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

Good afternoon all. I would like to welcome you all to Tabreed 9 Months 2023 Earnings Conference Call. My name is Brika, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, Yugesh Suneja, to begin. So Yugesh, please go ahead.

Thank you, Brika. Good afternoon, everyone. On behalf of Tabreed management, I am pleased to welcome you all to our earnings call for the first 9 months of 2023. I am Yugesh Suneja, Head of Investor Relations at Tabreed. Next slide. Before looking at the agenda for today's call, let me draw your attention to the disclaimer on this slide, which contains an important information and a cautionary advice on the use of historical data and its limitation as well as some forward-looking statements. Kindly refer to this for more details. Next slide. I am joined today by our Chief Financial Officer, Adel Al Wahedi; and Salik Malik, Vice President of Finance. Adel will begin the presentation with key highlights and strategic progress during the first 9 months of 2023. During this period, Tabreed continued to deliver on its strategic priorities. Adel will then discuss financial overview and sustainability overview at Tabreed. Following that, Salik will discuss 9 months 2023 financial results in more details. At the end of the call, Adel will conclude with update on our guidance and outlook for the company. We will then open the lines for your questions. With that, I will hand it over to Adel.

Thank you, Yugesh. Good afternoon, everyone, and thank you for joining us today. Let me begin with the key highlights for the first 9 months of 2023. Tabreed connected capacity reached 1.3 million RTs, increasing by 3% compared to December '22. The company started operating its first district cooling plant outside the GCC region following acquisition from TATA Realty in India. We also started providing district cooling to another iconic development in the UAE, SeaWorld Abu Dhabi. Overall, UAE remains our largest and core market, accounting for 84% of connected capacity, and remaining capacity coming from our regional presence in Saudi, Oman, Bahrain and India. Group revenue grew at a strong rate of 10% year-on-year and 9 months for this year, driven by the robust performance of our core chilled water business, which contributed 97% to total revenue and increased by 10%. Our value chain business also supported growth and saw an increase of 16%. The growth was driven by various factors, including new connections and existing concessions, new plants, higher consumption volumes and a positive CPI impact. The company delivered a healthy and sustainable EBITDA of AED 914 million with a resilient margin of 50%. The 9 months for this year reported net profit was at AED 285 million, which included one-off noncash items. Net profit, adjusted for one-off items in both the periods and excluding the impact of deferred tax liability, increased by 14% to AED 442 million, driven by stable EBITDA and lower net finance cost. Let me shed some light on one-off items during the period, which significantly affect the true underlying results of our operations and are mostly related to accounting treatment. In first half of this year, we recognized fair value gains on unwinding of hedging instrument associated with early repayment of one of our loan facilities and on deemed disposal of Saudi Tabreed entity. In Q3 this year, we sold 50% stake in one of our subsidiaries, Tabreed Parks Investments, and recognized a gain of AED 84 million. During the third quarter, we also recognized deferred tax provision for AED 359 million as per IAS 12 accounting standard. Initial impact of deferred tax liability must be recognized with the introduction of UAE corporate tax. This is related to intangible assets from our customer contracts based on the acquisitions of Downtown Dubai, Saadiyat and the step-up acquisition of Al Wajeez. This is a provision and not an actual tax liability, which will be released to P&L as we amortize annually the intangible assets. And it will be fully reversed over the useful life of customer contracts. It doesn't impact our EBITDA or our cash generation ability, which remains robust and resilient. We also do not see any impact of this noncash item. On the strength of our balance sheet and our investment-grade credit rating, our business model continues to provide strong visibility and predictable cash flows, which underpin our ability to grow the business. We are moving to the next slide. In the first 9 months, we have added a new connection of 41,000 RTs. Our overall connected capacity