Equity Analysis /
Saudi Arabia

Saudi Ground Services: Q2 19 results better than expected on lower opex

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    30 July 2019
    Published by

    SGS reported a better-than-expected set of Q2 19 results with a net income of SAR124mn, up 9.9% yoy and 19% qoq. The results were higher than NCBC and consensus estimates by 11.0% and 4.6%, respectively. We believe the better-than-expected results are mainly driven by lower operating costs which include 1) lower provisions and 2) cost of living allowance of SAR16.8mn reported in Q2 18.

    Revenues stood at SAR648mn, in line with our estimates. This is a decline of 1.8% yoy (+6.4% qoq). We estimate that SGS serviced c95,000 flights in Q2 19 vs c92,000 flights in Q2 18. Our initial estimates suggest the average revenue/flight stood at cSAR6,800 in line with Q1 19, but lower than Q2 18 of cSAR7,100.  We believe the growth in flights is mainly driven by higher airline activity mainly during the Ramadan period. According to the Ministry of Hajj and Umrah, Umrah visitors reached 7.4mn by the end of June, of which more than 89% of visitors came by air.

    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.

    Gross margin stood at 30.0%, higher than our estimates of 28.4% and compared with 28.7% in Q2 18. We believe the better-than-expected margins are due to 1) the end of cost of living allowance, which had a cost of SAR16.8mn in Q2 18, 2) lower provisions and 3) improved efficiency. The cost of living allowance was a one-year programme, which ended in December 2018, with an estimated cost of SAR72mn. Gross profit stood at SAR194mn, higher than our estimates by 4.9%. 

    Operating income stood at SAR125.2mn, up 10.8% yoy and 18.3% qoq. This is 10.2% higher than our estimates. We estimate that SG&A stood at SAR69.2mn, compared with our estimates of SAR71.8mn and Q2 18 of SAR77mn. 

    We are Overweight on SGS with a PT of SAR37.2. Operating efficiency, growth in flight activity and attractive dividend yield of 6.1% are the key advantages of the stock. The stock is trading at 2019 PE of 12.8x, lower than peer group average of 20x.