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

Ladies and gentlemen, welcome to Tabreed's Q1 2021 Earnings Call. I hand over the call to your host, Ms. Souad Jamal Al Serkal, Vice President, Strategic Communications. Madam, please go ahead.

Thank you. And good afternoon, everyone. Once again, my name is Souad Jamal Al Serkal, the Vice President of Strategic Communications here at Tabreed. On behalf of Tabreed management team, I would like to welcome you all and thank you for joining us for the Q1 2021 results conference call. I hope you are all keeping safe and healthy. Now given that 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 Mr. Richard Rose, Senior Vice President of Finance. I will touch upon -- I will first touch upon the recent unveiling of the new branding and corporate identity. Then Mr. Adel will provide us with an overview of the first quarter 2021 performance and key events. Following that, Richard will discuss the financial performance in more detail. Finally, Adel will then conclude the presentation, and we will open the lines for your questions. Moving on to the next slide. In April 2021, Tabreed unveiled its all-new branding and corporate identity, ushering in an exciting new chapter in the story of one of the country's most promising companies. On the 11th of April, the new company brand identity lit up the night sky in Downtown Dubai during a spectacular lights and graphic show projected against the iconic Burj Khalifa. As the show drew to a conclusion, Tabreed's previous branding dramatically morphed into the all-new identity. Now if you missed it on the day, you can surely watch it on our social media account, @tabreedae on Instagram. Tabreed's new corporate identity builds around essential for progress as a core brand positioning. It's more closely aligned with the company's current strategy where business transformation and growth are at the forefront. The branding is more modern and dynamic, bolder in look and feel and able to accurately articulate the company's role in society: that of a catalyst for change, with progress as its central tenet, which reflects Tabreed's core values. 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 quarter 1 2021 performance. Total revenue grew by 21.5%, driven by chilled water business growth of 22.3%. During the same period, EBITDA growth was 27.3%, and as a result, our EBITDA margin expanded from 61% in Q1 2020 to 63% in Q1 this year. Net profit during Q1 this year increased by 4%, comparing to 3% growth of the same period of last year, with a margin of 24% of this quarter. The quarter was eventful, as we completed acquisition and consolidation of Saadiyat Island district cooling assets. We also published our first-ever ESG report in March 2021; and unveiled all-new branding and corporate identity for Tabreed, as you have seen. Moving on to the next slide. 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 are the largest district cooling providers in the region and currently operate 86 plants across the region, delivering over 1.4 million tons of cooling. Our operations saved over 2.26 billion kilowatt hours of energy consumption in 2020, enough to power over 128,000 homes for a year and equivalent to reducing over 1.35 million tons of CO2 emissions. Moving on to the next slide, please. This slide outlines our capacity growth trends across the region. For 2020 and 2021, we guided a capacity of 75,000 RT, which we are confident of achieving by end of this year. The first quarter had been slow in terms of new capacity addition and expects faster growth in the remaining part of the year. At the beginning of 2021, we announced that we expected to add at least 120,000 RT of new connected capacity by the end of 2022. Of this, we expect around 80% to be contributed by consolidated entity, and balance 20% from equity-accounted entities. Again we are confident of delivering this target. Tabreed continued to demonstrate its ability to deliver a steady increase in connected capacity in the region, driven by the growth in our key markets across GCC and by successfully leveraging our regional network to take advantage of commercial opportunities as and when they present themselves. Moving on to the next slide, please. 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 clear visibility of our earnings and cash flow. We currently have almost 90% of our capacity contracted for at least the next 10 years. About 80% of our revenues are derived from fully government-owned and partly government-owned organizations, therefore limiting counterparty risks. Tabreed has a track record of delivering profitable growth. EBITDA has increased at a CAGR of 15% per year since 2018. All the 3 recent acquisitions of Downtown DCP, Masdar and Saadiyat Island district cooling assets have helped us build a strong platform for future growth opportunities. These M&As have added significant concession capacity which we anticipate to connect in [ coming years ]. I will now hand over to Richard to talk about our financial results in more detail.