reached 1.3 million RTs by end of the 9 months of this year. Except for India, the new connected capacity in India -- in 9 months, sorry, is purely organic and arises from 4 new plants and connections within our existing connection areas. Of the new connections, 24,000 RT came from UAE, 14,000 came from Saudi Arabia, 1,000 came from Bahrain, Oman and India each. For the first 9 months, we spent a total capital expenditure of about -- around AED 132 million, strategically directing capital allocations towards expansion and construction of new plants. Moving to the next slide. Let me now talk about our value creation framework that allows us to deliver significant shareholder value. It is based on the 3 pillars of grow, optimize and innovate. As shown, we aim to maintain the strong growth momentum of the past, ensuring that IRR on new capacity exceeds our cost of capital, enabling us to add value for our shareholders as well as adequately compensate for upfront investment risks. We are also focusing on optimizing our operations by leveraging on our integrated business model and having in-house O&M capability and centralized maintenance function. We have set targets to run our plants more efficiently. Lastly, we are capitalizing on innovative technologies such as big data and AI-driven tools to efficiently control and run our plants. We are also actively pursuing opportunities to use treated sewage effluent and seawater, renewable energy resources and the new nanomaterials to further extract efficiencies in our operations and contribute to sustainable development. We have always managed our cash flows to maximize the returns to shareholders through a disciplined investment in future growth, optimize our capital structure and maintaining a stable and increasing dividend payout whilst maintaining investment-grade status. This financial discipline, coupled with our long-standing approach to integrate ESG, has led to sustainable value creation for our stakeholders over the years. Moving to the next slide. On this slide, we show strategic progress achieved in the first 9 months. We remain committed to delivering on our growth plans. As part of it, we have now successfully delivered 41,000 RTs of the plant capacity expansion. We started operations of 4 new plants that contributed 45% of incremental capacity addition. Of these, 3 plants were greenfield and one plant in India came through brownfield acquisition. The rest of the capacity addition was from new connections in our existing concession areas across UAE and GCC. As mentioned before, we incurred a CapEx of AED 132 million in 9 months, which is in line with our capital allocation strategy. To secure our future growth, we also announced 2 new significant projects. First one was for a total district cooling concession capacity of 125,000 RT in India's Hyderabad Pharma City. Phase 1 will be 2,500 RT and it will be ramped up in line with the development of master community. Expected CapEx for Phase 1 is around AED 36 million. The second project was King Salman Park in Saudi Arabia. This is for a total concession capacity of 60,000 RT, with Phase 1 of 20,000 RT and estimated CapEx of around AED 200 million. We are also channelizing our efforts not to only to grow capacity but also to enhance efficiencies in our operations and use of sustainable energy sources. We can now remotely monitor our plant equipment, like chillers, from head office, and centralized team can take decisions to adjust various plant parameters such as water flow, temperature set point and turning equipment on/off as per customer load requirements. Our program to retrofit plant pumps with Variable Frequency Drive is ongoing, and we are increasing the number of plants under this program to reduce electricity consumption. During the quarter, Tabreed also announced successful testing of geothermal wells in Masdar City in partnership with ADNOC to utilize underground heat to chill water. We are now currently working to operationalize this technology to partially meet chilled water requirements of Masdar City. Lastly, I would like to reiterate Tabreed's strong cash flow generation ability underpinned by long-term contracts. Free cash flow generation during the 9 months of this year was AED 903 million. Strong cash generation allows us to optimally utilize our cash to invest in future growth, maintain progressive dividend policy and reduce debt to strengthen our balance sheet. Moving to the new section. I will now provide a summary of our financial performance before handing it over to Salik for a detailed discussion of the 9 months