Saudi Telecom Co. (stc), the kingdom's largest telecom operator, reported a 12.4% decline in third-quarter net profit to 3.60 billion riyals, even as revenue climbed 3.7% to 19.99 billion riyals. The mixed results prompted FAB Securities, a UAE-based brokerage, to maintain its buy rating and 50-riyal price target on the stock.
What's behind the profit drop?
The profit decline may look concerning at first glance, but the underlying story is more about costs than a slowdown in demand. Revenue growth of nearly 4% suggests the company is still expanding its business. Instead, the bottom line was squeezed by several factors: higher direct costs and operating expenses, increased financing costs, and a larger zakat and income tax bill.
Zakat is a religious wealth tax that companies in Saudi Arabia are required to pay, and it can fluctuate from year to year. FAB Securities noted that the tax line looked worse partly because the previous year's figure was lower, making the comparison less favorable.
The brokerage described the results as "in line" with its expectations. Its estimate for attributable net profit was 3.59 billion riyals, just a hair below the actual 3.60 billion riyals. That close match is why the firm felt comfortable keeping its rating and price target unchanged.
Why the buy rating matters
FAB Securities' decision to stick with a buy rating and a 50-riyal price target signals that it sees the profit dip as temporary and not a reason to change its view on the company's longer-term prospects. For investors, a maintained price target often indicates that the analyst believes the stock still has upside from current levels.
Telecom companies like stc are often seen as defensive plays because they generate steady cash flows from subscriptions and services that people use every day. Even in uncertain economic times, demand for mobile and internet services tends to remain relatively stable.
However, the sector is not without challenges. Competition can pressure pricing, and heavy investment in network infrastructure—such as 5G rollouts—can weigh on margins. Higher financing costs, which have been a theme across many industries as interest rates have risen globally, also eat into profitability.
What it means for investors
For everyday investors, the key takeaway is that a company can grow its top line while seeing profits fall. That divergence often points to rising costs rather than weakening demand. It's a reminder to look beyond the headline profit number and consider what's driving the change.
In stc's case, the cost pressures are largely operational and financial, not a sign that customers are leaving. The fact that revenue is still growing suggests the core business remains healthy.
Investors might also watch how stc manages its expenses going forward. If cost pressures ease—perhaps through efficiency measures or lower interest rates—profitability could recover. Conversely, if costs continue to rise faster than revenue, the profit squeeze could persist.
FAB Securities' confidence, as reflected in its maintained buy rating, offers some reassurance. But it's always wise to consider multiple perspectives and do your own research before making investment decisions.
For context, other companies in the region have faced similar dynamics. For instance, Mashreqbank was recently upgraded to hold by FAB Securities after a strong third-quarter profit, showing that the brokerage is not shy about adjusting ratings when warranted. In contrast, stc's results were seen as in line, so no change was needed.
Globally, telecom and utility stocks are often favored for their dividends. stc has a history of paying dividends, which can provide a steady income stream. However, dividend sustainability depends on cash flow, and higher costs could pressure that in the future.
Looking ahead
The market will likely focus on stc's next earnings report to see if the cost pressures persist or begin to ease. Analysts will also watch for any updates on capital expenditure plans, particularly around 5G and other technology investments.
For now, the company's revenue growth is a positive sign, and the maintained buy rating suggests that the profit dip is not seen as a red flag. As always, investors should weigh the risks and opportunities based on their own financial goals.
This article is for informational purposes only and does not constitute investment advice. Always consult a qualified financial professional before making investment decisions.
