SEC reported a Q3 21 net income of SAR7.38bn (before Mudaraba instruments cost), vs a net income of SAR2.20bn in Q3 20 and SAR5.83bn in Q2 21. This is the highest quarterly earnings on record but came in lower than our estimates of SAR8.75bn. The yoy growth is due to 1) cancellation of government fee in Q3 21 vs a fee of SAR4.96bn in Q3 20 2) adoption of the RAB model driving higher other operating revenue 3) lower finance costs following the conversion of government loans as part of Mudaraba instruments.
Revenues stood at SAR22.04bn in Q3 21, up 7.4% yoy (+16.4% qoq) and were slightly lower than estimates of SAR23.01bn. The yoy growth in revenues is mainly a result of the implementation of the RAB model in Q1 21, accordingly SAR575mn has been recognized from the MoF in Q3 21, taking the cumulative 9M 21 balancing funds to SAR1.73bn. The qoq growth in revenue is due to the impact of higher electricity sales due to seasonality. In Q3 21, SEC’s subscriber base grew 1.0% qoq to 10.4mn, while volumes increased 17.2% qoq to 95.3 TWh.
Gross profit stood at SAR8.80bn in Q3 21 vs SAR3.34bn and SAR6.81bn in Q3 20 and Q2 21 respectively and is lower than our estimate of SAR9.59bn. Gross margin came in at 39.9%, vs 16.3% in Q3 20 and our estimates of 41.7%. Government fee cancellation as part of the regulatory reforms, vs a fee of SAR4.96bn in Q3 20, resulted in a substantial yoy increase in margins. This was partially offset by the increase in costs of purchased power, operations & maintenance, depreciation, and a one-off fuel dues settlement.
Operating profit stood at SAR7.99bn in Q3 21, up 137% yoy (+23.6% qoq), vs our estimates of SAR9.44bn. EBITDA increased 58.9% yoy (+15.1% qoq) to SAR12.97bn vs SAR8.16bn in Q3 20. In Q3 21, net profit after Mudaraba cost of SAR1.93bn stood at SAR5.45bn, vs our estimates of SAR6.84bn.
Capex stood at SAR5.7bn in Q3 21, with 9M 21 capex at SAR21.2bn (39% of sales), compared to SAR20.8bn in 9M 20 and our estimates of SAR25.0bn for 2021f. SEC’s capacity grew 2.1% to 54.4GW in 9M 21 vs FY 2020.
Based on our November 2020 update, we are Overweight on SEC with a PT of SAR24.9. Since then, the stock has recorded a strong rally of 33.1% and exceeded our PT. We await the full financials to update our PT and estimates. We believe the regulatory changes will significantly change SEC’s operating model going forward. The stock trades at 2021f PE and EV/EBITDA of 15.3x and 6.9x, respectively.