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

Ladies and gentlemen, welcome to Tabreed's Q2 2021 Earnings Call. I now have the pleasure of handing over the call to your host, Ms. Souad Jamal Al Serkal, Vice President of Strategic Communications. Madam, please go ahead.

Thank you so much, and hello 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 H1 2021 Results Conference Call. Hope you are all keeping safe and healthy. And 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. Khalid Marzouqi, our Chief Executive Officer; and Mr. Adel Al Wahedi, our Chief Financial Officer. Khalid will begin with the opening remarks and provide an overview of the first half of 2021 performance and key events. Following that, Adel will discuss the financial performance in more detail. Khalid will then conclude the presentation, and we will open the line for your questions. Thank you, and over to you, Khalid.

Thank you, Souad, and thank you, everyone, for joining us today. This is the first time I'm speaking to you all. As you are aware, I have joined Tabreed as the CEO in May 2021. I spent over 25 years in the energy sector. Prior to joining Tabreed, I was Chief Operating Officer for Dolphin Energy, overseeing the downstream division in UAE, prior to which I was Senior Vice President of Dolphin's Technical Service division. In addition to those roles, I've also occupied 2 more roles in the Abu Dhabi Department of Transport earlier and ADCO. I'm excited to be part of Tabreed and to contribute to the significant transformation of the company. Tabreed remains committed to provide value -- shareholder value through growth in our existing core GCC markets and selectively pursuing opportunities outside of GCC. Tabreed recently unveiled its new branding and corporate identity, built around essential for progress as a core brand positioning and closely aligned with the company's strategy, reflecting Tabreed's core values. The branding is more modern and new market dynamics, and articulating the company's role in society, that of a catalyst for change with progress in its central tenet. We move on to the next slide. Moving on, I would like to highlight the H1 2021 performance. Total revenue grew by 22%, led by chilled water business growth of 22% and value chain business growth of 28%. During the same period, EBITDA growth was 25%, and as a result, our EBITDA margins expanded from 59% in H1 2020 to 60% in H1 2021. Net profit during H1 2021 increased by 4% to AED 233 million. During the first half of the year, we added capacity of over 13,000 RT. In spite of this capacity addition during the first half of '21, we remain confident in achieving our target of delivering 120,000 RT of new capacity over '21 and next year, '22. The last quarter also marked the first anniversary of partnership with Emaar Properties for the exclusive provision of energy efficient district cooling services to landmark development in Downtown Dubai. 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 provider in the region and currently operate 87 plants across the region, delivering over 1.41 million tons of cooling. Our operations saved over 2.26 billion kilowatt hours of energy consumption in last year, enough to power 128,000 homes for a year or equivalent to reducing over 1.35 million tons of CO2 emission. Moving on to the next slide. Now this slide outlines our capacity growth trends across the region. At the beginning of '21, we announced that we expected to add at least 120,000 RT of new connected capacity by the end of '22. Of this, we expect around 80% to be contributed by consolidated entities and balance 20% from equity accounted entities. Again, we are confident of delivering this target. Then in last year, we had guided a capacity of 75,000 RT for 2021, for which we added over 53,000 RT of capacity. The first half has been relatively slow in terms of new capacity addition and expect faster growth in the remaining part of the year. Saudi Arabia has strong growth potential. Going forward, we expect around 15% of the guided capacity for '21 and '22 to be contributed by Kingdom of Saudi Arabia. Tabreed continues to demonstrate its ability to deliver a steady improvement in connected capacity in the region, driven by the growth of our markets across the GCC and by successfully leveraging our regional network to take advantage of commercial opportunities as and when they present themselves. If you follow me 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 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 fully government-owned or -- and partly government-owned organizations, therefore limiting counterparty risks. Also the contracts are long term in nature of around 25 years, providing better revenue visibility. The current contract -- connected capacity is over 1,400 RT, which has grown at a CAGR of 8% since 2018. In the same terms, the chilled water business has been growing at a CAGR of 10% since 2018, and has been primary driver for the group revenue. Tabreed has a track record of delivering profitable growth. EBITDA has increased at a CAGR of 17% since 2018. All the 3 recent acquisitions of Downtown DCP, Masdar and Saadiyat Island DC 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 the coming years. I will now hand over to Adel who will talk about our financial results in more detail. Please.

Thank you, Khalid. Let me start by highlighting the key points on our income statement for H1 2022 -- '21, sorry. Total revenue grew by 22%, driven by robust performance of both chilled water and value chain business. Chilled water business recorded a growth of 22% during the period. Key factors driving this increase, recent acquisitions contributed over 15% of the growth; balance sheet contributed to new connections, increasing consumption volumes and overall improvement in operational efficiency. [ The third one ] partly offset by negative CPI. Value chain business accounted for 4% of consolidated revenues and less than 1% of EBITDA. VCB is a noncore business, but continues to be profitable. EBITDA for 2021 grew by 25% to AED 518 million. EBITDA margins for the period were 60%, in line with last year. The growth in EBITDA was primarily driven by consolidation of Downtown DCP, Masdar and Saadiyat Island DC assets. Higher finance cost reflects 2 new loans raised last year for funding new acquisitions. Other gains in previous year mainly represents gain on contract amendment with an existing client. Share of associates and JV higher primarily due to better performance coupled with fixed cost savings and operational efficiency. Net profit for the period increased by 4% compared to last year. We will now look at the statement of financial position on the next slide. Main highlight, increase in fixed assets and intangibles represent additions due to acquisition of Saadiyat Island DC assets. Receivables are in line with year-end given the growth in our business and in the last few months. DSOs have remained stable since the year-end. Increase in other liabilities mainly represents seasonality factor and acquisition of Saadiyat entities. Turning to the next slide. We will now take a look at the cash flow statement. Our cash flow generation during the period has been stronger than last year same period. Higher collections from customers in the current period. DSOs remain stable since the year-end. CapEx outflows relate to the acquisitions of the Saadiyat Island assets. Tabreed retained strong liquidity with closing cash balances at the end of the period at AED 551 million, and our revolving credit facility remains unutilized. Let me now turn to the slide on debt portfolio. This slide provides the usual background in Tabreed's debt portfolio. As of June 2021, Tabreed has AED 6.1 billion of net debt and a gearing ratio of 53% at the quarter end. Net debt-to-EBITDA ratio improved to 5.7 multiples in June 2021 compared to [indiscernible] 2020. We expect this to further improve as the full EBITDA contribution from recent acquisitions is reflected in our financials. Both the Moody's and Fitch reaffirmed their investment-grade rating following the Downtown acquisition and the bond issue. That completes the detailed review of our results of the first half of this year. I will now pass back to Khalid for closing comments.

