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

Ladies and gentlemen, welcome to Tabreed's Full Year 2021 Earnings Call. I now have the pleasure of handing over the call to your host, Ms. [indiscernible]. Madam, please go ahead.

Thank you. Good afternoon. My name is [indiscernible]. On behalf of Tabreed's management team, I welcome you all and thank you for joining us for the 2021 full year results conference call. Hope you are all safe and healthy. Before we begin the 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 will now request you to turn to Slide 3 for today's agenda. On today's call, we have with us Tabreed's Chief Executive Officer, Engineer Khalid Al Marzooqi; and Tabreed's Chief Financial Officer, Adel Salem Al Wahedi. Khalid will begin with opening remarks and provide an overview for Tabreed's 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 floor for your questions. Thank you. And over to you, Khalid.

Thank you, Adel, and welcome, everybody, to our call today. Tabreed is contributing to the reduced growth through efficient and environmentally friendly cooling, enabling sustainable development. As our business grows, so does our positive environmental footprint. We are one of the largest cooling providers in the region, currently operate 86 plants across the region, delivering over 1.2 million tons of cooling. Our operations saved over 2.33 billion kilowatt hours of energy consumption during '21, enough to power 132,000 homes for a year and equivalent to over 1.3 million tons -- [ metric tons ] of CO2 emission. Today's results announcement will demonstrate Tabreed's sustainable and resilient financial performance. In addition, we believe that carbon emission savings generated through our district cooling services are an extension enabler to allow the region's governments to meet their sustainability targets for the future. The next slide will summarize our connected capacity. During 2021, we added capacity of 40,000 RTs across our operation. Of the total added capacity, about 39,000 RTs were added in the UAE and balance 1,000 RT in Bahrain. Our capacity numbers for prior periods have been adjusted for divestments of[indiscernible] . In addition to the growth shown here, we purchased 50% of the equity of cooling plant in Abu Dhabi, which will move the 64,000 of capacity from equity accounted to fully consolidated. Slide 7 shows historical performance and on capacity guidance to our new capacity guidance for 2023. Bear with me on this one. In 2020, we guided capacity additions of 75,000 tons for 2021, which we exceeded with actual additions of 80,000. This builds on our track record of delivering guided capacity across every 2-year cycle. At the beginning of '21, we guided expected addition of 120,000 RTs of new connected capacity by the end of '22. We have delivered over 40,000 in '21. We also added 19,000 in the early days of '22 with the acquisition of Al Mouj DC assets in Muscat, Oman. We remain confident of achieving the guided target by end of '22. For 2022 and 2023, we are issuing new capacity guidance of 120,000 RTs. Of the guided capacity, we expect 70 contribution from our consolidated entities and balance from equity accounted quantities. Tabreed continues to demonstrate its ability to deliver a steady increase in connected capacity in the region, driven by the 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 on to Slide 8. During the year, our focus remains on further strengthening future growth opportunities. We started the year with achieving financial close on the Saadiyat Island DC acquisition. This added a concession of 88,000 RT and contracted capacity of over 35,000 RTs. As we see strong growth opportunities available in the UAE and other international markets, we undertook a strategic decision to divest our stake in copper cooling. We plan to use the first feet enter market with greater potential to enhance returns and shareholder value. During 2021, we also acquired the remaining 50% stake in Al Wajeez, which is an exclusive 80,000 RT district cooling scheme with 65,000 tons already connected, supplying Al Maryah in Abu Dhabi, which includes landmarks such as Abu Dhabi Global Market Square, Cleveland Clinic, and Abu Dhabi hotels and shopping malls namely the Galleria. Moving on to next slide, please. I would like to take a moment to mention our involvement in the [indiscernible] to supply utilities in the Red Sea project in the Kingdom of Saudi Arabia, one of the so-called Giga Project. Saudi Tabreed, which we hold 28% share, was part of the winning consortium led by ACWA. The project to the multi-utility project, which includes desalination, wastewater treatment, solid waste processing, district cooling plant and communication infrastructure. Saudi Tabreed will own 15% of the results in multi-utility entity, providing these services to this development, further establishing our brand in the region as leading DC player. Installed district capacity, cooling capacity for the project will be 32,500 RT, for which Saudi Tabreed will be the O&M service provider. Perhaps the most significant feature of the Red Sea development is its power source, which is 100% sustainable using only solar and wind power, demonstrating that carbon neutral cooling is achievable. Moving on to the leadership. This slide provides a background of our Board members. Tabreed board is inside a nonexecutive. During the -- during the year, there were changes to the Board's composition. Ms. Anne-Laure de Chammard and Mr. Pierre Cheyron joined the Board, replacing Mr. Frédérique Dufresnoy and Mr. Sébastien Arbola. In addition to Mr. Musabbeh Al Kaabi, joined the Board, replacing Mr. Mohamed Ramahi. I would like to thank the Department Board members for their invaluable service to the Tabreed's group, and welcome the new Board members of all very considerable experience and knowledge to their role. We move on to the management team. As you're aware that I joined the company in May -- last May 22 -- '21, and we had an opportunity to interact during our Q2 '21 earning call. Other recent changes in the management team is the introduction of Mr. Antonio Di Cecca, replacing Mr. Jean-Francois Chartrain, as Chief Operating Officer. Mr. Antonio has over 22 years of experience in the energy sector, including 5 years in our International Energy Agency and 11 years in ANGI, where he performed numerous roles. I would like to thank Jean-Francois for his service to the group as CEO, and welcome Antonio into his new role. The Tabreed management team has a wealth of experience and is well equipped to guide Tabreed through the coming years. I will now hand over to Adel, our Chief Financial Officer, to take you through the performance highlights and financials for 2021.

