Saudi Ground Services08Sep16
Company Update
September 08, 2016
Saudi Ground Services
Price Data (SAR) Current Price
42.65
Target Price
52.00
52 wk High/Low
67.75/31.10
Ratings
Transportation
Short-term
Positive
Long-term
Buy
Risk Profile
Normal
Market Data Sector
Transportation
Market Cap
USD 2.14bn
Primary Market
Saudi Arabia
Other Exchg SGSC.SE
Bloomberg
SGS AB Equity
Free Float
30%
Valuation Ratio 2016E
2017E
10.5
10.3
P/BV x
2.7
2.5
EV/EBITDA x
7.9
7.7
Div Yld %
6.1
6.4
P/E x
Recent price decline offers good entry opportunity, rating upgraded to ‘Buy’ Dividend pay-out increased in 1H16, expect FY16 dividend yield of 6%; We upgrade our rating to ‘Buy’ (previously ‘Neutral’) for SGS with a one year FCFE based target price of SAR 52.0/sh, offering an upside of 21.9% from current levels. Our rating revision was led by the c.12% decline in stock price, since our last report on 11 July 2016. We believe that one of the key overhang on the stock is the outcome of SGS’ contract rate renegotiation with its principal shareholder, Saudia Airlines, which is yet to be determined (due since 4Q15 end). We understand that there has been ongoing restructuring within Saudia’s management over the past 912 months which may have distracted them from completing the negotiations on SGS’ new contract pricing. However, we do not expect any downward revision in the contract rates, considering SGS’ increasing cost base with major portion (c.80%) of operating expenses being manpower costs, which will ideally increase in an inflationary macro environment. Nevertheless, due to limited clarity on the renegotiation, we conservatively assume current rates to remain constant till FY18 and then increase 2% till FY20. Saudia had contributed 54.4% to the company’s revenue in FY14 (as disclosed in the prospectus). Exhibit 1: FCFE Valuation
Trading Data
GCC Equities
Absence of one-off expenses and seasonality affect to drive YoY growth in 3Q; earnings estimate at SAR 190mn, +14% YoY
Upgrade to ‘Buy’ on price decline; TP at SAR 52/sh
Reuters
Daily Vol (6M Avg)
0.3
FCFE Valuation
SAR mn
Daily T/o (6M Avg USD)
3.6
Cost of Equity
10.52%
Issued Shares All in millions
188.0
Relative Price Performance 160
Tadawul
140
SGS
Terminal Growth Rate - FY26E
3.0%
Equity Value
9,819
Shares Outstanding ('000)
188.0
Target Price (SAR)
52.0
Current Price (SAR)
42.7
Upside / (Downside) (%) Source: SICO Research, Company Data
120 100
21.9%
During the past one month, SGS’ stock underperformed compared to the Tadawul All Share Index and now offers good entry point to long term investors.
80 60
Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 Apr-16 May-16 May-16 Jun-16 Jun-16 Jul-16 Jul-16 Aug-16 Aug-16
40
Restated to 100
SICO Research
3Q preview and Rating upgrade
Performance (%)
1m
3m
12m
Absolute
(6.3) (12.0) (34.3)
Relative (3.9) (6.0) (16.4) Source: SICO Research, Bloomberg
Exhibit 2: SGS underperforms compared to TASI 105 100 95 90
Nishit Lakhotia, CFA, CAIA +973 1751 5021 [email protected] www.sicobahrain.com
85 80 09-Jul
16-Jul
23-Jul
30-Jul 06-Aug SGS
13-Aug
20-Aug TASI
27-Aug
03-Sep
*Note: Tadawul All Share Index (TASI) and SGS share price rebased to 100 on 09 July 2016. Source: SICO Research, Company Data © SICO 2016 All Rights Reserved Attention is drawn to the disclaimer and other information in the end
SICO RESEARCH
Saudi Ground Services SGS is trading at a PE multiple of 10.5x on our FY16 EPS estimate of SAR 4.04, compared to peer group average of 19.0x. Despite being debt-free, SGS reported a strong ROE of 23.9%, substantially higher than levered comparative company’s average of 13.6%. It is worth highlighting that SGS’ had two major one-offs in 2015, 2 month bonus pay-out of SAR 98mn after the royal decree and SAR 26mn GACA rent adjustment in 3Q15. Excluding impact of these one-offs, SGS’ FY15 gross margins and EBITDA margins would have been 37.8% and 35.6% respectively and ROE at 28.7%.
