Equity Analysis /
Saudi Arabia

Saudi Airlines Catering: Higher revenues offset by increased opex

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    12 May 2019
    Published by

    Saudi Airlines Catering reported an in-line set of Q1 19 results with a net income of SAR104mn, declining 13.8% yoy (+36.1% qoq). This is lower than the consensus estimates of SAR111mn. The strong top-line growth and margin expansion were offset by higher receivables provision following the implementation of IFRS 9.

    We highlight that Catering implemented IFRS 15 at the end of FY 18, which had an impact on the sales of equipment to airlines. Accordingly, only the commission on equipment sales will be recorded vs the old treatment where the price and commission of equipment were recorded in the top-line.

    Revenues stood at SAR522mn, increasing 6.7% yoy and 7.7% qoq. This is 8.5% higher than our estimates. We believe the variance was driven by both volume (higher than expected flights) and price (higher meals sales price). The topline has benefited from the growth in Umrah pilgrims and Saudia Top 5 initiative, in our view. According to the Ministry of Hajj and Umrah, Umrah visitors grew 7.0% yoy in the first 8 months of the Hijri Calendar to reach 6.7mn with more than 89% of visitors coming by air.

    Gross profit came in at SAR191.9mn in Q1 19, increasing 9.5% yoy (+27.8% qoq). This is significantly higher than our estimate of SAR160mn. Gross margin stood at 36.8%, vs 35.9% in Q1 18 and our estimate of 33.2%. We believe the increase in margins is attributed to higher contribution of inline flight catering along with better cost controls. 

    EBIT came in at SAR113mn in Q1 19, down 14.5% yoy (+29.2% qoq). This is in-line with our estimate of SAR116mn. We estimated opex to stand around SAR86mn vs SAR57mn in Q1 18 and our estimate of SAR50mn. The increase in opex offset the strong growth in sales and margins. Catering management attributed the increase in opex to a change in receivables provision treatment following to the implementation of IFRS 9.

    Catering announced a DPS of SAR1.3 for Q1 19, in-line with Q4 18. If annualized, it reflects a dividend yield of 6.3%. However, payout ratio for Q1 19 reached 103% which we believe is not sustainable.

    We are Neutral on Catering with a PT of SAR96.8. We believe the strong revenues growth and better cost controls are the key positives. However, Catering contract with Saudia is expiring by the end of the year. The developments of the contract renewal is the stock key catalyst. The stock is trading at 2019f PE of 12.2x vs peer average of 16.6x.