Thank you, Khalid, and thank you, everyone, for joining us today. I would like to highlight our '21 performance. Total revenues grew by more than 12%, led by the chilled water business growth of 11.6% and value chain business growth of 35%. During the same period, EBITDA growth was 6%, surpassing AED 1 billion and resulting in EBITDA margin of 63% for the period. Net profit during the year increased by 6.3% to a record of AED 585 million. During the year, we added capacity of over 40,000 RT. And we delivered on our earlier capacity, as mentioned by Khalid, the guidance of the 80,000 RT for 2021. Our '21 financials included consolidation of Saadiyat Island cooling assets for over 10 months, which added additional 35,000 RT capacities. We also acquired Al Mouj cooling assets in Oman in January this year, with the contracted capacity of 18,000 RT. Saudi Tabreed was part of ACWA Power led consortium that was award projects personnel. I would like to reiterate our revised capacity guidance for the next 2 years. Based on current signed contracts in hand, we expect to commit at least 120,000 RT of new capacity over '22 and '23. To deliver maximum value for our shareholders, Tabreed's board propose dividend of AED 0.12, similar to last year to be paid to a cash dividend of AED [ 0.06 ] per share, and the bond share issued at 2.5% for one share for every 14 share. Moving to the next slide. This slide recaps the evolution of our performance of our recent year. 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 approximately 90% of our current capacity contracts for at least the next 10 years. About 80% of our revenues are derived from fully government or property government-owned organization, therefore, limiting counter-party risk. Furthermore, contracts are long term in nature, providing strong revenue visibility. The current connected capacity is over 1.21 million RT, which has grown at an average rate of 10% since 2018. The chilled water group business has been growing at an average rate of 11% since 2018 and has been the primary driver of the group revenue. Tabreed has a track record of delivering profitable growth. EBITDA has increased at an average rate of 15% per annum since 2018. '21 profitability is in line with historical averages. And we are confident of maintaining the margin level over long term. Tabreed's performance during the last 2 years of the COVID dynamic and legacy CPI demonstrated a robust and resilient nature of our business and the returns we generate. Moving to the next slide. Let me start by highlighting the key points on our income statement for 2021. Total revenue grew by 12%, driven robust performance of both chilled water and value chain business. Chilled water business recorded growth of 11% during the period. Key factors driving this increase. Recent acquisitions contributed around 12% of the growth. Around 3% of the growth was contributed by new connections, increases in consumption volumes and overall improvement in operational efficiency, and the last one, partly offset by at the negative CPI. EBITDA for '21 grew by 6.6% of AED 1.033 billion. EBITDA margin for the period were 53%, marginally lower than last year and in line with the historic average. The growth in EBITDA was primarily driven by consolidation of acquired district cooling assets. Higher finance costs reflects the full year impact of the senior facility raised during 2020 to fund the new acquisitions as well as the consolidation of Al Wajeez debt. Other gains in '21 reflect the valuation gain arising from Al Wajeez acquisition. Net profit for the period increased by 6.3% compared to last year to a record of AED 585 million. We will now look at the statement of financial position on the next slide. The increase in fixed assets and intangible represents addition to new acquisitions of Saadiyat Island District cooling assets and consolidation of Al Wajeez. Receivables are significantly improved on prior year, falling by 23% despite the 12% increase in revenue. This reflects strong collections from our largest personal and has resulted in this or improving compared to prior period. The increase in debt mainly represents consolidation of Al Wajeez debt of AED 653 million following the salable acquisition from last year. The increase in other liabilities nearly represent seasonality factors, coupled towards acquisition of [indiscernible] entities and Al Wajeez consolidation. Turning to the next slide, we will now take a look at the cash flow statement. Our cash flow performance during the period has been extremely robust. Strong cash flow from operations of AED 1.3 billion, reflecting significantly higher collection across customers with significant inflows from our major customers in particular. DSOs improved strongly throughout the year, and we have seen this trend continue for this year 2022. CapEx outflows related to acquisition of the Saadiyat Island and Al Wajeez cooling scheme and also includes inflows from the divestment of Qatar Cool. Tabreed has very strong liquidity with closing cash balance at the end of the period of AED 1.2 billion, and our revolving credit facility remains unutilized. This liquidity combined with our flexible capital structure position, the group will perform future growth. Let me now turn on to the slide on risk portfolio. This slide provides the usual background on Tabreed's risk portfolio. As of December 21, Tabreed has AED 6.2 billion of net debt. The increase during the year reflects the consolidation of Al Wajeez. Net debt-to-EBITDA ratio of 5.9x in December '21 compared to 5.25x in December -- in September of 2020. We expect this to improve as the fully EBITDA contribution from recent acquisitions is reflected in our financials. Tabreed naturally de-levered over time due to the strong cash generation, characteristics of our business models. Both Moody's and Fitch Reaffirm their investment-grade rating following the 2021 acquisition. That completes the detailed review of our results for last year. I will now pass back to Khalid for the closing remarks.

