Equity Analysis /
Saudi Arabia

Saudi Electricity: Weak results on lower sales, higher financing cost

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    28 July 2019
    Published by

    SEC reported a disappointing set of Q2 19 results, with a net profit of SAR789mn, declining 57.3% yoy and significantly lower than the NCB estimate of SAR2.0bn. We believe the variance is due to lower than expected revenues and higher financial expense. However, a 38% yoy decline in capex is a key highlight which helps the company to reduce its debt level.

    Revenues stood at SAR16.5bn in Q2 19, 6.8% lower than our estimates of SAR17.7bn. This is a decline of 6.7% yoy. The additional revenue from higher tariffs is transferred entirely to the government, as per the Fiscal Balance Program. SEC sold 75.0TWh of electricity in Q2 19, declining 3.7% yoy, although customer base grew 3.9% yoy to 9.59mn in H1 19. The company attributed the decline in sales to consumption rationalisation mainly in the residential segment (-7.6% in H1 19) and the change to lower tariff slabs, following the increase in tariff in 2018.

    Gross profit stood at SAR1.8bn, significantly lower than our estimate of SAR3.0bn. This is a decline of 38.0% yoy. Gross margin came-in at 11.0% vs our estimates of 16.9% and 16.6% in Q2 18. This is the lowest Q2 gross margin since Q2 13. We believe the variance is due to lower electricity sales with limited reduction in cost of sales. SEC said that lower fuel cost was mitigated by higher depreciation expense. 

    Operating profit stood at SAR1.9bn in Q2 19, lower than our estimate of SAR3.0bn. This is a decline of 31.8% yoy. We believe SG&A came-in at SAR179mn vs our estimate of SAR266mn and SAR238mn in Q2 18. 

    The variance increased at the net income level due to higher financial expense. Based on our calculation, finance expenses stood at SAR1.1bn, higher than our estimates of SAR1.0bn and SAR991mn in Q2 18.

    Despite the negative impact on sales, consumption rationalisation helped SEC to control its capex which declined 38% yoy to SAR9bn. We believe this is a key highlight of the results as it will help in reducing the debt level of SAR159bn.

    We are Neutral on SEC with a PT of SAR19.5. The stock is trading at a 2019f EV/EBITDA of 10.5x, higher than peer group average of 9.9x. High debt levels and the uncertainty on the dividend policy are the key risks.