Exhibit 3:
Peer Comparison Table P/E FY16E (x)
EV/EBITDA FY16E (x)
3,221 871 21.4 SIA Engineering Co Singapore 1,366 1,116 7.5 TAV Havalimanlari Turkey 3,375 2,130 16.3 BBA Aviation PLC UK 2,358 726 15.9 Flughafen Wien AG Austria 2,526 284 26.4 Grupo Aeroportuario Mexico 977 173 24.9 Save SpA Italy 2,138 677 10.5 Saudi Ground Services Saudi 2,304 1,021 19.0 Weighted Avg ex SGS *Note: Revenue, leverage and Margin data for FY15. Data as on 07 September 2016 Source: SICO Research, Bloomberg, Company Data
23.4 5.0 11.8 8.2 16.0 13.4 7.9 14.1
Company Name
Country
Mkt Cap (USD mn)
Revenue* (USD mn)
ROE FY15 13.6% 27.4% 5.1% 10.2% 20.7% 13.8% 23.9% 13.6%
Debt to Equity*
Gross Margin*
EBITDA Margin*
0.03 1.82 0.24 0.48 0.80 1.22 0.56
NA 44.8% 18.6% NA 81.4% NA 33.0% 45.4%
10.9% 49.6% 9.6% 42.4% 50.6% 44.3% 29.3% 29.4%
Expect YoY growth in 3Q due to absence of one-off relating to GACA rent in 3Q15 We estimate SGS’ 3Q16 earnings at SAR 190mn, up 14% YoY, led by revenue growth estimate of 12% YoY. Despite we projecting a lower recurring gross margin of 33.5% (36.6% in 2Q16) in 3Q15, earnings is expected to grow 14% YoY during the quarter due to the fact that 3Q15 earnings were adversely impacted by a one-off expense of SAR 26.2mn, incurred from retrospective adjustment of increased GACA rent. Our analysis suggests a 12% YoY increase in the company’s 3Q16 top line to SAR 740mn, driven by a shift of seasonality with less number of Ramadan days falling in 3Q16 compared to 3Q15. However, on a QoQ basis, the company’s 3Q net profit is expected to decline 3.3% from SAR 197mn in 2Q16, despite a 6.9% QoQ of estimated growth in revenues. This is due to the hiring of temporary high cost labour to meet higher demand during Hajj season at the Jeddah and Medina airport. In addition, providing ground services at Jeddah Airport is relatively more expensive compared to other airports in the Kingdom. As a result, we expect the company’s 3Q16 gross margin to decline to 33.5% from 36.6% QoQ. Recall, SGS reported 13% YoY growth in 2Q16 earnings at SAR 197mn, outperforming our estimates by 11%. The company also posted 13% YoY growth in 2Q16 revenues to SAR 692mn, ahead of our forecast by 6%. Exhibit 4: SGS 3Q16 earnings estimates (SAR mn) SAR mn Revenue Gross Profit Gross Margin Operating Profit Operating Margin Net Profit
3Q16E
2Q16
3Q15
YoY
QoQ
740
692
661
12.0%
6.9%
12.4%
-2.1%
14.6%
-2.3%
14.0%
-3.3%
248
253
221
33.5%
36.6%
33.4%
196
201
171
26.5%
29.0%
25.9%
190
26.8% Net Margin Source: SICO Research, Company Data
197
167
28.4%
25.3%
Expect FY16 dividend at SAR 2.6/sh, offers a yield of 6% SGS paid a quarterly dividend of SAR 0.65/sh in 1H16, higher than FY15 quarterly average of SAR 0.51/sh. We expect the company to maintain its current dividend run rate with FY16 dividend of SAR 489mn (SAR 2.60/sh), translating into a yield of 6.1% at current levels. 2
SICO RESEARCH
Saudi Ground Services SGS reported strong liquid asset balance of SAR 832.9mn (cash of SAR 481.8mn and SAR 351.1mn of investment in money market) by 2Q16 end, compared to SAR 779.4mn of cash by FY15 end, sufficient to fund a capex of SAR 100/120mn (our FY16 estimate). We expect the company to generate FCF/sh of SAR 3.54 and SAR 3.61 in FY16 and FY17 respectively, leaving sufficient headroom for higher dividends compared to our DPS forecasts of SAR 2.60 and SAR 2.75. Exhibit 5: FCF/sh vs DPS/sh (SAR) 5.00 4.00
3.95 3.38
3.54
3.61
2.60
2.75
3.00 2.00 1.00
2.04
3.00
FY15E
FY16E
FY17E DPS/sh
FCF/sh
FY18E
