Al Ansari Financial Services PJSC (ALANSARI) Earnings Call Transcript

Good afternoon, everyone. This is Elena Sanchez. And on behalf of EFG Hermes, I would like to welcome you all to Al Ansari Financial Services Q3 2024 Results Call. With us, we have in the call today Mr. Rashed Al Ansari, Group CEO; Mr. Mohammad Bitar, Group CEO; and Mr. Faisal Anwar, Group CFO. The management team of Al Ansari Financial Services will present the key highlights of Q3 2024. And after that, we will open the floor for Q&A. I would like to hand over the call now to Mr. Rashed Al Ansari. Please go ahead.

Thank you, Elena, and a warm welcome to everybody. Good afternoon. I would like to welcome you all to our earnings call today, where we're going to be covering the Q3 results for this year as well as the performance over the past 9 months. Before we start, just wanted to highlight few points before I hand over the presentation to the team to deep dive into the financial performance. Q3 results show the start of a recovery in overall performance. Over the past 1.5 years, we have been affected by the parallel market as well as some predatory pricing by some fintech companies. Although the parallel market issue has subsided some to a great degree somewhat. However, the predatory pricing from the fintech companies has been an issue over the past few months. Some fintech companies, they come and establish themselves in free zones and then they target the mainland customers. And this is something that we have been discussing with the regulatory authorities. They also conduct predatory pricing by which they offer their services below cost. In most cases, they offer their services free, which is something that is not sustainable. In certain cases, they also go and actually pay the customer sums of money, the largest I've seen actually is [ AED 500 ] per transaction for large share of volumes. This is something that is unheard of. And this is something unsustainable. We have taken these practices to the regulatory authorities here in the United Arab Emirates through the Ministry of Economy as well as the Central Bank and also we communicated with the free zone authorities as well to curb these practices. And the initial meetings have shown good results. We have seen some improvements in that area. However, we have also discussed certain regulation to be put in place in order to solve this issue from the root. And we anticipate that these solutions should come beginning of next year or at least in the few months coming. Over the past months, we have been very busy with the key strategic initiatives in order to grow the revenue line, such as the digital wallet, which we have launched this year as well as the BFC acquisition, which we have also announced recently as well as some other corporate services, which we're introducing into the market. All these initiatives will have a positive impact on our EBITDA in the quarters to come, when they go live and start contributing to the revenue line of the company. Last but not least, we have also engaged into cost optimization plans without, of course, affecting the quality of the service. This is in order to restore the EBITDA margin to pre-IPO levels as far as we can. And we anticipate that we're going to announce, or make some significant announcement in terms of this line of cost optimization in the very near future. And with that, I will hand over the floor to Mohammad Bitar to take us through the financial performance for the quarter and the past 9 months. Mohammad, over to you.

