How did research firms view stc’s financials, average TP in Q3 2022?

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In this report, Argaam reviews the opinions of 11 research firms on the financial results of telecom firm stc, as earnings rose 21% year-on-year (YoY) to SAR 3.541 billion in Q3 2022.

Nine research firms assigned a “Buy” rating to stc, while two others recommended a “Neutral”, based on the valuation criteria adopted by each of them. 

FAB Securities set the highest target price (TP) at SAR 54 a share, while Morgan Stanley put the lowest TP at SAR 43. The average TP was SAR 50.05 per share.

Riyad Capital said that stc's Q3 net profits rose by 21% YoY and 25% quarter-on-quarter (QoQ), to reach SAR 3.54 billion, mainly due to the reversal of provisions despite the increase in other expenses by SAR 653 million YoY and by SAR 157 million QoQ.

This came on the backdrop of stc’s net profit share and impairment in investments in associates and joint ventures at a value of SAR 776 million, compared to SAR 21 million in Q3 2021 and SAR 283 million in Q2 2022 due to an impairment provision for investment in Binariang GSM Holding (BGSM) on lower fair value amid a drop in Malaysia's market condition.

Meanwhile, AlJazira Capital said that the telecom firm's Q3 net profit exceeded its expectations of SAR 2.98 billion and average expectations of SAR 2.94 billion.

The deviation from the actual results and AlJazira Capital's expectations was mostly related to the reversal of a provision worth SAR 1.079 billion related to potential liabilities, in addition to a higher-than-expected rise in gross profit margin. This was partly offset by a decline in revenues and the amortization of investments in Binariang GSM at a value of SAR 722 million, it added.

SNB Capital also reported that the company's Q3 2022 net profit was higher than its expectations of SAR 2.99 billion and market's average forecasts of SAR 2.94 billion. It ascribed the deviation between its estimates and actual profit to reversing SAR 1.08 billion worth of liabilities provision.

AlJazira Capital said that the telecom firm's Q3 2022 revenues increased by 4.7% YoY to reach SAR 16.47 billion, in line with its expectations of SAR 16.99 billion. It added that revenue also grew by 4.7% YoY, indicating that the positive impact of one-offs on net profit for Q3 2022 amounted to about SAR 530 million.

Among the key factors that led to the increase in revenues was the 1.5% YoY  growth in fiber optic (FTTH) subscribers in September. Also, fixed wireless access increased by 18.1% in Q3 2022. In addition, the business segment recorded a growth of 12.4% YoY, carriers and operators (7.3%) and retail (9.6%) in 9M 2022, the brokerage added.

Meanwhile, Riyad Capital said that stc revenues fell by 3% QoQ, while the cost of revenue declined by SAR 939 million YoY, due to the reversal of the potential liability provision of SAR 1.079 billion, but increased by about 5% YoY. The brokerage believed that stc will distribute additional dividends for 2023, especially after the company received a non-binding offer from the Public Investment Fund to acquire a 51% stake in its subsidiary Tawal.

SNB Capital said that the rise in the company's Q3 revenues was due to the increase in revenues of all segments. However, the growth in revenues by 4.7% YoY is less than the rise recorded by Mobily (6.2%) and solutions (14.1%).

FAB Securities said that stc  deployed about 7,000 towers to support the 5G network in 2022, and recorded a growth in the customer base of FTTH and fixed wireless access (FWA) services by 3.4% and 13.5%, respectively, in Q2 2022.

The company also entered into a number of partnerships to expand the scope of its activities and invested in new areas, such as the Saudi Cloud Computing Company (SCCC) in partnership with Alibaba, in which stc owns a 55% stake, FAB Securities added.

The brokerage also said that stc's strategic acquisitions are fully in line with its long-term goals, which are represented in local and international expansion, which may cost about $ 1billion.

SNB Capital considers the steady growth in stc's revenues and margins to be one of key factors supporting its performance, while the increase in operating expenses and items with regard to the company's investment in BGSM Group is the main concern.

AlJazira Capital added that a significantly high and rising amount of government receivables remains a key risk for the telecom operator. The PIF offer to acquire 51% of Tawal at a valuation of SAR 21.9 billion, would benefit STC in terms of cash inflows and lower depreciation on tower assets.

Given the solid set of subsidiaries the company has and the investment it has made in ICT business, there is potential for value unlocking from these subsidiaries in future, AlJazira Capital added.

stc stock is currently trading at around SAR 36.00 per share, as shown in the following table:

The company's board, in a meeting held on Oct. 27, recommended the distribution of cash dividend at 4% of capital, or SAR 0.40 per share, for Q3 2022, according to Argaam's data.

In November, stc signed a binding offer with solutions to sell its entire 49% stake in CCC for a cash consideration.

The financial impact is expected to be positive as solutions will acquire the entire share capital of CCC, where it will become a wholly-owned subsidiary. As a result, CCC's financial results will be consolidated in solutions' financials upon the deal completion.