United Development Company Q.P.S.C. (UDCD) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, this is Mehmet Aksoy from QNB Financial Services. I would like to welcome everyone to United Development Company's Fourth Quarter 2020 Financial Results Conference Call. On this call from UDC, we have Mr. Maher Omar Naim, who is the Executive Director of Financial Planning; and Mr. Karim Farhat, Financial and Business Planning Director. We will conduct this conference call first with brief comments on the presentation followed by the Q&A. I will now hand the call over to Mr. Naim and Mr. Farhat to get us started. Mr. Naim, Mr. Farhat, please go ahead.

Okay. Good afternoon, everyone. This is Maher Naim from UDC. Let us start with providing a snapshot on the company's performance for the year 2020. United Development Company has achieved a net profit of QAR 266 million -- or QAR 265 million, which is compared to QAR 458 million of prior period. And the net profit attributable to the equity holder is QAR 226 million, with the total revenue of almost QAR 1.2 billion. The net profit as it is witnessed is lesser than prior year by 40%-plus. This is indeed due to the reduction in revenue, which is lesser by 33% than prior period. And this is due to the -- the main reason for the decline in revenue is to the outspread of the coronavirus, which had a negative impact on the company's overall operation from a sales point of view and a revenue recognition accordingly. Moreover, the company has announced a proposed dividend of 5% of the share par value, which is equal to QAR 0.05 per share with a total dividend of QAR 177 million, equaling almost to 78% dividend payout ratio compared to the net profit attributable to the equity holders of the company. Let me start again -- let me also continue speaking about the development activity. Despite the outspread of corona activity, our development activities have not stopped. All our projects are ongoing. There is some delay in our projects due to the difficulties that the contractor is facing from shortage of labor, from securing the necessary material, the procurement from outside and these all impacted the progress. However, no project has stopped. And we are working with a recovery plan and the completion date will be -- hopefully will be met as planned. So we will be contributing heavily towards the end of 2022 by major projects being completed, and they will be ready for revenue recognition. So I leave the floor to you. Should you have any questions, please go ahead.

[Operator Instructions] We have our first question. Mr. Shabbir Kagalwala from Al Rayan Investment.

I have a couple of questions. Could you give us some idea of how the occupancy is panning out currently for your residential and commercial places. Second question is that in the fourth quarter of 2020, you recorded a very high gross margin, about 73%, which was probably one of the highest since 2019. Could you give us a sense of what led to this gross margin expansion in the quarter? And how do we see the gross margins going forward?

Thank you very much. In respect to the occupancy, the occupancy as of now, they are based on the current challenges that the market is facing, is considered acceptable on both retail and residential. Due to the corona outbreak, certain residents have fled the country because they lost their job and so forth. So we are okay and hoping to be improved in the year 2021 towards, wishfully speaking, that coronavirus hopefully will be disappeared. So from -- again, from an occupancy point of view, it is considered to be good within the current market situation. As for the profitability and the gross profit for Q4, you know the real estate when you recognize -- revenue recognition is mainly determined on the handover. So there has been handover of certain real estate properties as of the year-end. And accordingly, the revenue has been increased and the gross profit has been increased accordingly in relation to the recognition. So you can sell or a sale can be concluded for a real estate property, but if the rewards and risks are not transferred, which no physical handover is made, then there will be no revenue recognition. Going forward, yes, we are somehow optimistic, hopefully, for the year 2021. Should there would been no surprises on the new thing about corona, we are optimistic that things shall be better than the year '20. And now, I think the whole market is watching out and all of us are hoping that there will not be another major impact -- negative impact on corona outspread again. And if this does not materialize, hopefully the year 2021, should the plan and the revenue that we are planning to recognize where our budget is realized, things will be better than 2020.

I would -- I have 2 follow-ups on that. Firstly, which project did you start handing over? And secondly, the residential occupancy had declined in the first 9 months from like 60% to 50%. Where does it stand currently?

Now handing over, as I told you, it's handover of plots, handover of units. The revenue recognition is based on the individual sale of units. It's not a project per se. Al Mutahidah Towers project will be handed over, hopefully, the units of Al Mutahidah, through the Q2 of year 2021. So it was mainly a handover of more of residential units and land plots, which contributed to the revenue recognition. As for the residential occupancy, we are within the same range, as you mentioned, within the 50%. And we are hoping things will be better and more stability will be on the market and there -- in respect to corona. And hopefully, things will go back to normal, and we are hoping that the occupancy will be increased in the coming years also.

Our next question comes from [ Mr. Anastasios Dalgiannakis ] from [ Al Sasan ].

Could you please let us know. You spent in work in progress QAR 1.040 billion in 2020 and raised QAR 700 million -- QAR 0.5 billion, sorry, in net increase in loans. Now given you want to finish all projects by end of 2022, could you give us the balance of spending you plan till 2022 and how much more debt you plan to raise to fund this balance.