results. Leveraging our strong operational track record, regional presence and partnerships, Tabreed has experienced a robust growth in capacity and revenues, which have seen annual growth rate of 10% and 13%, respectively, between '19 to '22. This growth momentum was maintained during this year's 9-month period wherein revenue increased by 10%. Tabreed's business is a stable and predictable utility business model. We have long-term contracts with highly creditworthy customers, with an average contract term spanning 25 years on average. Approximately 80% of our group's revenue are derived from contracts with either fully government-owned or partially government-owned entities, underpinning a robust credit profile. Next slide. Over the years, Tabreed's business has demonstrated consistent growth trajectory and EBITDA profits from operations and net income, which closely align with its top line performance. This upward trend has been supported by the capacity charge component in our revenue model, which effectively provides earnings predictability as well as increasing consumption demand. Between '19 to 2022, our EBITDA, operating profit and net income margins have remained broadly stable, driven by the sustained operating efficiencies maintaining an average of 54%, 34% and 30%, respectively. This stability underscores the attractiveness of Tabreed's business. With confidence in our robust and resilient business model, we continue to expect to deliver these margins levels over the long term. Moving to the next slide. Tabreed has demonstrated consistent growth in cash flows from operations, which have grown at a higher rate than EBITDA due to efficient working capital management. Strong cash flow generation has enabled us to maintain our investment-grade rating with both reputable credit rating agencies, Fitch and Moody's. Through the early settlement of one of our bank facilities, we successfully reduced our total debt by AED 650 million in the first 9 months of this year, resulting in a lower gearing ratio from 51% to 49%. Our net debt-to-EBITDA has also seen an improvement over the last few years due to reduction in debt, higher EBITDA and an increase into cash liquidity position. Our balance sheet remains strong and provides sufficient room to enhance shareholders' returns through a combination of growth and a sustainable dividend policy. Moving to the new section. This slide provides an overview of Tabreed's contribution to enable a sustainable use of energy and its environmentally positive operations. We are contributing to the region's growth through efficient and environmentally friendly cooling. As our business grows, so does Tabreed's positive environmental footprint. We are proud to report that Tabreed's operations have resulted in a saving of approximately 2.48 billion kilowatt hours of energy consumption, enough to power over 141,000 homes for a year and equivalent to the annual prevention of over 1.48 million tonnes of CO2 emissions. We are part of DFM's UAE ESG Index aimed to measure ESG best practices followed by UAE listed companies. Tabreed is a highly cash generation business -- generating business, delivering significant power efficiencies compared to other cooling alternatives. We believe that the carbon emissions prevented through our sustainable cooling services are essential in enabling governments in the region to meet their sustainability targets for the future. As a result, Tabreed is committed to providing innovative district cooling solutions to the region and beyond. Next slide. Sustainability is at the core of Tabreed's long-term strategy, and we remain committed to integrating sustainability in our operations. Tabreed has set ambitious targets for reducing energy consumption and emissions. We will leverage innovative technology solutions and environmentally friendly operating practices, such as the use of treated sewage effluent, thermal energy storage, seawater, emissions monitoring, hazardous waste management and compliance with trade effluent regulations to achieve these targets. We are further committing to increase operational energy efficiency and water efficiency by 20% by investing in innovative solutions. Lastly, in line with the UAE government's strategic goals, Tabreed remains committed to its sustainability objectives. Tabreed has demonstrated its commitment to decarbonization and net zero by signing the UAE Climate-Responsible Companies Pledge. I will now hand over the presentation to Salik, our VP, Finance, who will discuss in detail our financial results for the 9 months of this year. Salik?

