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

On behalf of Tabreed management team, I welcome you all and thank you for joining us for the H1 2022 results conference call. Hope you are all keeping safe and healthy. 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 like to request you to turn to Slide 3 for today's agenda. On today's call, we have with us Adel Salem Al Wahedi, Chief Financial Officer; and Salik Malik, Vice President of Finance. Adel will begin with the opening remarks and provide an overview for H1 2022 performance and key highlights. Following that, Salik will discuss the financial performance in more detail. age will then conclude the presentation, and we will open the lines for your questions. Thank you, and over to you Adel.

Thank you, Weaam, and thank you, everyone, for joining us today. I would like to highlight our first half of this year performance. Total revenue grew by 12.3%, led by chilled water business growth of more than 13%. During the same period, EBITDA growth was 13.7% resulted in an EBITDA margin of 60% for the period. The net profit during the year increased by 3% to AED 240 million. During the first half, we added capacity of over 32,000 RT, including 18,000 RTs with acquisition of Al Mouj district cooling assets in Oman in January this year. As part of Tabreed's strategy to focus on chilled water and core business during the second quarter, sold a stake in value chain business subsidiary equal to 70% of Ian Banham & Associates, which is a mechanical and electrical consulting firm for AUD 5 million. As a result of this transaction, our financials include loss of AED 900,000. Moving to the new 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 one of the largest district cooling providers in the region and currently operate 86 plants across the region, delivering over 1.24 million tons of cooling. Over the last 12 months, our operations saved 2.2 billion kilowatt hours of energy consumption enough to power over 125,000 homes for a year-end equivalent to over 1.32 million tonnes of save CO2 emissions. Today's results announcement will demonstrate a brief sustainable and resilient financial performance. In addition, we believe the carbon emission savings generated through our district cooling services are an essential enabler to allow the regional governments to meet their sustainable targets for the future. The next slide will summarize our connected capacity. During the first half of this year, we added capacity of 32,000 RTs across our operations. Of the total added capacity, 18,000 in Oman with an acquisition of Al Mouj district cooling assets in January of this year and approximately 14,000 RTs were added in the UAE and balanced in Bahrain. As you would be aware, in Q4 last year, we also had a step-up acquisition of the remaining 50% stake in Al Wajeez cooling plant of Abu Dhabi's Al Maryah Island, which has resulted in movement of 64,000 RTs of capacity from equity accounted to fully consolidated. Moving to the next slide, which summarizes the recent quarter development. This slide recaps the evolution of our performance over recent years. To summarize, Tabreed is a stable utility infrastructure business with long-term contracts with high-profile customers. This provides the clear visibility of future earnings and cash flows. We currently have approximately 85,000 -- 85% of our current capacity contracted for at least the next 10 years. The current connected capacity is 1.24 million RT, which has grown at an average rate of 11% since 2019. About 70% of our revenues are derived from fully government-owned, partially government-owned organizations, therefore, diversifying the customer profile. Group revenue has grown by 13%, mainly from core chilled water business, which has shown an average growth rate of 14% in 2019. Tabreed has a track record of delivering profitable growth. EBITDA has increased at an average rate of 17% per annum in 2019. Our profitability is in line with historical averages, and we are confident of maintaining the margin levels over long term. The brief performance during the last 2 years of the COVID pandemic and negative CPI demonstrates the robust and resilient nature of our business and the returns we generate. And now I will hand over to Salik for a detailed discussion of our income statement.

