Strategy Note /
Saudi Arabia

STC | Q4 Update | Digitisation growth potential with stable dividends

  • Moving from telecom to tech

  • Asset monetization to unlock value

  • Solution to drive revenue growth

SNB Capital
21 December 2022
Published bySNB Capital

We upgrade STC to Overweight with a revised PT of SAR42.5. We believe the focus to transform to technology, asset monetization programs, and strong revenue growth from its subsidiary Solutions will drive STC going forward. Moreover, the completion of the towers deal and the potential increase in dividends are the short-term catalysts. We expect the company to record revenue and net income CAGR of 5.3% and 7.9% during 2021-24f to reach SAR74bn and SAR14.2bn, respectively. The stock is trading at 2023f P/E and EV/EBITDA of 13.2x and 6.4x, compared to historical average of 18.6x and 8.8x and peer’s group average of 14.2x and 6.1x, respectively.

  • Moving from telecom to tech: In line with the Saudi digitization strategy by both the public and corporate sectors, STC has shifted its focus towards being a technology player through its subsidiaries Solutions, STC Bank, Saudi Cloud Computing Company (SCCC), among others. This transformation is expected to be a key long-term growth driver. According to IDC, software and cloud computing is expected to grow at a 2021-2026f CAGR of 9.9%. In Q2 22, STC launched SCCC (57% STC stake) in a JV with eWTP Arabia (27%) and Alibaba Cloud (10%). Moreover, STC is planning to transform its digital wallet (STC Pay) into a fully-fledged digital banking solution (STC Bank). STC in collaboration with PIF also established a new IoT company, further expanding its footprint in the technology space.

  • Asset monetization to unlock value: Following to the IPO of Solutions and the 15% sale of STC Pay in 2021, STC kick-started its asset monetization plans. Recently, STC signed a non-binding MOU with PIF to sell a 51% stake in its towers company Tawal at a valuation of SAR21.9bn. Tawal has more than 15,500 towers in Saudi and owns AWAL in Pakistan. We expect the asset monetization plans to continue going forward to potentially include STC Channels, Specialized by STC and Aqalat (the real-estate arm) which we believe will enable the company to re-invest in new tech-focused domains and/or increase its dividends payout.

  • Solution to drive revenue growth: We expect solution revenues to be the major growth driver for the company. Solution revenues are expected to grow at a 2021-24f CAGR of 17.4% while we expect revenues from core operations to grow at a CAGR of 4.8%. Overall, we expect the company to record a revenue CAGR of 5.3% to reach SAR74bn, while net income to grow at a CAGR of 7.9% to SAR14.2bn by 2024f.

  • Upgrade to Overweight with a PT of SAR42.5: We upgrade STC to Overweight with a revised PT of SAR42.5. We believe the transition towards technology, asset monetization programs and sustainable dividends are the stock’s key positives while the potential increase in dividends is a key catalyst. The stock is trading at 2023f P/E and EV/EBITDA of 13.2x and 6.4x, compared to historical average of 18.6x and 8.8x and peer’s group average of 14.2x and 6.1x, respectively.