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Saudi Ground Services Co November 2019 Saudi Ground Services Co. Investment Update Saudi Ground Services (SGS) posted Q3-19 earnings, exceeding our estimates. Its Overweight revenue growth is expected to be driven by a rise in the number of flights and terminals owing to measures undertaken by GACA and growing tourism in the Kingdom. Margins Target Price (SAR) 35.25 are expected to remain under pressure with the entry of new players in the market. We recommend a “Overweight” rating on SGS, with a positive outlook from a long-term Upside / (Downside)* 9.8% th perspective with a PT of SAR 35.25/share. Source: Tadawul *prices as of 14 of November 2019 • GACA’s airport development program to boost revenues: In FY-18, KSA’s Key Financials SARmn aviation sector accounted for 4.6% of total GDP, contributing USD 34.0bn to (unless specified) FY17 FY18 FY19E gross value added. The General Authority of Civil Aviation (GACA) as part of its Revenue 2,585.5 2,554.0 2,510.7 development program started with Prince Nayef bin Abdulaziz International Airport Gross Profit 874.4 684.4 715.7 in Qassim and Prince Abdulmohsen bin Abdulaziz International Airport in Yanbu. Net Profit 501.5 368.4 441.0 SGS’s partner carriers, such as Kuwait Airways and Air Arabia Egypt, have recently EPS 2.67 1.96 2.35 launched additional flights. Moreover, GACA announced the launch of a new Source: Company reports, Aljazira Capital terminal at King Khalid International Airport in Riyadh. Thus, we expect SGS’s top Revenue by Airport FY-19 (SAR mn) line to grow with the addition of new terminals and increased number of flights at 800 existing terminals. • Increase in tourism and fleet size of partner carriers to be key growth driver: 600 According to GASTAT, the official number of Hajj pilgrims taking part in FY-19 is 400 2.5mn, of which 1.9mn (93.0%) arrived by air. While, as of June 2019, 7.5mn visas were issued to Umrah pilgrims, of which 6.4mn (85.3%) arrived through air. In light 200 of regulatory changes such as cancelation of repeat Umrah fees and other initiatives undertaken by the Saudi government, we expect the number of tourists visiting the 0 1Q2019 2Q2019 3Q2019 country to rise. As majority of them arrive through air, we believe the airline industry Jeddah Riyadh Dammam Madina Others will expand. Source: Bloomberg, AlJazira Capital • Saudia, the key partner of SGS, has added 17 new planes to its fleet, taking the total Key Ratios fleet size to 165 airplanes in FY-19, in order to support Hajj demand. The company is FY17 FY18 FY19E expected to continue expanding its fleet size. Some of other airline partners such as Gross Margin 33.8% 26.8% 28.5% Flyadeal has a fleet size of 11 aircrafts and is likely to add 30 more by 2021. Net Margin 19.4% 14.4% 17.6% • New entrants may impact company’s margins and market share: In Q3- P/E 14.7x 15.8x 13.7x 19, operating margins rose to 17.8% from 12.5% in Q3-18, primarily driven by P/B 2.6x 2.0x 2.0x discontinuance of cost of living allowance, a 20.2% Y/Y decline in G&A expense EV/EBITDA (x) 11.9x 10.7x 8.4x and rise in other income due to the refund from government on staff working card. Source: Company reports, Aljazira Capital In 9M-19, the margins expanded to 18.2% from 15.6% in 9M-18. In terms of ground handling services, SGS owns a market share of c93%. However, in FY-19, GACA Key Market Data has granted licenses to two new operators - Sky Prime and Jet Aviation, thus Market Cap (bn) 6.0 YTD % 4.37% increasing the number of ground handling companies in KSA to four. Thus, pricing 52 Week (High / Low) 34.2/26.0 pressure may continue to affect the margins. Shares Outstanding (mn) 188.00 AJC View and Valuation: The aviation industry in KSA has favorable growth prospects Source: Company reports, Aljazira Capital due to rising tourism and the Kingdom’s increased focus on refurbishment of the Price Performance industry. SGS stands to benefit from the rise in the number of flights and the addition 70 9000 of new terminals. The company’s persistent efforts to diversify its current revenue 60 8000 dependency from Saudia are in line with the Kingdom’s attempt to privatize the sector. 