Solutions by stc (7202) is Saudi Arabia's leading ICT services provider, delivering end-to-end digital transformation solutions. With 79% ownership by Saudi Telecom Company (STC), the company benefits from strong institutional backing and access to Saudi's largest telecom infrastructure.
Why This Stock Deserves Attention
Solutions by stc is positioned at the intersection of three powerful trends: Saudi Vision 2030's digital transformation mandate, explosive ICT sector growth (forecast to reach $106.8B by 2034), and the Kingdom's push toward a knowledge-based economy. The company posted SAR 12.06B in revenue for 2024 (+9.3% YoY) with net profit surging 33.9% to SAR 1.597B.
What makes this story compelling is the company's exceptional profitability metrics: a 43.4% return on equity, 34.3% return on invested capital, and 16.1% EBITDA margin—all while maintaining strong cash generation of SAR 1.19B in free cash flow. These numbers reflect a business with significant competitive advantages and pricing power.
The Strategic Position
As the #1 IT services provider in KSA with a 22.7% market share, Solutions by stc operates in a highly attractive, government-supported sector. The company's SAR 14 billion contract backlog provides revenue visibility for years to come, including major 5G network expansion projects (SAR 313M), data center hosting agreements (SAR 261.9M), and smart city infrastructure initiatives.
Recent regional expansion through the Giza Systems acquisition has opened doors to the Egyptian market and broader Middle East/Africa region, with operations now spanning 8+ countries. This geographic diversification reduces concentration risk while tapping into high-growth emerging markets.
Catalysts: What Could Drive Growth?
1. Vision 2030 Mega-Projects: Solutions by stc is well-positioned to capture contracts from Saudi's $1+ trillion development pipeline, including NEOM, Red Sea Project, and Qiddiya. Government ICT spending jumped 20% in 2023 alone to SAR 41.9B.
2. 5G Infrastructure Rollout: As STC's primary technology partner, the company is central to Saudi's nationwide 5G deployment, creating recurring revenue streams from network management and digital services.
3. Cloud Adoption Acceleration: Saudi enterprises are migrating to cloud at 15%+ annually. Solutions by stc's comprehensive cloud services (IaaS, PaaS, SaaS) and partnerships with global leaders position it to capture this shift.
4. Cybersecurity Demand Surge: With digital transformation comes heightened security needs. The company's end-to-end cybersecurity integration services address a market growing at 12% CAGR in the region.
5. M&A Strategy: Management has demonstrated appetite for strategic acquisitions (Giza Systems, Devoteam Middle East stake). Further consolidation in fragmented regional markets could accelerate growth.
Assumptions: My Investment Thesis
My SAR 342.23 fair value is based on conservative yet achievable assumptions:
• Revenue Growth: 10% CAGR - Below analyst consensus of 12-14%, accounting for market maturation while capturing Vision 2030 tailwinds
• Net Margin: 13% - Slight improvement from current 12.35%, driven by operating leverage as fixed costs are spread over growing revenue base
• Target P/E: 18x - Conservative multiple between current 17.3x and industry average 21.3x, justified by quality and growth profile
• Discount Rate: 21.33% - Reflects moderate risk given STC backing, strong balance sheet, and government relationships
The bull case assumes continued Vision 2030 momentum, stable margins through operational efficiency gains, and successful execution on the SAR 14B contract backlog. These are reasonable given the company's 35-year track record and #1 market position.
Risks: What Could Go Wrong?
1. Customer Concentration Risk: Approximately 31% of revenue comes from STC, with significant additional exposure to government contracts. Any slowdown in public sector IT spending or changes in STC's procurement strategy could materially impact results. Oil price volatility indirectly affects government budgets.
2. Execution Risk on Large Projects: The company's project-based revenue model means margins can fluctuate based on project mix and delivery timing. Delays, cost overruns, or contract disputes on major initiatives could pressure profitability.
3. Competitive Pressures: While Solutions by stc dominates today, international technology giants (IBM, Oracle, Cisco) and aggressive local players are targeting the same high-growth market. Price competition could compress margins.
4. Regulatory and Policy Changes: Changes to Saudi labor regulations (Saudization requirements increasing to 65%+), outsourcing rules, or foreign ownership restrictions in the tech sector could impact operations and costs.
5. Integration Challenges: Recent acquisitions (Giza Systems, Devoteam stake) require successful integration to realize synergies. Cultural differences and operational complexities across 8 countries add execution risk.
6. Technology Disruption: Rapid evolution in cloud, AI, and cybersecurity could require significant ongoing investment to maintain competitive positioning. Failure to keep pace with technology shifts could erode market share.
Valuation: Where Is The Opportunity?
At SAR 342.23 fair value versus the current ~SAR 225 price, the stock offers 34.3% upside potential—a compelling risk-reward for a quality company in a structural growth market.
This valuation is supported by multiple approaches:
• Forward P/E Analysis: Using projected 2026 EPS of ~SAR 17-18 and target P/E of 18x yields SAR 306-324
• EV/EBITDA: At 12x forward EBITDA of ~SAR 2.2B = SAR 26.4B enterprise value, or ~SAR 330 per share
• DCF Model: 10-year discounted cash flow with terminal growth of 3% supports SAR 320-360 range
• Analyst Consensus: Average 12-month target of SAR 309.65 (range: SAR 238-400)
The company currently trades at just 15.2x forward earnings—a significant discount to its growth profile and quality metrics. For context, comparable regional IT services firms trade at 18-22x forward earnings.
The Bottom Line
Solutions by stc represents a rare opportunity to invest in a dominant market leader during an inflection point in Saudi Arabia's digital transformation. The combination of:
• Strong fundamentals (43% ROE, 34% ROIC, consistent cash generation)
• Structural growth tailwinds (Vision 2030, 5G, cloud migration)
• Attractive valuation (34% upside to fair value)
• Improving margins and operational efficiency
• Growing dividend (SAR 10/share in 2024 vs SAR 6 in 2023)
creates a compelling investment case for long-term value creation.
My Take: This is a BUY for investors seeking exposure to Saudi's tech transformation story with downside protection from strong fundamentals and STC backing. The 34% upside potential, combined with a ~4% dividend yield and improving margins, offers an attractive total return profile. However, monitor customer concentration and execution on major projects closely.
How well do narratives help inform your perspective?
Disclaimer
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