We remain Overweight on SGS with a revised PT of SAR39.5. After two challenging years, the travel industry is set for a major comeback. We believe SGS is well-positioned to record a strong recovery driven by 1) the positive outlook of the Saudi Aviation and Tourism sectors, 2) the pick-up in religious tourism, and 3) SGS’s strong cost control measures. We expect SGS to break even in 2022f and reach a net income of SAR417mn by 2024f. Although the stock trades at 2023f P/E of 20.7x, in line with the peer group average, we believe a premium is justified given the positive outlook of the Saudi travel sector.
IATA forecasts a strong recovery post COVID-19: As the world recovers from COVID-19, the ease of travel restrictiona improves the aviation industry's outlook. According to IATA, the number of travellers was 47% of 2019 levels in 2021 and is expected to improve to 83%, 94%, and 103% in 2022f, 2023f, and 2024f, respectively. Domestic travel is expected to grow at a faster pace from 61% in 2021 to 93%, 103%, and 111% in 2022f, 2023f, and 2024f, respectively. Meanwhile, international travel is expected to grow from 27% in 2021 to 69%, 82%, and 92%.
Recovery of religious tourism begins: After two years of COVID-19 restrictions, the Ministry of Hajj and Umrah raised the number of Hajj pilgrims to 1.0mn in 2022f (vs c60,000 in 2021, c10,000 in 2020, and 2.49mn in 2019). The number of Umrah visitors also started to increase, to reach 0.9mn in the 1st week of April (the highest level since COVID-19). We believe the recovery in religious tourism will reflect positively on SGS. Moreover, the Crown Prince’s launch of a major expansion of the Qubaa Mosque in Madinah, increasing its capacity by ten folds to more than 66,000 prayers, will position it as a key destination for Madinah visitors further supporting the sector's outlook.
Fleet expansions to drive top-line CAGR of 15.5%: In 2021, SGS flights were c0.22mn vs c0.15mn in 2020 (c0.34mn in 2019). SGS level of operation was 80% in December 2021, with int. and domestic operation level at 65% and 89%, respectively. Operating levels continued to improve in 2022, with March data showing a level of 83% with expectations to reach 89%-99% by December 2022f (2022f average of 83%-94%). We estimate the flights to grow to c0.30mn in 2022f and further increase to c0.40mn in 2024f, driven by the expansion of Saudi airlines fleets. Therefore, we expect SGS revenue to grow 15.1% yoy to SAR1.85bn in 2022f and to record a 2021-2024f CAGR of 15.5% to SAR2.48bn by 2024f.
Breakeven after two years of losses: Driven by sales growth and cost efficiencies measures, we expect SGS to break even in 2022f with a net income of SAR33mn (vs losses of SAR254mn in 2021). We expect earnings to reach SAR417mn by 2024f, reflecting a net margin of 16.8% (vs 1.8% in 2022 and 16.7% in 2019). Therefore, SGS’s FCF is expected to be positive starting from 2022f and leading to the resumption of dividends in 2024f.
Remain Overweight with a PT of SAR39.5: We remain Overweight on SGS with a PT of SAR39.5. After two challenging years, the travel business is set for a strong recovery. We believe SGS is a key beneficiary supported by 1) the positive outlook of the aviation and tourism sectors in Saudi, 2) the pick-up of religious tourism, and 3) SGS’s strong cost control measures. The stock trades at 2023f P/E of 20.7x, in line with the peer group, we believe a premium is justified given the positive outlook of the Saudi travel sector.