Thank you, Rashed, and thank you all for joining us in our earnings call. We're happy to report that despite facing industry with headwinds that persisted throughout the past quarters, as explained by Mr. Rashed, we're witnessing a positive trends in which are encouraging for the company's overall performance during this period and Inshallah moving forward. Our reported third quarter results were encouraging as our total operating income has slightly increased by 1%. EBITDA faced a decrease of 7% due to the increase in costs. As for net profit, after tax, we witnessed a decrease of 17% due to the introduction of corporate tax. We would like to highlight that during 2023, there was a one-off Iraq income, which we have excluded to arrive at a like-for-like comparison. On an adjusted basis, the third quarter of this year witnessed a positive 11% increase in operating income, 14% increase in EBITDA and a 4% increase in net profit after tax. Next slide, please. We would like to show in this slide the quarter-to-quarter trend witnessed, since Q1 of 2022. In the beginning of 2023 and after excluding the one-off Iraq income, we witnessed a downward trend in our operating income, mainly driven by the effects of the parallel markets across our major corridors, such as Egypt, Pakistan, India and Bangladesh. Also, the geopolitical tensions are in the rise, as Mr. Rashed said, authentic players with short-term price undercutting tactics contributed to this downward trend. This downward trend continued, as you can see in the graph, until the third quarter of 2023. Starting from the fourth quarter of 2023, we began to notice an upward-moving trend as a result of the steady improvement in the parallel market conditions. Remittances that were lost to unofficial channels started to come back. This was mainly driven by measures taken by the governments and receiving countries. For example, the withdrawal of the INR 2,000 notes in India, the help of the army to close unofficial remittance channels in Pakistan and finally, the floating of the Egyptian pound in Egypt. Also, the gradual increase in remittance fees implemented, since April 2024 on selected corridors contributed to the upward trend. So we are pleased to report that our operating income is back to historical levels with a positive outlook in the future. Next slide, please. Now let's take a closer look at our performance for the first 9 months of this year. Our reported total operating income has slightly declined by 1% and this is as a result of remittance and bank notes income, both witnessing a minor 2% increase -- sorry, decrease. EBITDA saw an 11% decrease as a result of the expansion cost and increased manpower needs, while net profit after tax showed a 20% decrease as a result of the introduction of corporate tax. Again, from an apple-to-apple comparison, if we exclude Iraq business, our operating income will be up 4%, EBITDA will be down by only 2%, and net profit after tax will be down by 10%. Looking on the right-hand side of the slide, we have the following operational metrics to report. In continuation of the improvement in the remittance business, the group processed over 37 million transaction. This represents a 20% increase year-on-year, coupled with a 4% increase in the number of bank note transactions. In addition to the rise in the total number of transactions, our other business lines witnessed encouraging momentum, including WPS delivering 9% growth in operating income and 15% growth in number of salary dispersals, reaching to AED 6.1 million. Digital transactions now make up 23% of our total number of output remittance transaction. This is compared to 20% during the same period last year. Our number of branches also increased to 263, whereby we added 15 net new additional branches, since September last year. Looking ahead, there have been a few key positive developments that we already discussed, including the steady stabilization of the parallel markets and gradual increase in remittance fees in some select corridors, as we mentioned. This translated into improved financial performance, Inshallah, in the coming quarters. Next slide, please. Now if we take a look at our revenue mix for this year, as witnessed on the slide, the revenue mix more or less remains very similar compared to last year, where the remittance business is still the major contributor to our top line, followed by the bank note business. We're also witnessing very encouraging growth in operating income of our ancillary services as we continue to be diverse and target a more resilient business model. Next slide, please. Now we will take a quick look at the UAE economy, which continues to shine creating a stable and attractive investment environment. The expected GTV growth of 3.9% for 2024, coupled with an inflation rate that is expected to stabilize at the 2% mark, shows the encouraging fundamentals of the UAE economy in general and our sector and specific. This is despite the ongoing global macro challenges and the geopolitical factors across the region. In terms of travel and tourism, the sector continues to demonstrate its strong fundamentals with Dubai welcoming over 9 million visitors in the first half of 2024. This is 9% higher than same period last year. Also, Abu Dhabi Airports facilitating the travel of approximately 22 million passengers, which is 31% higher than last year. This encouraging trend is expected to continue. The financial services sector in the UAE enjoys the supportive conditions in order to keep thriving, including the overwhelming majority of the UAE population being expats, coupled with a population that is in favor of digital penetration and the government's strong push for the digital agenda. All these factors are and will continue to drive the sector forward in a very positive way. And finally, the corporate sector has witnessed healthy growth in 2023 with the private sector workforce growing 10.5% and the number of companies growing by 9%. So to sum, the demand for the service that we provide is continuously growing, and we are very well positioned to take maximum advantage of that. Next slide, please. The Central Bank of UAE recently published the financial stability report for 2023. This report dives a little deeper into the performance of exchange houses, and we believe it is valuable to share with you insights from this report. From a market share perspective, we continue to maintain the leading market share of 36% of personal output remittances across exchange houses, and we have 16% market share of the corporate output remittances market, emphasizing the room for growth for business and this segment in the future. In addition, we command a sizable 32% market share of the WPS market. In terms of number of licensed exchange houses in the UAE, this number has decreased to 77 players in 2023. And this is mainly driven by the ongoing consolidation in the sector, which supports our competitive edge in the market. If we look at the right-hand side of the slide, it is evident that our business continues to dominate the exchange houses sector with our contributions remaining the highest to the overall sector as the leading market player. With 38% contribution to total income made by all exchange houses last year, we also had 48% contribution to income from remittances business. We had 28% contribution to income from foreign currency exchange business. So not only that we took the lion's share in terms of revenues, but we did it in the most cost efficient way, with cost-to-income ratio of 59% as compared to 75% for the sector. Such outstanding efforts resulted in achieving 63% of net profit made by the 77 exchange houses during last year. Now imagine with the introduction of corporate tax this year and increased amortization requirements and increased cost of compliance, we expect more consolidation in our sector, which will leave gaps in the market for us, to take advantage of and fill. Next slide, please. Now let's dig deep into the performance of our core offerings, starting with remittances. We saw a marginal 2% decline year-on-year in the remittance operating income to AED 513 million in the first 9 months of this year. However, excluding the one-offs occurred in the first 9 months last year, the picture becomes positive, and we witnessed in this case, a 7% increase. To further demonstrate the positive trend on a quarterly basis, the remittance operating income for the third quarter of this year has witnessed a 14% increase, including the one-offs. The overall, as we said before, trend is driven by the steady improvement in the parallel market witnessed across our major corridors, coupled with a gradual increase in remittance fees implemented in select corridors. And this started from April this year. Now digital transactions have now increased to 23% of our total number of output remittance transaction compared, as I said before, to only 20% last year. The digital transformation of our customer experience is one of our highest priorities. From one side, we give better experience to our valuable customers. And from the other side, we lower the cost of serving those customers. On a very -- on a further positive note, we are thrilled to report on the phenomenal performance of WorldWide Cash Express, our MTO. Compared to the first 9 months of last year, this service has seen a 108% increase in operating income, a remarkable 223% increase in number of transactions and 119% jobs and transaction value reaching to $204 million. Though still the contribution is relatively low, but WorldWide Cash Express is one of our big future growth stories. Next slide, please. Moving to bank notes. And during the first 9 months of this year, Operating income, which includes multicurrency prepaid card reached to AED 268 million. This translates to a 2% year-on-year decline. This is mainly due to the geopolitical tensions in the region. However, on a quarter-to-quarter basis, the bank note operating income reported a healthy 8% increase compared to the previous quarter. And 4% increase from same period last year. This movement demonstrates the upward trend in performance supported by the influx of tourists in the UAE. And now we're about to start our peak season in terms of tourism with winter. The overall all values of transactions decreased by 12% versus last year. This is mainly by the decline in the wholesale transaction. Again, this is because of the geopolitical tensions, which hopefully will settle very soon. However, the bank note number of transactions witnessed a 4% increase in the first 9 months of this year, driven by the strong demand in the market for our multicurrency prepaid card. Next slide, please. We are thrilled to report that our WPS segment continues to maintain it's positive trajectory. Operating income increased by 9% year-on-year, reaching to AED 53 million. This is driven by a 17% year-on-year increase in our WPS customer base and 15% year-on-year increase in salary dispersals. Other products and services, which improved cash trends at bill collection income witnessed a 10% growth compared to last year. CashTrans, which is our end-to-end cash management solution, saw a very encouraging 23% increase in operating income, supported by a 26% increase in number of trades and sizable 70% increase in number of customers. Again, CashTrans' contribution is relatively low now. But again, it's one ;of our future growth stories. Now I will hand over to Faisal to take you through our financial positions.