Source: SICO Research, Company Data
Earnings estimates marginally revised downwards despite higher top-line We have slightly revised our earnings estimate downwards by 0.8% and 1.1% for FY16 and FY17 respectively. The decline in our forecasts was due to our cautious view on SGS’ rate renegotiation with Saudia (expecting no increase in FY16 and FY17 versus 2% and 3% rate hike expectation in FY16 and FY17 respectively previously. However, our FY16 and FY17 revenue forecast have been revised upwards to SAR 2.8bn and SAR 3.0bn respectively, attributed to increasing traffic of international airlines in the erstwhile domestic airports where SGS is primarily sole ground services provider. Exhibit 6: Revised estimates (SAR mn) New Estimates Revenue Operating Profit
Old Estimates
% Change
FY16
FY17
FY16
FY17
FY16
FY17
2,810
2,982
2,766
2,891
1.6%
3.1%
786
788
782
804
0.6%
-2.0%
780
767
788
-0.8%
-1.1%
760 Net Profit Source: SICO Research, Company Data
Increasing competition in the sector, although not a major threat Swissport was awarded the second ground services license in Saudi Arabia in April 2015, to operate from three international airports- Jeddah, Riyadh and Damman. However, by June 2016, the company had commenced its operations at only two airports, offering services to Jazeera Airways in Jeddah and Riyadh and Scoot in Jeddah. Although we expect Swissport to initially establish itself in the three major airports, it does have plans to further expand its services to other domestic airports in the Kingdom. In the near term we do not expect any major threat to SGS from Swissport, which will still remain a much smaller player compared to SGS’ pan Saudi presence across 27 airports. In addition, some of the kingdom’s domestic airports opened up for international flights, which has increased traffic of nonSaudi based airlines into these airports and SGS is benefitting from such traffic as it has monopoly in most of these airports. Another factor to be considered is airport privatisation initiatives being undertaken by Saudi government, which may grant non-exclusive ground services licenses at particular airports, as part of the BOT contracts. 3
SICO RESEARCH
Saudi Ground Services Again, due to SGS’ dominant presence across Saudi Arabia, investment in airport infrastructure and existing relationship with all major airlines operating in the Kingdom, the company will continue to hold an edge over other smaller competitors.
4
SICO RESEARCH
Saudi Ground Services
Financials Income Statement (Consolidated)
Cash Flow Statement (Consolidated)
Year ending 31 Dec (SAR mn)
2015A
2016E
2017E
Revenue Cost of Goods Sold
2,541 (1,703)
2,810 (1,807)
2,982 (1,970)
Gross Profit
Year ending 31 Dec (SAR mn) Net profit before Zakat Depreciation
2015A
2016E
2017E
644 149
800 151
800 154
837
1,002
1,012
Other Adjustments
(242)
(244)
(255)
Working Capital Changes
779
937
941
Cashflow from Operations
665
775
814
630
786
788
Capital Expenditure
(28)
(110)
(134)
Other Income
50
35
35
Other Investing Activities
24
0
0
Net Interest Income
(1)
6
7
Cashflow from Investing
(3)
(110)
(134)
(23)
(40)
(20)
0
0
0
621
760
780
Selling, General Expenses EBITDA
and
Admin.
Operating Profit
Tax Minority Interest Net Profit
11
(18)
4
(140)
(159)
(143)
Debt Raised/Repaid Dividend
0
0
0
(402)
(462)
(509)
Other Financing Activities Cashflow from Financing Net Chg in Cash
0
(350)
0
(402)
(812)
(509)
260
(148)
170
Note: The above statements may not match the published cash flow statements due to adjustments made by us.
