Ooredoo Q.P.S.C. (ORDS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Ooredoo Group's Full Year 2019 Financial Results Investor Call Webcast. I will now hand over to Sara Al Sayed from Ooredoo Group. Madam, please go ahead.

[Foreign Language] Hello, and welcome to Ooredoo's Financial Results Call. My name is Sara Al Sayed from the Investor Relations team. As part of today's discussion, I am pleased to introduce Ajay Bahri, our Group Chief Financial Officer; Andreas Goldau from the Investor Relations team; and Mark Dowds from Strategy team. We start with an overview of the group results, followed by a Q&A session. The presentation is available on our website, ooredoo.com as well as on the webcast. Please do note the usual disclaimer on Slide #2. So to begin, I will now hand over to Ajay.

Thank you, Sara, and thanks to everyone for joining today's call. We reported a robust set of results for the financial year 2019 driven by the careful execution of our digital transformation strategy. Our net profit for the year was QAR 1.7 billion, up 10% compared to the previous year. Growth was supported by a robust EBITDA performance, a more favorable foreign exchange environment as well as from the recognition of profit from the sale of 3,100 towers in Indonesia. Key to ensuring the sustainability of our business and the creation of long-term shareholder value is a state-of-the-art network, which we continue to enhance and expand. In 2019, our CapEx was QAR 5.9 billion, an increase of approximately 20% from the previous year. As we accelerate our 5G deployment in our mature markets and upgrade of our coverage and increase capacity in our emerging markets. In our home market in Qatar, we applied 5G technology during the FIFA Club World Cup Final in December 2019 with excellent stadium coverage and network quality. Driving efficiency and delivering seamless customer experiences were key aspects of our digital transformation strategy. We have delivered healthy EBITDA margins while increasing our customer base by 2% to 117 million. Revenue for the year remained stable at QAR 29.9 billion, as we continue to navigate the industry shift from voice to data consumption as well as macroeconomic and currency weaknesses in some of our markets. We also experienced a reduction in handset sales, which contributed positively to EBITDA margin during the year, which improved to 43% compared to 41% in the previous year. Our Board recommended the distribution of a cash dividend of QAR 0.25 per share. Additionally, they have approved a sustainable and progressive dividend policy for the company, aiming for a dividend payout ratio in the range of 40% to 60% of normalized earnings. Moving on to the next slide. Slide #5. We maintained group revenues for the year, like I said, at a healthy QAR 29.9 billion, testament to our ability to manage the industry-wide shift from voice to data consumption. Service revenue increased year-on-year. Our results for the year were achieved despite currency depreciation, macroeconomic instability in some of our markets and intense price competition in our regions. Revenue for Q4 2019 increased 8% compared to the same quarter in the previous year. We also witnessed a reduction in handset sales, which contributed to the improvement of EBITDA margin for 2019 to 43% from 41% earlier. 2019 EBITDA margin also impacted by IFRS 16. EBITDA increased 5% and 11%, respectively, for both the full year and quarter 4 2019 compared to the same period last year. Growth was driven by ongoing implementation of our efficiency program, changes in product mix as well as the implementation of IFRS 16. Excluding this FX impact, revenue increased 1% and EBITDA increased 6% year-on-year. Let's move to Slide 6. Net profit rose 10% in 2019 compared to the previous year, supported by a robust EBITDA performance, favorable FX environment, in addition to the recognition of profit from the sale of 3,100 towers in Indonesia. Good performances in Qatar, Iraq, Tunisia, Kuwait and Indonesia and a more favorable FX environment were partially offset by provisions and negative impact from the implementation of the IFRS 16 on the net profit. On Slide 7, let's take a look at CapEx and free cash flow. Our CapEx for the period increased by 20% to QAR 5.9 billion as we expanded the reach of our network and deployed the latest technologies. The sale of 3,100 towers in Indonesia has enabled to accelerate our investments in the country, in line with our strategy to develop high-value base. While in our more developed markets, we continue to roll out 5G. Capital expenditure represents an essential part of our strategy to deliver long-term growth by deploying the latest technologies in our markets. Furthermore, our global sourcing strategy enabled us to optimize CapEx by taking advantage of Ooredoo Group's scale. Free cash flow for the year