Disappointing 2Q
August 01, 2016 Rating 12- Month Target Price
Buy SAR 73.00
SAUDI TELECOM COMPANY (STC) 2Q2016 First Look
Disappointing 2Q Expected Total Return Price as on Jul-31, 2016
61.46
Upside to Target Price
18.8%
Expected Dividend Yield
6.5%
Expected Total Return
25.3%
STC reported weak 2Q results with a net income of SAR 1.9 billion (-27% Y/Y and 21.5% Q/Q) missing both our estimates and Bloomberg consensus of SAR 2.3 billion despite posting a +3% growth in gross profits. Double digit revenue growth was offset by a significant increase in operating expenses of over SAR 500 million and losses on its investment portfolio of SAR 278 million. However, STC stuck to its dividend policy by announcing 2Q DPS of SAR 1.00. Trading at 12.0x 2016E earnings and offering a dividend yield of 6.5%, STC is the only telecom stock on our Buy list.
Double digit revenue growth
Market Data 69.75/52.75
52 Week H/L
SAR 122,920 mln
Market Capitalization
2,000 mln
Shares Outstanding
16.2%
Free Float
603,731
12-Month ADTV
STC posted a +11% Y/Y and +6% Q/Q growth in revenues to SAR 13.6 billion. During 1H2016, revenue from local operations grew by +5% while international revenue recorded growth of +3%. Enterprise business revenue grew by 17% supported by growth in business sector data service revenue that grew by +30% Y/Y. It is worth highlighting that despite the -33% decline in termination fees, which had the greatest negative impact on STC, the company has managed topline growth.
Margins down both Y/Y and Q/Q Although gross profit is up +3% Y/Y, gross margins declined 400bps Y/Y and 200bps Q/Q to 54% for the quarter. Cost of service grew +23% Y/Y dwarfing the +11% rise in revenues. We believe increase in cost of service is likely due to ‘other costs’, which have risen by SAR 1.0 billion between 1Q15 and 1Q16 (43% of cost of service). This trend may have continued in 2Q as well. EBITDA margins are also 500bps lower both Y/Y and Q/Q. Operating margins have been hit by the +13% Y/Y rise in operating expenses. Selling and marketing expenses likely grew due to bio-metric verification costs while SAR 219 million rise in depreciation and amortization implies increase in assets.
1-Year Price Performance 110
100 90 80 70 60
50 40
Net income declines -27% Y/Y
30 A
S
O
N
D
J
STC
F
M
A
M
J
TASI
-27% Y/Y decrease in EPS to SAR 0.93 surprised both us and the market, coming in significantly below consensus expectations. STC suffered from significant increase in other expenses to the tune of SAR 446 million to SAR 537 million (almost 5 times growth Y/Y) as it recorded a loss on its investment portfolio of SAR 278 million and retirement program costs of SAR 174 million. As a result of higher expenses, net margin has taken a beating to 14% in 2Q versus 21% last year and 19% last quarter.
J TTI
Source: Bloomberg 6M
1Y
2Y
10% 0%
Stands by dividend policy
-10%
Maintaining its SAR 1.00 quarterly dividend payout has been one positive for investors. We plan to re-visit our full year earnings expectations once detailed financials are available with a possible decline to current estimates on the cards. For now, we recommend a Buy with a target price of SAR 73.00.
-20% -30% -40% -50%
-60% STC
TASI
TTI
Key Financial Figures 2Q2016E (SAR mln)
Actual
RC Forecast
Revenue
13,576
12,707
Gross Profit
7,360
7,266
Net Income
1,865
2,348
0.93
1.17
EPS (SAR)
FY Dec 31 (SARmln) Revenue Gross Profit Net Profit EPS (SAR) DPS (SAR)
2015A 50,650 30,344 9,256 4.63 4.00
Key Financial Ratios 2016E 51,003 27,717 10,171 5.09 4.00
Muhammad Faisal Potrik
Faisal S Abaalkhail
[email protected] +966-11-203-6807
[email protected] +966-11-203-6812
2017E 51,389 30,371 9,043 4.52 4.00
FY Dec31 BVPS ROAE ROAA EV/EBITDA P/E
2015A 30.3 15.4% 9.6% 6.4x 13.1x
2016E 31.4 14.9% 10.4% 6.3x 12.0x
2017E 31.9 14.6% 9.1% 6.6x 13.6x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI TELECOM COMPANY (STC) 2Q2016 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia Page 2 of 4 (“KSA”). Website: www.riyadcapital.com
Buy SAR 73.00
SAUDI TELECOM COMPANY (STC) 2Q2016 First Look
Disappointing 2Q Expected Total Return Price as on Jul-31, 2016
61.46
Upside to Target Price
18.8%
Expected Dividend Yield
6.5%
Expected Total Return
25.3%
STC reported weak 2Q results with a net income of SAR 1.9 billion (-27% Y/Y and 21.5% Q/Q) missing both our estimates and Bloomberg consensus of SAR 2.3 billion despite posting a +3% growth in gross profits. Double digit revenue growth was offset by a significant increase in operating expenses of over SAR 500 million and losses on its investment portfolio of SAR 278 million. However, STC stuck to its dividend policy by announcing 2Q DPS of SAR 1.00. Trading at 12.0x 2016E earnings and offering a dividend yield of 6.5%, STC is the only telecom stock on our Buy list.
Double digit revenue growth
Market Data 69.75/52.75
52 Week H/L
SAR 122,920 mln
Market Capitalization
2,000 mln
Shares Outstanding
16.2%
Free Float
603,731
12-Month ADTV
STC posted a +11% Y/Y and +6% Q/Q growth in revenues to SAR 13.6 billion. During 1H2016, revenue from local operations grew by +5% while international revenue recorded growth of +3%. Enterprise business revenue grew by 17% supported by growth in business sector data service revenue that grew by +30% Y/Y. It is worth highlighting that despite the -33% decline in termination fees, which had the greatest negative impact on STC, the company has managed topline growth.
