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Saudi Arabia

Saudi Ground Services: Earnings Call Summary – Q1 22

  • Operating levels reached 84% in April 2022 with expectations to reach 89%-99% by December 2022

  • The management guides that when SGS attains 100% operations, expenses will remain largely stable

  • SGS to break even between Q4 22- Q1 23 depending on the international business recovery and seasonality

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

SNB Capital
25 May 2022
Published by

Q1 2022 results

  • Revenue stood at SAR425mn, up 13.9% yoy, (-3.3% qoq), The yoy growth is due to business recovery post COVID-19, while the qoq decline is due to the impact of Omicron.

  • Gross profit came in at SAR48mn, down 17.5% yoy (-31.6% qoq) with a margin of 11.2% in Q1 22 contracting from 15.4% and 15.8% in Q1 21 and Q4 21 respectively.

  • The yoy decline in gross margins is due to SANED suspensions while the qoq decline is due to lower revenues in Q1 22.

  • Operating loss came in at SAR20mn vs losses of SAR12mn and SAR66mn in Q1 21 and Q4 21, respectively.

  • SGS didn’t report SANED benefits in Q1 22 (impact of SAR60mn vs Q1 21).

  • Q1 22 recorded additional zakat of SAR12mn yoy related to additional zakat costs after assessment.

  • Net loss stood at SAR19mn vs losses of SAR17mn and SAR101mn in Q1 21 and Q4 21, respectively. SGS recorded a one-off gain on the sale of equity shares (Aramco) of SAR19mn, adjusted for one-offs, net loss would be SAR38mn.

Operations

  • Q1 22 witnessed an improvement in operations post COVID-19 with the removal of all COVID-19 restrictions for both inbound and outbound travel.

  • In Q1 22, the total number of flights stood at 65,968 vs 46,242 in Q1 21 and 63,275 in Q4 21.

  • The World defense show contributed an additional revenue of SAR6mn in Q1 22.

  • SGS overall level of operations stood at 83% in March 2022, with the international and domestic operations level reaching 74% and 88%, respectively.

  • SGS overall level of operations increased from 76% in Jan 22 to 83% in Mar 22 due to a recovery driven by resumption of airline services and Umrah pilgrims.

  • In April 2022, SGS’s level of operations stood at 84% and is higher than the global levels of 80%. Domestic and international recovery reached 88% and 79% respectively. Airport wise, Riyadh operated at 91%, Dammam at 87%, Jeddah and Medina operated at 89% and 85% respectively and Domestic flights operated at 71% vs April 2019 baseline.

  • The Saudization rate for SGS is 82%.

Liquidity

  • SGS has a current ratio of 2.22x and quick ratio of 1.82x.

  • Debt to equity stood at 50% while the gearing ratio was 1.74x at the end of Q1 22.

  • SGS has a cash/cash equivalent balance of SAR1.65bn of which SAR1.03bn (63%) is in mutual funds and SAR617mn (37%) is in cash.

  • After Q1 22, SGS has repaid SAR100mn of its debt and intends to repay SAR300mn of its outstanding debt of cSAR1.13bn soon. SGS’s debt fulfills all covenants.

  • The Q1 22 consolidated collection as a % of revenue stood at 114% vs 87% in 2021, while the related party collection as a % of revenue stood at 114% vs 86% in 2021. Other airlines collection is 114% of revenue in Q1 22.

  • The management affirms a positive trend in receivable collection. 

Other highlights

  • As per IATA, the global operations should reach 88% of the 2019 level in 2022f and 105% of 2019 levels in 2023f and grow at a CAGR of 3.9% 2025-2030.  Global airlines revenue recovery in 2022f is projected to be at 79% of 2019 level.

  • There was high level of flight activity during Ramadan leading to domestic business in Jeddah reaching 100% of its level of operations.

  • SGS will be operating bridges at the Jeddah station in June 22.

  • There has been no change in pricing from Saudia’s contract with SGS.

  • The seasonality for SGS has been impacted by events spread throughout the year, long weekends, and school vacation changes.

  • Starting from Feb-March 22, SGS has begun hiring to ensure readiness to support 100% business recovery. SGS has already begun providing training to ensure employees are compliant with license requirements from GACA.

  • A Hajj participation quota of 1mn was announced for 2022.  This compares to 2mn pilgrims in 2019 contributing SAR40mn to SGS’s operations. SGS will employ temporary manpower to facilitate the Hajj operations. 

Outlook

  • Operating levels reached 84% in April 2022 with expectations to reach 89%-99% by December 2022. For the full year, operating levels is expected to reach 83% (base case) to 94% (optimistic case).

  • The yields in international flights are higher than domestic flights by 15-25% due to additional functions like security checks and more baggage. Going forward as international flight operations recover, overall yields for SGS will be higher which could support margins.

  • The management guides that when SGS attains 100% operations- revenues will grow; however, expenses will remain largely stable as 90% expenses are fixed and 10% is variable.

  • The management expects SGS to break even between Q4 22- Q1 23 depending on the international business recovery and seasonality.

We have recently published an update on SGS. We are currently overweight on the stock with a PT of SAR39.5. I have attached the report for your reference.