Earnings Report /
Saudi Arabia

Solutions by STC: Earnings surprise on strong revenue growth

  •  Revenue increased 29.5% yoy (+17.3% qoq) to SAR2.42bn and came higher than our estimates of SAR2.02bn

  • Core ICT service revenue increased by 44.8% yoy to cSAR1.46bn

  • EBITDA stood at SAR368mn, up 43.7% yoy (107% qoq) and higher than our estimates of SAR303mn

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Vice President, Senior Equity Research Analyst

SNB Capital
20 April 2022
Published by

Solutions reported a strong set of Q1 22 results, with a net income of SAR283mn, increasing by 37.9% yoy (+147% qoq). This compares to the SNB Capital and consensus estimates of SAR218mn and SAR238mn, respectively. We believe the variance is mainly driven by 1) strong growth in revenue which stood at SAR2.42bn (+29.5% yoy, +17.3% qoq) vs our estimates of SAR2.02bn driven by strong growth across all the business segments and 2) a decrease in operating expenses due to lower selling and distribution expenses. As a result, opex to sales ratio stood at 5.2% vs 7.1% in Q1 21 and our estimates of 6.2%.

  •  Revenue increased 29.5% yoy (+17.3% qoq) to SAR2.42bn and came higher than our estimates of SAR2.02bn. Revenue growth was driven by strong growth across all business segments.

  • Core ICT service revenue increased by 44.8% yoy to cSAR1.46bn, Managed services revenue were up by 13.4% yoy to cSAR529mn and Digital services revenue increased by 9.3% yoy to cSAR427mn.

  • Gross margin contracted by 43bps yoy to reach 20.4% and came lower than our estimates of 21.2%. We believe the variance in gross margins might be attributed to a more competitive projects pricing.

  • EBITDA stood at SAR368mn, up 43.7% yoy (107% qoq) and higher than our estimates of SAR303mn. EBITDA margin stood at 15.2% and came in-line with our estimate of 15.0% and higher than Q1 21 levels of 13.7%.

  • EBIT came in at SAR313mn, up 39.5% yoy (+145% qoq) significantly higher than our estimate of SAR235mn. We believe the variance is mainly driven by lower selling and distribution expenses. As a result, opex-to-sales ratio stood at 5.2% vs 7.1% in Q1 21 and our estimate of 6.2%.

  • Non-operating expenses stood at SAR30.0mn (+57.1% yoy) and came higher than our estimate of SAR16.5mn. We believe the variance is due to higher than expected zakat expenses.

Outlook

Based on our initiation report published in November 2021, we are Neutral on Solutions with a PT of SAR193.4. We believe the strong top-line growth and lower opex are the key positives of the results while the decline in gross margins is the main concern. The stock is trading at 2022f P/E and EV/EBITDA of 29.7x and 20.6x compared to the peers average of 32.4x and 19.1x, respectively.