Sharqiyah Desalination Company SAOG (SHRQ) Earnings Call Transcript & Summary

Good morning, everyone. This is Sharqiyah Desalination Company first half discussion session on 17 August 2026. The meeting and its content are being recorded and can be shared internally and externally. Agenda content for today is company overview, operational highlights, business continuity, financial information, internal control and corporate governance. The company overview started with key dates. The initial project was awarded on 7 January 2006. The company incorporated on 14 January 2006 (sic) [ 2007 ]. The WPA initial was signed on 17 January 2006 (sic) [ 2007 ]. The financial close of the project was on 15 May 2007. The commercial date of initial project was 8 October 2009. The company listed on Muscat Securities Market or Muscat Stock Exchange on 30 June 2013. The increase of capital and distribution of bonus share was on 16 December 2014. The commercial operation date confirmed by OPWP was 7 Feb 2017. The commercial operation date of solar farm was 16 April 2023. Detail of pre-IPO and post-IPO. The post-IPO shareholders are Veolia Middle East, 35.75%; Middle East Investment is 29.25%; public is holding 20.53% of the share capital; and pension fund is holding 14.47%. The local activities, the company is committed to full compliance with all aspects of the Omani regulations. This includes, but not limited to, the Royal Decree related to the employment, Omanization and to allocate a proportion of the awarded contract to Omani content. Capital, invest maximum capital in local investment. Procurement, maximize the procurement of the local goods and services with quality and price compliance constraints. Human resources, identify, recruit, train and develop the local talent. Local development, maximize the impact of local communities through a wide range of actions. Our commitment to the local content will strengthen Oman's economy, create sustainability, opportunities and drive long-term value for our stakeholders and communities. The message of our CSR manager. The corporate social responsibility extends beyond the regulatory compliance, which reflects the company's genuine commitment to creating the lasting values of the communities in which it operates. We remain dedicated to supporting the sustainable social, economic, environmental development through the impactful initiatives to align with the objectives of Vision 2040. In 2026, the company continued to adopt these best practices in sustainability, environmental stewardship and corporate citizenship. Through these strategic CSR and community programs, we enhance the impact of the social responsibility efforts, which remains a key pillar to our long-term growth and sustainable development. The main initiatives taken in the first half of 2026 was school bag distribution, orphans and support initiatives, lower income support, blood bank and Ramadan Iftar program. Under that, the company has Tamkeen Empowerment program, which program is aimed to empower, develop and train young people to qualify and integrate into the labor market. It enhances the self-confidence to serve as a support for the job seekers, being a priority for the government to focus its national policies. Tamkeen programs in the first half of 2026 were: electricians and mechanicals, 7; health and safety, 2; administrative and procurement, 4; operators and laboratory was 5. The operational highlights and business continuity. In the first half of 2026, the plant produced 13.5 million cubic meters of drinking water and average of 56% plant load, 98% availability rate. The water quality maintained 100% compliance rate. Through the strict maintenance protocol, the plant achieved average specific energy consumption at 3.19 kWh/cubic meter, indicating the efforts to optimize energy usage. Overall, the plant's exceptional performance maintained and the practices and collaboration contributed to the success as a reliable provider of high-quality drinking water in the Sharqiyah region. The outlook for 2026 is SDC is dedicated to fulfilling its commitment to OPWP and the people of Sharqiyah by ensuring a reliable supply of drinking water to meet the region's increasing demand. In addition, the company is proactively reviewing its energy optimization strategy with a focus on enhancing the sustainability over the next decade. The forward-thinking approach reflects SDC's commitment to both environmental stewardship and social responsibility, ensuring that it continues to support the community while minimizing the ecological impact. Furthermore, SDC's aim to be an employer of choice in the Sharqiyah region demonstrates its commitment to the local community. It is important to acknowledge the support of the community of Sur, shareholders, partners and employees in SDC's efforts. Collaborations and cooperations are key to achieving long-term success, and it is encouraging to see the SDC recognizing and appreciating the support it receives. Overall, SDC's commitment to meeting water demand, prioritizing sustainability and being a responsible employer is commendable. By staying dedicated to these goals, SDC is continuing to contribute positively to the Sharqiyah region and its community. The company paid cash dividend of 15 baisa, amounting to OMR 1.4 million for the year ended 2025, 15% of the share capital to the shareholders listed on Muscat Clearing capital -- MCD on 17 March 2026. Here is the financial highlights for H1, first half of the year. The revenue was at OMR 5.4 million, compared to OMR 5.5 million for the same period last year 1 January to 30 June 2026 (sic) [ 2025 ]. Decreased by 2.3%, OMR 130,000. This is mainly due to a direct result of decrease in the finance income, P&L impact only, linked with the reductions of the outstanding finance lease balance as per the finance lease model, offset by higher revenue from water output and electricity revenue. Cost of sales decreased by OMR 3,000, mainly due to lower capacity cost, tariff index and lower depreciation. G&A expenses, the general and administrative expenses, are a little higher by OMR 11,000 in link with the higher professional fee and the membership fee. The finance charges, finance cost is lower by OMR 115,000 due to loan repayment. Here is the cash flow highlights. The company's ending balance on 30 June is OMR 958,000. Successfully paid the dividend for year-end 2025. Loan repayment in June was OMR 1.7 million. Finance cost was OMR 976,000. Income tax paid was OMR 284,000. Our DSCR rate at 1.32, whereas the required threshold is 1.05. The upcoming payments are OMR 1.9 million for the loan repayment and the interest payment will be OMR 806,000. Internal control and the corporate governance. The management of the company believes in a strong internal control system, overseen by the internal auditor in compliance with the regulations prescribed by the Financial Services Authority and the International Professional Practices Framework. The company has in place high standards of corporate governance, which is compliant with the Code of Corporate Governance promulgated by the Financial Services Authority. This is all about our presentation. Anybody have any questions, please?

