Earnings Report /
Saudi Arabia

Saudi Airlines Catering: Q2 19 – Revenue growth offset by higher finance expense

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    7 August 2019
    Published by

    Catering reported an in-line set of Q2 19 results with a net income of SAR117mn, declining 2.7% yoy, but increasing 13.1% qoq. The results were also in line with the consensus estimates of SAR121mn. The company attributed the yoy decline to higher financing expenses after the implementation of IFRS 16, which offset the growth in the top line.

    Revenues stood at SAR545mn, increasing 6.8% yoy and 4.4% qoq. This is in line with our estimates. We believe the yoy growth is driven by (1) an increase in the number of passengers, and (2) the implementation of Saudia Top 5 initiative.

    In June 2019, Saudi Airlines passengers grew by 1% yoy, to 3.0mn passengers with international passengers increasing by 7% yoy to 1.5mn. The number of flights grew 3.0% yoy to 18,600. For H1 19, passengers grew by 1% yoy to 17mn, with international passengers representing 51.2% of the total. The number of flights increased 1.6% yoy to 107,600. Moreover, the number of foreign hajj pilgrims reached 1.81mn (until yesterday), exceeding last year’s number of 1.76mn.

    Gross profit came in at SAR193mn in Q2 19, down 1.7% yoy (+0.4% qoq). This is 3.2% lower than our estimate of SAR199mn. Gross margin stood at 35.4%, vs 37.2% in Q2 18 and our estimate of 36.8%. We believe the contraction in margins is due to higher contribution of Sky Sales segment.

    EBIT came in at SAR134mn in Q2 19, increasing 2.2% yoy (+10.3% qoq). This is in line with our estimate of SAR133mn. We estimated opex to stand around SAR59mn vs SAR58mn in Q2 18 and our estimate of SAR66mn. The decline in opex mitigated the decline in gross margins. 

    Net income declined 2.7% yoy to SAR117mn, with the variance increasing to 4.1%. This is mainly due to the implementation of IFRS 16, which resulted in an increase in finance expenses. Based on our estimates, finance expense stood at SAR7.6mn vs our estimates of SAR1.5mn and Q2 18 of SAR1.2mn.

    Catering announced a DPS of SAR1.35 for Q2 19, higher than Q1 19 DPS of SAR1.3. The annualised DPS reflects a dividend yield of 6.0%. 

    We are Neutral on Catering with a PT of SAR96.8. We believe the healthy revenues growth is a key positive. However, Catering's contract with Saudia is expiring by the end of the year. Any developments of the contract renewal will be a key catalyst. The stock is trading at 2019f PE of 13.0x vs peer average of 19.1x.