Earnings Report /
Saudi Arabia

STC: Earnings growth mitigated by lower margins

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Head of Equity Research

    SNB Capital
    27 October 2019
    Published bySNB Capital

    STC reported a broadly in-line set of Q3 19 results with a net income of SAR2.75bn, up +3.9% yoy (-3.6% qoq). We believe the lower margins and higher than expected non-opex offsets the slightly better than expected revenues.

    Revenues grew +6.0% yoy (+3.8% qoq) to SAR14.1bn and are broadly inline with our estimates. This is the highest quarterly revenue since 2012. The yoy growth is a continuation of the strong sector growth, which started in Q4 18. In comparison, Mobily reported a growth of +14.4% yoy (+2.2% qoq). 

    Based on CITC Q2 19 data, mobile subscribers declined -3.6% yoy (flat qoq). This translates to a penetration rate of 124%, the lowest level since 2010. Post-paid subscribers grew +26.0% yoy (+7.2% qoq) to 15.2mn. The key highlight is the strong growth in FTTH subscribers which grew 7.4% qoq to 956,000.

    During Q3 19, Zain officially launched 5G services with 2,000 towers across 20 cities, to be the leading 5G operator in Saudi offering the service at reasonable prices. We believe this will put pressure on other operators to launch the services as soon as possible. Any delay could have a major impact on operators’ market share.

    Gross profit came-in at SAR7.9bn, -4.0% lower than our estimates of SAR8.3bn. Gross margin came-in at 56.1%, lower than our estimates of 59.8% and Q3 18 of 58.9%. We believe the weakness might be related to Hajj season and new services.

    EBITDA stood at SAR5.24bn in Q3 19, 7.4% lower than our estimates of SAR5.66bn. EBITDA margin came-in at 37.1% vs our estimates of 41.0% and 38.5% in Q3 18. SG&A stood at SAR2.68bn in Q3 19, in-line with Q3 18 and is higher than our estimates of SAR2.59bn. SG&A /sales came in at 19.0%, compared to our estimates of 18.8% and Q3 18 of 20.4%. Depreciation stood at SAR1.91bn, lower than our estimates of SAR2.21bn.

    Higher non-operating expenses increased earnings variance to -5.1%. This is due to either higher 1) early retirement expenses, 2) finance expense and, or 3) other expenses.

    We are Neutral on STC with a PT of SAR94.8. The company’s expansion in digital solutions along with a fixed dividends policy are the key stock drivers. However, we believe this is priced in at the current levels. The stock is trading at a 2019f PE of 17.5x, higher than peer average of 13.3x.