Thank you, Adel, and good afternoon, everyone. Let me start by highlighting the key points on our income statement for the first half of this year. As mentioned, total revenue grew by almost 13%, driven by the robust performance in chilled water, which recorded a growth of 14% compared to the same period last year. Other key factors driving this increase in revenue are around 10% of this growth was contributed from the consolidation of Al Wajeez that we did last year and also the impact of the Saadiyat acquisition, which we did it in Q2 last year. Oman added another 1% through the acquisition of Al Mouj at the start of this year. We also had some small benefit from the positive CPI inflation and the finances adjustments. The decline in VCB business primarily due to the sale of our stake in IBA. The growth for the quarter grew by 14% to AED 589 million. The growth in EBITDA was primarily driven by consolidation of Al Wajeez, the full year impact of Saadiyat district cooling assets distilling and Al Mouj. EBITDA margins were consistent at 60% in line with our historical margins for the same quarter. Increase in net finance costs is due to the consolidation of debt of Al Wajeez upon the step-up acquisition in Q4 last year. Share of results of equity accounted entities has reduced again Q2 Al Wajeez acquisition, where we are now consolidating and accounting it as a subsidiary versus the equity previously. Net profit for the period increased by 2.9% compared to the last year. We now go on to the next slide. This slide shows about the summarized version of the balance sheet as of 30 June 2022. The key movements during the first half of this year, movement in intangibles represents the deconsolidation of IBA on divestment of our -- and the amortization. Increase in trade receivables mainly represents seasonality impact, offset by deconsolidation of IBA receivables on divestment. DSOs are at historical low levels as of end of June. Change in derivatives represents the positive movement in MTM as because of the existing interest as was reflecting the current hikes in the interest paid. Share capital was increased by AED 69 million, representing the issuance of the bonus shares to the shareholders as part of the scrip dividend that we have declared. Reduction in the debt represents a scheduled repayment of our project finance facility. Turning to the next slide, which we'll look into the cash flow statement. Our cash flow performance during the period has been extremely robust. Strong cash flow from operations at AED 597 million and cash from operations before working capital changes is positive. And the negative variance in working capital is mainly due to 2021 higher collections. We would like to mention here that the CFO to EBITDA ratio for first half of this year was over 100%. In first half of this year, there was no significant investment in CapEx or acquisitions, and in comparatives, it reflects the payment of acquisition of Saadiyat cooling assets. Financing activity represents a normal debt servicing and the increase versus the last year is due to the consolidation of Al Wajeez post the step-up acquisition. It also includes the dividend payment of AED 166 million. Overall, the first half of 2022 recorded strong and robust cash from operations, resulting in a healthy closing cash balance close to AED 1.3 billion, and our revolving credit facility remaining unutilized and at AED 590 million. This liquidity with -- combined with our flexible capital structure positions the group well to fund any future growth. With this, now turn to the slide on debt portfolio. This slide provides the usual background on Tabreed's debt portfolio. It is as of June 2022. Tabreed has a net debt of AED 6 billion, though the debt has increased compared to the same period last year is due to the consolidation of Al Wajeez debt on step-up acquisition. With closing cash balance of AED 1.3 billion, therefore, the overall net debt is at AED 6 billion. The net debt-to-EBITDA ratio improved to 5.4x in June compared to 6 in December last year. This demonstrates the fact that Tabreed naturally delevers over time due to the strong cash-generating characteristics of our business model. Both Moody's and Fitch reaffirm their investment ratings following the 2021 acquisitions. This completes the detailed review of our results for the first half of this year. Now I'll hand it back to Adel to take through the conclusion. Over to you, Adel.

Thanks, Salik. Tabreed is a highly sustainable business, delivering significant power efficiencies compared to other cooling alternatives. Sustainability is at the core of Tabreed's operations, it reflects the company's commitment to energy efficiency and to the environment and to the sustainable socioeconomic development of the region. Tabreed has hit its own target to support energy consumption reduction and emission prevention through innovative technology solutions and environmentally endless. Various environments in the initiatives are part of Tabreed operations such as use of o Treated Sewage Effluent, emission, monitoring thermal energy storage, use of sea water, management of hazardous waste, and compliance with the framework of the regulations of Trade Effluent. All the above initiatives has saved over 2.21 billion kilowatt hours of energy consumption. As we said, enough to power around 126,000 homes for a year and equivalent to reducing around 1.32 million tons of CO2 emissions. Recently, we just also published our -- for the second year ESG report, and this is demonstrating also our forecast going forward in the ESG concept as overall. Moving to the next slide. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance with rising profitability and consistent margins. We continue to work on various fronts from business development to operations to help drive further growth whilst protecting and improving the shareholders' value. The grid has solid corporate governance and market-leading transparency demonstrated by an executive board composition. The second-party opinion and our green financing framework confirms the positive environmental impact of our core district cooling operations. Our partnership with IFC for expansion in India is experiencing some momentum, and we are confident of receiving a new contract in the near term. I would like to reiterate that 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 all for joining us, and I will now hand back to Weaam to open the Q&A line.