Thank you, Adel. So as a conclusion, Tabreed is a highly sustainable business, delivering significant power efficiencies compared to the other cooling alternatives. Sustainability is at the core of Tabreed's operation. It reflects the company's commitment to energy efficiency and to the environment and to the sustainable socioeconomic development of the region. Tabreed has set its own targets to support energy consumption reduction and emission prevention through innovative technology solution and environmental friendly practices. Previous environment company initiatives are part of Tabreed's operations, such is use of treated sewage affluent, emission monitoring, thermal energy storage, use of street water, management of hazardous waste and compliance with framework of the regulation of trade effluence. All the above initiatives have saved over 2.33 billion kilowatt hours of energy consumption in '21 alone, enough to power 132,000 homes for a year and equivalent reducing 1.39 million tons of CO2 emissions. On the next slide. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance, with rising profitability and margins. We continue to work on various fronts, from business development to operations to help drive further growth. Tabreed has solid corporate governance and market-leading transparency, demonstrated by nonexecutive Board composition. The second part of the opinion and our green financing framework confirms the positive environmental impact of our core DC operations. I would like to reiterate, Tabreed's performance during the last 2 years of the COVID pandemic and challenging business conditions demonstrate the robust and resilient nature of our business. Thank you for joining us. And I will now hand back to [indiscernible] conclude the call.

Thank you, Khalid. That concludes our results presentation. I will now request the operator to open lines for Q&A.

[Operator Instructions] Our first question comes from Thomas Mathew of KAMCO Invest.

My first question is on the return expectations that you have for KSA and Egypt. I think as these are new projects, so new geographies for Tabreed. So I'm just wondering if there's any sort of guidance that you can give on that front, even if that is a range in terms of margins and return expectations, in terms of IRR, any other metric that you look at. Also, I just wanted to check on the guidance of 120 KRT. Does that include your Saudi and your user project? Those are my 2 questions.

Thomas, it's Richard here, SVP Finance at Tabreed, just to take your questions. So thanks very much for the very good questions. I think in terms of KSA, what I would say is where we have our core business model of constructing and only and operating district cooling assets, our margin expectations are the same across the portfolio. I think in KSA, what we're seeing here with these big projects is a slightly different business model. As Khalid described, we're an equity owner in a multi-utility organization. We will do the O&M of the district cooling. But our returns will be a blend of all those different services that, that multi-utility company is going to provide. So it's early days yet for us. I think from an IRR perspective, we're looking at similar levels of return to the core business that we have. But how that's going to impact on a line-by-line level on margins, it's a bit early to say at this stage. Certainly, in Egypt, where we are looking to construct and then own and operate the mall there that we announced just a few days ago, the margin expectations will be very similar to those that you've given. Sorry, those that we've given in us -- the rest of the business. In terms of -- yes, sorry, in terms of guidance, so I think our guidance historically we've said is organic growth. I think we've managed to deliver that level of organic growth. And we would include Egypt as organic growth in that, and that we're going to construct the plant there. The -- I think going forward, where we see very, very small M&A activities, I think they'll be partly delivering the guidance. But yes, Egypt and Saudi are part of the guidance that we're giving for 2022 and 2023.

