STC reported a broadly in-line set of Q2 22 results with net income increasing marginally by 0.6% yoy (-6.5% qoq) to SAR2.84bn. This compares to the SNB Capital and consensus estimates of SAR3.10bn and SAR3.06bn, respectively. Revenue increased by 6.5% yoy (-0.3% qoq) to SAR16.94bn and came in-line with our estimates of SAR17.17bn. EBITDA and EBIT margins remained inline. The variance in earnings is mainly driven by the increase in losses from share in results of associates to SAR283mn vs our estimates of SAR172mn.
Revenues grew 6.5% yoy (-0.3% qoq) to reach SAR16.94bn and came in-line with our estimates of SAR17.17bn. We believe the yoy increase in revenue was driven by strong growth across all its business segments. In comparison to its peers, STC’s revenue growth is higher than the growth reported by Mobily (+4.6% yoy) but, lower than Zain KSA (+16.4% yoy).
Gross profit increased 9.8% yoy (+0.3% qoq) to SAR9.17bn and was in-line with our estimates of SAR9.19bn. Gross margins expanded by 163bps yoy to 54.2%, and marginally higher than our estimates of 53.5%. We believe the improvement and variance in margins was mainly driven by increased revenue contribution from higher margin business units.
EBITDA came-in at SAR6.20bn in Q2 22, up 10.3% yoy (-1.5% qoq), and was in-line with our estimates of SAR6.30bn. EBITDA margin stood at 36.6% vs 35.4% in Q2 21 and our estimates of 36.8%. SG&A stood at SAR2.97bn (17.5% of sales), in-line with our estimates of SAR2.88bn (16.8% of sales) and higher than Q2 21 levels of SAR2.73bn (17.1% of sales). Depreciation came-in at cSAR2.48bn, in-line than our estimates of cSAR2.51bn, but higher than Q2 21 levels of SAR2.38bn.
Non-operating expenses stood at SAR3.37bn (+20.0% yoy) vs our estimates of SAR3.21bn. We believe the yoy increase and variance is mainly driven by the increase in losses from share in results of associates of SAR283mn vs our estimate of SAR172mn and higher zakat expenses.
Maintaining its dividend policy, the company declared an interim dividend of SAR2.0bn (SAR1.0/share) for the Q2 2022, similar to Q2 21 and Q1 22.
Based on our latest update published in November 2021, we are Neutral on STC with a PT of SAR117.7. Growth in revenue and margins are the key positives of the results while increased opex and losses in share from associates are the major concerns. We believe the progress in STC Pay’s banking license is the key stock catalysts going forward. The stock is currently trading at 2022f PE and EV/EBIDTA of 16.1x of 8.3x compared to peer group average of 15.4x and 6.0x respectively.