Qalaa Holdings (CCAP on the Egyptian Exchange, formerly Citadel Capital) released today its consolidated financial results for the year ending 31 December 2014, reporting revenues of EGP6.5bn, up 34 per cent from 2013 pro forma figures.
EBITDA stood at EGP at EGP651.9m on a full-year basis, a significant improvement over FY13’s figure of negative EGP23.1m. Qalaa posted a full-year net loss after tax and minority of EGP879.6m, a 54 per cent improvement from the previous year’s pro forma figure of EGP1.9bn.
“Despite the headwinds we have faced, Qalaa Holdings has consistently made critical calls since 2004 as regards macro trends and business model that are now being vindicated — and made clear in our financial statements. We have always invested in infrastructure and industry, with a particular eye on energy de-regulation and demand created by Egypt’s compelling demographics. What was an investment thesis is now the core of our business strategy as a holding company as we finalize the transformation of our business model,” said Ahmed Heikal, Chairman and Founder of Qalaa Holdings.
“Most notable in this regard is that we have not just swung to the positive on the EBITDA front, but we have done so in line with our guidance of EBITDA north of EGP600m from a negative a year ago,” Heikal said. “Notable in this respect is that our EBITDA line reflects the impact of more than EGP140m in negative contributions from Rift Valley Railways — which is in the midst of a multi-year operational turnaround — as well as from pre-operational greenfields Egyptian Refining Company and Mashreq. The completion of the turnaround and the start of operations at greenfields will result in further significant EBIDTA improvements out of proportion to our natural EBITDA growth curve,” he added.
That improvement was muted in part by the impact of one-time charges recorded in 4Q14, including charges related to impairments, restructuring and layoffs, all of them designed to lock-in future efficiencies, weighted particularly toward TAQA Arabia and Rift Valley Railways. Moreover, results reflect the impact of the devaluation of the Egyptian pound against the US dollar, which contributed additional foreign exchange charges and inflated interest expenses, as the company has some dollar-denominated debt.
Some EGP204m in negative contributions from discontinued operations relate primarily to ESACO, Elmisrieen and Enjoy. Management restates its previous guidance that it aims for the income statement to include no charges from discontinued operations after 2Q15. Interest and depreciation due to discontinued operations are non-cash items; management accordingly estimates that c. 95 per cent of losses from discontinued operations are non-cash. A significant proportion of other charges on the income statement are also non-cash.
Against this backdrop, I believe we will look at 2015 as marking a watershed year for Qalaa — a year in which we will distinguish ourselves as the owner and steward of large, transformative assets including Egypt’s largest private-sector megaproject; the nation’s leading independent energy distribution business; a highly competitive regional cement producer; and innovative transportation and logistics businesses that will change how goods move to market in Egypt and East Africa.
“In the year to come, our focus will be the completion of our transformation at the holding company level and a push forward with our divesting and deleveraging program, which will allow us to return to profitability by late this year — well ahead of schedule. Further to that, we will continue the steady build-out of our two key remaining greenfield operations: the Egyptian Refining Company (ERC, which is building a greenfield second-stage refinery in the Greater Cairo Area that will more than halve Egypt’s present-day diesel imports) and Mashreq (which will become the first fuel bunkering facility in the Eastern Mediterranean),” Heikal noted.
Management has outlined key elements of its strategy for 2015:
•The company will increase its stakes in core assets through a capital increase that will see the firm capitalize liabilities arising from asset purchases worth around EGP1.7bn.
•Sale of non-core assets: Following the exit of Sudanese-Egyptian Bank, Sphinx Glass, the foundries AAC and AMC, and Pharos Holding in 2014 and early 2015, Qalaa is now looking forward to additional divestments of non-core assets including MGM (a container glass business and the sole remaining investment under its GlassWorks platform) and remains watchful for other exit opportunities. The company is presently exploring the exit of Tanmeyah, its microfinance platform, and the sale of both confectioner Rashidi El-Mizan and the farm and fresh milk companies that operate under the Dina Farms brand in the wake of management’s decision to treat the agrifoods sector as non-core.
The company is also streamlining and deleveraging its core businesses by selling non-core and non-essential elements of those units, such as ASEC Cement operations in Algeria and the Tebbin land held by Nile Logistics in Egypt. Proceeds of these sales and the consequent de-consolidation of debt will have a powerfully positive impact on the consolidated financial statements.
•Share Buybacks: Management will create new value through share buybacks, using proceeds from strategic exits to acquire Qalaa shares for so long as these trade at a significant discount to their fair market value.
Equity-linked issuance: Management has appointed Renaissance Capital as mandated lead arranger to explore the potential issuance of a convertible bond in the fourth quarter of the current year.
“Management will continue to pursue exits such as the potential sale of Tanmeyah to fund share buybacks, motivated by the belief that Qalaa’s shares are presently trading at a steep discount to their fair market value,” said Qalaa Co-Founder and Managing Director Hisham El-Khazindar. “As our recent disclosure on the subject indicated, our divestment program is progressing, with multiple transactions having reached stages at which information memoranda have been withdrawn or at which binding offers are shortly due. As it has been for the past year, the mitigation of both financial and operational risk will key to our strategy. We are reducing financial risk by significantly deleveraging at the holding and platform company levels. Meanwhile, we are limiting operation risk through the divestment of underperforming assets, focusing instead on the winners and ensuring they have the funding they need to deliver on growth plans,” he added.
Added Heikal: “We continue to institutionalize the new systems rolled out in 2014 that are not only giving our board better oversight of Qalaa, but which have given both the board and Qalaa management clearer control over subsidiary management. With phase one now complete, we are moving into the second phase of a three-year technology implementation cycle for a common information-sharing platform across Qalaa and all of our subsidiaries.”
“This process is already paying dividends, and we see substantial opportunities to drive efficiencies not just through control of headcount and improved labor productivity, but through consolidation of spending on services and products ranging from assurance and mobile telephony to insurance, human resources and warehousing,” Heikal noted.
During FY14, Qalaa Holdings’ companies contributed a total of EGP25m to the Tahya Masr Fund in light of the company’s continued commitment to forging a better future for Egypt and the communities in which it does business.
Qalaa Holdings’ full business review for 4Q/FY14 and the financial statements on which it is based are now available for download on ir.qalaaholdings.com.