decreased by 20% to QAR 4 billion as a result of higher investments in the network. Moving on to the next slide. Our customer base increased 2% to 117 million, driven by increased customer acquisitions in Indonesia, Myanmar, Kuwait and Tunisia as our refreshed Indonesia strategy continues to deliver results. Next slide, please. We continue to maintain a healthy and well-balanced debt profile. Net debt increased 12% to QAR 25 billion impacted by the implementation of IFRS 16. Excluding the impact of IFRS 16, our net debt decreased 14%, while we maintained the course of deleveraging. During the year, we were able to negotiate new banking covenant threshold for net debt-to-EBITDA from 4x to 4.5x, taking into account IFRS 16 impact on our financials. Our net debt-to-EBITDA ratio is at 1.8x. Without IFRS 16 impact, it would be 1.5x, which is within our long-term guidance of between 1.5 and 2.5x. This guidance remains unchanged. Group debt remains mainly at a corporate level, like in Qatar, followed by Indonesia and then a smaller percentage allocated in the other opcos. As a reminder, debt at the opco level is kept primarily in local currency. Moving on to the next slide. Slide #10, dividends. Our board recommended the distribution of a cash dividend of QAR 0.25 per share to be approved at the AGM to be held on 4th March. The Ooredoo Board approved a sustainable and progressive dividend policy for the company, aiming for a dividend payout in the range of 40% to 60% of normalized earnings. The payout ratio for 2019 is around 50%, in line with our dividend policy. Let's move to Slide 11. Revenue growth for the year was flat, so it came at the top end of our guidance range. In 2020, we expect growth in the range of minus 1.5% to plus 1.5%; EBITDA growth was at 5%. Adjusted for IFRS 16, it would be down 3%, slightly better than the full year 2019 guided range of minus 7% to minus 4%. We expect growth in 2020 to be in between minus 2% and plus 1%. CapEx for the year was QAR 5.9 billion within our guided range of QAR 5.5 billion to QAR 6.5 billion. The range remains unchanged for the next year. Let's move to Slide #13 for an operational review of our opcos. Now within Qatar. In the home market of Qatar, we continue to pave the way for 5G adoption while enhancing our portfolio of digital services contributing to the growth in the postpaid customers. We demonstrated the power of 5G with flawless application of 5G stadium technology during the final round of the FIFA World Cup -- FIFA Club World Cup held in Doha in December last year. Our innovations extended beyond our telecommunications offerings, with Ooredoo Money, our mobile payment solution, being recognized as the Best Global Mobile Solution in 2019 by MoneyGram. Financially, revenue was down 6% due to reduced handset sales and partially offset by growth in the business-to-business segment. Our EBITDA margin increased to 54% during the year, up from 52% in 2018. EBITDA growth was supported by a favorable mix between service revenue and handset sales as well as improved efficiencies and positive impact of IFRS 16. Sequentially, the revenue increased 7%, supported by strong performance from the B2B segment. EBITDA margin was impacted partly due to revenue growth coming from lower-margin projects and timing of marketing activities. Let's move to Slide 14, Indonesia. Indosat Ooredoo delivered a robust set of results in 2019 driven by our renewed commercial strategy and accelerated network deployment. Revenue increased 14% in 2019 compared to the previous year to QAR 6.7 billion. As we target high-value customers and a lower churn rate, Indosat Ooredoo's EBITDA margins improved to 43% from 33% a year earlier. Accordingly, EBITDA grew by 47% in 2019 compared to the previous year to QAR 2.9 billion, supported by careful cost optimization initiatives. Indosat Ooredoo's customer base grew by 2% in 2019 compared to the previous year to 59.3 million. The sale of 3,100 towers in Indonesia will enable us to accelerate our investments in our network. The number of our 4G base transceiver stations already grew to 29,000 at the end of 2019. Quarter-on-quarter, Indosat Ooredoo's revenue increased 11%. EBITDA margin was lower due to certain one-off reversals in Q3 and timing of year-end provisions and marketing activities in Q4. Post-period, we unveiled the next phase of the execution of Indosat's strategy to create a more agile business with a sharper focus on its customers. Moving on to the next slide, Iraq. In Iraq, we upgraded our entire network to support our 4G -- our 3G customers. During the year, we added more than 500 new sites. Asiacell's reported revenue growth of 3% to QAR 4.6 billion in 2019, while EBITDA was down slightly to QAR 2 billion due to network expansions. Q4 revenue was impacted by the Internet shutdown in October and November, which negatively affected