STC to bonus issue, a positive stock momentum
STC BoD recommended to increase its capital 150% to SAR50bn, through the issuance of bonus shares via capitalizing SAR30bn from retained earnings. The company further added that the capital increase will help it in achieving its growth and expansion strategy.
We believe this step should prove beneficial for the company in the long run, as it looks to pivot away from a traditional telecom service provider to a technology company. STC has embarked on a strategy that has seen it to pursue its expansion through setting up technology companies like STC solutions, STC bank (STC pay).
The strategy is in line with vision 2030, where the government is looking to transform the local economy through a digitization drive and emphasized the importance of digital infrastructure for advanced industrial, commercial and social activities.
The higher equity capital should help the company in strengthening its balance sheet and provide an opportunity to diversify its capital structure. The company currently has a D/E of 13%, which leaves ample room to increase its debt levels, without impacting its cost of funding.
We believe growth through traditional service (voice, data) will remain in the low single digits, given the high penetration levels. However, it should continue generating sufficient free cash flow (FCFF) for the company in the range of SAR18-22bn.
Strong operating cash flow and room to increase its debt level, can potentially help the company in allocating funds towards higher growth opportunities in the technology space.
STC will continue with its current dividend policy for paying quarterly dividends. However, after the capital increase per share dividend will stand at SAR0.4, while maintaining its dividend yield.
We expect the bonus issue to increase the liquidity in the stock and create positive momentum as the number of free float shares will also increase. Alrajhi (+12%) and Ma’aden (+32%) had strong performance in the 60 days post the announcement of bonus issues.
Based on our latest update, we are Neutral on STC with a PT of SAR117.7. We believe the progress in STC Pay’s banking license is the key stock catalyst going forward. The stock is currently trading at 2022f PE of 18.5x and EV/EBIDTA of 9.4x respectively.