Margins down both Y/Y and Q/Q Although gross profit is up +3% Y/Y, gross margins declined 400bps Y/Y and 200bps Q/Q to 54% for the quarter. Cost of service grew +23% Y/Y dwarfing the +11% rise in revenues. We believe increase in cost of service is likely due to ‘other costs’, which have risen by SAR 1.0 billion between 1Q15 and 1Q16 (43% of cost of service). This trend may have continued in 2Q as well. EBITDA margins are also 500bps lower both Y/Y and Q/Q. Operating margins have been hit by the +13% Y/Y rise in operating expenses. Selling and marketing expenses likely grew due to bio-metric verification costs while SAR 219 million rise in depreciation and amortization implies increase in assets.
1-Year Price Performance 110
100 90 80 70 60
50 40
Net income declines -27% Y/Y
30 A
S
O
N
D
J
STC
F
M
A
M
J
TASI
-27% Y/Y decrease in EPS to SAR 0.93 surprised both us and the market, coming in significantly below consensus expectations. STC suffered from significant increase in other expenses to the tune of SAR 446 million to SAR 537 million (almost 5 times growth Y/Y) as it recorded a loss on its investment portfolio of SAR 278 million and retirement program costs of SAR 174 million. As a result of higher expenses, net margin has taken a beating to 14% in 2Q versus 21% last year and 19% last quarter.
J TTI
Source: Bloomberg 6M
1Y
2Y
10% 0%
Stands by dividend policy
-10%
Maintaining its SAR 1.00 quarterly dividend payout has been one positive for investors. We plan to re-visit our full year earnings expectations once detailed financials are available with a possible decline to current estimates on the cards. For now, we recommend a Buy with a target price of SAR 73.00.
-20% -30% -40% -50%
-60% STC
TASI
TTI
Key Financial Figures 2Q2016E (SAR mln)
Actual
RC Forecast
Revenue
13,576
12,707
Gross Profit
7,360
7,266
Net Income
1,865
2,348
0.93
1.17
EPS (SAR)
FY Dec 31 (SARmln) Revenue Gross Profit Net Profit EPS (SAR) DPS (SAR)
2015A 50,650 30,344 9,256 4.63 4.00
Key Financial Ratios 2016E 51,003 27,717 10,171 5.09 4.00
Muhammad Faisal Potrik
Faisal S Abaalkhail
[email protected] +966-11-203-6807
[email protected] +966-11-203-6812
2017E 51,389 30,371 9,043 4.52 4.00
FY Dec31 BVPS ROAE ROAA EV/EBITDA P/E
2015A 30.3 15.4% 9.6% 6.4x 13.1x
2016E 31.4 14.9% 10.4% 6.3x 12.0x
2017E 31.9 14.6% 9.1% 6.6x 13.6x
Riyad Capital is licensed by the Saudi Arabia Capital Market Authority (No. 07070-37)
SAUDI TELECOM COMPANY (STC) 2Q2016 First Look
Stock Rating Buy
Neutral
Sell
Not Rated
Expected Total Return Greater than 15%
Expected Total Return between -15% and +15%
Expected Total Return less than -15%
Under Review/ Restricted
* The expected percentage returns are indicative, stock recommendations also incorporate relevant qualitative factors For any feedback on our reports, please contact [email protected]
Disclaimer The information in this report was compiled in good faith from various public sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated in this report are accurate and that the forecasts, opinions and expectations contained herein are fair and reasonable. Riyad Capital makes no representations or warranties whatsoever as to the accuracy of the data and information provided and, in particular, Riyad Capital does not represent that the information in this report is complete or free from any error. This report is not, and is not to be construed as, an offer to sell or solicitation of an offer to buy any financial securities. Accordingly, no reliance should be placed on the accuracy, fairness or completeness of the information contained in this report. Riyad Capital accepts no liability whatsoever for any loss arising from any use of this report or its contents, and neither Riyad Capital nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. Riyad Capital or its employees or any of its affiliates or clients may have a financial interest in securities or other assets referred to in this report. Opinions, forecasts or projections contained in this report represent Riyad Capital's current opinions or judgment as at the date of this report only and are therefore subject to change without notice. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or projections which represent only one possible outcome. Further, such opinions, forecasts or projections are subject to certain risks, uncertainties and assumptions that have not been verified and future actual results or events could differ materially. The value of, or income from, any investments referred to in this report may fluctuate and/or be affected by changes. Past performance is not necessarily an indicative of future performance. Accordingly, investors may receive back less than originally invested amount. This report provides information of a general nature and does not address the circumstances, objectives, and risk tolerance of any particular investor. Therefore, it is not intended to provide personal investment advice and does not take into account the reader’s financial situation or any specific investment objectives or particular needs which the reader may have. Before making an investment decision the reader should seek advice from an independent financial, legal, tax and/or other required advisers due to the investment in such kind of securities may not be suitable for all recipients. This research report might not be reproduced, nor distributed in whole or in part, and all information, opinions, forecasts and projections contained in it are protected by the copyright rules and regulations.
Riyad Capital is a Saudi limited liability company, with commercial registration number (1010239234), licensed and organized by the Capital Market Authority under License No. (07070-37), and having its registered office at Al Takhassusi Street, Prestige Building, Riyadh, Kingdom of Saudi Arabia Page 2 of 4 (“KSA”). Website: www.riyadcapital.com