Thank you very much, Bitar, and good afternoon, everybody. I will take you through with the income statement. Net gain on currency exchange saw a slight dip of 1.9% on year-on-year and mainly due to decline in bank notes wholesale volumes, which was partially offset by increase in exchange gain income of foreign currency travel cards amounting to AED 5 million. The net commission income remained flat year-on-year basis as the decline in commission income from the remittances was offset by the increase in WPS and other products. In terms of the interest income, interest income saw a sharp growth as a result of placement of excess cash and fixed deposits for short-term duration, which is generally between one week to 3 months. And in terms of the cost and the increase in these service impact was due to the rise in number of employees directly related to opening of 15 new branches since Q3 2023 and 38% increase in number of Emirati Nationals, which is in line with the support of the government's amortization initiatives. On the operating income or operating expenses side, these have been increased by 14.3% directly related to opening of 15 new branches since Q3 2023 and that cash percentage center which was opened in Q4 2023. The decline in the finance cost is mainly attributable to the efficient utilization of bank OT facilities during [ peak ] business days only. And the corporate income tax expense has been recognized based on the income tax of 9% applicable to the net profits from 1st January 2024. In terms of the EBITDA, EBITDA has been decreased by 11.5% on year-on-year to AED 389 million, with an EBITDA margin of 45% due to a notable increase in the cost base. And as a reminder, the relative that industry average to EBITDA is less than 30%. Next slide. Turning our attention to the balance sheet. The increase in light of used assets by 9.1% is attributable to addition of new branches, translocations and the renewal of lease contracts that expired during the period. And the primary reason for 9.3% increase in other assets is [ derived or ] in outstanding lines, both to by a related party against the foreign currency part and parcel of the year and advance to the liquidity provider to support the market prices in all the shares. For the trade and [indiscernible], these have increased by [ 13.9% ], driven by papers in respect on WPS and increase in the prepaid card tables that can make and dispersed to the beneficiaries, coupled with the income tax position booked for the year. Dividend payment approved, and Board meeting held on September 19, 2024, and this was set to subsequent to the period there on October 16, 2024. Bank volumes were temporary, it's really based on the business requirements and liquidity position of the company and were sent subsequent to the period end in October. And in terms of the other liabilities, these declined by 8.2% due to the settlement of accounts payable to exchange houses and other agents against each settlement of the remittances. Move to the next slide, please. Now looking to our cash positions. Majority of our cash assets are composed of cash and cash-like items, a significant portion we're using for our operations. During the 9 months of 2024, the group average cash requirements of remittances and bank notes range from 3 to 4 days and 3 to 7 days, respectively. In addition to that, management also considered a buffer of 25%, given the company's business has significant intra-month seasonality, for example, holidays, weekends and salary-driven days. As we mentioned, we have a very CapEx light business model and by this, we're able to change a strong growth with our limited CapEx requirements expected to be 3% of the operating income. CapEx decreased by 25% compared to last year as the group streamlines branch network expansion. In terms of the cash conversion, these have decreased in the 9 months to 2024 due to the decrease in EBITDA by 11.5%, with this 94% cash conversion rate. And the debt-to-equity ratio has reduced from 18% to 10% due to the impairment of the ForEx. Next slide, please. For the dividend policy, as a reminder, our dividend policy is a minimum dividend of 70% of the net profit after tax paid on annual basis in April and October of each year. And in relation to the group's H1 2024 reserves. We have issued a dividend of AED 157.5 million, which translates into 76% of the net profit after tax and this was paid on October 16, 2024 to the shareholders. The implied annualized dividend yield is 4.2% based on the closing price of AED 0.97 per share on September 30, 2024. With this now, I hand over back to Bitar to provide an update on our growth strategic pillars.