Yes, [ Mona ].

Thank you for your presentation and for your call. I have some questions. Can I continue?

Yes, please.

So as you said in the income statement, I noticed the revenue has been -- and the finance income has been lower on a Y-o-Y basis, and which you mentioned is due to the amortization of finance lease receivables. So as a result, I can see the net income also has been compressing. So how rapidly will the retained earnings compress and erode the remaining earnings?

See, the revenue which is going down, this is as per the finance lease models. Because when the project was started, at that time, this model was initiated based on IFRS 16. And our finance income is getting reduced over the period of years. And this is as per the model because this is the reducing balance method, and this will continue to reduce over the year and years. That's why if you see the revenue breakup, our revenue from OPWP, which is cash revenue, which is higher by OMR 50,000. And this amortization is just a P&L impact. It's not having actual impact on our financials or cash.

But when I look at the retained earnings, the retained earnings buffer, it gets reduced because the earnings compression over the years.

Okay. So what's your concern on this?

How rapidly is this going to happen over the years?

How rapidly, like you can see it's already in a declining motion. So if you see -- what's the decline, how much we can sustain the retained earnings for next -- the model?

Retained earnings will continue till the end of the project.

Okay.

But the point is this is just a revenue reduction. But as far as the cash is concerned, there is no cash impact and cash is not reducing over the years. If you see our cash in the next slide, we are having -- we have successfully paid our loan and we have successfully paid the dividend, which is continued from last, I would like to say, 5 years almost now, we are paying a sustainable dividend, which is OMR 1.4 million. And we are continuously paying our loan repayment. We are paying our finance charges. So there is -- that debt is not a challenge for the company so far, even is reducing our finance income. If you see the IFRS 16 treatment, this will be very clear for you guys that this is based on the model and which is reducing the balance method. So that's why this finance income is getting reduced. And this is not a major amount of reduction in our revenue. This is just a 2.3%.

We can sustain the retained earnings for foreseeable future. So you don't need to worry about that.