data revenues, while contributing positively to our total revenue through voice revenue. Consequently and also benefiting from seasonality on a quarter-on-quarter basis, revenue rose 10%. As a result, the EBITDA was higher, partly offset by higher year-end provisions and timing of marketing spend. Asiacell's customer base remained stable at 14.2 million. We've completed preparations for the launch of 4G in anticipation of the LTE license award, though no official timeline has been finalized yet. Going to Slide 16, Oman. Our operations in Oman remain stable. Revenue for 2019 was up 1% at QAR 2.7 billion, while EBITDA increased by 2% to QAR 1.5 billion. During the year, we invested in expanding the reach of our network. The broadband network now covers all Wilayahs across the Sultanate and our SuperNet network reaches over 98% of Oman's population. Ooredoo Oman's customer base was stable at 2.9 million. Quarter-on-quarter, Ooredoo Oman's revenue rose 3% primarily due to device sales, which has also resulted in lower overall EBITDA margin. Let's move to Slide 17, Kuwait. Kuwait remains a saturated market with strong price competition. However, we're beginning to see some early signs of market stabilization. Our focus has been on differentiation through experience and network quality as we continue to deploy 5G. EBITDA during the year increased 31%, supported by an improved product mix efficiency initiative and a positive impact from the implementation of the accounting standard IFRS 16. Full year revenue was down 5% to QAR 2.8 billion in 2019 compared to previous year, partially due to a reduction in handset sales and competitive market dynamics. Our focus on experience earned us the recognition of Best Digital Service at the Telecoms World Middle East Award 2019 for ANA, our brand-new fully digital mobile experience. Consequently, Ooredoo Kuwait's customer base increased 2.6 million in 2019, up 12% compared to the previous year. Sequentially, revenue increased 11% due to higher equipment sales. Supported with cost efficiency in the quarter, EBITDA increased 13%. Slide 18, Algeria. You will see that the situation in Algeria continues to be challenging with difficult economic conditions and political instability, a persistent price war and an overall shrinkage in the market. As a result, Ooredoo Algeria's revenue declined 9% in 2019 compared to the previous year to QAR 2.5 billion. Ooredoo Algeria's customer base was 12.6 million at the end of 2019. Throughout the year, we continue to strengthen and expand our 4G network. We installed 1,400 new technical sites across the country and became the first operator in the country to cover all 48 wilayas with 4G. Our 3G and 4G network leadership was confirmed by Ookla during the year. At the same time, the development of our digital ecosystem to drive 4G adoption continues to gain traction with our Haya Music application, becoming the leading music streaming service in Algeria in 2019. The service gained international recognition for the Bronze Stevie Award. Quarter-on-quarter, we saw relatively stable revenue and EBITDA. Slide 19, Tunisia. Tunisia delivered another robust set of results despite challenging market conditions and currency depreciation. We grew EBITDA by 15% to QAR 682 million in 2019 compared to last year due to improved operational efficiencies, careful cost management, digitization and the positive impact of IFRS 16. Revenues increased by 7% in local currency terms, supported by our push to drive data usage. We converted prepaid customers to higher-value postpaid customers. In Qatari riyal, revenues decreased 3% due to a 10% year-on-year depreciation of the Tunisian dinar. Our customer base grew by 1% to 9.2 million, affirming our position as the #1 telecom player by customer market share. Sequentially, revenue declined due to seasonality, and consequently, EBITDA was also lower. Moving to Slide 20. Myanmar. In Myanmar, we continue to execute on our digital transformation strategy to streamline operations and improve customer experience. As a result, our customer base grew 20% during 2019 compared to the previous year, reaching a total of 11.5 million customers. Revenue for 2019 was QAR 1.1 billion, down 16% compared to previous year, partly due to a 6% depreciation of the Myanmar kyat in 2019 and the entrance of a fourth player, which led to aggressive price competition in the market. EBITDA increased by 42%, mainly due to the positive impact from the implementation of the new accounting standard, IFRS 16. Quarter-on-quarter, the aggressive pricing competition continued, impacting revenues and margins. Our digital initiatives maintained positive momentum with the My Ooredoo App having monthly active users growing to 1.7 million users from 1.3 million in the previous quarter. This concludes the presentation. I will now hand back to the IR team.