Thank you, Faisal. Next slide, please. As you know, our growth strategy focuses on 6 key pillars, and I'm happy to report the following progress. Our investment in the expansion of our physical presence continue to yield strong results. We've added 15 new branches to our UAE network since September last year, bringing our total to 263. This expansion not only enhances customer reach, but also drives profitability, with 95% of our branches being profitable. Moving on to our second strategic focus, which is geographical expansion within the GCC. In terms of integration of Al Ansari Exchange in Kuwait with our Oman exchange in Kuwait as well. This process has completed. And we expect the Al Ansari Exchange in Kuwait to be acquired by Al Ansari Financial Services by the fourth quarter of this year, synergies to be realized in the first quarter of 2025. In relation to the BFC acquisition that we announced earlier, in terms of timelines, we are currently in the closing process and expect to close the deal by the end of Q1 '25. Post closing, we expect to complete the integration process and realize the synergies between the first quarter of '26 and the third quarter. In relation to our digital innovation, which is our third growth pillar, we continue to focus on expanding our digital offerings and our digital capabilities. We have witnessed an encouraging 46% increase in the number of smart counters coupled with a 16% increase in newly issued prepaid cards. And a 13% increase in the number of active users on our app. Although we expect to launch Al Ansari digital wallet, which is a fully fledged digital marketplace before the end of this year. Next slide, please. Our fourth pillar is margin increase on our remittance fees. Since April 2024, we have implemented a gradual 15% increase on our remittance fees and select corridors. We implemented the pricing increase in a strategic manner to ensure there is no negative impact on our market share. And we have witnessed and continue to witness a positive impact on our results. Our fifth pillar focuses on growing the corporate cross border remittance business. We're happy to report significant progress evidenced by a sizable rise in new corporate clients and an 11% increase in number of output corporate chemicals transaction during the first 9 months of this year. In addition, we have launched Exchange, which is a web-based portal, specifically for corporate customers to perform their transactions without the need to come to the branch. This initiative is expected to increase our presence in the corporate remittance segment. And if you recall, we said this many times that the size of cross border payments for SMEs in UAE is 3x bigger than personal output remmitances. Our final pillar centers on expanding our CashTrans operation. CashTrans business currently has a total of 56 customers, which is a 70% increase compared to last year, and the business overall continues to demonstrate encouraging growth. I will now hand it back to Faisal to discuss the short- to midterm guidance.

