Earnings Report /
Saudi Arabia

STC: Non-opex offsets sales growth and Careem proceeds

  • STC reported a lower-than-expected set of Q1 20 results with a net income of SAR2.91bn, increasing 5.9% yoy (+25.5% qoq)

  • Revenues increased 4.1% yoy (+5.1% qoq) to SAR13.9bn, coming in line with our estimate

  • We are Neutral on STC with a PT of SAR93.5

Iyad Khalid Ghulam
Iyad Khalid Ghulam

Head of Equity Research

SNB Capital
22 April 2020
Published bySNB Capital

STC reported a lower-than-expected set of Q1 20 results with a net income of SAR2.91bn, increasing 5.9% yoy (+25.5% qoq). This compares to the NCBC and consensus estimates of a net profit of SAR3.87bn and SAR3.19bn. We believe the lower-than-expected result is due to lower margins, higher depreciation and lower other income.

Revenues increased 4.1% yoy (+5.1% qoq) to SAR13.9bn, coming in line with our estimates. This is the strongest Q1 top-line on record. STC said that FTTH subscribers increased by 23% yoy while data revenue grew 15.5% yoy. As per CITC, ever since the implementation of the precautionary measures to control the spread of COVID-19, daily mobile and fixed internet traffic grew 33% over February's daily average. We expect the strong growth to continue as customers switch to post-paid and upgrade their packages. 

Gross profit came in at SAR8.2bn, -5.3% lower than our estimates. Gross margin came-in at 58.8% vs our estimates of 62.2% and Q1 19 of 59.0%. We believe the lower than expected margins is due to higher contribution of business and wholesale sales, as we believe telecom operators helped companies to provide Work-from-Home solutions. 

EBITDA stood at SAR5.3bn in Q1 20, 8.2% lower than our estimates of SAR5.8bn. EBITDA margin came-in at 38.2% vs our estimates of 41.7% and 40.2% in Q1 19. SG&A stood at SAR2.87bn in Q1 20, in-line with our estimates of SAR2.85bn and Q1 19 of SAR2.52bn. SG&A/sales came in at 20.6%, compared to our estimates of 20.5% and Q1 19 of 18.8%. Depreciation stood at SAR2.33bn, higher than our estimates of SAR2.20bn. It’s worth noting that SG&A expenses included receivables provision. 

Other income and expenses were the main reason behind the variance from our estimates. Total other income stood at SAR177mn compared to our estimates of SAR549mn. We believe the proceeds of Careem deal of SAR767mn was offset by higher investment losses and lower commissions. 

We are Neutral on STC with a PT of SAR93.5. The progress in Vodafone Egypt deal (MoU extended until 30 June 2020) is the stock’s key catalyst. Moreover, the stock's key strengths are strong balance sheet (cash balance of SAR8.2bn as of 2019) and sustainable dividend policy of SAR4/share. We believe the telecom sector is one of the few sectors that benefits from the lockdown caused by Covid-19.