Thank you, Adel. If you turn to Slide 12 in the deck, let me start by highlighting the key points on our income statement for Q1 2021. So as Adel mentioned, revenue grew by 21.5%, primarily driven by the chilled water business which recorded growth of 22.3% during the period. The key factors driving that movement were the acquisition of Downtown DCP last year, which added 20%; and the acquisitions of Masdar and Saadiyat during the course of the quarter, which added 4%. And this was offset to some extent by the impact of negative CPI. Value chain businesses accounted for 5% of consolidated revenues and less than 1% of EBITDA. VCBs are noncore businesses, but they continue to be profitable. EBITDA for Q1 2021 grew by 27.3%, and EBITDA margins for the period were 63% compared to 61% in the same period last year. This margin enhancement was primarily driven by the consolidation of Downtown DCP, Masdar and Saadiyat Island assets; as well as some savings in G&A; and some impact from the accounting adjustment relating to CPI. Finance cost for the period was higher due to the 2 new loans that we raised last year to fund the growth of -- and the acquisitions of the downtown assets in the Saadiyat Island concessions. The share of results of associates and joint ventures was down due to higher one-off gains in the previous year. And net profit for the period increased by 4% compared to last year. We'll now look at the statement of financial position on the next slide. Here we see an increase in the balance sheet, including fixed assets, intangible assets and accounts receivable, all of those primarily driven by the consolidation of the new acquisitions of Downtown DCP, Masdar and Saadiyat Island district cooling assets. Receivables were in line with the year-end given the growth in our business in the last few months, and DSOs have remained stable since the year-end. The higher liabilities balance reflects the dividend payable at the quarter end and the balance outstanding to Aldar for the acquisition of the Saadiyat concessions. Turning to the next slide, we'll take a look at the cash flow statement. Given the current difficult economic scenario, our cash flow generation during the period has been strong. Improvement in cash flow from operating activities, compared to the same quarter last year, was primarily driven by the consolidation of the acquisitions. In addition, DSOs have stabilized since the year-end, and [ post-quarter indices ] indicate further improvements. CapEx outflows relate to the partial settlement for the acquisition of the Saadiyat Island district cooling assets in the quarter. And overall, Tabreed maintains strong liquidity with significant closing cash balances at the end of the period of AED 745 million as well as unutilized revolving credit facility of AED 590 million. Let me now turn to the slide on the debt portfolio. This slide provides the usual background of Tabreed's debt portfolio as of the end of March 2021. Tabreed has AED 5.9 billion of net debt and gearing ratio of 53% at the quarter end. The increase in net debt reflects the corporate facility used to fund the Downtown DCP acquisition; and the Q4 $500 million bond issuance, which was partly used to fund the acquisition of the Saadiyat Island assets. Both Moody's and Fitch rating agencies reaffirmed their investment-grade ratings following those 2 acquisitions -- or the acquisition and the bond issuance. That completes the detailed review of our results for Q1 2021, and I'll now pass back to Adel for closing comments.

Thank you, Richard. So in March 2021, Tabreed published its first ESG report. Tabreed is a highly sustainable business delivering significant power efficiencies compared to other cooling alternatives. Despite a challenging year, Tabreed continued to make considerable progress on its business objectives whilst all ensuring the health and safety of its staff [ across all its ] operational sites. In a year unlike any other, the company maintained business continuity whilst ensuring the health and safety of all staff and partners across all Tabreed's entities. This resilience, combined with our commitment to the communities in which we operate, our staff and customers and to the highest levels of governance across our operations, reflect our very strong ESG credentials. And on the next slide, before we open the lines for Q&A, let me summarize, please. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance with rising profitability and margins. Tabreed has a strong investor base and experienced management team, solid corporate governance and market-leading transparency demonstrated by Board composition with over 50% independent director, including its Chairman. Tabreed has a flexible [ commercial ] structure to fund its future growth. As we have mentioned before, we will look at opportunities within the -- within and beyond GCC, and we'll provide you with updates as and when such opportunities materialize. We'll continue to work on various fronts, from business developments to operations, to help drive growth and improve profitability. That concludes the presentation of our Q1 earnings. Thank you for your time today.

[Operator Instructions] Our first question comes from Junaid Farooq of Frontier IM Partners.

