever you're calling into this earnings call. I would like to begin by providing an overview of the year. 2020 was a very challenging year for everyone with unprecedented impact of the pandemic and all the changes that had brought to our lives. I'm pleased to say that Tabreed has responded well to these difficult times and has provided uninterrupted service to all its customers throughout. We have many thousands of customers, and we cool many of the region's most iconic landmarks. Tabreed contributes positively to the region's growth through our efficient and environmentally friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We are one of the largest district cooling providers in the region and currently operate 86 plants, delivering about 1.4 million tons of cooling across the GCC. Our operations have saved over 2.26 billion kilowatt hours of energy consumption in 2020, enough to power of 128,000 houses for a year, an equivalent of reducing over 1.3 million tons of CO2 emissions. Moving on to the next slide. 2020 was an exceptional year for us. During the year, we not only reduced our -- we have not only recorded our strongest period of growth in our history, but we also developed a strong platform for future growth opportunities. The acquisition of Downtown District Cooling concession from Emaar has provided a template for similar transactions and has also demonstrated our ability to seamlessly integrate such acquisition even in the most difficult working environment of pandemic lockdown. Our performance during the period is a testament to our resilient business model. We have provided uninterrupted service to all our customers, and we have delivered both organic and annual growth. Today, Tabreed is stronger than ever before. We have a strong shareholders 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 our profitability. Moving on to the next slide. Tabreed has delivered increasing growth in the recent years, averaging 9% capacity addition per annum since 2017. 2020 capacity grew at 19% compared to 2019, primarily driven by the acquisition of Downtown DCP, but organic growth also grew by 3%, an exceptional performance given the impact of COVID-19. We also saw consumption revenue increase by over 17% during the year. Tabreed's long-term and price-certain contracts enhance the revenue and earnings visibility of the company. In addition, we also focus hard on efficiency and cost control. We have a number of projects in place to improve the efficiency of our operation, and we have a number of research and development projects designed to further improving -- to improve our efficiency going forward. 2020 has seen our EBITDA margin increase to 56%, partly driven by the Downtown acquisition and partly by the short-term changes in capacity and consumption mix due to COVID. Moving on to the next slide, please. During the year, we announced 3 acquisitions, all are strategic and important. Masdar was announced early on in the year and have achieved financial close later in the year. In addition to adding new capacities of growth opportunities, it also provide an opportunity for important research and development. Masdar City is an important development, showcasing Abu Dhabi's commitment to sustainability, and district cooling is an essential element of the master plan. The acquisition of Masdar district cooling concession added 9,500 RTs of new capacities with a potential to maximum concession size of 69,000 RTs. As part of the acquisition, Tabreed gains access to geothermal wells. These provide an exciting opportunity to provide highly efficient and highly sustainable cooling solution. Tabreed is currently conducting research to see -- to assess the feasibility of the solution. Secondly, moving on to the next slide, the Downtown DCP acquisition in April 2020 was Tabreed's most significant M&A transaction in its history. The Downtown DCP concession is one of the most prestigious district cooling concessions in the world, serving the world's tallest building, the Burj Khalifa as well as Dubai Mall, Dubai Opera House, among others. This acquisition is a landmark transaction for Tabreed, taking us from #4 market share in Dubai to #2. Furthermore, the transaction took Tabreed into a long-term partnership with Emaar with the potential for future growth. We successfully integrated the Downtown concession into our operation during the highs of pandemic with no issues arising, demonstrating our commitment to operational excellence. Moving on to the next slide, please. The most recent acquisition Tabreed announced in Abu Dhabi, the acquisition of 2 concessions on Saadiyat Island from Aldar further strengthens our position in Abu Dhabi and further reflects the trust and confidence our customers place in Tabreed. The acquisition will allow Tabreed to provide cooling to some of Abu Dhabi's