AlJazira Cap starts SGS coverage with ‘Neutral’, TP at SAR 39.5

AlJazira Capital has initiated coverage on Saudi Ground Services Co. (SGS) with a “Neutral” rating and a target price of SAR 39.5, the brokerage said in a report on Wednesay.

SGS holds a 95 percent local market share, thanks to its strong association with Saudia Air Transport (Saudia).

However, the Kingdom’s privatization plans for all local airports would increase the probability for new players to enter the market.

The entry of new operators would be a threat for SGS in terms of pricing power, which is determined based on negotiation with the airlines. SGS will have to compete for market share and retaining its existing clients going forward.

“Given the high level of market share, we believe the company can potentially enhance its revenue growth driven by fleet expansion from airline operators and higher aircraft traffic,” AlJazira Capital added.

SGS’ reliance on religious tourism is unlikely to be impacted by economic slowdown, as the Saudi government is targeting to increase the number of Hajj and Umrah Pilgrims (domestic and foreign) from current 1.5 million and 6.0 million to 2.5 million and 15.0 million respectively by

2020.

Cost optimization plans and improved business efficiency are forecast to mitigate the impact of high fuel/electricity costs going forward along with expat fees which would slightly compress margins.

“FY2018, we expect SGS to post earnings of SAR456.5 million (SAR 2.43 EPS), depicting a decline of 8.9 percent YoY impacted by top-line decline of (1.5 percent YoY) attributed by pricing revisions from Saudia and a higher OPEX,” the brokerage firm added.

AlJazira Capital added that it expects SGS to maintain sustainable dividends, and distribute a DPS for E2018 of SAR 2.60 (yield of 7.0 percent) backed by a strong free cash flow.