Ooredoo Q.P.S.C. (ORDS) Earnings Call Transcript

Good afternoon, everyone. Welcome to Ooredoo Group's Q1 2024 financial results call for the period ended 31st March 2024. My name is Luelle Pillay, and I'm the Head of Investor Relations for the group. Today, I'm joined by Aziz Aluthman Fakhroo, our Group CEO, who will kick off our presentation with an update of our strategy and take us through the consolidated results. He'll be followed by Abdulla Al Zaman, our Group CFO, who will walk us through the operations performance. As always, we will keep the presentation brief to allow ample time for your questions. [Operator Instructions] The presentation is available on our website at ooredoo.com as well as on this webcast. The recording and transcription of the session has started now. So by attending this session, you consent to be included. Please note the usual disclaimer on Slide #2. And on that note, I hand over to Aziz.

Good afternoon, everyone. Welcome to our quarter 1 investor call. As usual, I'll commence with our strategy update. Our strategy remains unchanged and fixed around 5 pillars: customer experience, our people and talent, smart telco and evolving the core, strengthening the core and a value-focused portfolio. We continue to execute on this strategy to position Ooredoo as the leading digital infrastructure provider in the region. A brief update of our key vertical, starting with towers. In December of 2023, you will recall that we finalized the agreement with Zain and TASC to establish the largest tower company in the MENA region. Currently, our primary focus is on finalizing the deals in each market. At TASC, we anticipate completing within 18 to 24 months. In the data center vertical, following the carve-out of Qatar and Tunisia, our attention is focused on Kuwait, which is expected to complete next quarter. The carve-outs of Oman and Iraq will follow suit during the year. In the fintech vertical, in Oman, our PSP license was granted last week. The product and technology solutions are ready to go live. A friends and family soft launch will commence during this month. We are pursuing licenses application in Iraq, Kuwait and Tunisia. The positive momentum seen in Q4 2023 carried forward into the new year with an improvement in all financial and operating metrics. Let's dive into the details into the next slide. As shown on the slide, all our KPIs are in the green, indicating a strong start to the year and the first quarter. Revenue grew by 4%. EBITDA increased by 6%. EBITDA margin improved by 1 percentage point to close the quarter at a solid 43%. Free cash flows increased by 8% on the back of improved profitability. Normalized net profit was up by 26%. And we maintain a healthy leverage ratio of 0.8x net debt-to-EBITDA. We grew our customer base by 3%, reaching nearly 160 million subscribers, including IOH. Let's move on to the next slide for the revenue bridge. Revenue was up by 4% to QAR 5.9 billion. This growth was on the back of strong operational growth in Iraq, Algeria, Kuwait, Tunisia and Maldives. Weaker top line performance in Qatar, which was impacted by lower mobile, fixed services and device revenue, partially due to the spillover impact of FIFA. Oman remains under pressure due to the highly competitive environment. Myanmar grew in local currency, but was impacted by currency depreciation. And Palestine, of course, was impacted by the war. On the next slide for an overview of our EBITDA performance. The improvement in profitability and margin were driven by service revenue and a strict control of our OpEx. Algeria, Iraq and Tunisia were the main contributor to this performance. Included in others is a positive contribution from fintech Masarat, our ISP provider, data centers, AMH and IOH. Oman's EBITDA was affected by lower gross margin and higher OpEx, while Qatar's EBITDA decline was mainly due to softer top line performance. Additionally, EBITDA saw a decline due to a one-off bad debt provision raised in Q1 2024. On a reported basis, net profit 5% lower on a year-on-year. Q1 2023 benefited from a litigation gain in Kuwait. On a normalized basis, net profit actually increased by 26%. These slides illustrate the major differences between reported to normalized net profit with FX impact being the biggest contributor for Q1 2024. Turning to CapEx. In the first quarter of the year, we invested QAR 382 million on our infrastructure. We strategically increased investments in Tunisia, Qatar, Kuwait and Algeria. The CapEx intensity improved slightly to 6.5%. CapEx spend is expected to rise over the year due to the timing and cyclical nature of expenditures. Free cash flow grew by 8% to QAR 2.2 billion on enhanced profitability. In the first quarter, we increased our customer base by 2 million subscribers. Our customer base increased by 4%, reaching just shy of 59 million with each OpCo expanding its customer base. As previously reported, the decrease in our Qatari customer base is attributed to a driven in the definition of prepaid customer. On a comparable basis, our customer base grew by 1% in Qatar. Now let's discuss our balance sheet. From the chart, it's evident that we have a robust financial position. Our gearing is low at 0.8x and below our board guidance. We have worked with our lenders to extend availability of our existing RCF up to 2028. We now have ample liquidity to cover all our maturities. We are also structurally hedged for interest rate hike as 96% of our debt is at a fixed rate. Our efforts has paid off. Last month, Fitch upgraded our credit rating to A stable. They highlighted our conservative leverage profile, strong parent support and solid free cash flow generation, while S&P and Moody's maintained our investment-grade rating. To conclude my section, we reaffirm our forward year 2024 guidance. We had a solid start to the year with improved commercial and financial metrics. Our Q1 results are ahead of our full year guidance. Our revenue are up by 4%, thanks to growing service revenue. EBITDA margin expanded by 1 percentage point to 43% as we work towards improving profitability and cash generation. For 2024, we expect an EBITDA margin in the low 40s with a continued focus on cost control. The CapEx spend is projected to be approximately QAR 3.5 billion. On this note, I hand over to Abdulla to provide more insight into our operational performance. Thank you.