Thank you very much, Bitar. We will walk through with our guidance for the short and medium term, which remains unchanged from half yearly. In the short term, we are guiding for operating income to be single-digit growth and mid-teens in the midterm. In terms of the number of branches, we are targeting to have 300 branches here in the UAE in the midterm. For the remittance business, our guidance gained a single-digit growth in the short term, followed by low to mid-teens growth in the midterm. And for the bank notes business, our guidance is single-digit growth in the short term and low to mid-teens over the midterm. With the strong growth expected in CashTrans and WorldWide Cash Express businesses, we expect that the WPS and other products contribution to the total operating income to be mid- to high teens in the short term and in the high-teens in the midterm accounting for 10% of the overall operating income. Further, for the EBITDA margin, we expect the EBITDA margin to remain steady near current levels in the short term. And over the midterm to expand in line with the business growth as the digital business continues to gather pace. And finally, in terms of the CapEx, we expect to remain in the low single digit as a percentage of the operating income. And with this, I will now hand you back to Mr. Rashed for the closing remarks of this presentation. Mr. Rashed.

Thank you, Faisal, and thank you, Bitar. So basically, this brings us to the conclusion of the meeting. The key highlights that we want to -- we want you as valued investors to take away from this meeting is that we have started to see a gradual and positive recovery in our Q3 results, and we anticipate this to continue with the efforts that we have been putting in place in order to curb the bad market practices with the regulatory authorities, which are going to have a positive results. We've also been working very hard in order to put strategic initiatives such as the acquisitions and the wallets, which we have very -- it has a very high potential basically to increase the customer stickiness when it comes to remittance services. All these are going to be a positive contributor to our EBITDA in the coming quarters when they go live. And last but not least, of course, we are working very hard in order to improve the margins basically to pre-IPO level. We have -- as you can appreciate, we have many moving parts that started in 2024 this year, whether it was the corporate tax introduction of the corporate tax, whether it's the amortization targets that are set by the regulator and other areas of course, when it comes to compliance and of course, from the other side, the competition from the fintech, all these were many moving parts, which we are handling very delicately to ensure that we maneuver those areas, and we recover the pre-IPO EBITDA margins that we used to enjoy before and the results are showing that we are on track in a positive trend. With that, I will conclude the earnings call presentation, and we will open the floor for questions from your side. Thank you.

[Operator Instructions] We have received several questions already. I will start reading them. Can you mention the amount of the one-off Iraq income and if this is related to remittances?

Amount is closer to AED 45 million. And it is related to remittances coming from Iraq. To little explain, there was I think the difference between the official rate for dollar in Iraq in the parallel market rate. And some customer took advantage of this, whereby they send remittances to the UAE against the official rate. And then the money made its way back to Iraq and got exchanged in the parallel market. And majority of it's came in the second and the third quarter of this year. Hope this answers your question.

