STC reported a lower than expected set of Q4 19 results with a net income of SAR2.41bn, declining -22.4% yoy (-12.2% qoq). This is the lowest net income since Q2 17 and is also lower than the NCBC and consensus estimates of SAR2.71bn and SAR2.83bn, respectively. We believe the lower than expected results are due to higher SG&A and depreciation expenses.
Revenues remained flat yoy (-6.0% qoq) at SAR13.3bn and is 5.0% lower than our estimates. This is the first quarter of flat yoy growth in revenues since Q2 18, which we believe is a concern.
Gross profit came-in at SAR8.4bn, +6.2% higher than our estimates. Gross margin came-in at 63.1% vs our estimates of 56.5% and Q4 18 of 64.5%. We believe the variance is due to a higher contribution of high-margin segments such as data, which mitigated the impact of lower than expected top-line.
EBITDA stood at SAR5.0bn in Q4 19, 3.4% marginally lower than our estimates of SAR5.2bn. EBITDA margin came-in at 37.7% vs our estimates of 37.1% and 40.8% in Q4 18. SG&A stood at SAR3.37bn in Q4 19, significantly higher than our estimates of SAR2.71bn and Q4 18 of SAR3.13bn. SG&A/sales came in at 25.4%, compared to our estimates of 19.4% and Q4 18 of 23.7%. The company mentioned that the higher selling and marketing expense was due to the increase of customer acquisition costs and the launch of a new brand by STC and its subsidiaries. Depreciation stood at SAR2.60bn, higher than our estimates of SAR1.93bn. The higher depreciation expense is a result of continued investments in 5G network infrastructure, fiber optics, and investments in software and systems.
Lower non-operating expenses reduced earnings variance to -10.9%. This is due to either lower 1) early retirement expenses, 2) finance expense, or 3) other expenses.
In Q4 19, STC launched a new unified brand identity in KSA, Kuwait, Bahrain and its subsidiaries. The new brand is in-line with the development witnessed by the company in the areas of digital transformation and enriched customer experience. Also, Q4 19 results do not include the financial impact of STC’s direct stake in Careem (8.88%) after Uber’s acquisition and the same will be reflected over Q1 20 financials.
We are Neutral on STC with a PT of SAR94.8. The fixed dividend policy and the launch of 5G network expansion are the stock key drivers. However, lower revenues and higher opex are key concerns. The stock is trading at a 2020f PE of 15.6x, higher than the peer average of 14.3x.