Earnings Report /
Saudi Arabia

Saudi Ground Services: Cost reduction initiatives limit losses

  • Revenues stood at SAR115mn, higher than our estimates of SAR78mn.

  • Gross loss stood SAR136mn in Q2 20, lower than our estimate of a gross loss of SAR151mn.

  • Operating loss stood at SAR196mn, compared to a profit of SAR125mn in Q2 20 and loss of SAR8mn in Q1 20.

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

Follow
SNB Capital
6 August 2020
Published bySNB Capital

SGS reported losses for the 2nd consecutive quarter. Net loss came in at SAR198mn vs a net profit of SAR124mn in Q2 19 and net loss of SAR52mn in Q1 20.  This compares with the NCBC and consensus estimates of net losses of SAR175mn and SAR187mn, respectively. The loss is mainly attributed to the impact of COVID-19 lockdown on the aviation services in Saudi. The company said that cost reduction initiatives helped the company to reduce its losses from SAR408mn. We await for the full financials to update our PT and estimates.

Revenues stood at SAR115mn, higher than our estimates of SAR78mn. This is a decline of -82.2% yoy (-77.5% qoq). The revenue decline was due to the lower number of international and domestic flights due to COVID-19. As domestic flights resumed only from 31 May 2020, flight operations were c18% of the pre-pandemic volume. We believe the higher than expected revenue is mainly due to new services introduced by the company such as aircraft disinfection services which contributed cSAR32mn to the top-line.

Gross loss stood SAR136mn in Q2 20, lower than our estimate of a gross loss of SAR151mn. This is the first gross loss on record. We believe the variance is mainly due to SAR202mn decline in operating cost due to cost reduction initiatives done by the company to increase its operational efficiency and limit the impact of the pandemic on profitability. The company said that permanent cost savings is estimated at SAR30mn (SAR120mn annually)

Operating loss stood at SAR196mn, compared to a profit of SAR125mn in Q2 20 and loss of SAR8mn in Q1 20. This compares to our estimate of a loss of SAR180mn. We estimate that opex came-in at SAR60mn, vs our estimates of SAR29mn. The higher than expected opex is mainly due to impairment loss on trade receivables of SAR11mn and a higher than expected SG&A. We believe SG&A came-in at SAR54mn vs our estimates of SAR35mn.

The losses increased at the net income level due to losses of SAR9.7mn from its investment in Alamad Company. SGS reported a net loss of SAR198mn in Q2 20 vs our estimates of a loss of SAR175mn. Adjusting for the cost savings of SAR210mn, net loss would be SAR408mn.

We are Overweight on SGS with a PT of SAR28.3. Despite short-term headwinds, the long-term outlook for SGS is positive driven by strong potential of the Saudi tourism sector, the growth of airline fleets and increase in the number of pilgrims. We await for the full financials to update our PT and estimates.