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

[Operator Instructions] And our first question comes through on the chat box from Thomas Mathew of KAMCO Investment. I have a few. One, for capacity post 120 kRT that gets added over 2022 and '23, what amount of capacity is left from a total concession capacity across projects to be connected. The second question, how is the market looking for new signings and acquisitions within the UAE? The third question, for the Saudi Consortium led project, how should we look at pricing and margins?

Hi, good afternoon. Thanks, Thomas, for your question, multiple questions in one question. Thank you very much. Well, I'll break down this as the three questions. For the first one, the capacity guidance that we have, we are still confident of achieving that 120,000 spread across 2022 this year and later. So, so far, as you are aware, we have already connected 32,000 tonnes, and we are confident to meet that 120,000 target. The question regarding the remaining concession. As you are aware, and I said already in the public knowledge, Thomas, that we have acquired operate recently a lot of concessions as well in order to and our existing Al Raha Beach and Yas Island. The concessions in Downtown DCP, we still have 100,000 or to be connected. And then the Saadiyat, which is still 50% only has been connected and there is remaining. So overall, I would say there is still 0.25 million of tonnes to be connected. And we expect that to be happening in future, near future. So we are quite confident to make that especially with this current economic boom within UAE based on the higher oil prices, we are quite confident of achieving it. Okay. And I hope that I've answered for you that question. And now how is the market looking for new signings and acquisitions. So as you have seen in the last 2 years, we have done quite a few brownfield acquisitions to run. And we continue to see still there is an appetite and market, especially the real estate developers are quite keen to incentivize themselves and to get the district cooling businesses, which they are having those captive assets to be divested and from their core segments, so that can earn more return. So we are quite confident, and we expect to sign a few more before it saturate. So that's our expectation, and we are quite buoyant on that front. With results of the Saudi led consortium, this third person. As we said last time as well, we are participating in this project, in this Giga project as an equity investor led by ACWA Consortium. And we will be getting the dividend as part of that. And so it's a complete different model. It's a mega utility projects, not just the district cooling. So what we are expecting is that it will be a dividend starting in 2 years from now, 3 years -- as soon as the project is complete and the profit is able to be generated from that. That answers all your questions, Thomas.

[Operator Instructions] We have a question on the chat box. Can you describe your debt financing and refinancing plans for the next couple of years.

Thank you. Thank you for your question. So the debt financing. Currently, we -- currently, we have debt which is maturing only in 2025 first quarter. So we are quite room for us to plan for the next refinancing that is due, which is in Q1 2025, which is basically the financing that we did in 2020 on the acquisition of Downtown district cooling assets. So -- and with regards to the raising interest rates as well, we are -- because all this corporate debt or almost 99% is hedged at a historical low level. So the financing cost raise in financing cost is not a threat for us. We are quite confident in having a hedge for that. refinancing, we will be looking into it next year or later for the RCF facility that we have.

Thank you. We currently have no further questions. So I'll hand the call back over to Weaam for any closing remarks.

That concludes our H1 2022 earnings call. So we look forward to interacting with you at our earnings conference call and investor conferences. Should you have any further questions, please don't hesitate to contact us. Have a great day, and thank you once again for joining this call.