I have 2 questions. The first one is on the debt capacity, if you can give some color on, based on the current covenant, how much higher can you go from the current level of 5.8x net debt to the last 12 months EBITDA. That's one. And my second question is if you can give some color on any divestment plans that you had earlier. Notably, I think you were looking to exit Qatar. That would be very helpful.

Over to you, Richard.

Okay, thank you, Junaid. So 2 good questions. I think, in terms of debt capacity, if you look at it in the context of a multiple of EBITDA, we're probably near that kind of limit that we have. There isn't much more room for senior debt in the portfolio. However, when we acquire these new businesses in this new market that we're facing at the moment where there is a lot of M&A opportunity, we are acquiring EBITDA at the same time. And it starts to flow from day 1. So I think there is still potential for us to grow quite significantly more. And we are endeavoring to secure that growth as fast as we possibly can. I think, as far as the -- your second question goes, in relation to the divestment of Qatar Cool, I -- all I can say on that is that, yes, we have had some discussions with the other shareholders in Qatar, but at this point we don't have anything further to announce in relation to any transaction [ that may be more ] than that.

Our next question comes from Yawar Saeed of International Securities Abu Dhabi.

[indiscernible]. My question is really [indiscernible] proportion to revenue [indiscernible]...

I'm unable to hear the question, I'm afraid.

Yawar, we are unable to hear your line very well. [Operator Instructions] We have a chat question that is when will -- this new investment platform entity in Singapore is going to be operational. What is the nature of this entity? And how would it be operated? That question comes from [ Pavesh Izmael ].

All right, it's Richard here. Thanks for the question in relation to the entity in Singapore. So I think, as you know from the -- in the press release that we did, this is a partnership which is 75% owned by Tabreed; and 25% owned by IFC, the -- I'm sure you will know, a part of the World Bank Group. The intention is that any investments that we do within India initially but also other areas of Asia would go through this investment platform. And then if IFC decide to decline a particular investment, then we can do it ourselves if we feel positive about that, but the intention is that -- well, that all of the investments that we do in India and Asia will go through this investment platform. And it will be funded as necessary, so as we win new business in these markets, then we will -- us and IFC will fund the entity. So it's not going to be funded upfront or in advance. It will be funded as necessary. And in terms of status, it's currently going through due diligence with IFC. And so it's not yet up and operational, but we will make an announcement as soon as is -- it is, okay?

We take our next question from [ Jai Andrew Lawrence ] of Al Mal Capital.

I just wanted to -- I joined the call slightly late because of technical difficulties, but perhaps if we can have an update on Saudi. And previously when we spoke, I asked the question with regards to the mega projects that were coming up and what will be Tabreed's role within that. Can you -- is there anything perhaps that would be updates with -- in that business or in that geography?

[indiscernible]. Jai, thanks for the question. I think Saudi remains a really important market for the Tabreed group. And we are as hopeful and as excited about the potential in Saudi as, I think, many others are indeed. So my understanding is that we are actively bidding on all of the big projects that are out there that have as yet put out a request for tendering in relation to cooling services. Often these cooling services tenders are also linked with other services at the same time, other utility services, so in some cases we are bidding in partnership with others. And in some cases, we are still waiting for the tenders to come out. My understanding is we haven't lost any of these yet, but equally we haven't won or been appointed to deliver district cooling services to any yet. So I think watch this space. And hopefully, we will be successful and we'll be able to take advantage of those growing mega projects in the Saudi market.

Well understood. And just one last question, in terms of the capacity guidance over the next few years. You're still sticking to the same guidance.

We are, yes. So I think it has been a slow quarter in terms of connecting new capacity, but nevertheless, we're still confident we can deliver that over the next 2 years, the 120,000 that we guided; and that we will also deliver the full 75,000 that we guided for last year and this year as well before the end of this year.