Thank you, Aziz. Good afternoon, everyone. I will take you through our operational performance for the first quarter of 2024. Let us start with our home market, Qatar. The operation grew its customer base by 1% on a like-for-like basis. Revenue decreased by 7% on a reported basis. The revenue base for quarter 1 2023 was higher due to FIFA 2022 contracts for the B2B service and revenue from Ooredoo Financial Service and data center, which have now been carved out. Normalizing for this, revenue decreased by 2% year-on-year. On the other hand, revenue improved by 2% in quarter 1 2024 compared to quarter 4 2023. Normalized EBITDA declined by 2%. EBITDA margin strength by 1 percentage point, reaching solid 52%. Moving to Kuwait, the operation grew its customer base by 3%. The increase in the customer and high service revenue led to a revenue growth of 8% in local currency. EBITDA was impacted by one-off bad debt provision raised in quarter 1 2024. Excluding this provision, EBITDA increased by 1%. In Oman, performance still impacted by intense competition on the mobile market. Despite this, the operation grew its customers by 2%. Revenue declined by 3% and EBITDA decreased by 5%. Even with intense competition, Ooredoo Oman managed to maintain a solid EBITDA margin of 46%. Moving to Iraq. Asiacell once again stood out as a strong performance, thanks to a favorable market condition, a growing customer base and increased adoption of data services. Commercially, Asiacell expanded its customer base by 6%, reaching 18 million customers. In local currency, revenue grew by 14% and EBITDA increased by 17%. EBITDA margin expanded by 1 percentage point to 46%. Next is Algeria. Ooredoo Algeria emerged as another top performer for the group, highlighting our ability to enhance efficiency and improve profitability. The customer base grew by 4% to 13.5 million. Revenue increased by 14% in local currency. EBITDA expanded by 25% in local currency with 4 percent point increase in margin to 43%. Moving to Tunisia. Despite a challenging operational environment, we continued to invest in the country and advance our competitiveness. Our investment paid off, and we are leading in customer satisfactions and grew our customer by 1%. In local currency, revenue grew by 5%, helped by significant growth in mobile B2B and fixed businesses. Normalizing for one-off bad debt provision in quarter 1 2023, EBITDA grew by 4% in local currency. Shifting our focus to Asia. In Myanmar, customer expanded by 7%. The significant depreciation of the currency impacted the reported financials. However, in local currency basis, revenue grew by 14% due to higher B2C mobile voice and gaming revenue. EBITDA declined by 10% due to adverse FX effect and raising fuel costs, reducing the EBITDA margin to 30%. In Maldives, we kept investing in our infrastructure to improve our market position, expand our share of customer wallet, boost revenue and enhance profitability. For quarter 1, 2024, customers grew by 1%, revenue grew by 8% and EBITDA increased by 4%. EBITDA margin was solid at 53%. Despite the tough condition in Palestine, we remain committed to support our customer and ensuring connectivity, leading to a 3% growth in our customer base, which now total 1.5 million. In the face of challenging operation landscape and a 4% depreciation of local currency against the U.S. dollars, revenue declined 4% on a reported basis. EBITDA decreased by 9%, while EBITDA margin dropped 2% points, reaching 38%. Next is Indosat, last but not least. Operation, another solid set of results last week. Its scale and merger synergy helped propel revenue up by 16% and EBITDA increased by 21%. This concludes my operational review. Back to IR team. Thank you.

Thank you very much, Aziz and Abdulla. Before we dive into the Q&A portion, I'd just like to draw your attention to some of the upcoming conferences displayed on your screens that we may join. [Operator Instructions]

For the Q&A session, I'm joined by senior leadership team. In addition to Aziz and Abdulla, we also have with us Sheikh Mohammed, our Deputy CEO; Rene, our Head of Strategy; and Eyas, our Deputy CFO. So we're going to open up with a question now. I see a hand raised by Nishit Lakhotia from SICO Bank.

I have a couple of questions. First, on the Qatar operations, it seems that still Ooredoo is losing a bit of market share to its competitor. So what is the strategy to change that because it's been a few quarters of relatively poor performance versus your competitor in Qatar. So that's my first question. Second is can you quantify the impact of the one-off bad debt provision in Kuwait and what was exactly this relating to that triggered it in the first quarter? So that's the second question. And third, any update on the TowerCo transaction in the last 3 months since the call that we did in terms of how it has moved, that would be helpful.

Thank you.