Key Ratios (Consolidated)
Balance Sheet (Consolidated) Year ending 31 Dec (SAR mn) Cash & Short Term Deposits Other Current Assets
2015A
2016E
2017E
Year ending 31 Dec (SAR mn)
2015A
2016E
2017E
779 986
632 1,182
802 1,342
EPS EPS Growth (%)
3.30 (5.5)
4.04 22.4
4.15 2.5
0
0
0
Gross Margin (%)
33.0
35.7
33.9
Net Fixed Assets
473
470
485
EBITDA Margin (%)
30.7
33.4
31.6
Net Intangible Assets
934
896
861
EBITDA Growth (%)
0.0
20.3
0.4
76
103
134
Net Margin (%)
25.8
28.0
27.2
3,249
3,634
3,975
ROAE (%)
23.9
26.7
24.9
ROAA (%)
21.2
22.9
21.3
0.0
0.0
0.0
Investments
Other Non-Current Assets Total Assets Current Liabilities
280
316
333
Total Debt
0
0
0
Debt/Equity (%)
Other Liabilities
0
0
0
Valuation Ratios
545
632
703
PER (x)
12.9
10.5
10.3
0
PBV (x)
3.0
2.7
2.5
Dividend Yield (%)
4.8
6.1
6.4
9.9
7.9
7.7
Total Liabilities Minority Interest Share Capital
0
0
1,880
1,880
1,880
824
1,122
1,392
EV/EBITDA (x)
Shareholders Funds
2,704
3,002
3,272
Source: Company, SICO Research, Bloomberg
Total Equity & Liabilities
3,249
3,634
3,975
Reserves & Surplus
5
SICO RESEARCH
Saudi Ground Services
Price, Target Price and Rating Change History Chart of (SGS AB) RatingInitiation
80.0
X 75.0 70.0 65.0
N
N
N
25-Aug-16
25-Dec-15
25-Nov-15
25-Oct-15
25-Sep-15
25-Aug-15
25-Jul-15
25-Jun-15
40.0 35.0 30.0
B
B
25-Jun-16
B
25-May-16
50.0 45.0
25-Jul-16
60.0 55.0 B
25-Apr-16
B N N B B N B
25-Mar-16
Target Price 74.00 71.00 62.00 56.00 50.00 52.00 52.00
25-Feb-16
25-Jun-15 5-Aug-15 28-Oct-15 2-Feb-16 21-Feb-16 11-Jul-16 7-Sep-16
Closing Price 51.52 65.87 55.08 38.49 40.74 47.72 42.65
25-Jan-16
Date
Closing Price Target Price B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R = Under Review
Securities & Investment Company BSC Analyst Stock Rating Definitions * Note:- Under old methodology, up until 20th Feb 2016, we had 5 categories of LT rating. Sell (+25%). The LT rating was independent of Risk Profile. Time horizon Short term SICO Research issues a Short term outlook if the analyst feels that there are factors which might affect the short-term performance of the stock during the immediate six months after issuing a rating. This might be due to both quantitative and qualitative factors which the analyst think can affect the stock price. Long term SICO Research’s Long-term rating is based on the Target Price calculated by the analyst. The Target Price is arrived at using both fundamental and/or comparative valuation methods based on the detailed Financial models developed by analysts incorporating current expectations and analyst's assumptions. Target price for a stock is calculated one year forward from the valuation date Recommendation (Short term) Positive Analyst expect positive triggers in the short term which might affect current price positively (> 10%) Neutral Analyst does not expect any short term triggers/events (+/- 10%) Negative Analyst expect negative triggers in the short term which might affect current price adversely (< 10%) Recommendation (Long term)* Buy If Risk profile is “High” Target price estimate offers 20%+ return from the current share price. If Risk profile is “Normal” Target price estimate offers 15%+ return from the current share price. Neutral If Risk profile is “High” Target Price estimate offers 0% to 20% return from the current share price. If Risk profile is “Normal” Target Price estimate offers 5% to 15% return from the current share price Sell If Risk profile is “High” Target price estimate offers less than 0% return from the current share price. If Risk profile is “Normal” Target price estimate offers less than 5% return from the current share price. Risk High Stock volatility (360 days standard deviation) exceeds 2x of S&P GCC market volatility Normal Stock volatility (360 days standard deviation) lower than 2x of S&P GCC market volatility
6
SICO RESEARCH
Saudi Ground Services
NOTES Contact Details BMB Centre, 1 Floor P.O Box 1331, Diplomatic Area Manama Kingdom of Bahrain st
Investment Research [email protected]
Head of Research Nishit Lakhotia, CFA, CAIA Tel: (Direct) +973 – 17515021
Brokerage Fadhel Makhlooq Tel: (Direct): +973 – 17515202
Visit us at www.sicobahrain.com
Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. The analyst(s) who is (are) responsible for producing the report certifies(y) that he (she) or any of their close relative have no beneficial ownership in the company’s stock at the time of publishing the report. Any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and National Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA) and Zain Bahrain’s shares.
Copyright Notice © Securities and Investment Company 2016. This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part.