We'll take our next question from [ Vijan Bhagwan ]. It reads, "We read about the first district cooling license to Saadiyat Cooling LLC, which serves Saadiyat Island, including Saadiyat Beach and Saadiyat Cultural District and Saadiyat district cooling which serves New York University Abu Dhabi. Under the new regulatory framework issued by DoE, we wanted to understand about the impact from these new regulations on Tabreed's existing business. Will the new regulations lead to reduction in consumption fees for residential, commercial units at Saadiyat Island and New York University Abu Dhabi? If so, what would be the potential fee reduction and its impacts on the revenues? Will the new regulation lead to any pricing caps on the capacity charges that Tabreed offers to its various clients? Will there be additional costs involved for Tabreed to comply with these regulations? What additional services will Tabreed have to offer as part of this new regulation, and will this impact its profitability?"

Okay, [ Vijan ], thank you very much for the multiple questions in there. I think what we can say, so far, is that we've been saying for many years that Tabreed welcomes regulation of the district cooling market. We see regulation as a way to ensure that district cooling is considered for all significant new developments and new cooling requirements within the market. And that could only be good for us because we fundamentally believe in our business, as the regulator has said that they do as well, and the power efficiencies in particular that our business can offer as well as the continuity of service and the quality of service that we offer to our customers. So we continue to welcome and support regulation. I think it's early days with the regulator in Abu Dhabi at this point in time. I mean clearly we're in very frequent dialogue with them. And we're in the process of licensing those assets that we have in Abu Dhabi that are going to fall under that oversight of the regulator. And up to date, we've just had the one asset license, as you mentioned. So that licensing of the Saadiyat entity resulted in the [ ground targeting ] of the contracts that were in place through the process of an acquisition that we did. So the original contracts in place with Aldar, we've acquired them and [ open ground target ] them with -- under the new licensing regulations. There were a few very minor changes in that [ ground targeting ] process just to tidy up [ details ] as you'd expect in any acquisition really but nothing that had any kind of material impact on our numbers. I think, going forward, it's very difficult to know exactly how the regulator is going to upgrade and in terms of looking for savings. And they have said in their press release that they want to see savings for the ultimate customers of district cooling, so we're going to work with them and to ensure that we can deliver those savings in a mutually beneficial manner going forward, but I think the key thing for us is that we've seen the -- a contract which fundamentally reflects our business of a long-term district cooling provision with a 2-tariff structure being grandfathered by the regulator. And that can only be good for us going forward.

We take our next question from Yawar Saeed, who says, "The operating costs have increased in relation to revenue. Can we expect normalization of it, and gross margins? Or is it related to new acquisitions-led shift in operating cost structure?"

Okay, I think, I mean -- but we see it from quarter to quarter. Always we see some kind of slight movements in margins. I think this quarter we have a number of changes in the business, in particular in relation to the 3 acquisitions that we completed, 2 of them last year, being Masdar and Downtown DCP; 1 of them this year, being the Saadiyat concessions that we've discussed so far on the call, but in addition to that, we've seen volume changes in -- particularly in Q1. We've seen variations in volume from 1 year to another. Always, over the course of the year, they kind of become immaterial and insignificant, so I don't think there's anything fundamentally going on that you need to be aware of in relation to margins. I think all you're seeing is that -- a lot of change in the business and maybe some of that is coming through. What I would say is, from an operational perspective, our business becomes more and more efficient, particularly from a power utilization perspective. Every year, we have a number of programs in place which are designed to reduce our power consumption and reduce our operating costs. So going forward, I wouldn't anticipate that we're going to see operating costs increasing as a proportion of revenue going forward.

[Operator Instructions] Our next question comes from [ Ramalan Kan of Abu Dhabi Commercials ].

This is [ Rama Delasan from ADCB ]. I have a question on your interest costs. So a rough calculation gives me a sense that the cost of debt for you is around 4% plus. I just wanted to understand. Given this low interest rate scenario and I still see that EIBOR is trending down over last many months, what is your view on your interest costs going forward? How much you have issued at debt on the fixed coupon. Or how much is -- out of the AED 6 billion is your flexible-rate bank loan? Some kind of color will be helpful.