Another question. What is the expected contribution of Kuwait to group revenue, EBITDA and profits on a full year basis.

Let me take this question. It is less than 2% in the initial years, yes.

Remittance income fell Q-on-Q. Is this attributable to competition from fintechs, or was there any country negatively impacting growth?

I'll take this question. So there is a wider part, when it comes to the decline in remittances. So there is an element, as we said, of the black markets. There is of the parallel market, there is an element, which we are, by the way, addressing with the law enforcement authorities here in the United Arab Emirates and they have shared with us that they have done good traction in order to curb -- despite the fact that we are depending on the receiving countries in order to take initiatives to eliminate it, but we're also coordinating here with the law enforcement authorities to curb unlicensed remittances, what in the industry is called Hawala to us. So that is one aspect of it. The other aspect, of course, is the fintechs. The -- as I mentioned, the predatory pricing, when you have a fintech that is finding it very difficult to penetrate the market because market is being served by the exchange industry. If you look at our mobile app, it's on a growing basis. It has a contribution around to more than 20% of our transactions are happening through the mobile app and the digital channels in general. So we are serving the customer very well. So the new or the incumbent or the new fintechs that are trying to penetrate the market, they cannot compete on quality of service or quality of product that we offer in the app. So they resolve through practices of offering free remittances, in certain cases, as I've mentioned, they reward the customer with monetary vouchers or monetary value on top of the remittance amount in order to desperately get some market share. And that has impacted the digital or savvy customer, but also because it has affected the exchange industry in general, other exchange companies in order to maintain their market share have also to start to compete on price on a certain level. So it has a direct and indirect effect. I hope that basically answers the question. Now my concern or for my look into the matter is that this is something that is short lived. No company can sustain operating in this manner, where they pay out of their pocket to serve their customers at some point, and we have seen quite a lot of them that they started charging the customer and the customer basically came back to our ecosystem based on the survey that we have done over the past months. The other aspect is some of them are either knowingly or unknowingly are operating from a free zone bypassing the Central Bank regulation. And we have highlighted this to the Central Bank and are taking action. And that's why we saw some improvement in the Q3 results. And this is going to continue with tighter regulation in order to prevent such regulatory arbitrage that has affected the financial results of Al Ansari Exchange. I hope this gives an overview of the situation and why we have been in this position. And what we have done, we've been working very hard lately over the past months with the regulators in order to curb this phenomenon.

Thank you. Last question I can see in the list, what is the market share of exchange houses in SME corporate remittances?

Bitar, do you have an idea? Because this is something that the Central Bank shared and the report is very limited. So we do not have exact figures. All I know is that we have more than 270,000, correct me if I'm wrong Bitar, we have almost 300,000 SMEs here in the United Arab Emirates, and they are underserved by the banking sector. And we have had great traction in order to serve their remittance needs and cash collection needs, WPS needs and other financial services. And we've had a good growth in that segment in our customer base. Bitar, would you like to shed some more light?

Our share across the exchange house sector is 16% and growing with our focused effort. However, unfortunately, there is no reported count that completely get from Central Bank about corporate remittances. However, I want to emphasize that our focus is not corporate in general. Our focus is SMEs, which is a sentiment that is underserved by the banking community. And they are -- as you know, we are major trading hub here in UAE and import export is very important. And all of those are heavily dependent on small and medium enterprises. This segment alone in terms of size, when we did the study before IPO, we quantified to be 3x bigger than the personal output remittances. And again, I'm excluding the remittances of big companies like the [ ADNOCs ], the [indiscernible], the government, et cetera.

As we wait for more questions, maybe this is [ Shabbir Malik ]. I can ask a couple of questions. Some clarification, please. If I look at your remittance revenue for third quarter compared to the second quarter, it's come down. And I think you've indicated that it's part of the reason has been the pricing from some of these fintechs. And is it -- is that the only reason? Or is there anything else that you would have said and might -- and I might have missed it.