Thank you, Adel, and good afternoon, everyone. Let me start with the income statement highlights for the first 9 months of this year versus the same period last year. Total revenue recorded a robust growth of 10% in the first 9 months of this year versus the same period last year, primarily driven by our performance of our core chilled water business segment, which also recorded an impressive year-on-year growth of 10%. This growth is organic and attributed to the addition of about 47,000 tonnes of new connections connected during the last 12 months. Majorly through new connections in existing concession areas, our consumption volumes also experienced an increase of 9% year-on-year. And we also benefited from a positive CPI impact of 4.8%. Gross profit for the same period increased by 3% year-on-year. The operating cost increase represents, in prior year there was a reversal of utility provision subsequent to financial close of 2021 acquisitions and some one-off increase in maintenance related to temporary chillers. Adjusting for this, operating cost increase was in line with the consumption volumes, underscoring efficient management of our cost. During the first 9 months of this year, Tabreed delivered a healthy EBITDA of AED 914 million and a margin of 50%, demonstrating our ability to generate sustainable EBITDA margin between 50% to 55%. EBITDA is very stable versus last year. Our general and administrative expenses increased modestly, reflecting prudent cost control measures and optimization. EBITDA margins declined versus last year, mainly reflecting lower cost in 2022, as I mentioned earlier. Net finance costs reduced due to the lower interest cost after the repayment of some of our existing debt facilities and due to the higher fixed income on a rising interest rate market. Therefore, our profit from operations before deferred tax provision is at AED 605 million and our net profit before one-off gains and DTL provision is AED 442 million, which is an increase of 14% year-on-year for the same period, driven by stable EBITDA and reduced net finance cost. During Q3 this year, Tabreed divested 50% stake in Tabreed Parks Investment and as a result booked a gain of AED 84 million, which included the disposal of 50% in [indiscernible] and a fair value gain of 50% on retained interest. Lastly, during Q3 2023 Tabreed also recognized a deferred tax provision of AED 359 million, which Adel has explained in his opening remarks. This was due to an accounting treatment of intangible assets based on our customer contracts, and we expect this to fully reverse over the useful life of the customer contracts. In summary, excluding the impact of all of these one-off items explained above and in addition to some prudent provisions in the first 9 months, adjusted normalized net profit amounted to AED 442 million, reflecting consistent growth in underlying operational and financial performance. Moving on to the next slide. This slide presents the summary of the balance sheet as of the end of September 2023. The key highlights of the balance sheet movement during this year are fixed asset movement represent the consolidation of Tabreed Parks asset post 50% divestment of our stake and normal amortization and depreciation recorded during the first 9 months of this year. Investments in associates and JVs increased, which is mainly attributed to the fair value adjustment of our investment in Saudi Tabreed and recognition of the remaining 50% stake of Tabreed Parks Investment at fair value. Receivables and other assets remain broadly stable as slight increase through improved collections, which is offset by seasonality impact and other stuff like the MTM derivatives, which is lower, with the early settlement of one of our project finance debt earlier this year and a forward-going impact of reduction in [ SOFR ] outlook. Changes in equity and reserves is mainly the reflection of 2022 dividends paid to shareholders early this year. There is an addition of deferred tax liability as previously mentioned. Our net debt position has decreased to AED 5.2 billion as of September 2023 on a strong cash generation during the same period and decline in gross debt by about AED 650 million is from the liability management exercise done early this year. Overall, our balance sheet continues to strengthen with an improved leverage ratio of net debt-to-EBITDA of 4.2x and lowering the gearing ratio to 49%. Our financial position remains prudent with 2 fixed rate DCM instruments, sukuk and bond, and 100% hedged corporate loan. This effectively shields Tabreed from higher interest rate regime, which demonstrates effective risk management policies at Tabreed. Going forward, we have these 2 facilities maturing in 2025, with one of them in the first half of that year and the other is in the second half of 2025. Our loan facility allows us the penalty-free payments, providing us with greater flexibility to manage our cost of capital and refinancing risk. As mentioned earlier, both Moody's and Fitch reaffirmed Tabreed's investment-grade ratings, with Moody's at Baa3 and Fitch at BBB, which is a testament to our strong financial standing. Moving on to the next slide. Tabreed's business remains highly cash-generative. This slide shows the sources and uses of cash in the first 9 months of this year. Cash flow from operations [ inches ] equal into EBITDA, amounting to AED 914 million, highlighting the company's resilient business model and sustainable cash generation ability. This was further complemented by a positive working capital movement, indicating efficient management of collections and the strong credit profile of our customers. Our net operating cash flow-to-EBITDA ratio for 9 months of this year stood at 105%, demonstrating prudent financial practices. Capital expenditure during the first 9 months was around AED 132 million, which is in line with our strategic capital allocation, enabling us to expand our operations and maintain growth. We divested 50% stake in one of our subsidiaries, Tabreed Parks, and generated a net cash inflow of AED 68 million, allowing us to effectively recycle capital. All in all, we generated free cash flows of AED 903 million in the first 9 months. The financing activity primarily represents the cost of debt net of interest income, the settlement of bank facilities as part of the liability management program and the payment of dividends to our shareholders. Overall, the first 9 months of this year recorded robust cash flow generation, resulting in a healthy closing cash balance of AED 1.4 billion. We are also in the process of [ retaining ] our revolving credit facility, which will further enhance our liquidity position to fund any major acquisition quickly. We are well placed to capitalize on the strong financial position combined with our solid cash generation ability to deploy cash towards funding growth initiatives, strengthening balance sheet and returning cash to our shareholders. With this, I conclude the financial detailed presentation. Now I will hand it back to Adel to take you through the rest of the presentation.