Okay. My next question is on the dividend. So the company has maintained a stable dividend of 15 baisa per share, so which is sustained by the lease principal collection rather than the earnings. So I just want to understand, is this fixed -- is this dividend payment fixed at 15 baisa or would it be lower going forward?

No. It depends upon purely on the company profits and the management and the share and the Board of Directors' decision and at the same time based on the cash flow. So we cannot say that this 15 baisa or 15% will continue. Maybe it goes up or maybe it can be reduced. It's totally dependent upon the decision of the Board of Directors. Anybody else? Any question? Yes?

My question around, following up with what Mona was asking. I wanted to check, as per the model, do you expect the company to report losses during the project period? Or will it just be very minimal profit as per the model?

See, the model that was published, and I think you can get it very easily from the initial when this project was started. And so far, the company is into profit and the company is giving the reliable dividend, which is 15 baisa per share. And we hope that company will continue with the profits and this will continue to pay the regular dividends. And the second thing is this is a desalination plant and, strategically, our location is in Sur. So we hope that company will continue with the profits. But as you know, this is the world we cannot predict anything right away, that the company definitely will do our best to give the -- to make the profit over the years and to make the dividend to its shareholders.

Sir, my question is about the model. So you said there will be a declining finance income. So now the company's profit is somewhere -- is likely to be, this year, you might end up with somewhere around OMR 400,000. So do you expect during -- until 2036, does the model show that there will be net losses for the company, assuming things are going as per the model?

See, the losses, maybe at the end of the project, there could be a possibility of the losses as well because this is a project which is having a declining finance, but this is only the, I would like to say, the P&L impact of this one. There is no cash impact. And as far as the shareholders are concerned, we are committed to pay our best -- to do our best to take the maximum dividend to the shareholders.

Okay. I agree with your point. But my question is primarily on the P&L side. So should we look at an increasing profitability possibility sometime in the future, we should not? That's what you mean to say. Or is that...

The management of the company, we also hope that company will increase the profits and definitely company will do our best. Management will do our best. Board of Directors will do our best that company will increase their profits and we will be distributing a good dividend again.

So how is it possible, sir, when you are saying there is a declining finance income, how is it possible that the company makes profit or increase the profits in the future years? Is there any additional income or any additional adjustments that you are expected to do on the P&L?

That again depends upon future, because this is only reducing -- when we are saying the P&L impact, only that means -- that doesn't mean that we don't have the cash or -- like we have initiated our solar project in 2023 and we are getting profit out of that. So similarly, that will be added back to our profit. And as of now, our load is just 56%. And we are expecting our load of the water output will increase. And definitely, we will be having a good profit out of it. So that's -- we can hope that the company will make a good profit in the coming years and company will distribute the good dividend.

No, my point is, see, you have right now -- last year was OMR 500,000, OMR 0.5 million. This year, it's coming down again. And over the last 7 years, if you look at it, the company's profit is continuously coming down, from OMR 1.9 million to it has reached almost OMR 0.5 million right now. And I understand that this is as per the model. So my question is based on the model, assuming 100% plant availability, 100% load factor and normal operating expenses, other things, everything remains the same, does the model envisage an increase in profits beyond OMR 0.5 million? My question is primarily on the model. Now what does your model say? That will be...

As per the model, as we've shown that the company is -- the model is on the reducing balance method. And definitely at the end of the project, somewhere company will be in losses. This is no doubt as per the model, there are losses also as part of the model. I think mainly your concern is at the end of the project, what is going to happen, that whether company will sustain their profit or it will be in losses. Definitely, at some stage of point, the company may go into the losses because of this reducing balance method, as the reduction of the revenue is not much like 10% or 20% or something like that, no doubt that this is a reducing balance method. And at the end of the project, it may go into the loss.

So if I'm assuming the normal scenario, OMR 0.5 million is the maximum profit per year that we should be actually expecting or we should be estimating for the company. Is that a correct statement?

See, the profit is OMR 0.5 million or it may go up or it may go down. It's dependent upon all the circumstances within the country.