Saudi Ground Services Co.

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1 © All rights reserved

November 2019

Saudi Ground Services Co.

Investment Update

Key Financials

SARmn

(unless specified) FY17 FY18 FY19E

Revenue 2,585.5 2,554.0 2,510.7

Gross Profit 874.4 684.4 715.7

Net Profit 501.5 368.4 441.0

EPS 2.67 1.96 2.35

Source: Company reports, Aljazira Capital

Head of Research

Talha Nazar

+966 11 2256250

[email protected]

Overweight

Target Price (SAR) 35.25 Upside / (Downside)* 9.8%

Source: Tadawul *prices as of 14^th of November 2019

Key Ratios

FY17 FY18 FY19E Gross Margin

33.8% 26.8% 28.5%

Net Margin

19.4% 14.4% 17.6%

P/E

14.7x 15.8x 13.7x

P/B

2.6x 2.0x 2.0x

EV/EBITDA (x)

11.9x 10.7x 8.4x

Source: Company reports, Aljazira Capital

Key Market Data

Market Cap (bn)

6.0

YTD % 4.37%

52 Week (High / Low)

34.2/26.0

Shares Outstanding (mn)

188.00

Source: Company reports, Aljazira Capital Price Performance

Saudi Ground Services (SGS) posted Q3-19 earnings, exceeding our estimates. Its 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 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 perspective with a PT of SAR 35.25/share.

• GACA’s airport development program to boost revenues: In FY-18, KSA’s aviation sector accounted for 4.6% of total GDP, contributing USD 34.0bn to gross value added. The General Authority of Civil Aviation (GACA) as part of its development program started with Prince Nayef bin Abdulaziz International Airport in Qassim and Prince Abdulmohsen bin Abdulaziz International Airport in Yanbu.

SGS’s partner carriers, such as Kuwait Airways and Air Arabia Egypt, have recently launched additional flights. Moreover, GACA announced the launch of a new terminal at King Khalid International Airport in Riyadh. Thus, we expect SGS’s top line to grow with the addition of new terminals and increased number of flights at existing terminals.

• Increase in tourism and fleet size of partner carriers to be key growth driver:

According to GASTAT, the official number of Hajj pilgrims taking part in FY-19 is 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 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 country to rise. As majority of them arrive through air, we believe the airline industry will expand.

• Saudia, the key partner of SGS, has added 17 new planes to its fleet, taking the total fleet size to 165 airplanes in FY-19, in order to support Hajj demand. The company is expected to continue expanding its fleet size. Some of other airline partners such as Flyadeal has a fleet size of 11 aircrafts and is likely to add 30 more by 2021.

• New entrants may impact company’s margins and market share: In Q3- 19, operating margins rose to 17.8% from 12.5% in Q3-18, primarily driven by discontinuance of cost of living allowance, a 20.2% Y/Y decline in G&A expense and rise in other income due to the refund from government on staff working card.

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 has granted licenses to two new operators - Sky Prime and Jet Aviation, thus increasing the number of ground handling companies in KSA to four. Thus, pricing pressure may continue to affect the margins.

AJC View and Valuation: The aviation industry in KSA has favorable growth prospects due to rising tourism and the Kingdom’s increased focus on refurbishment of the industry. SGS stands to benefit from the rise in the number of flights and the addition of new terminals. The company’s persistent efforts to diversify its current revenue dependency from Saudia are in line with the Kingdom’s attempt to privatize the sector.

Furthermore, with heightening competition, we expect SGS to continue to witness pricing pressure. In Q3-19, SGS reported revenue of SAR 683.3mn, implying a decline 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 volume. We expect the company to report EPS of SAR 2.35 in FY-19, representing a growth of 19.7%.

We value SGS on 100% weight for DCF (3.0% terminal growth and 9.2% average 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 EPS. We recommend a “Overweight” rating on SGS, with a positive outlook from a long-term perspective with a PT of SAR 35.25/share.

Source: Tadawul, Aljazira Capital

TASI SGS (RHS)

20 30 40 50 60 70

5000 6000 7000 8000 9000

Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Feb-18 Jun-18 Oct-18 Feb-19 Jun-19 Oct-19

Jeddah Riyadh Dammam Madina Others 0

200 400 600 800

1Q2019 2Q2019 3Q2019

Revenue by Airport FY-19 (SAR mn)

Source: Bloomberg, AlJazira Capital

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2 © 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

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1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target.

Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months.

2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target.

Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months.

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Head of Research