AlJazira Cap says Saudi tourism sector’s long-term prospects bright; upgrades Saudi Catering to ‘Overweight’

The long-term prospects for the travel and tourism sector in Saudi Arabia are bright although the sector’s recovery from the pandemic is likely to be slow, AlJazira Capital said in a new report.

The pace of recovery could pick up significantly once conditions normalize, it added.

However, the travel and tourism sector would take some time to return to pre-COVID-19 levels due to the spread of the second strain of the virus and the time taken to vaccinate the entire population.

Furthermore, the announcement of lifting restrictions on travel for certain citizens from May 17, 2021, and the expected opening of international borders in May 2021 will give a boost to the sector. The return of Hajj and Umrah pilgrims at full capacity is another key driver that is likely to help recovery in the sector.

While the sector is expected to face short-term challenges, the long-term potential remains unchanged, the report noted. Therefore, the current situation presents a good opportunity for investors from a long-term perspective.

AlJazira Capital’s top pick in the sector is Saudi Airlines Catering Co. (Saudi Catering), with a potential upside of 24.5% at current valuation on account of good revenue visibility, strong financial and healthy expected dividend yield.

The company is estimated to return to profitability in 2022, the brokerage said.

“We believe that Saudi Catering’s long-term story remains intact due to the growth potential in the sector, driven by government support and the company’s firm position in both in-flight catering and non-airlines business.”

Given Saudi Catering’s reputation of providing high-quality services and ability to handle large volumes, the company is well-positioned to grab growth opportunities.

Thus, the brokerage raised the target price (TP) per share to SAR 98.3 from SAR 97.6 and upgraded the rating to “Overweight” on the stock, based on the company’s stronghold in operating markets and high growth potential in the sector.

Meanwhile, the brokerage expected Saudi Ground Services Co. (SGS) to feel the COVID-19 pressure in the short term. However, the long-term outlook remains positive. The company’s operations is likely to feel the impact of the pandemic in 2021, as travel restrictions are still in place. However, operating conditions are expected to improve in 2022, driven by vaccination rollout.

Thus, the company’s long-term prospects remain intact, given the government’s emphasis on developing the travel and tourism sector under Vision 2030. Furthermore, the General Authority of Civil Aviation’s (GACA) focus on upgrading the airports and services offered bodes well for the Tadawul-listed firm.

In addition, the initiatives taken towards cost-cutting and liquidity improvement during the pandemic are likely to help SGS recover strongly from the crisis.

AlJazira Capital increased the target price per share to SAR 36.80 from SAR 27.90, while maintaining a “Neutral” rating on the stock, given the company’s rapid expected recovery and long-term positive outlook.