Thanks for that question, [ Ramalan ]. And I think what we can say in finance costs is that most of our finance costs are fixed. We have very little floating now. So the $500 million bond that we took out in Q4 last year is at 2.5%. I think the all-in cost of the Downtown DCP facility but after hedging and so on is broadly in the region of 2%, but then we also had some legacy debt which -- the sukuk is, for example, at 4.5% (sic) [ 5.5% ]. That was $500 million. That's still there in the debt portfolio. And then we have 1 or 2 smaller facilities which are -- and of course, some of the overseas facilities [ which are consolidated costs ] which are a bit higher, in the same sort of ballpark as the sukuk. And I think we've done what we can to minimize our finance costs going forward. I think we also need to appreciate, I think, that the finance costs, as shown on the face of the P&L account, include some finance lease related costs as well. So our actual debt-related finance costs are managed down as low as we can get them.

Okay. So we expect this to remain at more or less the same level [indiscernible].

Sorry, [ Ramalan ]. I missed that follow-up.

I'm sorry. I'm saying that -- I just wanted to confirm that -- so we should expect that interest costs will be more or less at the same level that you reported in Q1.

More or less, yes.

Okay. So my second question is since you mentioned during the presentation that probably your leverage ratio is very close to the limit where you can retain your investment-grade credit rating. Does that mean that probably you are not going to bid any big offers in the UAE domestic market such as [indiscernible]?

Certainly no. That's not what I was alluding to. I think our debt-to-EBITDA ratio probably can't move that much more, but of course, any of these new acquisitions, there are a number of significant targets out there in the market. And you're immediately buying EBITDA at the same time that you're taking on those debt if indeed we decide to fund any acquisitions with debt. So we do have a bit of capacity internally at the moment. We have a healthy cash balance. And we have a revolving credit facility available to us, which may allow us to do some of the less-sizable transactions without having to revert to any new facilities, but no, we are active in trying to secure any of the major opportunities that are currently in the marketplace.

Okay, fair enough. If I could ask last one small question. How much spare capacity you have now said. So currently number is 1.4 million RT. I think, when you acquired downtown and Saadiyat, you had some spare capacity which is not connected. You -- could you please remind me how much is still there and...

Yes. I mean there's that -- there is quite a bit. The number of 1.4 million is our connected capacity. That's the revenue-generating capacities that we have in place at the moment, so we feel that that's the most useful number to provide to the market. However, you're quite right. A number of our contracts are concession areas where the master account has a maximum [ level of ] capacity, which may not all be connected at this current time. So for example, the master account in Masdar City has a maximum capacity size of 69,000 tons. And currently, I think we have around about 11,000 connected, so there's significant future capacity potential in that Masdar concession. So -- and any building that comes up in one of these concession areas will connect to Tabreed. So other important concession areas for us include Raha Beach. I'm not fully aware off the top of my head what the potential capacity is there. And then the Downtown DCP is -- the downtown district cooling concession that we have is also a very important concession. And those, the maximum capacity size there is 235,000, and currently we have about 170,000 connected, something in that ballpark. It might be slightly less. So then this -- I wouldn't call it spare capacity. I'd call it future capacity. In terms of spare capacity, when you consider our existing installed capacity versus connected, there is not a great deal of spare capacity. There's a little bit in some of our plants, where we actively are looking for buildings in the area that we could try and connect with. These are known concession areas, but generally we will try and install capacity as it's required rather than install significant capacity [indiscernible].

We take our next question from [ Pavesh Izmael ], who says, "If possible, could you please shed some light on this question again?" I believe [ Pavesh ] is referring to his earlier question.

All right. So I think his question related to IFC Singapore. I think the gist of the relationship there is that this is an investment vehicle and for any growth that we manage to secure in India and the broader Asian market. It's 25% owned by IFC, 75% owned by Tabreed. It will be funded as and when we win contracts in those markets that I mentioned. Our initial focus is India. And currently the entity is still going through due diligence with IFC, so it's not operating yet, but we hope that, that gets completed in the very near future in that we can start to focus on growing and establishing our business in those markets.

We have no further questions, so I will hand back to Ms. Souad Jamal Al Serkal.

Thank you so much. So this concludes our first quarter 2021 earnings call. Tabreed always looks forward to interacting with you at our earnings calls and conference calls and investor conferences. Should you have any further questions, please do not hesitate to contact us. Have a great day. And thank you once again for joining this call. And please stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect your lines.