Equity Analysis /
Saudi Arabia

Saudi Ground Services: In-line results, higher margins offset lower sales

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    5 May 2019
    Published by

    SGS reported an inline set of Q1 19 results with net income of SAR104mn, declining -2.4% yoy (up +84.7% qoq). The results were 12.1% higher than the consensus estimates of SAR92mn. Net sales were slightly lower than expected, but higher margins mitigated the impact. The stock is trading at 2019f PE of 13.2x, lower than the peer group average of 15.4x.

    Revenues stood at SAR609mn, 3.0%, marginally lower than our estimates of SAR628mn. This is a decline of 2.0% yoy but an increase of 6.5% qoq. We estimate that SGS serviced c88,000 flights in Q1 19 vs c80,000 flights in Q4 18. Our initial estimates suggest the average revenue/flight stood at cSAR6,900, slightly lower than Q4 18 of cSAR7,090.  We believe the growth in flights is mainly driven by higher Umrah visitors. According to the Ministry of Hajj and Umrah, Umrah visitors grew 5.1% yoy in the first 7 months of the Hijri Calendar to reach 5.5mn with more than 89% of visitors coming by air.

    Gross margin stood at 28.4%, higher than our estimates of 27.1% but slightly lower than 29.1% in Q1 18. We believe the better than expected margins are due to 1) end of cost of living allowance and 2) improved efficiency . The cost of living allowance was a one-year program, which ended in Dec-2018, with an estimated cost of SAR72mn. Gross profit stood at SAR173mn, in-line with our estimates. The lower than expected sales was offset by higher margins

    Operating income stood at SAR106mn, down 1.0% yoy but increasing 58% qoq. This is 4.7% higher than our estimates. We estimate that SG&A stood at SAR67.3mn, compared to our estimates of SAR69.1mn and Q1 18 of SAR74mn. The company attributed the yoy decline to lower account receivable provisions. The qoq improvement is due to provisions of SAR68 reported in Q4 18 related to Fly Nas. 

    We are Overweight on SGS with a PT of SAR37.2. Operating efficiency, growth in flight activity and attractive dividend yield of 5.9% are the key advantages of the stock. However, the recent development of delayed payments from Flynas is a key risk going forward. The stock is trading at PE of 13.2x, lower than the peer group average of 15.4x.