I'll take a couple transfer to finance team. I'll start with the last, which is the TowerCo. We are proceeding with trying to close respective market. It's a very complex transaction, as you may imagine. This involve 6 markets, as you know, with diverse regulatory frameworks. We're currently pursuing all the regulatory approval in each market. We're making where -- our main focus is first to close Qatar, as explained on the call, to close Qatar and to merge it within the existing Jordanian and Iraqi business of TASC. This requires regulatory approvals on both sides. We're making very strong progress, we're comfortable that we will get this transaction closed this year for sure and hopefully before the second half of the year. And we're also pursuing regulatory approval in all the other markets in parallel. When it comes to Qatar's performance, actually, this is the second quarter in a row where we are stable in revenue market share and mobile revenue market share -- not mobile revenue market share, we actually in certain segments likely gained a bit. So I don't see a pursued decline. I'm actually a bit surprised you're seeing pursued decline. When we look at our numbers versus competition, we've been stable for 2 quarters in a row and we're happy with the stabilization within the market. Regarding Kuwait, I don't know, Sheikh, if you have any other comments about the Qatar?

Yes. About Qatar, it remains one of the -- the market is still competitive. And I think when you referred to the decline, maybe if it's year-on-year because it is the impact of the World Cup, which is related to the B2B businesses. However, when it comes to the market competition, we are quite optimistic about the market for the last 2 quarters, where we had some stabilization and a good story of back to growth of the prepaid segment. This is in a nutshell how we see the stabilization on the mobile market for the last 2 quarters with regard to Qatar. For Kuwait, yes, there is one bad debt provision. I think we can shed some light from the finance time for that exact provision then for quarter 1 with Kuwait.

Yes. On like-to-like, we said there is a growth if we normalize the one-off that was coming in the quarter 1. That's a slight increase by 1%, I would say. So from performance perspective on Kuwait, we see a as a growth and it's not declining.

Thank you. Our next question comes from Maddy Singh from HSBC.

Yes. Can you hear me okay?

Yes, we can.

Great. So a few questions from my side. Firstly, as a follow-up on the TowerCo transaction. Is there any guidance or any suggestions on how -- what will be the impact of the TowerCo transaction on the income statement for Ooredoo? Are you expecting it to be net income accretive or dilutive? What kind of impact we should expect on the EBITDA margins? If you could share any thoughts on that for our modeling purposes, that will be very helpful. And the second question is on Algeria. The performance looks very strong there. So I was wondering whether this is a sustainable performance, you think, especially the margins coming back to above 40%, 42%, 43%. So whether that level is sustainable? And thirdly, on the Indosat performance, again, very strong performance during the quarter. So I was wondering, has there been any upgrades to the synergy targets, if at all, in Indonesia? And generally, right now, we are at $80 million profit level as you shared on the slide. Can the net profit margin -- is there a target on what could be the, let's say, sustainable or a good level of net profit margin compared to where the revenues are, that will be great.

So first for Indosat as we guided in the past, initially, when we announced the transaction, we were targeting around $300 million to $400 million a year of recurring synergies within year 4 or 5. As we've guided in the recent quarters, we're running ahead of the schedule. We actually completed most of the synergies as of today, and we're at the higher end of our estimates. So we're closer to $400 million of recurring synergies achieved within 2.5 to 3 years versus 4 to 5 years. That is one big driver of Indosat's performance. The other performance -- driver is also the excellent job the management team has been doing on many fronts from driving efficiency, innovation, customer excellence and also a general market dynamic, where rationalization of the market subsequent to our merger has driven general better behavior by all telco operators. So there's not one factor, but many factors helping with Indosat. Going to Algeria. Algeria and Iraq, by the way, have been very fast-growing markets for the past 2 years now. First, there's a macro picture. These are oil-denominated economies. They're benefiting for the past 2.5 years from elevated oil price, which is fueling the economy in general. As you know, telco is, in a way, a factor of GDP, so that has helped. There is also quite a lot of positive evolution in the countries in the economic fabric and evolution of the middle class, their young population with high-growth population. So this is also benefiting. And last and not least, the management teams on the ground are also doing excellent work in capturing a larger than fair share of that market growth and this is all to their credit. What was the first question?

The TowerCo?

TowerCo, look, we have -- happy to answer offline to this question. We've done a full, very, very comprehensive explanation of the TowerCo deal in December when we had our Capital Markets Day. I would, please, advise you to first go and look at that presentation, which is available in our IR section. There's also a link to the video. And if you have any additional questions, we're very happy to answer them. And this covers closing sequence, pro forma impact, value uplift in general. What we're seeing is a slight value uplift at the EBITDA level in terms of the general telco operation. And there is, of course, leases that sit below that, but also, as you know, we are not selling the towers. We actually retained 50% of our business, which is larger than our own towers. So we get back a lion's share of the economics on that side. But please go to the section. There's a full comprehensive overview of the transaction. And happy to answer any subsequent questions, which are not covered there to the extent we can disclose them or we actually have answers.

Just one follow-up on the Indonesia side. Is the net margin number, how quickly you think we can get about 10%?