SGS reported a net loss of SAR67mn in Q2 22 vs losses of SAR93mn in Q2 21 and SAR19mn in Q1 22. The losses are significantly higher than the SNB Capital and consensus estimates of losses of SAR10mn and SAR13mn respectively. Although revenue came in 7.4% higher than our estimates, the variance was mainly due to lower-than-expected gross margin and higher than expected non-opex. The increase in non-opex was due to an additional one-off zakat adjustment of SAR33mn. Excluding the one-off, Q2 22 losses will reduce to SAR34mn, but still higher than our estimates.
Revenues increased by 32.3% yoy (+16.7 qoq) to SAR496mn, higher than our estimates of SAR461mn. The growth in revenues reflects the increase in flight traffic and operations after the lifting of COVID-19 restrictions and the Hajj season. Based on our estimates, we believe SGS served c79,500 flights in Q2 22 vs c65,968 flights in Q1 22 and our estimates of c74,100 flights.
Gross profit stood SAR52m, up 381% yoy (+9.6% qoq) vs a profit of SAR48mn in Q1 22. However, it is lower than our estimates of SAR74mn. This reflects a margin of 10.5% in Q2 22, lower than 11.2% in Q1 22 and our estimates of 16.0%. We believe the decline in margins is due to higher costs incurred to support business recovery and to ensure readiness for Hajj.
Operating loss stood at SAR11mn, compared to losses of SAR20mn and SAR63mn in Q1 22 and Q2 21 respectively, and our estimate of a profit of SAR5mn. Opex came-in at SAR63mn, slightly lower than our estimates of SAR69mn vs SAR74mn and SAR68mn in Q2 21 and Q1 22 respectively. Opex to sales stood at 12.8% lower than our estimates of 15.0%. We believe the lower opex is a result of the management’s focus to optimize costs.
Net non-opex stood at SAR56mn, higher than our estimates of SAR15mn. This compares to a non opex of SAR30mn in Q2 21 and a non-operating income SAR1mn in Q1 22. We believe the increase in non-opex is mainly due to one-off Zakat expense of SAR33mn.Excluding this, net loss would be SAR34mn. We highlight the Q1 22 non-opex included a one-off gain of SAR23.7mn from the disposal of equity shares.
Based on our last update, we are Overweight on SGS with a PT of SAR39.5. Despite the weak Q2 22 results, we believe the removal of COVID-19 travel restrictions and the recovery in travel activity will support SGS in the near term. In the long run, we believe, SGS is well positioned to benefit from the recovery of the travel industry driven by 1) the strong potential of the Saudi Aviation sector, 2) increase in the number of pilgrims and 3) SGS’s focus on cost control. The stock trades at 2023f P/E of 19.6x lower than its peer average of 20.7x.