Renaissance Services SAOG (RNSS) Earnings Call Transcript & Summary

Very good afternoon, everyone, and welcome to our investors and analysts and shareholders call for this quarter. As always, thank you very much for your interest in Renaissance Services. You've obviously seen our quarterly results and you've read our Chairman statement, so I won't go into all of those details. I'll certainly mention one or 2 things from the quarter. You've seen that as we've been suggesting that we'll continue to sort of have a fairly flat result during the hiatus period with that downturn in Duqm occupancy, although we've started to see the upturn coming as we told you the last time. But that is being compensated by better performance in the other parts of the business. In terms of important things that have happened during this period, you may have seen our announcement of the appointment of a new CFO sitting with me here today, Juma Al-Khamisi. I know he doesn't require much introduction to many of you, and you will have seen our announcement anyway. I think the other important things that happened during the quarter, we announced the award of contracts from PDO and NAMA. One thing that didn't come from us that very nicely came from MSX, from the Muscat Stock Exchange was their appreciation that we were one of 3 companies that has fully complied and reported with the new ESG requirements that of course become strict formal requirements from reporting for this year, but we've already done it for '23. So I think those are a few things from what's been going on in the quarter. And as always, rather than us talking, we much rather hear from your good selves. And so we open up the floor to your questions that anyone would like to go first.

So [ Joyce Malcolm ], please go ahead with your question.

Good afternoon, Steve and Juma welcome on board. Congratulations on the new appointment. And congratulations to the team for a good set of numbers despite a challenging operating environment. Could you please explain the situation at Duqm Village right now, what the occupancy that we had during the third quarter and at the exit of the third quarter, where were we? And as of now, where are we and what are we seeing? Where do we see exiting the full year?

Yes. So we've sort of landed at the end of the third quarter at an average of 6,000 for Duqm. And we forecast that we should end the year for this fourth quarter at 6,500. And indeed, we achieved that average for the last quarter because we crept up to 6,500. It's gone off the boil a little during October. We're down at 5,700 at the moment with the end of one project and another slow to mobilize. So a little bit behind where we want to be for this quarter. So starting the quarter as we started the last quarter, and we needed to do the same again to achieve that. That said, we are pleased with the efforts that have been made on without diluting customer service and performance in terms of continuous improvement programs, cost optimization, some of the -- we're looking at smart solutions coming back to our vision of wanting to lead the future with smart, sustainable service solutions. We've been looking at a project with Lean Park to reduce food waste. And we've piloted that and it's produced some very positive results. And so we're driving down cost without diluting customer satisfaction while we go through this period. And that will stand us in good stead when we come back up. Looking ahead on occupancy from the known things that we've got, we can see just from known histograms, an average of 10,200 next year compared to where we will end at around 6,500 this year. And going ahead with numbers, we got 14,000, 15,000, and then we see it full after that. Now there are other projects that can come. There are projects that can be slower than we've been showing these numbers. So we've seen the upturn of that low point in January of 4,000, the highest we've hit this year is 6,700, and we're about 1,000 below that literally on the day at this moment. So a mixed bag as we go through that hiatus period Joyce. Thank you.

Steve. So this 3,600 you mentioned, was that at the end of third quarter? Or is that the breakeven point that you mentioned?

Sorry, I missed which one?

3,600.

No. I don't think I mentioned that. The low point we've hit is about 4,000 for this year. I think 3,600 may have been a number we've given you before where we see sort of EBITDA breakeven would be down at that kind of level. But -- so we continue to be EBITDA positive. We need to come back up towards 8,000 to get to -- a little higher than that to get to PAT breakeven. But we certainly see that with the forecast of 10,200 for next year. So yes, those are sort of key numbers.

Okay. And which are the projects that we should be looking at for you to achieve those additional 5,000 -- additional people coming into Duqm? Is it only the green steel projects? Or are there any other projects, major projects that are coming in?

It's a mixture. But one of the main drivers of that going into next year will be the first of the green steel projects. So Jindal Steel, Vulcan Steel be known in their project in Duqm have already got contractors staying with us doing the leveling of the land for the project. And they're expected to sort of mobilize more fully by the middle of next year, and that's to sort of start production in 2027.

Okay. Okay. And could you please touch upon the PAC facilities? How is it -- how is the mobilization for the additional capacity that we have built is progressing?

Yes. So that has gone very well. And it's one of the reasons why in spite of this downturn, obviously, in contribution -- from the negative contribution from Duqm in this year, one of the compensatory factors is this expansion piece in PDO, where we've added 1,600-odd beds to our capacity. Now -- and in 4 locations, we've pretty much filled up because they're at the new levels of capacity, they're in the high 90 percentile occupancy. And we tend to regard -- I know I've said this before in these sessions, 95% is sort of full by the time you do ship changes and et cetera. So the -- so that's going well. Now in 2 of the locations, we've got capacity in Bahja that has not been filled, so we've added the capacity, but we haven't filled it. And we've had some spare capacity anyway there, which was taken into account. And in Al Mouj, we've only partially filled the additional capacity. Now this is not a complaint for our client because they have built up very nicely in the other places. And there are genuine issues as to why they've not been able to meet their own expectation of moving people in those 2 locations. So it's not to berate them in any way. And we've understood, we're talking with them, obviously, on this, but we are expecting that situation to be resolved early next year. So bottom line is it's performing much better than last year. And of course, this part of the business performed well anyway. So we're performing well due to the expansion, but there's more headroom to go, and we can expect more from that going forward.