Thank you, Adel. In addition to the good news that we already announced, we would like to add a few points as well. In March '21, Tabreed published its first ESG report and it's available on our web page under Sustainability section. We encourage you all to go through it moving ahead. Tabreed is a highly sustainable business, delivering significant power efficiencies compared to other cooling alternatives. Tabreed continues to make considerable progress on its business objectives while also ensuring the health and safety of its staff across all its operational sites. Under the current circumstances, despite the pandemic, the company maintained business continuity while ensuring the health and safety of its staff and partners across all Tabreed 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. Moving on to the next slide please. Before we open the lines for Q&A, let me summarize. 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 Directors, including the Chairman as well. Tabreed has a flexible capital structure to fund future growth. As we have mentioned before, we will look at opportunities within and beyond the GCC, and we'll provide you with updates as and when such opportunities materialize. We continue to work on various fronts, from business development to operations, to help drive growth and improve profitability. That concludes the presentation for our H1 earnings. Thank you for your time today, and we will now take any questions you may have.

[Operator Instructions] Our first question comes from Jai Andrew Lawrence of Al Mal Capital.

This is Jai from Al Mal Capital. Congratulations on a great set of numbers. I was just wondering, is there any progress on the Saudi front in terms of winning projects that you were bidding on previously with the mega projects that are coming up in Saudi? And that's it for now.

Saudi Arabia, as I said, has just been a great area of growth for us, as I mentioned in my presentation. We are evaluating some new businesses that's coming up in Saudi Arabia. And hopefully, once they transpire, you will be the first to know.

[Operator Instructions] Our next question comes from [ Dana Al-Ofen ] of NBK Capital.

I have 2 questions, if I may. The first is, is there any update on the time line of exits from [indiscernible]? And second, any update on the brownfield acquisitions and update on India and Egypt operations?

So for Qatar, I mean there are no partners in Qatar and I think once we -- the business -- we will see how [indiscernible] status. And definitely, we will inform our shareholders and individual investors of the outcome, what is going to happen in Qatar. As far as -- there is a question on India or is brownfields? We have around [indiscernible]. So for the brownfield, [indiscernible] about 200 RTs have been added to our brownfield project so far. And of course, the prospects of us getting the brownfield [indiscernible]. As far as international market is concerned, I think India is part of it. We are still evaluating our options there in the international market, and we are following it up very closely. And hopefully, once something comes up and actually solidifies [indiscernible] as soon as possible.

[Operator Instructions] Our next question comes from Rakesh Tripathi of Franklin Templeton.

Hello? Am I audible?

Yes.

Yes. We can hear you.

Yes. My apologies. So a few questions from my end. Number one, if you could just remind us a bit on the RCF size and the maturity that's available as of now to the company. Secondly, I didn't get it, if you -- if you spoke about this in the previous question. Any updates on acquisition plans? Is there anything that you are actively looking at as of now? What's happening on that front? And thirdly, on your leverage, I mean -- I suppose the understanding as of now is that leverage improves as the EBITDA contribution from the new acquisition starts to show up. But if you were to go for any additional acquisitions, then how do you plan to manage or delever implications and how the rating agencies would look at that?

Yes, regarding the RCF -- the current RCF that we have, okay. The tenor is up to Q1, Q2 next year -- '23 -- sorry, next year. And its value, as I said, AED 590 million. Regarding the growth expansion, the question. As you said, the company always is going to study. There are many opportunities in the market, whether in the region or any interesting markets. And we will pursue that once we see if it is something really attractive. And definitely, we will share this with the market upon materializing, for sure. About the -- how to fund and about the growth, you know that the company -- or the shareholder, they decided, the growth, which is something important. This is a strategy for the time being. This is in line that a company -- our company, Tabreed, is rated investment grade by Fitch and Moody's. And also, we will maintain that, and we will not go [indiscernible] this decision, this threshold. So that we will manage this growth, considering that strategic objective for us always to maintain and the shareholders. For 2020, the dividend distribution, if you try and remember, it was as 50-50, cash and bonus shares. And this is a clear message that the shareholders always, they will back up that growth story. And whenever there is also an execution and additional splits required, definitely that they will do. I hope that I answered.

Yes. Yes, you did. So RCF, you mentioned was $590 million, right? USD 590 million up to 2023?

No, dirhams.