Equity Analysis /
Saudi Arabia

STC: Strong top-line growth, in line with sector

    Iyad Khalid Ghulam
    Iyad Khalid Ghulam

    Vice President, Senior Equity Research Analyst

    SNB Capital
    10 May 2019
    Published by

    STC reported an in-line set of Q1 19 results with a net income of SAR2.75bn, up 6.3% yoy (-11.5% qoq). This is in-line with the consensus of SAR2.6bn.The strong yoy top-line growth is a key highlight of the results, which came in-line with the sector trend. We await for the full financials to update our models.

    Revenues stood at SAR13.4bn, up 8.4% yoy (2.5% qoq). This is in-line with our estimates. The strong yoy growth is in-line with the strong top-line growth reported by Zain (24.2%) and Mobily (13.0%), which we believe is driven by higher income from the business segment, FTTH and higher prices. Based on CITC Q4 18 data, mobile subscribers grew 2.8% yoy to 41.3mn reflecting a penetration rate of 127%.

    Gross profit stood at SAR7.9bn, in-line with our estimates of SAR7.6bn. Gross margin came in 59.0% vs our estimates of 58.5% and higher than the Q1 18 margins of 56.5%. The yoy expansion in margins came from higher prices and came despite the increase in royalty fees in Q4 18.

    Operating profit stood at SAR3.3bn in Q1 19, 10.9% higher than our estimates of SAR3.0bn and compares to SAR2.6bn in Q1 18. EBITDA stood at SAR5.4bn, 9.9% higher than our estimates. EBITDA margin stood at 40.2% vs our estimates of 37.7% and 41.4% in Q4 18. Depreciation expense came-in at SAR2.1bn, 8.2% higher than our estimates of SAR1.95bn. We believe this is due to the reclassification of operating leases from SG&A to depreciation. Therefore, SG&A expenses were lower than our estimates of SAR2.7bn (20.8% of sales) and stood at SAR2.5bn (18.8% of sales).

    Non-operating loss stood at SAR525mn, vs our estimates of SAR306mn. We believe this is mainly due to higher than expected finance expenses of SAR164mn vs our estimates of SAR90mn. The increase in finance expenses is due to increase in cost of finance and reclassification of leases from operating expenses to depreciation and finance cost.

    STC extended its dividends policy for 3 years until Q3 2021. The dividends policy will remain quarterly with a payment of SAR1/quarter. In-line with the new dividend policy, STC announced a DPS of SAR1/ share for Q1 19.

    The key stock drivers are 1) inclusion to EM indices and strong top-line growth. If earnings are annualized, the stock is trading at a PE of 21x, higher than peers group average of 14.8x. We await for the full financials to update our models and price target.