So if I understand that correctly, currently, we are at 90% capacity on the total, utilization on the total capacity.

So if you go across the entire PAC spectrum, we're at about 87%. So we want to be at the -- expecting to be 92%, 93%. I am saying what we got in 4 of the facilities is higher, 95% and in 2 of them, we've got less. And it's in that less that it is dragging it down to being under 90% at the moment. But that's still making a very solid contribution because of this 87% of the higher capacity that we're talking about.

I understand. I understand. And that's where you can make up for what is lost in Duqm.

There is more to come. Yes.

Yes. That's very nice. The other -- another question that I have is on the Chairman's report was talking about tax issues, which you couldn't recover the tax shield in the earlier year. So we had to take additional provisions, and we are likely to take the tax provisions -- tax shield during this year or starting from 2021. So could you please explain that? And will there be any -- do you expect any tax payment in 2025 and beyond?

Juma?

So well, actually, just to explain this, I think you have the history of this tax shield. So the tax shield we are expecting it to be applied from 2019 to 2025, 2026. However, I mean, during the filing for '19 and '20, the assessment of that says that actually the deregistration of that company is only happening in 2021. So this is why actually the tax assessment has imposed a tax loss in 2019 and '20, which is already paid. However, as financial impact, we have already provided the tax payables with assumption that there is no tax shield in that. But we are actually expecting the tax shield to cover us up to 2025 or '26 depends on the taxable income during those 2 years.

So does that mean we will get -- we'll write back some provisions and for 2025 -- up to 2025 or '26, we will not pay any taxes?

We'll leave that discussion once we finish the tax assessment for these years, which is pending. So I don't want to predict the future. So let us discuss this once it is clear, and we will disclose it also once it's happening.

But it is a reasonable assumption, Joyce, if you look at what our tax advisers are telling us, this is allowable against our profits. So the tax shield is allowable following the rules and regulation. Now that has to be agreed by the tax inspector when they actually inspect 2021 because when they've inspected 2019, as Juma has explained, they've said, look, you can't have it for now. It needs to be when you deregistered, it can't be 2021. So whilst we still want to claim against the 2019, are you sure because the actual reporting of the numbers was then and impact of that. But -- so that claim will go forward, but also we will reclaim this. Now if as we expect they will allow the tax shield, then yes, it will apply in '21 for a 5-year period. And the upside of that, if you want, is that, that means the entire shield will be utilized. If it was from 2019 until now, then there will still be a residue of about just over OMR 3 million that we wouldn't have utilized. So that's what we're expecting. As Juma rightly said, we don't know that to be the case until the tax inspector has looked at it for 2021, which they'll do next year and hopefully confirm that to us.

Can I continue or should I go back in queue?

Joyce, you can keep going as long as you want.

Thank you. Next one is on -- see, recently, there was a clarification from the Labor Ministry saying that the labor law gratuity allowances, which you have taken last year, probably that might not be required going forward or the application period is only from 2023 and not on a retrospective effect. So -- and I understand that we have taken some provisions in 2023 financials. So do you expect any write-back of these provisions during this year?

Yes. Actually, we have taken that into account, and we are evaluating that. We are expecting some upside on that once we have taken a stock for the entire staff in the company.

I mean there are 2 things, really. We've provided the full amount of that extra 1.5 months would have applied. And indeed, some colleagues have left during this period and being paid at the new regulation, we declared that. But we would expect a reversal of about OMR 560,000 for that.

Okay. So that reversal will be only OMR 50,000, OMR 60,000?

Yes. OMR 560,000 in this year, yes.

Okay, OMR 0.5 million -- OMR 560,000. Okay. So this is not included in the third quarter financials, right? It will come only in the full year.

Yes, full year.

Okay. And Steve, could you please explain -- touch upon the Saudi Arabia operations? Is there anything worth mentioning about it?

So 2 things. One is we've registered the company there, but we've not put boots on the ground, okay? However, there are 3 major PPP bids that we've taken part in, 2 new PPP bids that we are taking part in, one for staff accommodation for Saudi Aramco and one for . The bid we've already got and we've told you about before about the broader facilities. And that is still a live bid. We and our partners who we've gone within the bid are still live in it. Now there has been a change of scope because the client wishes to actually broaden the scope and is therefore looking for that additional scope to be factored in, in a resubmission of best and final offer. So that is happening as we speak. They're very much confirming that, yes, this project is going to go ahead. And clearly, we are still in the mix.

Okay.