most prestigious developments, including the Louvre Abu Dhabi, New York University and a number of hotels on Saadiyat Beach; the Sheikh Zayed Museum and the Guggenheim Museum, both are coming up soon. Aldar has been a partner and a customer of Tabreed for many years. And the sale of this concession cooling such prestigious assets reflects the quality of service we have always provided to them and the long-term partnership we have created. These 3 M&A transaction added a total concession capacity of over 390,000 RTs. We believe that there is more opportunities both organic and inorganic growth opportunities in the future. Turning to Slide 11. As you are aware that the acquisition of the Dubai Downtown was financed through the corporate facility for an amount of USD 692 million, with a tenor of 5 years and 100% bullet payment at maturity in 2025. This facility was successfully syndicated to a group of 9 local and international banks during the second quarter of the year. This created both conventional and Islamic tranches. Despite the extremely challenging economical climate at that time, the indication crystallized the lowest-cost corporate facility in Tabreed's history. This unprecedented low-interest market has allowed us to fix almost all of our interest costs at a historic low levels. We also raised USD 500 million bond issued for 7 years at 2.5% interest in October 2020. This issue was almost 5x oversubscribed, reflecting the demand for Tabreed's credit. Furthermore, over 90% of the investors were from outside the MENA region, reflecting the international reputation Tabreed has developed in recent years. Both Moody's and Fitch reaffirmed their investment-grade rating to Tabreed following the Downtown acquisition and the bond issue. Moving on to Slide 12. This slide outlines our capacity growth trends across the region. At the beginning of 2020, we announced that we are expecting to add at least 75,000 RTs of new connection capacity by the end of 2021. Excluding M&A growth, during 2020, we've added 40,000 RTs of capacity across the region in addition to the Downtown DCP acquisition and Saadiyat. Of this capacity, around 2/3 was consolidated, and the balance was through joint ventures and associated entities. Based on the current signed contract in hand, we expect the connected -- we expect to connect 120,000 RTs of capacity over 2021 and 2022. Of this, we expect the split between consolidated level and equity accounting joint venture to be 80-20. Tabreed has always delivered on its forward-looking market guidance, and we continue to demonstrate our ability to deliver a steady increase in connection -- in contracted capacity. I will now hand over to Adel, our CFO, to take us through some more financial highlights.

Thank you, Bader, and thank you, everyone, for joining us today. I would like to begin by highlighting our full year 2020 performance. Chilled water business grew by 15.8%, and total revenue grew by 14.5%. EBITDA for the year grew by 27%, and the reason our EBITDA margin expanded from 50% in 2019 to 56% in 2020. Net profit in 2020 increased by 16.5% with a margin of 32%. Total capacity additions during the year were over 220,000 RTs, including the Downtown [Audio Gap] growth of 75,000 RTs of the new capacity over 2020 and 2021; and on an organic basis, connected 40,000 RTs during 2020, achieving over 50% of the target during the year. I would like to outline our revised capacity guidance for the next 2 years based on current signed contracts in hand. We expect to connect at least 120,000 RTs of the new capacity over 2021, 2022. This guidance updates and replaces the guidance we gave a year ago. Finally, as per our policy of growing dividends in line with the growth in business, the Board has proposed a total shareholder payout of AED 0.115 to be paid through a cash dividend of AED 0.0575 per share, and the bonus share issued at 2.22% or 1 share for every 45 shares held. In value terms, this is approximately 7 -- 10% up to 2019 and reflects the Board's determination to return value to shareholders. Moving on to the next slide. This slide recaps 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 over 90% of our capacity contracted for at least the next 10 years. About 80% of our revenues are derived from wholly and partially government-owned organizations with, therefore, limiting counterparty risks. Tabreed has a track record of delivering profitable growth. EBITDA has increased by 16% per year since 2017. Our acquisition of Downtown 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 for 2020 despite the prevailing turbulent times. Going to the financial slide section, please. Let me start by highlighting the key points on our income statement for 2020. Chilled water revenue recorded a growth of 15.8% during the period. Key factors driving the movement: Downtown DCP, 18%; new capacity additions, 5%, offset to a certain extent by an increase in finance lease, amortization and lower consumption due to pandemic. Total revenue grew by 14.5%, primarily driven by chilled water business. Value chain business accounted for 3% of consolidated revenues and less than 1% of EBITDA. VCB is a noncore business but continuous to be profitable . EBITDA for 2020 grew by 27%, which is in line with our earlier discussion that Downtown margins are better. EBITDA margins for the period were 56% compared to 50% in the same period last year. This margin enhancement was primarily driven by Downtown consolidation, partly offset on account of higher operating costs and administrative expenses. Finance cost for the period was higher due to Downtown or the new loan for Downtown acquisition. However, we were able to get lower rates compared to last year resulting in some benefits. Share of associates and JVs were lower due to subdued performance of some of our equity accounted entities, offset to a certain extent due to cost-saving initiatives at some of the entities. Net income increased by 16.5%, and margins improved to 32% compared to 31% last year. We will now look at the statement of financial position on the next slide. Significant movements in the balance sheet as at December 31, 2020, compared to the end of 2019 were attributable to Downtown consolidation. 2.5% nonconvertible bond of $500 million was issued with maturity of 7 years. The proceeds were used to acquire Saadiyat Island assets and refinance an existing term loan; balance to be utilized for potential acquisition in 2021. Increase in receivables was primarily due to the short-term timing delay in collections for some customers. Turning to the next slide. We will now take a look at the cash flow statement. Our cash flow from operations declined due to delay in receivables collection, as highlighted in the previous slide. We are aware of the challenges faced by our customers due to COVID-19. However, we have long-standing relationship with them and are working closely to accelerate collections. We have a very strong relationship with this customer. Tabreed is an exclusive provider of cooling to them, and we have continued providing our services to them over the years without any [ dispute ]. Historically, they have always paid in full, and we anticipate the receivables to normalize soon. Our cash-generating ability remained robust, driven by long-term, price-certain contracts and enabling investments in growth. Let me now turn to the slide on the debt portfolio. This slide provides the usual background on Tabreed's debt portfolio as of December 2020. Tabreed has AED 5.4 billion of net debt and a gearing ratio of 53%. We are confident that our ability to generate strong cash flows will enable us to manage the leveraged profile and bring it back in line with the guidance provided by the rating agencies within 18 months. That completes the detailed review of our results for 2020. I will now pass back to Mr. Bader for the closing comments.

Thank you, Adel. Before we open the lines for Q&A, let me make a few closing comments. As a stable utility-like business, Tabreed continued to deliver strong financial and operating performance, with rising profitability and stable margins. 2020 was a landmark year for growth, and we added over 180,000 RTs of capacity through acquisition. All these acquisitions have additional concession capacity, which we hope and plan to connect in the future. We continued to work on various fronts from business development and operations to help drive growth and improve profitability. We remain committed to generate sustainable returns for our shareholders through providing environmentally friendly cooling solutions. That concludes our results presentation. Thank you for joining us, and I will now hand back to Souad and open for questions. Thank you.

[Operator Instructions] Our first question comes from Zafar Nazim from JPMorgan.

Very Helpful. I had a question about your balance sheet and your leverage ratio. As you know, on the back of the acquisitions that you made this year, your leverage ratio has increased quite significantly to almost 5.2, 5.3x. And it seems that there are other potential opportunities out there, which can come around this year for further acquisitions. So I was wondering, is there -- what is your threshold? What is the max that you can potentially go to in terms of leveraging your balance sheet? And what is your comfort leverage level? I mean, you may increase your leverage, I guess, for the short term but then bring it down. So what's the comfort level? And what's the maximum you can go to? And also, at what point would you consider issuing equity to partially hopefully fund any acquisition? What leverage would make you think about issuing equity?