We initiate coverage on the KSA IT Sector with the only two listed names – Arabian Internet & Communication Services Co. (Solutions by STC), and Al Moammar Information Systems (MIS). Overall, we have a favorable view of the sector and expect it to remain on a strong growth trajectory in the foreseeable future, supported by the government’s digital transformation drive. We have used two valuation methodologies (DCF, relative valuation – P/E), and applied equal weightage to both the methods to arrive at the target price.
• IT spending share of GDP in KSA is below the developed markets. Saudi Arabia’s IT spending as % of GDP is below the matured markets and even its neighbor UAE (0.7% vs. 1.3%, and 0.9%, respectively, as of 2018). This indicates the Kingdom needs to keep on investing in the sector as a developed IT market would be imperative, in our view, to achieve its long-term economic goals. The Ministry of Communications & Information Technology (MCIT) has initiated steps in this direction and formulated an ICT strategy for 2023, which is a stepping stone to realizing the broader goals of Vision 2030. Some of its salient objectives are to raise the size of the IT sector by 50%, which is estimated at ~SAR 38bn in 2021, increase the sector’s contribution to GDP by SAR 50bn (4.6% of GDP by 2023 vs. 3.6% in 2017), and create over 25,000 jobs.
• The ambition to develop Kingdom as the region’s digital hub is a major catalyst for the sector’s growth. The government intends to make the Kingdom region’s digital hub, as part of its broader economic diversification plan. The IT sector can be seen at the forefront to achieve this considering the increasing role technologies like AI, data analytics, IoT, etc. are playing in almost every business. Further, megaprojects like smart cities, changing dynamics of the entertainment industry with higher usage of live streaming services, post-COVID developments like hybrid work environments, and increasing digitization & automation by the private sector to become more nimble and efficient are the additional demand drivers for the sector. Hence, the ICT sector is estimated to gain traction, clocking between 8% and 9% CAGR during 2021-2025 (vs. 4-5% CAGR during 2018-2021).
• Organized IT players well placed to capitalize on upcoming opportunities. In our view, both Solutions and MIS are well equipped to benefit from the upcoming opportunities in the IT sector, given their proven capabilities, and availability of requisite infrastructure. Solutions, because of its relationship with STC, gets significant business opportunities internally. Also, with the highest market share of 19%, a good brand presence, and its association with major global IT players works in its favor in attracting more business. On the other hand, MIS’s involvement in the data centers project appears to be a major catalyst for the earnings growth going forward, while its diverse segments covering almost every domain of the IT Services sector are expected to expand in tandem with the industry.