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

Good morning, and welcome to the Tabreed Q3 2022 Earnings Conference Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to our host, Kevin Hackett of Tabreed to begin.

Thank you. On behalf of Tabreed's management team, I welcome you all, and thank you for joining us for the Q3 '22 results conference call. I hope everybody is keeping well 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'd now request that you turn to Slide 3 for today's agenda. So on today's call, we have with us Adel Salem Al Wahedi, our Chief Financial Officer; and Salik Malik, our Vice President of Finance. Adel will begin with the opening remarks and provide an overview for the Q3 2022 performance and key highlights. Following that, Salik will discuss the financial performance in more detail, and Adel will then conclude the presentation and we'll open up the lines for your questions. Thank you, and over to you, Adel.

Thank you, Kevin, and thank you, everyone, for joining us today. I would like to highlight our Q3 2022 performance. Total revenue grew by 13%, led by the chilled water business growth of 14%. During the same period, EBITDA growth was 18%, resulting in an EBITDA margin of 55% for the period. Net profit during the year increased by 3% to AED 400 million. In September this year, the shareholders voted to amend Article 7 of the company's Articles of Association for 100% foreign ownership. Tabreed Egypt, our new entity in Egypt, had signed a contract with the developer called Egyptians for Healthcare Services, EHCS, for their new smart medical city project called CapitalMed. Tabreed is to construct and operate this new sustainable energy plant, which is designed to meet their cooling and heating demand. It is a prestigious project with 19,500 RT of cooling in Phase 1, with a total concession of 30,000 RT for the entire development. It also includes 12 megawatts of space heating, thus providing a full end-to-end term solution. Tabreed published its second environmental social governance, ESG, report, offering greater insight into the company's activities and accomplishments following our first report in 2021. Tabreed is committed to play a key role in new UAE's target towards net zero emissions by 2050. Moving 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 thus our positive environmental footprint. We are one of the largest sustainable cooling providers in the region and currently operate 86 plants across the region, delivering over 1.25 million tons of cooling. Over the last 12 months, our operations saved approximately 2.3 billion kilowatt hours of energy consumption, enough to power over 128,000 homes for a year and equivalent to save over 1.35 million tons of CO2 emissions. Today's results announcement will demonstrate Tabreed's sustainable and resilient financial performance. In addition, we believe the carbon emission savings generated through our sustainable cooling services are an essential enabler to allow the region's governments to meet their sustainability targets for the future. Going to the next slide. During quarter 3 of this year, we added a capacity of 17,000 RT and a total of 48,000 RT during the first 9 months of this year. It was achieved through organic and inorganic growth. We remain committed to achieve our guided target for 120,000 RT by end of 2023. As you would be aware, in quarter of last year -- last quarter of last year, we also had the step-up acquisition of the remaining 50% stake in Al Wajeez cooling plant in Abu Dhabi, which has resulted in movement of 64,000 RT of capacity from equity accounted to fully consolidated. Moving to the next slide. 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 a clear visibility of future earnings and cash flows. We currently have approximately 81% of our current capacity contracted for at least the next 10 years. The current connected capacity is 1.25 million RT, which has grown at an average rate of 9% since 2019. About 2/3 of our revenues are derived from fully government-owned and partly government-owned organizations, which represents a strong credit profile of our customer base. Group revenue has grown by 13%, mainly from core chilled water business, which has shown an average growth rate of 13% since 2019. Tabreed has a track record of delivering profitable growth. EBITDA has increased at an average rate of 17% per annum since 2019. Our profitability is in line with historical averages, and we are confident of maintaining the margin levels over long term. With the