I think to look forward on Saudi, we've got to -- and we're looking at our business plan time. We've just done our strategy session with the Board, and we definitely see when we tell you that our growth strategy is about diversifying our services sectors and geography. The geography we're really going to go after is Saudi. Now it's not a magic wand, particularly to have any high expectations of us doing that purely organically by taking our soft services and our hard services and expecting us to immediately compete or be an attractive option to a very well served market of established players. But so we have to look at where we may provide that difference, that USP. One is in the long-term facilities management, the knowledge in build, own, operate in terms of accommodation solutions that meet the IMO standards at affordable rates so that to attract the international financing for those projects. And that is very much on the project side in Saudi, they're asking and looking for that. And we've got very solid credentials and prepared to take that long-term view on such projects as we did with our PAC's with PDO as we've done with Duqm, et cetera. So that's somewhere where we feel that we are bringing something new. It's also interestingly, even with the established players there, with what is going on in Saudi. And I think we all understand sometimes the announcements come of the huge projects, they might get pared back and put into some sort of stages that is not as large as the original announcement. That's fine as they sort of readdress these things. But nevertheless, the demand is for such services is greater than the current capacity in country to provide. So we think that gives us an edge as well. So we've delayed in terms of getting on the ground to have a bidding team and business development, et cetera, because we've seen it's tricky in just a pure organic play. Whilst there's nothing on the table, we are open to looking at M&A opportunities that would -- particularly in the hard FM space or IFM space. But at the moment, it's a very busy market. And so there's nothing coming out in that fashion at the moment available that would be of interest. So those are the ways we're looking at it. We definitely see Saudi as part of our future growth opportunity. Thank you.

Thank you, Steve. You have answered my next question as well on the M&A opportunities.

We are open to any further questions if anyone would like to go next. So we have a written question there asking what number of projects we are scheduled for Duqm in the next 3 to 5 years and discussing them separately with current status. Okay, fine. So I think they do fall into the 2 major categories of projects that seem to be very real and going to happen. So the one that's already been touched on are the green steel project. So we've been expecting them, when are they going to get confirmed? And indeed, we have some of their numbers factored into the end of this year. And we've got a small amount coming, as I described earlier, we've got the people doing the groundwork for the Vulcan Steel project. But there's been delay as the project developers and the government have reached agreement on gas allocation, gas price, because they need the gas to transition as a greener source of energy before more and more renewable energy becomes available in Duqm with wind, solar, green hydrogen, et cetera. And the -- although as we've discussed before in this forum, Duqm is seen as a really positive space where a lot of green and renewable energy can be developed, and there are a number of projects happening looking at precisely that. So that's the first one that is expected. The second on Mitsui and Vale where -- and sorry, Jindal Steel is expected to start actually in earnest of the project having done the prep and build up midway through next year. Mitsui and Vale, we don't have their actual start date, but it would seem that they would be about 6 months or so behind that. So either the end of next year or the start of '26. Then there is the petchem project and the expansion of OQ8, the refinery. So these 2 things are important. And of course, neither is announced, but you've seen statements on them made by either OQ or the government in different capacities, where on the one hand, the expansion of OQ8 is seen as important and necessary to create economy of scale for the investment that's been made already. So the 230,000 barrels being expanded by another 30,000 to 40,000 barrels a day that they could take in is seen as an important thing to drive efficiency into the project. However, similarly, the project cannot fulfill its potential and add value to the 230,000 or 270,000 barrels, whatever it turns out to be without the downstream projects of petchem. And so the discussions around petchem and which partners are staying in and staying out, et cetera, you will hear as much market rumor as us on that. What does seem to be clear is that it is going to go ahead, and we can expect an announcement to that effect early next year.

I may add also, I mean, to what Steve mentioned. So the project which Steve is mentioning is we already heard about and found about. And also, I want to add the fiscal environment is getting better in Oman. So Oman has been upgraded to investment grading. And we see a positive momentum for the investment in Oman. So more of investment will come to Oman that's what we are seeing from the economic point of view.

I mean then beyond that, there's miscellaneous projects. There's talk of a new hospital actually going ahead, we're privately funded and so on. So a range of things. Those are not factored in because we don't have any numbers connected with that. But the major projects that we do factor in are the ones we've just described. So thank you for that question. Would anyone else like to enter a question -- and of course, we understand if there are questions as well, we'll have to get on to our Chairman. He's obviously writing too clearly in his Chairman's statement and answering everything for you, so you don't need to back it up. We'll wait another minute or 2 in case anyone has anything. And if not, we'll wrap it up early. Well, I think Mohammed and Joyce have obviously asked all the questions that everyone had to bring today. We'll I think, call it a day there, and thank you all for joining us and for your continued interest. We always enjoy having this exchange with you, whether it's half an hour like today or we take it up to the full hour. But we look forward again to seeing many of you next quarter when we'll be talking about our year-end. We wish you all the very best and wish everyone a very Happy National Day as well for those -- most of you here in Oman. Thank you very much indeed.