7
September 08, 2016
Saudi Ground Services
Price Data (SAR) Current Price
42.65
Target Price
52.00
52 wk High/Low
67.75/31.10
Ratings
Transportation
Short-term
Positive
Long-term
Buy
Risk Profile
Normal
Market Data Sector
Transportation
Market Cap
USD 2.14bn
Primary Market
Saudi Arabia
Other Exchg SGSC.SE
Bloomberg
SGS AB Equity
Free Float
30%
Valuation Ratio 2016E
2017E
10.5
10.3
P/BV x
2.7
2.5
EV/EBITDA x
7.9
7.7
Div Yld %
6.1
6.4
P/E x
Recent price decline offers good entry opportunity, rating upgraded to ‘Buy’ Dividend pay-out increased in 1H16, expect FY16 dividend yield of 6%; We upgrade our rating to ‘Buy’ (previously ‘Neutral’) for SGS with a one year FCFE based target price of SAR 52.0/sh, offering an upside of 21.9% from current levels. Our rating revision was led by the c.12% decline in stock price, since our last report on 11 July 2016. We believe that one of the key overhang on the stock is the outcome of SGS’ contract rate renegotiation with its principal shareholder, Saudia Airlines, which is yet to be determined (due since 4Q15 end). We understand that there has been ongoing restructuring within Saudia’s management over the past 912 months which may have distracted them from completing the negotiations on SGS’ new contract pricing. However, we do not expect any downward revision in the contract rates, considering SGS’ increasing cost base with major portion (c.80%) of operating expenses being manpower costs, which will ideally increase in an inflationary macro environment. Nevertheless, due to limited clarity on the renegotiation, we conservatively assume current rates to remain constant till FY18 and then increase 2% till FY20. Saudia had contributed 54.4% to the company’s revenue in FY14 (as disclosed in the prospectus). Exhibit 1: FCFE Valuation
Trading Data
GCC Equities
Absence of one-off expenses and seasonality affect to drive YoY growth in 3Q; earnings estimate at SAR 190mn, +14% YoY
Upgrade to ‘Buy’ on price decline; TP at SAR 52/sh
Reuters
Daily Vol (6M Avg)
0.3
FCFE Valuation
SAR mn
Daily T/o (6M Avg USD)
3.6
Cost of Equity
10.52%
Issued Shares All in millions
188.0
Relative Price Performance 160
Tadawul
140
SGS
Terminal Growth Rate - FY26E
3.0%
Equity Value
9,819
Shares Outstanding ('000)
188.0
Target Price (SAR)
52.0
Current Price (SAR)
42.7
Upside / (Downside) (%) Source: SICO Research, Company Data
120 100
21.9%
During the past one month, SGS’ stock underperformed compared to the Tadawul All Share Index and now offers good entry point to long term investors.
80 60
Jan-16 Feb-16 Mar-16 Mar-16 Apr-16 Apr-16 May-16 May-16 Jun-16 Jun-16 Jul-16 Jul-16 Aug-16 Aug-16
40
Restated to 100
SICO Research
3Q preview and Rating upgrade
Performance (%)
1m
3m
12m
Absolute
(6.3) (12.0) (34.3)
Relative (3.9) (6.0) (16.4) Source: SICO Research, Bloomberg
Exhibit 2: SGS underperforms compared to TASI 105 100 95 90
Nishit Lakhotia, CFA, CAIA +973 1751 5021 [email protected] www.sicobahrain.com
85 80 09-Jul
16-Jul
23-Jul
30-Jul 06-Aug SGS
13-Aug
20-Aug TASI
27-Aug
03-Sep
*Note: Tadawul All Share Index (TASI) and SGS share price rebased to 100 on 09 July 2016. Source: SICO Research, Company Data © SICO 2016 All Rights Reserved Attention is drawn to the disclaimer and other information in the end
SICO RESEARCH
Saudi Ground Services SGS is trading at a PE multiple of 10.5x on our FY16 EPS estimate of SAR 4.04, compared to peer group average of 19.0x. Despite being debt-free, SGS reported a strong ROE of 23.9%, substantially higher than levered comparative company’s average of 13.6%. It is worth highlighting that SGS’ had two major one-offs in 2015, 2 month bonus pay-out of SAR 98mn after the royal decree and SAR 26mn GACA rent adjustment in 3Q15. Excluding impact of these one-offs, SGS’ FY15 gross margins and EBITDA margins would have been 37.8% and 35.6% respectively and ROE at 28.7%.