robust and resilient nature of our business, Tabreed has demonstrated its nimbleness in facing any organic challenges, and we are confident and ready to overcome the same in the future. I will now 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 9 months of 2022. Total revenue grew by 13%, driven by the robust performance in child water, which recorded a growth of 14% compared to the same period last year. Other key factors driving this increase are 8% growth was contributed by consolidation of Al Wajeez and incremental impact of full quarter for Saadiyat district cooling consolidation which we did in Q1 last year. Oman consolidation added another 2% with the acquisition of Al Mouj. We also had some small benefits from positive CPI and the finance lease adjustment. EBITDA grew by 18% year-on-year to AED 912 million. The growth in EBITDA was primarily driven by consolidation of Al Wajeez district cooling assets, full quarter impact of Saadiyat district cooling assets and the growth achieved during this year. EBITDA margins were at 55%, slightly higher than our historical margins compared to the same period last year. Increase in net finance cost is due to consolidation of debt on Al Wajeez step-up acquisition last year. Share of results in equity-accounted entities has reduced, again, due to the consolidation of Al Wajeez upon the step-up acquisition. We have a chain method from 2 subsidiaries instead of the equity method. Net profit for the profit -- period increased by 3% compared to the last year. We will now look into the statement of financial position on the next slide. This shows the summarized version of the balance sheet as of 30th September 2022. The key movements in 9 months are as follows: nonmaterial intangible surplus and deconsolidation of IBA on investment disposal and amortization for the period; increase in trade receivables mainly represent seasonality impact, offset by the consolidation of IBA receivables on investment disposal; as you would be aware, during early Q2, we issued bonus shares to cover the 50% dividend discussed; reduction in debt represents the scheduled repayments of project finance facilities. We now go on to the cash flow statement. Our cash flow performance during the period has been extremely robust. Strong cash flow from operations of AED 866 million, slightly better than the last year for the same period before working capital adjustments. Our cash from operations to EBITDA ratio for Q3 was over 95%. As of Q3, there is no significant investment in CapEx or acquisitions. However, the comparatives of last year represents CapEx payments of AED 962 million made towards the acquisition of Saadiyat district cooling assets, net of sales proceeds from the Qatar Cool disposal. Financing activity represents a normal debt servicing, and the increase versus last year is due to consolidation of Al Wajeez post step-up acquisition. It also includes dividend payment of AED 166 million. Overall, 9 months recorded a strong and robust cash from operations and resulting in a healthy closing cash balance of close to AED 1.5 billion. And our revolving credit facility of AED 190 million remains fully unutilized. This liquidity, combined with our flexible capital structure, positions the group well to fund future growth. I will turn to the debt portfolio and return ratios. Tabreed's portfolio as of September 2022 is as follows: Tabreed has a net debt of AED 5.8 billion. So the gross debt has increased due to consolidation of net debt, but the debt has reduced overall due to higher cash balance. There are 2 facilities maturing in 2025, which are corporate loan in H1 2025 and a sukuk in second half of that year. The facility maturing is with initial tenure of 5 years and it has 100% bullet at maturity. This facility allows us penalty-free prepayments, allowing Tabreed to manage refinancing risk over the life of the facility. Our intention is to refinance the term loan before the sukuk prepayment. Net debt-to-EBITDA ratio improved 5x in September compared to 6x in December 2021. As you all aware, company naturally delevers over time due to the strong cash-generating characteristics of our business model and maintaining the investment grade status is our core. Following the 2021 acquisitions, both Moody's and Fitch reaffirmed their investment-grade ratings with Moody's at Baa3 and Fitch improved from BBB- to BBB with a stable outlook. This completes the detailed review of our results from Q3 2022. Now I will hand it back to Adel to take you through the conclusion.

