Sembcorp Salalah Power & Water Company SAOG (SSPW) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to our live MSX discussion session. Thank you for taking the time to join us today. Before we begin, we kindly request all the participants to remain on mute during the presentation. There will be a dedicated Q&A session at the end, where we'll be happy to address your questions. Today, we will be presenting the company's financial statement for the year ended 31st December 2025. In today's session, we will cover company background, financial performance, operating performance, followed by a Q&A session. Let me begin with company background. The construction of our project began in 2009, and we achieved commercial operation date on 25 May 2012. The total project cost was approximately USD 1 billion, and the project was originally financed with a 75-25 debt equity ratio. The company was initially a joint venture between Sembcorp and Oman Investment Corporation, holding 60% and 40%, respectively. In October 2013, 35% of the shares were offered to the public through an IPO. Today, Sembcorp owns 40%, Oman Investment Corporation holds 13% and the remaining shares are held by public and institutional investors. Our project debt of approximately USD 750 million was funded by a consortium of 9 international local banks. Over the years, we have repaid around USD 606 million. Last repayment date is 30th September 2026. The contracted capacity of the plant is 445 megawatts and the water plant is 15 million gallon per day. As disclosed on MSX in October 2025, the company has signed a new PWPA, under which the contracted capacity -- contracted power capacity will increase to 465 megawatt while water capacity remains unchanged at 50 million gallons per day. Our original 15-year PWPA expired on 3rd April 2027. The new PWPA begins 4 April 2027, and runs until 3rd April 2037. This agreement remains under a take or pay arrangement, ensuring predictable cash flows as long as the plant remains available. This is primary reason our PFO and EBITDA remained stable year-over-year regardless of actual power and water dispatch. We also have an O&M agreement with Sembcorp Salalah O&M Services Company. Sembcorp Salalah O&M Company is owned by -- 70% owned by Sembcorp, 30% owned by Oman Investment Corporation. In addition, we maintain a long-term CSA contract with GE for planned maintenance of the gas turbines. Currently, the company supplies around 50% of the total electricity and 50% of the total desalinated water demand of the region. Highlighting our strategic importance. For the year 2025, the company reported a net profit of OMR 23.3 million, an increase of 3.6% compared to OMR 22.5 million in 2024. The increase in profit was mainly driven by lower net financing costs. Revenue was higher than the previous year due to an increase in fuel charge revenue. However, EBITDA and PFO was slightly lower, primarily due to lower capacity charge revenue and higher CSA maintenance costs influenced by inflation indices. Regarding dividend distributions, the company paid OMR 0.008 per share in dividend in 2025. For the year 2026, the company is proposing to pay up to OMR 0.016 per share, effectively doubling the previous year's dividend. If you look at the detailed profit after tax analysis, the increase in profit was mainly due to higher revenue and lower net financing costs. Fuel charge revenue increased, but as a reminder, fuel revenue and fuel costs are passed through, and therefore, have minimal impact on the profitability. The slight reduction in capacity charge revenue is attributed to marginally lower plant reliability and the fact that 2024 was a leap year. Cost of sales increased mainly due to higher fuel costs, higher CS and -- higher CSA costs driven by inflation indices. Net finance cost decreased in line with schedule loan repayment. On the statement of financial position, total assets decreased primarily due to depreciation on plant and machinery. The company is gearing improved significantly, reducing from 23% to 12%, reflecting continued deleveraging. Net assets per share increased due to the growth in retained earnings. On the statement of cash flows, cash flow from operating activities increased slightly due to lower finance costs. Working capital movement reflects normal timing difference and overall operating cash flow remains closely aligned with EBITDA movement. Cash flow from investment -- investing activities decreased mainly due to movement in fixed deposits. Loan impairment increased compared to the previous year, while dividend decreased. If you look at the last historical 5 years financial highlights, the company has consistently delivered strong and stable EBITDA and PFO supported by our capacity-based business model. Net profit has shown steady year-on-year growth demonstrating the company's financial resilience. On the operational performance review, electricity generation remained broadly in line with the previous year. Water production was slightly lower due to reduced demand from the government. As highlighted earlier, variations in generation or production do not significantly affect profitability since variable revenue are designed to cover variable costs. Plant reliability was slightly lower due to higher outages, but overall reliability remains high and well within industrial benchmark. Water plant reliability was 99.84%, marginally lower than the last year, but still exceptional. Planned outages were within the PWPA's allowable limits. This concludes our presentation. We now welcome any questions you may have. Please raise your hand before reading questions. Introduce yourself.

Abbas, you can unmute.

