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stc
Annual Report
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A brief overview of stc
Group

 

,The performance, activities

and investments of stc Group

and its subsidiaries during

the year 2022

 

Risks management

and transactions with

related parties

 

Board of Directors and
Committees

 

Dividends Policy and Distribution

and Board Recommendations and

Compensation

 

Conclusion

 

Financial Consolidated

Statements

A brief overview of stc Group The performance, activities, and
nvestments of stc Group and
its subsidiaries during the year 2022 Risks management and transactions
with related parties Board of Directors and Committees Dividends Policy and
Distribution and Board
Recommendations and Compensation Conclusion Financial Consolidated
Statements
Financial Risk Management
financial-risk

Financial Risk

Management

  • Credit Risk Management

    The Group has approved guidelines and policies that allows it to only deal with creditworthy counterparties and limits counterparty exposure. The guidelines and policies allow the Group to invest only with those counterparties that have high investment grade credit ratings issued by international credit rating agencies and limits the exposure to a single counterparty by stipulation that the exposure should not exceed 30% of the counterparty’s shareholders’ equity. Further, the Group’s credit risk is monitored on a quarterly basis.

    Other than the concentration of credit risk disclosed in Note 18 in the annual financial statements, concentration of credit risk with respect to trade receivables are limited given that the Group’s customer consists of a large number of unrelated customers. Payment terms and credit limits are set in accordance with industry norms. Ongoing evaluation is performed on the financial condition of trade receivables and management believes there is no further credit risk provision required in excess of the normal provision for impairment loss (for more details, see Note 18 in the annual financial statements).

    In addition, the Group is exposed to credit risk in relation to financial guarantees given to some subsidiaries with regard to financing arrangements. The Group’s maximum exposure in this respect is the maximum amount the Group may have to pay if the guarantee is called on. There is no indication that the Group will incur any loss with respect to its financial guarantees as the date of the preparation of these consolidated financial statements (for more details, see Note 45 in the annual financial statements).

    Cash balances and short term investments are deposited in banks with credit rating ranging from Baa1 and above.

    The credit rating of stc’s investments in government sukuk and Binariang GSM Sdn Bhd (BGSM) sukuk are A and Aa3, respectively as at 31 December 2022 (2021: A and Aa3, respectively) (for more details, see note 16-1 in the annual financial statements). The carrying value of financial assets represent the maximum exposure to credit risk.

  • Foreign Currency Risk Management

    Saudi Riyal is considered as the functional currency of the Group which is pegged against the United States Dollar. Therefore, the Group is only exposed to exchange rate fluctuations from transactions denominated in foreign currencies other than United States Dollar. Thus, the impact of foreign currency risk is minimal on the Group.

  • Liquidity Risk Management

    The Group has established a comprehensive liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity requirements under the guidelines approved.

    The Group ensures its liquidity by maintaining cash reserves, short-term investments and committed undrawn credit facilities with high credit rated local and international banks. The Group determines its liquidity requirements by continuously monitoring short and long term cash forecasts in comparison to actual cash flows.

    Liquidity is reviewed periodically for the Group and stress tested using various assumptions relating to capital expenditure, dividends, trade receivable collections and repayment of loans without refinancing

    The following table details the Group’s remaining contractual maturity for financial liabilities with agreed repayment periods. The table have been drawn up based on the undiscounted cash flows of financial liabilities:

    Undiscounted Cash Flows
    December 31, 2022 (SAR Thousand) Carrying Amount 1 Year or Less Above 1 - 5 Years Above 5 Years
    Trade and other payables (Note 33) 20,900,153 20,900,153 - -
    Borrowings (Note 27) 10,490,533 610,768 6,129,748 5,486,557
    Lease liabilities (Note 29) 3,296,120 1,032,911 1,698,639 989,055
    Dividends payable (Note 32-1) 2,223,109 2,223,109 - -
    Other financial liabilities (Note 32-1) 5,353,170 3,339,956 1,353,514 1,436,506
    Undiscounted Cash Flows
    December 31, 2021 (SAR Thousand) Carrying Amount 1 Year or Less Above 1 - 5 Years Above 5 Years
    Trade and other payables (Note 33) 17,114,298 17,114,298 - -
    Borrowings (Note 27) 9,303,290 1,688,367 3,876,231 5,288,416
    Lease liabilities (Note 29) 3,223,167 984,130 1,847,417 769,576
    Dividends payable (Note 32-1) 2,193,995 2,193,995 - -
    Other financial liabilities (Note 32-1) 4,470,715 2,692,254 1,207,232 1,269,814

    * The above notes are for the annual financial statements

    The Group has unused financing facilities amounting to SAR 5,843 million as at 31 December 2022 (2021: SAR 5,629 million). The Group expects to meet its obligations from operating cash flows, cash and cash equivalents and proceeds of maturing financial assets.