Exhibit 3:
Peer Comparison Table P/E FY16E (x)
EV/EBITDA FY16E (x)
3,221 871 21.4 SIA Engineering Co Singapore 1,366 1,116 7.5 TAV Havalimanlari Turkey 3,375 2,130 16.3 BBA Aviation PLC UK 2,358 726 15.9 Flughafen Wien AG Austria 2,526 284 26.4 Grupo Aeroportuario Mexico 977 173 24.9 Save SpA Italy 2,138 677 10.5 Saudi Ground Services Saudi 2,304 1,021 19.0 Weighted Avg ex SGS *Note: Revenue, leverage and Margin data for FY15. Data as on 07 September 2016 Source: SICO Research, Bloomberg, Company Data
23.4 5.0 11.8 8.2 16.0 13.4 7.9 14.1
Company Name
Country
Mkt Cap (USD mn)
Revenue* (USD mn)
ROE FY15 13.6% 27.4% 5.1% 10.2% 20.7% 13.8% 23.9% 13.6%
Debt to Equity*
Gross Margin*
EBITDA Margin*
0.03 1.82 0.24 0.48 0.80 1.22 0.56
NA 44.8% 18.6% NA 81.4% NA 33.0% 45.4%
10.9% 49.6% 9.6% 42.4% 50.6% 44.3% 29.3% 29.4%
Expect YoY growth in 3Q due to absence of one-off relating to GACA rent in 3Q15 We estimate SGS’ 3Q16 earnings at SAR 190mn, up 14% YoY, led by revenue growth estimate of 12% YoY. Despite we projecting a lower recurring gross margin of 33.5% (36.6% in 2Q16) in 3Q15, earnings is expected to grow 14% YoY during the quarter due to the fact that 3Q15 earnings were adversely impacted by a one-off expense of SAR 26.2mn, incurred from retrospective adjustment of increased GACA rent. Our analysis suggests a 12% YoY increase in the company’s 3Q16 top line to SAR 740mn, driven by a shift of seasonality with less number of Ramadan days falling in 3Q16 compared to 3Q15. However, on a QoQ basis, the company’s 3Q net profit is expected to decline 3.3% from SAR 197mn in 2Q16, despite a 6.9% QoQ of estimated growth in revenues. This is due to the hiring of temporary high cost labour to meet higher demand during Hajj season at the Jeddah and Medina airport. In addition, providing ground services at Jeddah Airport is relatively more expensive compared to other airports in the Kingdom. As a result, we expect the company’s 3Q16 gross margin to decline to 33.5% from 36.6% QoQ. Recall, SGS reported 13% YoY growth in 2Q16 earnings at SAR 197mn, outperforming our estimates by 11%. The company also posted 13% YoY growth in 2Q16 revenues to SAR 692mn, ahead of our forecast by 6%. Exhibit 4: SGS 3Q16 earnings estimates (SAR mn) SAR mn Revenue Gross Profit Gross Margin Operating Profit Operating Margin Net Profit
3Q16E
2Q16
3Q15
YoY
QoQ
740
692
661
12.0%
6.9%
12.4%
-2.1%
14.6%
-2.3%
14.0%
-3.3%
248
253
221
33.5%
36.6%
33.4%
196
201
171
26.5%
29.0%
25.9%
190
26.8% Net Margin Source: SICO Research, Company Data
197
167
28.4%
25.3%
Expect FY16 dividend at SAR 2.6/sh, offers a yield of 6% SGS paid a quarterly dividend of SAR 0.65/sh in 1H16, higher than FY15 quarterly average of SAR 0.51/sh. We expect the company to maintain its current dividend run rate with FY16 dividend of SAR 489mn (SAR 2.60/sh), translating into a yield of 6.1% at current levels. 2
SICO RESEARCH
Saudi Ground Services SGS reported strong liquid asset balance of SAR 832.9mn (cash of SAR 481.8mn and SAR 351.1mn of investment in money market) by 2Q16 end, compared to SAR 779.4mn of cash by FY15 end, sufficient to fund a capex of SAR 100/120mn (our FY16 estimate). We expect the company to generate FCF/sh of SAR 3.54 and SAR 3.61 in FY16 and FY17 respectively, leaving sufficient headroom for higher dividends compared to our DPS forecasts of SAR 2.60 and SAR 2.75. Exhibit 5: FCF/sh vs DPS/sh (SAR) 5.00 4.00
3.95 3.38
3.54
3.61
2.60
2.75
3.00 2.00 1.00
2.04
3.00
FY15E
FY16E
FY17E DPS/sh
FCF/sh
FY18E
