Earnings Report /
Saudi Arabia

Solutions by STC: Strong revenue and stable opex drives growth

  • Revenue increased by 14.1% yoy (-1.2% qoq) to SAR 2.23bn

  • Core ICT service revenue increased by 10.7% yoy to cSAR1.2bn and represents 53% of the top-line in Q2 22

  • Gross margin contracted by 130bps yoy to 22.4%, but were in-line our estimates of 22.2%.

SNB Capital
27 October 2022
Published bySNB Capital

Solutions reported broadly in-line set of Q2 22 results, with a net income increasing by 16.7% yoy (+9.9% qoq) to SAR300mn. This compares to the SNB Capital and consensus estimates of SAR278mn and SAR272mn, respectively. Revenue increased by 14.1% yoy (-1.2% qoq) to SAR2.23bn and came in-line with our estimates of SAR2.22bn. The growth was driven by increased revenue contribution from Digital and Managed Services segments. Slightly lower than expected non-opex resulted in the deviation from our net income estimates.

  • Revenue increased by 14.1% yoy (-1.2% qoq) to SAR 2.23bn and came in-line with our estimates of SAR2.22bn. Revenue grew on the back of growth across segments.

  • Core ICT service revenue increased by 10.7% yoy to cSAR1.2bn and represents 53% of the top-line in Q2 22. Managed services revenue were up by 18.5% yoy to cSAR586mn, while Digital services revenue increased by 18.2% yoy to cSAR450mn.

  • Gross margin contracted by 130bps yoy to 22.4%, but were in-line our estimates of 22.2%. We believe the contraction in gross margins came as result of increased revenue contribution from Alibaba Cloud project and Digital services.

  • EBITDA came-in at SAR369mn, up 4.2% yoy (5.5% qoq), higher than our estimate of SAR354mn. EBITDA margin stood at 16.6% and came in-line with our estimate of 16.2% but was lower than Q3 21 levels of 18.1%.

  • EBIT came in at SAR313mn, up 13.4% yoy,6.5% qoq in line with our estimate of SAR304mn. EBIT margins stood at 14.1% as compared to 13.0% for Q3 21. As a result, opex-to-sales ratio stood at 8.4% vs 9.5% in Q2 21 and our estimate of 8.5%.

  • Non-operating expenses stood at SAR33mn (+45.1% yoy) and came lower than our estimate of SAR35mn. We believe the variance is mainly due to higher other income and lower than expected zakat expenses.

Outlook

Based on our initiation report published in November 2021, we are Neutral on Solutions with a PT of SAR193.4. The stock has rallied 30% since our last update, we will publish an update once the financials are available.  We believe the strong top-line growth and stable opex is the key positives of the results. The stock is trading at 2022f P/E and EV/EBITDA of 28.0x and 23.5x compared to peer group average of 26.2x and 13.8x, respectively.