    In accordance with the terms of the agreements with other telecommunication operators, debit and credit balances are settled in connection to call routing and roaming fees and only the net amounts are settled or collected. Accordingly, the net amounts are presented in the consolidated statement of financial position as follows:

    Gross Amounts Amounts Set Off Net Amounts
    December 31, 2022 (SAR Thousand)
    Financial assets 37,597,143 (7,098,693) 30,498,450
    Financial liabilities 33,249,966 (7,098,693) 26,151,273
    December 31, 2021 (SAR Thousand)
    Financial assets 38,445,373 (7,319,318) 31,126,055
    Financial liabilities 28,797,481 (7,319,318) 21,478,163

    Changes in liabilities arising from financial activities are as follows:

    Item (Thousands of Riyals) January 1, 2022 Cash Flows Non-monetary Changes (*) December 31, 2022
    Short-term borrowings 1,456,684 89,430 (1,269,331) 276,783
    Lease liabilities - current 869,574 (1,037,357) 1,080,697 912,914
    Long-term borrowings 7,846,606 1,054,511 1,312,633 10,213,750
    Lease liabilities - non-current 2,353,593 - 29,613 2,383,206
    Total 12,526,457 106,584 1,153,612 13,786,653
    Item (Thousands of Riyals) January 1, 2021 Cash Flows Non-monetary Changes (*) December 31, 2021
    Short-term borrowings 318,485 (631,230) 1,769,429 1,456,684
    Lease liabilities - current 742,185 (976,719) 1,104,108 869,574
    Long-term borrowings 8,637,605 1,023,963 (1,814,962) 7,846,606
    Lease liabilities non-current 2,237,853 - 115,740 2,353,593
    Total 11,936,128 (583,986) 1,174,315 12,526,457

    * Mainly includes reclassification from non-current to current portion.

  • Profit Rate Risk

    The Group’s main profit rate risk arises from borrowings with variable profit margin rates. There has been no change to the Group’s exposure to profit risks or the manner in which these risks are managed and measured.

    The sensitivity analyses below have been determined based on the exposure to profit rates for non-derivative instruments at the end of the financial year. These show the effects of changes in market profit rates on profit and loss. For floating rate liabilities, the analysis is prepared assuming the amounts outstanding at the end of the year were outstanding for the whole year. A 100 basis point increase or (decrease) represents management’s assessment of the reasonably possible change in profit rates. If profit rates had been 100 basis point higher (lower) and all other variables were held constant, the impact on the profit of the Group would have been lower (higher) by SAR 39 million (2021: SAR 8 million based on change of 20 basis point). This hypothetical effect on profit of the Group primarily arises from potential effect of variable profit financial liabilities.

  • Fair Value of Financial Instruments

    The Group uses valuation techniques appropriate to current circumstances that provide sufficient data to measure fair value. For financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety. (For more details, see note 4-20 in the annual financial statements).

    The fair values of financial instruments represented in trade and other receivables, short-term murabaha, cash and cash equivalents, and trade and other credit balances closely approximate their book value due to their short maturity.

    Financial assets and liabilities measured at fair value:

    Fair value
    31 December 2022
    Thousands of Riyals     		Carrying amount Level 1 Level 2 Level 3
    Financial assets
    At fair value through profit or loss: stc Ventures Fund and STV LP Fund (Note 16-1) 2,929,065 - - 2,929,065
    Financial liabilities
    At fair value through profit or loss: Other financial liabilities - - - -
    Fair value
    31 December 2021
    Thousands of Riyals     		Carrying amount Level 1 Level 2 Level 3
    Financial assets
    At fair value through profit or loss: stc Ventures Fund and STV LP Fund (Note 16-1) 2,135,246 - - 2,135,246
    Financial liabilities
    At fair value through profit or loss: Other financial liabilities (Note 32-1) 675 - 675 -

    *The above notes are for the annual financial statements

    There were no transfers between levels of the fair value hierarchy during year ended 31 December 2022.

    The fair value of the non current liability resulting from the put option to non-controlling interest shareholders has been determined using discounted cashflow valuation method and is classified within level 3 of fair value measurement (For more details, see note 32-1 in the annual financial statements).