Source: SICO Research, Company Data
Earnings estimates marginally revised downwards despite higher top-line We have slightly revised our earnings estimate downwards by 0.8% and 1.1% for FY16 and FY17 respectively. The decline in our forecasts was due to our cautious view on SGS’ rate renegotiation with Saudia (expecting no increase in FY16 and FY17 versus 2% and 3% rate hike expectation in FY16 and FY17 respectively previously. However, our FY16 and FY17 revenue forecast have been revised upwards to SAR 2.8bn and SAR 3.0bn respectively, attributed to increasing traffic of international airlines in the erstwhile domestic airports where SGS is primarily sole ground services provider. Exhibit 6: Revised estimates (SAR mn) New Estimates Revenue Operating Profit
Old Estimates
% Change
FY16
FY17
FY16
FY17
FY16
FY17
2,810
2,982
2,766
2,891
1.6%
3.1%
786
788
782
804
0.6%
-2.0%
780
767
788
-0.8%
-1.1%
760 Net Profit Source: SICO Research, Company Data
Increasing competition in the sector, although not a major threat Swissport was awarded the second ground services license in Saudi Arabia in April 2015, to operate from three international airports- Jeddah, Riyadh and Damman. However, by June 2016, the company had commenced its operations at only two airports, offering services to Jazeera Airways in Jeddah and Riyadh and Scoot in Jeddah. Although we expect Swissport to initially establish itself in the three major airports, it does have plans to further expand its services to other domestic airports in the Kingdom. In the near term we do not expect any major threat to SGS from Swissport, which will still remain a much smaller player compared to SGS’ pan Saudi presence across 27 airports. In addition, some of the kingdom’s domestic airports opened up for international flights, which has increased traffic of nonSaudi based airlines into these airports and SGS is benefitting from such traffic as it has monopoly in most of these airports. Another factor to be considered is airport privatisation initiatives being undertaken by Saudi government, which may grant non-exclusive ground services licenses at particular airports, as part of the BOT contracts. 3
SICO RESEARCH
Saudi Ground Services Again, due to SGS’ dominant presence across Saudi Arabia, investment in airport infrastructure and existing relationship with all major airlines operating in the Kingdom, the company will continue to hold an edge over other smaller competitors.
4
SICO RESEARCH
Saudi Ground Services
Financials Income Statement (Consolidated)
Cash Flow Statement (Consolidated)
Year ending 31 Dec (SAR mn)
2015A
2016E
2017E
Revenue Cost of Goods Sold
2,541 (1,703)
2,810 (1,807)
2,982 (1,970)
Gross Profit
Year ending 31 Dec (SAR mn) Net profit before Zakat Depreciation
2015A
2016E
2017E
644 149
800 151
800 154
837
1,002
1,012
Other Adjustments
(242)
(244)
(255)
Working Capital Changes
779
937
941
Cashflow from Operations
665
775
814
630
786
788
Capital Expenditure
(28)
(110)
(134)
Other Income
50
35
35
Other Investing Activities
24
0
0
Net Interest Income
(1)
6
7
Cashflow from Investing
(3)
(110)
(134)
(23)
(40)
(20)
0
0
0
621
760
780
Selling, General Expenses EBITDA
and
Admin.
Operating Profit
Tax Minority Interest Net Profit
11
(18)
4
(140)
(159)
(143)
Debt Raised/Repaid Dividend
0
0
0
(402)
(462)
(509)
Other Financing Activities Cashflow from Financing Net Chg in Cash
0
(350)
0
(402)
(812)
(509)
260
(148)
170
Note: The above statements may not match the published cash flow statements due to adjustments made by us.