Sure. And just a follow-up. Egypt gets fully consolidated by keeping the KSA is going to be reflected in the equity accounted entities, right?

That's correct, yes.

Our next question comes from [indiscernible] from Bank of Muscat.

I just have a small question regarding, what is your view on Al Mouj DC assets which is acquired in Muscat, Oman? This is my only question.

Yes. Thanks. So this -- I mean, this is a 2022 acquisition as far as accounting and consolidation is concerned. I think if you know Muscat and Oman, Al Mouj is the premier area of Muscat in Oman. And the plant we've acquired there serves the whole of that development. And it will serve that as it grows as well. So the concession size is 33,000 tons. We have just over 18,000 tons connected at this point in time. We expect a small new connection to take place in this year. And then the concession area will -- and the connected capacity will expand over the next few years to move that 32,000, 32,500 ton full capacity. The -- just to reiterate, Tabreed Oman is a consolidated entity. It's a subsidiary of Tabreed. We own 61% of in partnership with some Omani -- primarily Omani pension funds that invest in that business as well.

Do you hear me?

Yes.

Sorry, I just got out to the call my mistake, and I didn't hear what you said. Could you just give me a summary of what you just said again? I'm really sorry for that.

Yes. So just very quickly. I don't bore everybody else on the call. So Al Mouj is a 2022 consolidated acquisition. It closed in 2022. It's 18,000 tons of connected capacity, concession area of 32,500 tons when it's fully built out. Tabreed Oman is a company we own 61% of. And I think anybody in those area will know that this is the primary development in Muscat and Oman. And it's certainly one we're extremely proud to have been able to acquire.

[Operator Instructions] Our next question today comes from Josefina Duran of Morgan Stanley.

My question is related to your guidance. If I understand correctly, this is mostly driven by organic growth. But do you have a sense of how much is your CapEx guidance? How it's going to be funded going forward? And tied to that, what do you expect for your leverage? Do you expect stable levels, slightly increasing, decreasing from here?

Josefina, thanks very much for the question. I think there's a couple of questions in there, I think. In terms of leverage, we manage our leverage to the kind of guidance that we get from the rating agencies, Fitch and Moody's that rate us. So we're currently BBB with Fitch and BAA3 with Moody's. That gives us a bit of flexibility because the rating agencies do allow us to -- when we make an acquisition for that leverage to pick up in the short term as long as it's going to decline back down within their kind of normal boundaries for those ratings in the longer term. And certainly, in all the acquisitions we've done, including those that we closed in 2021, we've been able to demonstrate to the agencies that, that is the pattern going forward. And they've been comfortable to retain those ratings. And we anticipate that we'll continue to see a decline in leverage as the business matures and those -- we see the full year consolidation of those new acquisitions taking place. As Khalid and Adel said in the presentation, we're a very highly cash-generative business. I think you can see that from the cash flow this year, where the cash that we started the year with was primarily utilized for the Saudi acquisition, but we see the same balance because we generate so much cash in the year. So I think that means we do naturally de-lever over time. And we will see that pattern going forward. If we have further acquisitions that are of a considerable size, then we may need to add new leverage to the organization in order to close those transactions. I think the small acquisitions like Al Mouj, things like that, and for the organic growth that we've talked about, we wouldn't anticipate adding debt capacity to secure that sort of organic growth and the guided growth that we've given. We believe we're generating sufficient cash and holding sufficient cash to allow us to fund that growth without new debt. But if we do anything that's major, the size or scale of the downtown DC or Saadiyat transactions, then we would probably need to add new debt to secure those. And then we will go back to the rating agencies and talk to them about how we're going to de-lever over time in order to ensure that we retain those investment-grade ratings. In terms of the guidance that we gave, I mean, historically, we used to say AED 10,000 per ton of new capacity was our CapEx guidance. I think that has generally declined over the last few years. And we're now in the region of AED 7,500 to AED 10,000 depending upon the specific nature of the connection and the capacity we're adding. If it's a significant network or a long connection, then it's towards the top end of that. If it's relatively straightforward, it's towards the top of the end, but it's in that range -- sorry, bottom at the end. But it's in that range of AED 7,500 to AED 10,000 per ton of capacity.