Well, I'll answer the first part, and then I'll let Karim answer the second part regarding the debt. It is -- obviously, the increase in work in progress is a positive indication of the increase of the percentage of completion of the projects. So this is very much expected as long as the projects are being executed. So the work in progress is yet to increase compared between 2019 and 2020 because the magnitude of the work being performed is higher and the tendency is higher and accordingly, the percentage of completion is higher. As in respect to the completion of project, the majority of the projects, we are planning to finalize them and complete them by 2022. But there will be other projects that are still part of Gewan Island will be completed post the year '22. And in respect of the financing, all of our current projects are financed and funds are secured through financing and equity. It's a mix. And if there is anything needed for any upcoming projects, of course, we will be -- we shouldn't be having any issue in respect to funds -- in respect to raising funds. Karim, if you want to add anything about this, please go ahead.

Just to mention that our current debt-to-equity ratio is 34%, and -- which is low comparatively. And we fund ourselves, as Maher said, all the projects are project financed and funded. But sometimes we don't go with full drawdowns on them, and that's why our debt-to-equity ratio is low. Reason being, it depends on presales, so the more we have presales and collection. So it's a mix between consuming our limits that we have in debt and presales. So basically, this is why you have your work in progress a bit higher than how much -- if you're comparing it, how much debt has been drawn down. But over and above, all the projects are funded regardless. There are limits available for them, and it's within the limits of the balance sheet that will stay below 55%.

So if I may, just to clarify, from the QAR 3 billion original target as per 2020 at the beginning planning, we spent now QAR 1 billion. So the other QAR 2 billion will come in '21 and '22 or spread out more? And from the debt to equity, clearly, it's 50% from debt. 50% of debt will continue of additional expenditures?

No, you have repayments on this one. What you have, you have basically repayments that will happen. So whatever comes from that, the projects that you're talking about are multiple projects, and they have different timings with different maturity dates. So some projects that are being handed over, for example, to the third party, and it had a debt during the previous construction, upon the collection of the final amounts, those debts will be repaid. The new developments that are going through, this is where we'll be getting more outstanding debt that you will see on your balance sheet. Eventually, what we always try to maintain is an optimum ratio up to 50%, 55% at max. But currently, we are at 34%. And obviously, we've been enjoying the debt-to-equity ratio for the past couple of years due to our presales and prior collections. So the debt profit that you would see up to QAR 3 billion, yes, definitely, it will have like a Bell curve, which will increase over '21, '22, '23, then will go down.

The next question comes from Mr. Monil Sanghavi from Axience Consulting.

I wanted to ask 2 questions right now. First, that you mentioned that there would be delay in other projects due to the COVID year. So could you please put some light into what projects are we looking delay in handing over the project. And other than that, I would also want to ask that the gross margins have increased year-over-year for the entire year of 2020. What -- is this sustainable? Or what kind of guidance are we looking at margin levels?

Let me give an insight. When I mentioned about the delay, what I meant is the delay on milestones, but it's not the overall completion of the project. We have recovery plan and with the current recovery plans, the projects will not be significantly delayed and the majority of which will be completed within the planned target. But as I said, contractors, they suffered throughout the year from shortage of labor, from difficulties in procuring materials from outside and construction material and so forth. But for us, there is no major worry, not a concern about the completion of the projects because as of now, as we speak now, the projects are going to be completed based on the recovery plan. Hopefully, there will be no major change on the current situation of corona and corona will not be out spread in a more velocity, and that might impact overall world business, not only the State of Qatar or UDC or real estate companies. From a margin, hopefully, this will continue to be sustainable. This is within our target, and this is well within our range. And whatever achieved is based on our financial projection and plans. And hopefully, this can be sustainable throughout the years.

A follow-up question on that. Are we talking about gross margins being sustainable? Or are we looking at EBITDA margins and the net margins as well? And what would be the target?

Maher, if I may. Our EBITDA margins are pretty much stable if you look at them. Yes, and they are around 40%. As far as the gross margin is concerned, you need to know that we -- our revenue is composed of 4, 5 main revenue streams that do have different margins depending on the product itself, if it's land, it's an apartment or it's a leasing revenue or if it is a margin that's coming from a utility income like Qatar Cool. So those margins -- on the gross margin level, you will definitely find sometimes basically a change that will -- or a unique change that will go there, depending on which product is being sold and when it's being launched. We always try to maintain stability on our EBITDA margins and our gross margins. But to a certain extent, sometimes it is guided by which product we are selling and at what time, not just the market price.

All right. And what would be the targeted growth levels -- bottom line growth levels? Are you expecting any -- what is the target bottom line growth levels?