Quick call about this renewal that you got. In terms of the tariffs, the fact that this year, the debt is going to be repaid entirely. My question is, if I look at your CFO over the last few years, it's been consistent, the net CFO or even the post income taxes and interest paid, it's been this OMR 32 million, OMR 32.5 million, now your debt repayment annually has been around OMR 25 million, OMR 26 million, which leaves around OMR 8 million on an ongoing basis available for equity distribution. And of course, you have some restricted cash sitting on the balance sheet. Now the question is, when you look at the new terms of renewal, if you exclude the restricted cash, is it fair to say that OPWP is going to obviously not pay you the debt capacity charge because the entire debt repayment has been done. So automatically from your tariffs, the debt capacity charge is going to be reduced. So effectively, you will still end up with this OMR 8 million or so for equity distribution? And on that basis, I don't know what -- is there a discount on that or not? Just trying to appreciate a little bit more what are the terms of the renewal, what are the sustainable dividends we can look at, if you exclude the sort of one-offs that will come in this year because this year, you'll benefit from the old tariff from September till December. So because once the debt is repaid, there's an extra sort of cash flow available for distribution. You have this release of restricted cash that you can pay. But on an ongoing basis, it's very important for the market to understand what could be the new cash flows available for distribution because I think there's a lot of noise in the sector, not just for you guys, it's for Phoenix, it's for Sawadi , it's for Batana, companies that are going to have their PPAs renewed over the next 1 to 3 years. And I think, in my opinion, the market needs a little more clarity in terms of how should we look at it, because will the tariffs immediately be discounted for the debt repayment. I mean that's my view that why should OPWP pay any company capacity charge for debt that's been repaid. But I would love to hear your views because you are the sector expert, and you've always been transparent in opening your communication to the market. So that's my first question, sir.

Great. Okay. So okay, overall, you know that the tariff is confidential, we'll not be able to provide what tariff would be post 2027. But the revised capacity-based receipts are disclosed in note 29 of the financial statement. You are correct that elimination of debt-related charges after full repayment of project financing in 2026 will result in lower capital base -- lower capital cost base. So which definitely has an impact on the revised capacity based receipts, which you can refer to note 29 of the financial statement. In addition, the company does not need no major investment. Obviously, a small CapEx will be needed. But compared to the overall project cost, it's not a major investment. In addition to that we are expecting that because of the significant reduced cost structure, post financing, supporting stronger cash flows and our results will show stronger cash flow goods and enabling sustainable long-term returns to shareholders.

So if I refer to note 29, it says that you're going to make approximately OMR 17.7 million. Is this a cash flow receipt that you're going to make from OPWP?

Okay. These are only capacity-based receipts. There will be other revenue streams like fixed O&M charge...

That -- that would be a pass-through, right? That will be a pass-through.

Not exactly, but yes, you can say that. You can -- to some extent, yes.

So effectively, this capacity charges, can we look at this as a sort of return on equity or some sort of a distribution available to shareholders? And if -- where am I going wrong? I just want to understand since you have this note 29 very clearly stated, and you're one of the few that has done that, so much appreciated. Thank you very much. But in that case, then how do we look at the OMR 17.7 million. If it's capacity charge, is it completely distributable or not?

See -- yes, okay. Obviously, we need to pay the taxes, right? We have not finalized the -- currently, we have not finalized our -- some of the agreements and we are not sure, okay, how the future environment will look like. But anyways, I will not be able to give you the future profits and dividend projections at the moment, and this is not the right forum as well. However, I would like to say that the company remains confident in its ability to continue delivering sustainable long-term returns to shareholders.

Mr. Tariq, what about your restricted cash on the balance sheet now? How much of -- once your debt is repaid, what cash will be available for distribution? You mentioned that you don't really need any major life extension CapEx as we speak. So I imagine the funds that are available, are they available for distribution? I mean I just wanted to understand the restricted cash element now?

You have seen that the dividend -- proposed dividend is OMR 0.016 a share, which has already reflected the cash release from the from the restricted cash balances.

Okay. Actually, what I was basing my analysis on was also that because your debt gets repaid in September and you get paid as per the old tariff till December or till March next year, so on that basis, also the extra dividend could have come in. You see what I'm saying, right? It's not just restricted cash. It could be that 6 months of additional sort of comfort around the old tariffs. Am I right?

Yes.

Are you planning to take on more debt now that the fact that, okay, you don't need that, I understand that, but the fact that there is time value of money and if now that you have this visibility, are you talking to bankers to sort of take on more debt where you can release some dividends upfront to shareholders or your plan is not to do that.

We -- the Board of Directors has not decided anything yet. So we cannot comment on that.

Okay. The question that I have, I think a technical question is, if you do decide to take debt whenever the Board decides, is that something that is going to be approved by OPWP or that's -- or the [indiscernible] giving you the tariff and it's a negotiation between you and the banks and OPWP does not have a say, if you take on more debt or not. I mean if you can just clarify that then.

No. As per sector law, we need to seek approval from the APSR.

You need to seek approval. Okay. I guess these are the questions I have for now. Did you confirm that there's no big LTE required right now as we speak in the plant? You are comfortable that there's no major maintenance, major CapEx that's going to come in over the next 1, 1.5 years?