Thank you, Ajay. Before we go into the Q&A session, the Ooredoo IR team, Andreas and myself, would like to thank you for supporting us in the Qatar Exchange IR Excellence Awards. We really do appreciate your votes, which helped us to become the most awarded company in Qatar. Your constructive feedback helps us to improve further. A very successful event last year was our Capital Markets Day. We hope to host you again this year, and we have tentatively scheduled it for the 21st of September in Doha. Details to be confirmed closer to the date. Now we can start the Q&A part. Questions can be asked on the webcast or over the phone. Operator, will you now please explain to the participants how to ask questions.

[Operator Instructions] The first question comes from Jonathan Milan from Al Waha Capital.

My question is on the free cash flow, net debt and dividends. I understand that you want to keep within that dividend bracket, but why is it so low? The dividend seems very disappointing, especially when your net debt-to-EBITDA is even less than 1.5x EBITDA, your net debt. Given your net debt is only QAR 15 billion. Why are you keeping it so low? Are you preparing for an acquisition because even if you have a surge in CapEx because of 5G or what have you, you have more than a strong enough cash flow and a very low leverage to do so? And my second question is around the cash levels. Why would you keep QAR 30 billion in debt, paying QAR 1.7 billion, QAR 1.8 billion a year in interest expense, while also keeping QAR 14.5 billion to QAR 15 billion in cash, making barely 1% interest. I mean you are paying 11%, 12% interest on your net debt. Wouldn't it be in your best interest and our best interest as shareholders for you to at least pay down a bit more of that debt, reduce your interest bill and not have $4 billion sitting on the balance sheet earning barely 1%.

Okay. As far as the dividend question is concerned, I think the payout ratio is based on normalized earnings. And you will see that this year, we had a couple of large one-off income coming into the company. The biggest one being the sale of 3,100 towers in Indonesia. You can see the other income schedules in the financials. The total net profit coming from that on a total basis of QAR 668 million. A lot of that money is to be invested back by Indosat and reduce their debt and then use it for investing back in the network in Indonesia. So when we -- a dividend decision is taken, I think a lot of factors are looked into, including leverage like you pointed out, but also the investment plans for different operations. Company normalized net profit to take out some one-off items here. So we -- only the leverage has gone down. And the dividend payout ratios of 40% to 60% take that into account. In the past, sometimes, we've been on the lower end of that when the leverage was higher. If you see historical payout ratios. So in this range, as we were comfortable with the leverage and if the profit normalized on an increasing trend, then the payout ratio would be on the higher end of the range. So the range basically gives flexibility, taking into account the needs of the company. And that's the way I think one should look at that. As far as the cash levels are concerned, the excess cash, which is on our balance sheet is earning more than the cost of debt. That's why it is sitting as cash. Some of the interest rates that you get in the region here are higher than the cost that we paid. If that reverses, of course, a lot of our cash is related to RCFs, which can be repaid at short notice here. Some of the other cash which sit in some other countries outside of Qatar is either operation is required or in a place like Iraq, which has limited ability to earn interest until it's upstreamed to us. We've had some good upstreaming of dividends and -- from Iraq last year. So historically, if you followed us, we had some issues of upstreaming cash from Iraq, which has changed since 2019 and we can see now slowly cash being upstreamed here. So apart from the cash sitting in Iraq, I think the other places is either operation is required or in Qatar, it earns more than some of the interest that we pay.

But also probably earns less than some of the interest that you pay as well. Or else, I mean, your whole debt is twice the cash, whereas your interest expense is 8x your interest income. I mean it just seems that you could optimize it.

Yes, if we could optimize it, we would do it. And the thing is if you have cash sitting, and you cannot repay a bond which is due which is at higher cost, the option is to pay down a revolving credit facility because we have to not theoretically look at the highest cost that you can repay it off. What you can use with the cash is what they've seen and the decision is taken here. If a debt, which is more expensive, can be repaid, obviously, that will be prioritized here.

So when the bonds are due -- whenever a bond is due in 2021, 2023, you'll pay it down and you won't issue bonds in lieu of this month. So you won't to replace it with new bonds?