Thank you, Salik. Allow me to take you through our capacity guidance for the next 2 years. For the next 2 years, that is '23/'24, we maintain our guidance for new capacity addition of 120,000 RT. This is aligned with our previous guidance. Approximately 60% of this guided capacity expansion is expected to come from consolidated entities, with the remaining contribution coming from equity accounted entities. We have already made substantial progress by delivering 96,000 RT since 2022 compared to our guidance of 120,000 RT. While there may be some spillovers from year-end to beginning of the next year, we remain optimistic to close the year on a positive note. Tabreed's ability to steadily increase its connected capacity reflects significant growth opportunities in the key markets across the GCC and Asia. This is driven by the demand for more energy-efficient solutions from our customers, both government and private sector, and their combined effort to reduce energy consumption. Furthermore, our expertise and diversified presence across our regional assets allows us to capitalize on commercial opportunities as they materialize. We are therefore excited by the prospects of our diversified presence across GCC and now in Asia through our entry in India. We are confident of delivering on our capacity guided of 120,000 RT for the years '23 and '24 and maintaining the positive momentum in the medium term. We will now open the floor for questions and answers.

[Operator Instructions] We have a text question from Thomas Mathew of KAMCO Invest, asking, the first one, can you please explain how we are accounting for the deferred tax liability of AED 359 million as amortized? And 2, can you talk a little bit about the landscape in terms of potential acquisition opportunities in the UAE in RTs?

Thank you, Thomas, for your question. With regard to the deferred tax liability, as you know, UAE promulgated the UAE Corporate Tax Law on 16th of January. Any transactions related to the acquisition prior to that, it demonstrates or recommends the recording of deferred tax liability. And the deferred tax liability is recorded on the intangible assets and goodwill because the initial recognition exemption is not applicable. And the intangible assets are basically the customer contracts, future value of the customer contracts. And we had gone through with various global accounting desks and concluded that, as per IAS 12, this needs to be recorded. And it has to be recorded through the -- in P&L, not through the first-time adoption, which goes into the retained earnings. With regard to the amortization, see, there is an annual amortization of this intangible of the customer contracts. As we amortize, the equal in 9% of that also will be credited in the form of a deferred tax credit. So the net impact will be reflected in the tax that is payable to the FTA authorities. I hope I answered your first part of the question. Around the second part, with regards to the landscape of the potential acquisitions in UAE, see, as you know on our balance sheet position, we are well placed to potentially tap into any acquisitions that may come in our way. With AED 1.4 billion of closing cash balance and an RCF facility of close to AED 600 million currently, we can turn around quickly for any financial close. And regarding the landscape itself, there are few opportunities that are still left in UAE that we are currently looking into and discussing with our potential customers. As and when this will materialize, we will be definitely informing it through the DFM and SCA process.

We have another question on the line from Rakesh Tripathi of Franklin Templeton, asking can you please elaborate on the lower EBITDA margin in Q3? Can you also confirm the size of the RCF and expiry date and whether or not it is committed? Can you also elaborate a bit on the tax liability?

Thank you, Rakesh, for your questions. With regard to the EBITDA margin being lower in Q3, as I explained previously as well and it's the same, so the acquisitions that we did in 2021, the financial close took place in 2022. As a result of that, there were some utility cost provision we had reversed in 2022, and as a reflection of that, you will notice the cost -- operating cost was lower in 2022 for the 9 months and in Q3 2022 as well. So that's the difference -- main difference. Apart from that, during this year, we were having some one-off maintenance cost increase in the form of temporary chiller cost, which is one-off in nature and it is not recurring in nature. If you remove these one-off items, our EBITDA margin has grown almost 4% for this quarter of 2023. Regarding your second question, on the RCF, I would like to mention it is a committed facility, which is having AED 600 million from a combination of 3 banks. Regarding the third point on the tax liability bit, Rakesh, I have answered through the first question that was raised by Thomas. If you need any further clarification, please do let me know.

We have another question from Abdulelah Hakami of Hassana Investment Company, asking could you please comment on the strategic direction behind the disinvestment of Tabreed Parks Investment?

Yes. This was based on the -- to open really business opportunities and prospects between us and the owners of the development there, the [ bypass ] under Meraas and the Dubai Holding. And Dubai Holding, it is a huge group. And we are optimistic that it can open more businesses and prospects together. And that was the main reason for that.

[Operator Instructions] We have a question -- a follow-up question from Rakesh Tripathi of Franklin Templeton, asking can you please confirm expiration date of the RCF?

On the expiration date, it's under renewal because we had it in Q4. It is for expiry, and we have already got the commitment for the renewal from the 3 banks, Rakesh.

[Operator Instructions] At this time, we have no further questions. So I'd like to hand it back to Yugesh for any remarks.

All right. If we have no further questions, then that concludes our 9 months 2023 earnings call. If you have any follow-up questions, please feel free to reach out to us or write to us on e-mail, [email protected], and we would be happy to answer the questions. Again, thank you, everyone, for joining today's call, and have a good day.

Thank you.

Thank you for joining today's call. You may now disconnect your lines, and enjoy the rest of your day.