Earnings Report /
Saudi Arabia

Solutions by STC: Strong revenue growth offsets higher opex

  • Revenue increased by 16.4% yoy (-6.8% qoq) to SAR 2.25bn and came higher than our estimates of SAR2.10bn

  • Core ICT service revenue increased by 20.8% yoy to cSAR1.23bn and represents 54% of the top-line in Q2 22

  • EBIT came in at SAR294mn, up 8.6% yoy (-6.1% qoq) marginally higher than our estimate of SAR288mn

SNB Capital
2 August 2022
Published bySNB Capital

Solutions reported broadly in-line set of Q2 22 results, with a net income of SAR273mn, increasing by 6.6% yoy (-3.5% qoq). This compares to the SNB Capital and consensus estimates of SAR259mn and SAR273mn, respectively. Revenue increased by 16.4% yoy (-6.8% qoq) to SAR2.25bn and came marginally higher than our estimates of SAR2.10bn. The growth was driven by increased revenue contribution from Core ICT and Managed Services segments. However, this was partially offset by increased opex which stood at SAR155mn vs our estimate of SAR143mn. As a result, opex to sales ratio stood at 6.9% vs our estimates of 6.8%.

  • Revenue increased by 16.4% yoy (-6.8% qoq) to SAR 2.25bn and came higher than our estimates of SAR2.10bn. We believe the growth and variance in revenue was driven by increased revenue contribution from Core ICT and Managed Services segments.

  • Core ICT service revenue increased by 20.8% yoy to cSAR1.23bn and represents 54% of the top-line in Q2 22. Managed services revenue were up by 21.8% yoy to cSAR586mn while Digital services revenue increased by 0.1% yoy to cSAR436mn.

  • Gross margin expanded by 10bps yoy to 22.4% and came in-line with our estimates of 22.5%. We believe the improvement in gross margins is mainly due to increased revenue contribution from higher margin Core ICT segment.

  • EBITDA came-in at SAR350mn, up 0.6% yoy (-4.8% qoq), higher than our estimate of SAR330mn. EBITDA margin stood at 15.5% and came in-line with our estimate of 15.7% but was lower than Q2 21 levels of 18.0%.

  • EBIT came in at SAR294mn, up 8.6% yoy (-6.1% qoq) marginally higher than our estimate of SAR288mn. We believe the variance is mainly driven by higher S&D and depreciation expenses. As a result, opex-to-sales ratio stood at 6.9% vs 4.3% in Q2 21 and our estimate of 6.8%.

  • Non-operating expenses stood at SAR21.0mn (+45.1% yoy) and came lower than our estimate of SAR29.0mn. 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 21% since our last update, we will publish an update once the financials are available.  We believe the strong top-line growth is the key positives of the results while higher opex is the main concern. 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.