I can't give just an open-ended answer right here. I think depending on when we have to repay a bond, we have nothing due this year. We have something new next year. And very often, we optimize what is available in the market. We don't have to issue a bond to repay a bond. We look at various options that we have, including cash available with us versus the pricing we may get from the bank market. And in the bond market, we may look at just the [ proof ] or the standard bonds. So we optimize after looking at all these options and only then decide which is the most optimal way to refinance or repay debt.

Okay. Just one last thing, if I may, on the dividend. I mean again, you make QAR 13 billion or QAR 12 billion in EBITDA, less the CapEx, you're still left with a decent QAR 6 billion; less taxes, QAR 5 billion; less interest expense, less dividends, you're still left with a decent QAR 3 billion free cash flow even after paying dividends or QAR 2.5 billion. I mean do we -- should we expect you to just maintain a cap of say almost QAR 1 billion on the dividend and continue to repay debt until your net debt drops to less than 1x EBITDA? Or are you saving some firepower for an acquisition?

I think the way to look at this is not looking at consolidated EBITDA and consolidated CapEx. The net profit available to Ooredoo shareholders is after excluding the minority interest, so the right way to look at it is look at net profit attributable to Ooredoo shareholders. And that's why the fully consolidated... Let me finish. Let me make the point and maybe I'll give you a chance to ask a further question. Looking at gross EBITDA will not give you the implication of what's available at Qatar level as for the Ooredoo shareholders. So that's one factor, I think, in your analysis, maybe you can look at. If you have all the data, you can -- you know what our ownership percentages are; you can look at the EBITDA based on proportionate EBITDA, and the number becomes smaller than the number that you've quoted here.

I mean I have done that. I mean I have looked at proportional EBITDA or attributable EBITDA less minorities and attributable CapEx less the minority share of CapEx, and you guys still generate an FCFE yield of 15%, 16% or 18%, which is one of the highest in the telecom space, at least in the Middle East, that I know of. And yet you pay dividend of 3.5% while attributable free cash flow to equity after minorities, also attributing the minority to CapEx is in the mid- to high teens. And yet, you have one of the lowest dividend yields and that will maybe tie into why Ooredoo Group, despite having a very robust operations across the globe, despite having one of the best presentations across all the other telecom operators, the best communication, is still trading at a massive discount to all the other incumbent operators be it in, for example, Saudi or UAE or even secondary operators in UAE or Saudi, such as Mobily or du, which don't generate nearly half as a decent cash as Ooredoo Group. I mean your FCFE yield is in the mid-teens.

So let me tell you how we do this analysis. We look at that as cash flow generated on upstream at Qatar levels for the benefit of Ooredoo shareholders and that cash flow is then adjusted for the expenses at a group level and then what's available is available for the dividends or repayment of debt. So the proxy that you're looking at, at EBITDA minus CapEx doesn't reflect everything in the right way. Not all cash sitting in the opcos is upstreamable. I've given an example to you already. And even in the other cash which is not yet upstreamed -- for example, if you're looking at Indosat, you'll get $450 million extra by end of this year, which is coming from the sale of towers, for example, right? So all these things have to be adjusted and then, of course, we have to balance the repayment of debt versus the dividend payment. So we are prudent. Now we have a dividend policy, which we didn't have earlier, right? That clearly shows the intention of the Board to give some commitment. So I think this should be seen more as a positive trend. Historically, we didn't have that guidance for the investors. So clearly, with this commitment, which clearly says it's a sustainable and progressive policy, should give you comfort that going forward, the policy will be implemented.

Okay. Fair enough. I mean just one last thing. Any acquisitions or any entries into new countries for the medium term or short term?

We talked about this in the past, and we are not actively looking for M&A right now. And regional expansion is not on our card. What we've talked about is that in-country consolidation, where it makes sense, will be definitely something we might look at, but not actively looking to go after.

The next question comes from Dalal Darwich from Arqaam Capital.

Congrats on the results. I have just 1 quick question. What was the impairment in Q4, the QAR 350 million about?

The impairments done in Q4 is a combination of a few things. And you'll see that at 3, 4 notes referred to in the financial statements, 12, 13, 16, 17 and 23, I think, which covers partly investment in associates. Also covers financial assets, also covers intangibles, including goodwill and licenses. So it's a combination of various different types of assets which have been reviewed. And based on this, the year-end impairment has been put in place.