Earnings Report /
Saudi Arabia

Saudi Ground Services: Lower losses in Q3 21 due to business recovery

  • Revenues increased by 57.0% yoy (+12.2% qoq) to SAR421mn in Q3 21 broadly in-line with our estimates of SAR409m

  • Gross profit stood at SAR57mn in Q3 21, compared to a gross profit of SAR11mn in Q2 21

  • Operating loss stood at SAR29mn, compared to losses of SAR97mn and SAR63mn in Q3 20 and Q2 21 respectively

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

SNB Capital
7 November 2021
Published by

SGS reported a net loss of SAR43.5mn in Q3 21 vs a loss of SAR86.8mn in Q3 20 and a loss of SAR93.2mn in Q2 21. This compares to the SNB Capital, and consensus estimates of losses of SAR57.9mn and SAR44.8mn, respectively. We highlight that although it is the 7th consecutive quarterly loss for SGS, the decline in losses is a sign of the ongoing recovery of the business from the impact of COVID-19. The 57.0% yoy growth in revenues was offset by 1) increase in operating costs by SAR85.6mn due to the suspension of the SANED subsidy amounting to SAR90mn 2) increase in finance costs 3) increase in Zakat expenses 4) decrease in gain from FVTPL investments.

Revenues increased by 57.0% yoy (+12.2% qoq) to SAR421mn in Q3 21 broadly in line with our estimates of SAR409mn. The yoy and qoq growth in revenues indicate the continuous recovery of the business post easing of travel restrictions and precautionary measures during COVID-19. Based on our estimates, we believe SGS served c66,000 flights in Q3 21 compared to c43,000 flights in Q4 20.

Gross profit stood SAR57mn in Q3 21, compared to a gross profit of SAR11mn in Q2 21, a gross loss of SAR10mn in Q3 20 vs our estimates of a gross profit of SAR26mn. This reflects a gross margin of 13.5%, compared to a gross margin of 2.9% in Q2 21 and our estimates of 6.4%. We believe, the company’s initiatives to bring in operating efficiency contributed to higher margins in the quarter.

Operating loss stood at SAR29mn, compared to losses of SAR97mn and SAR63mn in Q3 20 and Q2 21 respectively, and our estimate of a loss of SAR48mn. Opex came in at SAR86mn vs SAR74mn in Q2 21 and our estimates of SAR74mn. The suspension of the SANED program with a total amount of SAR90mn contributed to higher opex.

In Q3 21, SGS recorded a SAR4.5mn increase in finance costs due to the drawdown of bank facilities, SAR9.4mn increase in Zakat expenses and SAR9.7mn decrease in gain from FVTPL investments versus Q3 20.

Outlook

Based on our February 2021, we are Overweight on SGS with a PT of SAR34.5. Since then, the stock has rallied 21.7% and exceeded our PT. We await the detailed financials to update our estimates. Following the lifting of restrictions on 17 October 21, pilgrims will be allowed at the Grand Mosques at full capacity. We believe this is a strong growth driver to the Hajj and Umrah related operations of SGS’s business. The long-term outlook for SGS is positive, driven by the expansion of the local airlines fleet and the new logistics strategy. The stock trades at 2022f PE of 23.0x, compared to the peers’ average of 19.6x.