Key Ratios (Consolidated)
Balance Sheet (Consolidated) Year ending 31 Dec (SAR mn) Cash & Short Term Deposits Other Current Assets
2015A
2016E
2017E
Year ending 31 Dec (SAR mn)
2015A
2016E
2017E
779 986
632 1,182
802 1,342
EPS EPS Growth (%)
3.30 (5.5)
4.04 22.4
4.15 2.5
0
0
0
Gross Margin (%)
33.0
35.7
33.9
Net Fixed Assets
473
470
485
EBITDA Margin (%)
30.7
33.4
31.6
Net Intangible Assets
934
896
861
EBITDA Growth (%)
0.0
20.3
0.4
76
103
134
Net Margin (%)
25.8
28.0
27.2
3,249
3,634
3,975
ROAE (%)
23.9
26.7
24.9
ROAA (%)
21.2
22.9
21.3
0.0
0.0
0.0
Investments
Other Non-Current Assets Total Assets Current Liabilities
280
316
333
Total Debt
0
0
0
Debt/Equity (%)
Other Liabilities
0
0
0
Valuation Ratios
545
632
703
PER (x)
12.9
10.5
10.3
0
PBV (x)
3.0
2.7
2.5
Dividend Yield (%)
4.8
6.1
6.4
9.9
7.9
7.7
Total Liabilities Minority Interest Share Capital
0
0
1,880
1,880
1,880
824
1,122
1,392
EV/EBITDA (x)
Shareholders Funds
2,704
3,002
3,272
Source: Company, SICO Research, Bloomberg
Total Equity & Liabilities
3,249
3,634
3,975
Reserves & Surplus
5
SICO RESEARCH
Saudi Ground Services
Price, Target Price and Rating Change History Chart of (SGS AB) RatingInitiation
80.0
X 75.0 70.0 65.0
N
N
N
25-Aug-16
25-Dec-15
25-Nov-15
25-Oct-15
25-Sep-15
25-Aug-15
25-Jul-15
25-Jun-15
40.0 35.0 30.0
B
B
25-Jun-16
B
25-May-16
50.0 45.0
25-Jul-16
60.0 55.0 B
25-Apr-16
B N N B B N B
25-Mar-16
Target Price 74.00 71.00 62.00 56.00 50.00 52.00 52.00
25-Feb-16
25-Jun-15 5-Aug-15 28-Oct-15 2-Feb-16 21-Feb-16 11-Jul-16 7-Sep-16
Closing Price 51.52 65.87 55.08 38.49 40.74 47.72 42.65
25-Jan-16
Date
Closing Price Target Price B=Buy, A=Add, N=Neutral, R=Reduce, S=Sell, U/R = Under Review
Securities & Investment Company BSC Analyst Stock Rating Definitions * Note:- Under old methodology, up until 20th Feb 2016, we had 5 categories of LT rating. Sell (+25%). The LT rating was independent of Risk Profile. Time horizon Short term SICO Research issues a Short term outlook if the analyst feels that there are factors which might affect the short-term performance of the stock during the immediate six months after issuing a rating. This might be due to both quantitative and qualitative factors which the analyst think can affect the stock price. Long term SICO Research’s Long-term rating is based on the Target Price calculated by the analyst. The Target Price is arrived at using both fundamental and/or comparative valuation methods based on the detailed Financial models developed by analysts incorporating current expectations and analyst's assumptions. Target price for a stock is calculated one year forward from the valuation date Recommendation (Short term) Positive Analyst expect positive triggers in the short term which might affect current price positively (> 10%) Neutral Analyst does not expect any short term triggers/events (+/- 10%) Negative Analyst expect negative triggers in the short term which might affect current price adversely (< 10%) Recommendation (Long term)* Buy If Risk profile is “High” Target price estimate offers 20%+ return from the current share price. If Risk profile is “Normal” Target price estimate offers 15%+ return from the current share price. Neutral If Risk profile is “High” Target Price estimate offers 0% to 20% return from the current share price. If Risk profile is “Normal” Target Price estimate offers 5% to 15% return from the current share price Sell If Risk profile is “High” Target price estimate offers less than 0% return from the current share price. If Risk profile is “Normal” Target price estimate offers less than 5% return from the current share price. Risk High Stock volatility (360 days standard deviation) exceeds 2x of S&P GCC market volatility Normal Stock volatility (360 days standard deviation) lower than 2x of S&P GCC market volatility
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SICO RESEARCH
Saudi Ground Services
NOTES Contact Details BMB Centre, 1 Floor P.O Box 1331, Diplomatic Area Manama Kingdom of Bahrain st
Investment Research [email protected]
Head of Research Nishit Lakhotia, CFA, CAIA Tel: (Direct) +973 – 17515021
Brokerage Fadhel Makhlooq Tel: (Direct): +973 – 17515202
Visit us at www.sicobahrain.com
Disclaimer This report does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for any securities. The information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. Investors must make their own investment decisions. Past performance is not necessarily a guide to future performance. Nothing in this report should be construed as investment or financial advice or as an advice to buy or sell the securities of the company referred to in this report. SICO and/or its clients may have positions in or options on the securities mentioned in this report or any related investments, may affect transactions or may buy, sell or offer to buy or sell such securities or any related investments. The analyst(s) who is (are) responsible for producing the report certifies(y) that he (she) or any of their close relative have no beneficial ownership in the company’s stock at the time of publishing the report. Any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Additional information on the contents of this report is available on request. Among stocks under our coverage, Ahli United Bank and National Bank of Bahrain owns 11.9% and 12.5% respectively in SICO. SICO does market making in Aluminum Bahrain (ALBA) and Zain Bahrain’s shares.
Copyright Notice © Securities and Investment Company 2016. This report is being supplied to the recipient for information and not for circulation and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part.
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