No. The major maintenance will be there. Obviously, it is as per the maintenance plan, this has to be done. LTE CapEx will be there as well, but I said that, okay, it will not be that material as compared to the total project cost.

Okay. I guess the idea is at sooner or later, people would want to know what is the sustainable sort of dividends over the next 9 years, right? So everyone is trying to decide that. Now you have guided us to look at this note 29, which obviously gives a lot more clarity than we had going in, and you were saying the taxation would be coming in from here, right? That's pretty much that. Everything else is a pass-through. So I think you've given me some guidance. Thank you for the transparency. I think one of the few calls that we've actually walked away with a little more information than we expected. So thank you for that. Appreciate it, and thank you. Good luck.

So I have 1 question. You said that the current -- under the new agreement, the minimum lease receipt is around OMR 17.7 million as per your note 29, right? And if you consider this year, operating lease income is around OMR 42.7 million. So I wanted to understand, there's a gap between OMR 17.7 million and OMR 42.7 million. So could you shed some light on why there's a big gap over year? And could we expect to see a reduction in earnings going forward?

Okay. I think this is a repetitive question. But anyways, no worries, we will answer. I think Abbas has already mentioned that they are expecting that there will be a reduction in revenue and they are correct because the elimination of debt-related charges after full repayment of project financing in 2026, it will definitely affect the lower capital base, cost base. So that is why it is -- it will reduce.

Can you hear me?

Yes.

Yes. I have a couple of questions. My first question is the expected dividend for 2026 is OMR 0.016, which is double from the last year. Would be this dividend onetime or split into 2 dividend, OMR 0.008 each?

No, it is -- it will be paid in November.

Okay. And what is current plant life right now?

Plant life is 35 years.

It is total or from now.

No, it's total.

And you mentioned the major maintenance expense. Can you put some light what will be the major CapEx for maintenance? And what is the time line -- expected time line?

No. I will not be able to tell you because still, the team is working on that, and it's not quite simple a job that we can simply give you a number. It will be quite comprehensive exercise. It is not concluded yet.

Okay. So my last question is that what is the expected demand in DPS system and total capacity -- installed capacity?

Okay. The demand has increased significantly. Like in the last year, the peak demand increased to around 804 megawatt and which was quite high compared to the previous years. But overall, the plant is operating right now at 54% plant load factor, and we are expecting that in the future, the demand will increase.

I had another question, Mr. Tariq.

Yes.

When you guys internally look at this, when you are negotiating with -- is it APSR now? It's no longer OPWP? Because I keep saying OPWP and you say APSR. Should I just call them APSR?

No, APSR because sector law is going by APSR.

Okay. So if I talk about APSR, when you internally look at it, do you think there's another extension after this 9 years? You said the useful life is about 35 years. And after this extension, you'll still have probably another 10 years or so. So what's your house view? You think this plant can -- you'll get another extension, 9 years down the line? I'll tell you why I'm asking because a lot of times, we end up pricing -- the market ends up pricing these companies as perpetuities, which means they're going to pay you dividends forever, right? We'll be like this company should trade at 6% dividend yield. This company should be a 5% dividend yield. But that's not the reality because these plants have a finite life. So ideally, what we need to do is we need to model it over, let's say, the next -- either the next 9 years and you say that, okay, there's a residual value or you say that, okay, sure, there's going to be another 6-year extension and over 15 years. And then you said there's going to be no restoral value, and then we sort of discount the cash flows to see what's the fair value at our cost of equity. But I think what the market does, and unfortunately, sometimes people in the markets also are not correcting the perception that these companies are not like a Bank Muscat that's going to exist forever. So we could be like this company should trade at 6% yield or 7% yield. These companies have finite lives. So it's very important for me to ask this question, even though I feel like I probably know the answer, but to understand from your perspective, you think that, okay, after the 9-year extension, best case scenario is what -- how much longer can the plant run? I'm asking for your view.

Abbas , to answer your question, maybe you can refer to OPWP's 7-year statement. And where you can see that there is no excess capacity at the moment. And we believe that plant is dated post 2037 unless and until the government has a different plan, which we are not aware of. But in the current situation, we believe that the plant will be needed post 2027.

But the plant has a useful life of how much, 35 years after that, [indiscernible] yes, 35 years, right?

Yes, still 2047.

Yes. So that's the useful life, the best case useful life of the plant. Now who knows as a new technology, no one really knows that, right? Neither do I, neither do you know.

Yes, exactly.

Any further questions there?

I think we have one question in the chat. Expected DPS for 2026 is OMR 0.016, will it be paid as a single dividend? I think we have answered this question already.

Yes, it has been answered, that only one will be in the [indiscernible].

Yes. So any other question, Abbas?

No. Thank you, Mr. Tariq. I really appreciate this call.

Great. Great. Thank you. Thank you, everyone. Then we conclude our presentation, and we will see you in next MSX discussions. Thank you.

Thank you.