That's great. My other question is regarding your working capital. So I see an increase in trade receivables. Is this a normalization of what you've seen last year? Or what has changed?

So I think last year, I was sitting here saying that we have some customers that pay us on an inconsistent basis, so I can describe it as lumpy, and they will catch up. They're our largest customers. They are 100% government owned in the UAE. And I think what we're seeing this year is that they have caught up. So going forward, I think Tabreed is a business you need to look at long term. If you look at short periods, you might not get the right picture. But if you look at a long-term period, then I think you will get the right picture. So I'll refer you to the slide that show our long-term trajectory in terms of margins and growth and capacity additions. Those are the trends that you should expect to see going forward rather than just looking at one period versus another period. I think the EBITDA margins that we have reflect our cash generating ability. And that should be -- what drives the modeling, I think, of cash flow into the business.

Okay. That's clear. And my last question, sorry. I know margins are very high and -- but there has been a contraction from last year. I think it's on the gross profit as well. So are you seeing any pressure from cost increases? Or what's the driver of that?

I think, Josefina, I'd just reiterate that if you look long term, then the margins are pretty consistent. So the most important margins in our business are the EBITDA margin and the net income margin. I think EBITDA margin in particular, this year's number, 53%. It's slightly below last year, which was an exceptional year, but it is above the previous 2 years. So the long-term trend is right there in the right ballpark. I think, as I said, when you look at the just 2 periods, you might not get the right picture. And I think what we've seen in 2021 is a short-term slight contraction, but probably back to, from an EBITDA perspective, at least the right kind of normal level. I think 2020 was slightly exceptional as far as EBITDA margins are concerned. And net income margins, I think, going forward, that kind of 30% to 33% level is what you should anticipate seeing. I think we haven't seen anything in the business which is going to have any long-term impact on our margin. So the long-term trends that you see and that we publish should be how you think about the business going forward.

Our next question comes from Rakesh Tripathi of Franklin Templeton.

I just wanted to clarify something you mentioned earlier. It's just the time of the Red Sea project, what is the kind of capacity addition that we should expect from this? And will this be over 2022, '23, these 2 years? Hello?

Rakesh, yes, thanks for your question. Sorry. We couldn't hear you very well. So we had to confer as to what you were asking. The Red Sea project, as I said, is a -- or Khalid the CEO said is a multi-utility project. The district cooling capacity within that multi-utility project is 32,500 tons. In terms of timing, I think I don't have the timing on that, but it is going to take some time. It's not going to be in 2022. We're not going to see any service commencement in 2022. It's going to be beyond that. These are very, very large projects, and they will take time to develop. But in terms of being more specific, maybe we could deal with that one to one offline because I don't have that data with me.

[Operator Instructions] Our next question comes from Yawar Saeed from International Securities.

My -- I have 2 question. First is on -- there was a news that Tabreed is considering acquisition of Majid Al Futtaim cooling assets. Any update on that? And plus, also, can you shed some light on the impact of corporate tax on your performance? Will you be paying the same 9%? And from when it will be implemented on you if it gets implemented?

All right. Thanks, Yawar. I think let me take that corporation tax question first because I think that's probably a question on most people's minds. It's very early days for the corporation tax. We've received very little guidance from the authorities here in the UAE to date. But our understanding is that our first taxable period is most likely to be 2024. So we have some time to understand the regulations when they are published and to plan accordingly. I think until the more detailed regulations come out, which we anticipate being in the second half of 2022, it's very difficult for us to do any more at this point in time other than say what I've said. In terms of your other question on Majid Al Futtaim, we're not going to comment on -- sorry, on media speculation, I'm afraid, on this call. What I would say is that we're -- we still believe we have significant capacity for growth within our balance sheet, and as I say, a capacity to grow further. And we're very interested in continuing to look at these big transactions within the market, but we can't comment any further at this time.

That was our final question. So I would like to hand back to Mr. [indiscernible] for any closing remarks.

That concludes our 2021 full year results earnings conference call. Tabreed looks forward to interacting with you at our earnings call -- conference call and investor conferences. If you have any further questions, please don't hesitate to contact us. Have a great day. And once again, thank you for joining this call.

Apologies. We have received a -- I'm so sorry. They've removed their request to speak. We did receive a last-minute question. But this does conclude Tabreed's Full Year 2021 Earnings Conference Call. Thank you all for joining. We hope you have a great rest of your day. You may now disconnect your lines.