Equity Analysis /
Saudi Arabia

STC: Q2 19: Higher margins mitigated by higher non-opex

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    23 July 2019
    Published by

    STC reported an in-line set of Q2 19 results with a net income of SAR2.85bn, up 16.5% yoy and 3.6% qoq. This is slightly higher than the consensus estimates of SAR2.73bn. We believe the better-than-expected margins were mitigated by higher non-opex. Besides, a cash dividend of SAR1/sh was announced for Q2 19, taking H1 19 pay out to SAR2/sh. We expect STC’s 2019 full year pay out to be SAR4/sh, translating into dividend yield of 3.6%.

    Revenues grew 4.0% yoy (1.6% qoq) to SAR13.6bn and is in line with our estimates. This is the highest quarterly revenue since Q3 16. The yoy growth is a continuation of the strong sector growth, which started in Q4 18. Zain KSA reported a growth of 11.4% yoy (-1.7% qoq) while Mobily’s growth stood at +15.1% yoy (+4.1% qoq) in Q2 19. STC attributed yoy improvement to 1) the data segment, 2) the enterprise business segment, and 3) the wholesale business unit. In comparison, 

    Based on CITC Q1 19 data, the number of mobile subscribers declined -0.9% yoy but increased +0.8% qoq to 41.6mn as of Q1 19. This translates into a penetration rate of 125%, the lowest level since 2010. Postpaid subscribers grew 9.8% qoq and 16.2% yoy to 14.2mn. We believe this reflects telecom operators increased focus to switch customers to postpaid lines for more earnings stability. The key highlight is the strong growth in FTTH subscribers which grew 14.1% qoq and 20% yoy to 890,000 and exceeding DSL for the first time on record. 

    Gross profit came in at SAR8.2bn, +4.9% higher than our estimates driven by increased sales and higher contribution of higher margin data segment. Gross margin came in at 60.3%, higher than our estimates of 58.2% and the highest Q2 margin since Q4 18.

    EBITDA stood at SAR5.66bn in Q2 19, slightly higher than our estimates of SAR5.28bn. EBITDA margin came in at 41.6% vs our estimates of 39.3% and 36.6% in Q2 18. SG&A stood at SAR2.55bn in Q2 19 vs SAR2.38mn in Q2 18 and our estimates of SAR2.54bn. SG&A /sales came in at 18.8%, compared with the five-year historical average of 20.3%. 

    Despite better-than-expected operating profits, higher non-operating expenses reduced earnings variance from 10% to only 2%. This is due to higher 1) early retirement expenses (SAR216mn vs the historical average of SAR150mn), 2) finance expense, and 3) other expenses.

    We are Neutral on STC with a PT of SAR94.8. The stock is trading at a 2019f PE of 19.0x, higher than the peer average of 15.3x.