Strategy Note /
Saudi Arabia

Solution | Q4 Update | Digitization and M&A activities to drive growth

  • Digitization drive to continue

  • Expansion through M&A

  • Strong earnings growth ahead

SNB Capital
5 December 2022
Published bySNB Capital

We maintain our Neutral rating on Solutions with a revised PT of SAR253.5. We believe the digitization of Saudi economy, Solutions’ strategic M&A activities and increasing demand from STC and the public sector to result in strong revenue and profit growth. We expect the company to record net income CAGR of 21.6% during 2021-24f to reach SAR1.50bn by 2024f. The stock is currently trading at 2023f P/E and EV/EBITDA of 21.5x and 15.8x, compared to the peer group average of 18.9x and 11.7x, respectively. 

•   Digitization drive to continue

On the backdrop of the digitization of the Saudi economy by both the public and corporate sectors, we expect Solution to continue its topline growth trajectory. According to IDC, ICT spending in 2022f is expected to stand at SAR123bn and record a 2021-2026f CAGR of 4.0%. Software and Cloud (2021-2026f CAGR of 9.9%), specialized IT services (7.2%), and Hardware (5.2%) are the key driver for the ICT segment growth. In addition, key IT related spending like National Tech. Development Program (NTDP), Digital skill development, Saudi HQ initiative (attracting major corporate headquarters to Saudi), Global excellence in AI (aim to attract SAR75bn in FI), and Mega/Giga projects should support the sector growth.

•   Expansion through M&A

The company aims to expand through strategic M&A activities, by vertical integration, expanding segments/geographies and entering into disruptive tech. The company started its M&A strategy with 88.9% acquisition of Giza Systems and 34% in its Saudi subsidiary Giza Arabia at an EV/EBITDA multiple of 6.6x, translating into a valuation of SAR593mn. The transaction is expected to provide Solutions with expertise in application integration, development and management. In 2021, Giza posted revenues of SAR1.0bn and net income of SAR53mn. We expect similar contribution going forward. Although Giza margins are lower than Solutions (7.4% vs Solutions margins of 14.2%), we believe the synergies will mitigate the negative impact. Moreover, Solutions recently signed an agreement with STC to acquire Contact Center Company (CCC) at a SAR450mn. Through the deal, Solutions aims to expand its BPO offering and to further diversify its business. We expect more information to be provided about CCC and the deal in the coming period. We believe further announcements will be the stock’s key drivers going forward.

•   Strong earnings growth ahead

We expect Solutions top line to record a CAGR of 17.4% in (2021-2024f) to SAR12.7bn. The growth is expected to be driven by Giza acquisition (SAR1.0bn) and a low teen growth across the business lines. EBITDA margins are expected to decline marginally following to the Giza deal to 14.9% Accordingly, we expect net income to record a CAGR of 21.6% to reach SAR1.5bn by 2024f.

•   Remain Neutral on Solutions with a revised PT of SAR253.5

We remain Neutral on Solutions with a revised PT of SAR253.5. We believe the digitization of Saudi economy by both the public and private sectors and the strategic M&A activities will be the main growth drivers. The stock trades at 2023f P/E and EV/EBITDA of 21.5x and 15.8x, compared to the peer group average of 18.9x and 11.7x, respectively.