50 Furthermore, with heightening competition, we expect SGS to continue to witness 7000 40 pricing pressure. In Q3-19, SGS reported revenue of SAR 683.3mn, implying a decline 6000 30 of 2.5% Y/Y. Moreover, its 9M-19 revenue stood at SAR 1,940.4mn, down 2.1% Y/Y. The fall in revenues is attributed to a reduction in prices despite the rise in business 5000 20 Oct-19 Oct-18 Oct-17 Oct-16 Oct-15 Jun-19 Jun-18 Jun-17 Jun-16 volume. We expect the company to report EPS of SAR 2.35 in FY-19, representing a Jun-15 Feb-19 Feb-18 Feb-17 Feb-16 growth of 19.7%. TASI SGS (RHS) Source: Tadawul, Aljazira Capital We value SGS on 100% weight for DCF (3.0% terminal growth and 9.2% average Head of Research WACC). This yields a target price of SAR 35.25 per share, representing a 9.8% upside from current levels. The stock is currently trading at a P/E of 18.4x as per our FY20 Talha Nazar +966 11 2256250 EPS. We recommend a “Overweight” rating on SGS, with a positive outlook from a [email protected] long-term perspective with a PT of SAR 35.25/share. 1 © All rights reserved November 2019 Saudi Ground Services Co. Investment Update Amount in SAR mn, unless otherwise specified FY16 FY17 FY18 FY19E Income statement Gross Revenue 2,727 2,586 2,554 2,511 Revenue Growth (%) 7.3% -5.2% -1.2% -1.7% Cost of Revenue (1,802) (1,711) (1,870) (1,795) Gross Profit 924 874 684 716 Gross Profit Margin (%) 33.9% 33.8% 26.8% 28.5% General & Administrative Expense (249) (382) (313) (272) Other Income 8 3 0 8 Operating Income 683 495 371 452 Share in net income of equity accounted investee 22 23 8 9 Financial Income 15 19 18 15 Financial Charges - (3) (3) (8) Income before Zakat 720 535 395 469 Zakat (34) (33) (26) (28) Net income 686 502 368 441 Net Profit Margin (%) 25.2% 19.4% 14.4% 17.6% EPS 3.65 2.67 1.96 2.35 Balance sheet Assets Cash and cash equivalents 98 36 310 581 Short term Bank Deposits 405 - - - Investment Held for Trading 455 656 305 305 Trade Receivables, net 1,072 1,054 1,308 1,035 Inventories, net - - 0 0 Prepayment & Other receivables 291 390 354 264 Total Current Assets 2,320 2,136 2,277 2,184 Investment accounted under equity method 98 122 130 139 Property & Equipment 480 616 635 786 Intangbile assets 911 887 891 843 Prepayment & Other receivables 16 6 5 5 Total non-current assets 1,505 1,631 1,661 1,772 Total Assets 3,825 3,767 3,938 3,956 LIABILITIES - - - - Trade Payables 28 64 49 49 Accrued Zakat 47 66 86 71 Accrued Expenses & other Liabilities 390 334 452 289 Current- Lease Liabilities - - - 63 Total current liabilities 465 463 587 472 Employees end of services benefits 383 432 474 413 Non -Current- Lease Liabilities - - - 106 Non-current Liabilities 383 432 474 519 Total Liabilities 849 895 1,062 992 EQUITY - - - - Share Capital 1,880 1,880 1,880 1,880 Statutory Reserve 370 420 457 501 Retained Earnings 727 572 540 584 Total Shareholder's Equity 2,977 2,872 2,876 2,965 Total Liabilities & Equity 3,825 3,767 3,938 3,956 Cashflow statement Operating activities 616 564 436 789 Investing activities (957) (14) 204 (166) Financing activities (340) (611) (367) (353) Change in cash (682) (61) 274 271 Ending cash balance 98 36 310 581 Key fundamental ratios Liquidity ratios Current ratio (x) 4.4 3.8 3.3 4.1 Quick ratio (x) 4.4 3.8 3.3 4.1 Profitability ratios GP Margin 33.9% 33.8% 26.8% 28.5% Operating Margins 25.0% 19.1% 14.5% 18.0% EBITDA Margin 29.4% 23.8% 20.0% 26.9% Net Margins 25.2% 19.4% 14.4% 17.6% Source: Company financials, AlJazira research 2 © All rights reserved Head of Research Senior Analyst Analyst Talha Nazar Jassim Al-Jubran Abdulrahman Al-Mashal +966 11 2256250 +966 11 2256248 +966 11 2256374 [email protected] [email protected] [email protected] RESEARCH DIVISION General Manager – Brokerage Services & AGM-Head of international and institutional AGM-Head of Qassim & Eastern Province sales brokerage Alaa Al-Yousef Luay Jawad Al-Motawa Abdullah Al-Rahit +966 11 2256060 +966 11 2256277 +966 16 3617547 [email protected] [email protected] [email protected] AGM-Head of Sales And Investment Centers Central Region, & acting head Western and Southern Region Investment Centers Sultan Ibrahim AL-Mutawa CENTERS DIVISION +966 11 2256364 [email protected] BROKERAGE AND INVESTMENT BROKERAGE AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody.
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