Thank you, Salik. Tabreed is a highly sustainable business, delivering significant power efficiencies compared to other cooling alternatives. Sustainability is at our -- the core of Tabreed's operation that 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 emissions prevention through innovative technology solutions and environmentally friendly practices. Various environmental-friendly initiatives are part of Tabreed's operations, such as use of treatment sewage effluent, emission monitoring, thermal energy storage, use of seawater, management of hazardous waste and compliance with framework of the regulations of trade effluent. All the above initiatives has saved over 2.26 billion kilowatt hours of energy consumption, enough to power around 128,000 homes for a year and equivalent to producing around 1.3 million tons of CO2 emissions, as discussed or explained earlier today. Next slide. As a stable utility business model, Tabreed continues to deliver strong financial and operating performance with rising profitability and consistent margins. Also, we continue to work on various fronts from business development to operations to help drive further growth whilst protecting and improving the shareholders' value. Tabreed has solid corporate governance and market-leading transparency, demonstrated by nonexecutive Board composition. The second-party opinion on our Green Financing Framework confirms the positive environmental impact of our core sustainable cooling operations. During the year, we added capacity of 48,000 RT through organic and inorganic growth, and we're moving forward to achieve the guided target of 120,000 RT growth by end of 2023. Tabreed further is expanding in the Egyptian market through our second project, CapitalMed. I would like to reiterate that the robust and resilient nature of Tabreed's business as well as the returns, Tabreed has demonstrated its agile proactiveness in facing any economic challenges, and we are confident and ready it will deliver the same or even better in the future. Thank you for joining us today, and I will now hand back to Kevin to open the Q&A line.

Thank you, Adel. That concludes our results presentation. I'd like now to request for the lines to be opened for the Q&A.

[Operator Instructions] We've had a question sent into us asking, thanks for taking my questions and congrats on a great set of numbers. Firstly, my first question is on the 15,000 RT added in Q3 in the UAE. Which concession is this additional for?

Thank you very much for this question, Thomas. I appreciate you opening the line with the new question. So then the question that 15,000 RT, it's actually 17,000 RT that we added in Q3. And it's basically in our existing concession areas, which is spread across Abu Dhabi and Dubai, Raha Beach and Downtown DCP.

Secondly asking, can we safely assume that you would sign a greenfield concession in India via your partnership with IFC in 2023? What would be the average ticket size of the opportunities in India?

We are -- Adel again here. Yes, we are exploring the opportunities in the India market. And we cannot -- to mention anything now. And once we reach the level that we can share anything with the market, that we will do so.

And then thirdly, is there any update on acquisition opportunities of DC assets in the UAE, which RE developers and operators are offloading?

See, as you can understand, we are always into the market to make business. And we are into the dialogue with the different potential clients or investors or even developers. And this is -- always this happening, as the case. And again, once we reach to a state that we can announce something to the market, that we will do so.

Our next question says, hi, team. Can you please discuss briefly regarding near-term inorganic growth plans. Also can you please talk about any near- to medium-term plans to approach debt capital markets for another issuance?

Thank you, Rakesh, for this question. As Adel mentioned in his previous answer, so as and when we come close to the signing of any brownfield acquisitions, we will definitely inform the market and accordingly to the press as well. When it comes to the debt capital markets approaching, yes, today, we are having [ to check. ] We are -- as I said in my cash flow presentation, we are in a position to fund organically the cash from the internal funds. And then later on, we will take it to the debt capital markets. Hope this answers your query.

Our question says, thank you for the great presentation. My question is, is there any update on the acquisition of Majid Al Futtaim assets?

As you can understand, we are a listed company, so that we cannot talk about anything but it is not something really that reached to any final stage or any conclusion of it. Though still we are continuing to approach any prospect in the market, like any other players as well. Thank you.

[Operator Instructions] We have no further questions, so I'll hand back for any closing remarks.

Thank you. That concludes our Q3 2022 earnings call -- we have one more, I beg your pardon.

We've just received a question asking, does the management plan to increase the dividends?

I'm sorry. Can you repeat the question, please?

Does the management plan to increase the dividends?

See, as you can understand, this is a shareholders' decision. And that decision always depends on so many factors about the liquidity, about the growth plans, about so many things. And we cannot speculate anything as of now. And [ Sharlah ], you know that the next call, that we will be in a position that -- to share the announcement of the decision at that time.

Thank you. We have no further questions on the line.

Thank you, everyone. That concludes our Q3 2022 earnings call. We look forward to interacting with you at our earnings conference calls and investor conferences. And should you have any further questions, please don't hesitate to contact us. Have a great day. Thank you once again for joining the call. Bye.

This concludes today's call. Thank you for joining. You may now disconnect your lines.