    The fair value of the Group’s investment in the units of stc Ventures Fund and STV LP Fund (the “Funds”) is obtained from the net asset value (“NAV”) reports received from the Funds’ managers. The Funds’ managers deploy various techniques (such as recent round of finance, discounted cash flow models and multiples method) for the valuation of underlying financial instruments classified under level 3 of the respective Fund’s fair value hierarchy. Significant unobservable inputs embedded in the models used by the Funds’ managers include risk adjusted discount rates and lack of marketability discount. An increase/(decrease) of 10% in the discount rate would lead to a (decrease)/increase of (SAR 152 million)/ SAR 255 million in estimated value.

    The following is a reconciliation of the Group’s investment in these Funds, which are categorized within Level “3” of the fair value hierarchy:

    Statement (Thousands of Riyals) 2022 2021
    Net asset value as at 1 January 2,135,246 1,119,413
    Contributions paid to the funds during the year 412,342 375,020
    Distributions received from the funds during the year (16,092) (172,395)
    Net unrealized gain recognized in the consolidated statement of profit or loss (Note 41 in the annual financial statements) 397,569 813,208
    Net asset value as at 31 December 2,929,065 2,135,246

    The Group believes that the other financial assets and liabilities carried at cost in the consolidated financial statements approximate their fair value except for the following:

    Fair value
    31 December 2022 Carrying amount Level 1 Level 2 Level 3
    Financial assets
    Financial assets at amortized cost – Sukuk 3,947,219 - 3,837,052 -
    Financial liabilities
    Borrowings - Sukuk 4,674,892 - 4,480,569 -
    Fair value
    31 December 2022 Carrying amount Level 1 Level 2 Level 3
    Financial assets
    Financial assets at amortized cost - Sukuk 3,955,568 - 4,268,749 -
    Financial liabilities
    Borrowings - Sukuk 4,673,254 - 5,381,490 -

    Level 2 fair value entries are based on quoted prices in a non-active market

    There were no transfers between the different levels of fair value during the year ending on December 31, 2022.

  • Capital Management

    The Group manages its capital which includes share capital, statutory reserves, other reserves and retained earnings attributable to the equity holders of the Parent Company to ensure that:

    -

    It will be able to operate as a going concern.

    -

    It efficiently finances its working capital and strategic investment requirements at optimal terms.

    -

    It provides a long-term dividend policy and maintains a stable dividend pay-out.

    -

    It maintains an appropriate mix of debt and equity capital

    -

    It maximizes the total return to its shareholders.

    The Group reviews its capital structure in light of strategic investment decisions, changing economic environment, and assesses the impact of these changes on cost of capital and risk associated to capital.

    The Group is not subject to any externally imposed capital requirements. The Group did not introduce any amendments to the capital management objectives and procedures during the year ended 31 December 2022.

    The Group reviews the capital structure on an annual basis to evaluate the cost of capital and the risks associated with capital. The Group has the following target ratios:

    1

    Debt to EBITDA level of 200% or below

    2

    Debt to (Debt + Equity) level of 50% or below

    The ratios as at the year ended 31 December were as follows:

    2022 2021
    Debt (a) 10,490,533 9,303,290
    EBITDA (b) 25,078,667 22,840,600
    Debt to EBITDA %42 %41
    Debt 10,490,533 9,303,290
    Debt + Equity (c) 86,516,125 80,689,269
    Debt to (Debt + Equity) %12 %12
    a‌

    Debt is defined as current and non-current borrowings. (For more details, see note 27 in the annual financial statements).

    b‌

    EBITDA is defined as operating profit for the year adjusted for depreciation, amortization and impairment.

    c‌

    Equity is defined as total equity including share capital, reserves, retained earnings and non-controlling interest

  • Capital Commitments

    1

    One of the subsidiaries has an agreement to invest in a fund aiming to improve the telecommunication and internet environment for SAR 806 million (equivalent to USD 215 million) as at 31 December 2022 (31 December 2021: SAR 1,125 million (equivalent to USD 300 million) (For more details, see Note 6-17 in the annual financial statements).

    2

    The Group has contractual commitments for the acquisition of property and equipment and intangible assets amounting to SAR 4,709 million as at 31 December 2022 (31 December 2021: SAR 4,193 million).

    3

    During 2022, stc allocated an additional SAR 1,125 million (equivalent to USD 300 million) to invest in STV LP Fund.

  • Contingent Assets and Liabilities

    1

    The Group has outstanding letters of guarantee on behalf of the parent and its subsidiaries amounting to SAR 5,181 million as at 31 December 2022 (2021: SAR 4,695 million).

    2

    The Group has outstanding letters of credit as at 31 December 2022 amounting to SAR 1,544 million (2021: SAR 1,394 million).

    3

    On 21 March 2016, stc received a letter from a key customer requesting a refund for paid balances amounting to SAR 742 million related to construction of a fibre optic network. Based on independent legal opinions obtained, the management believes that the customer’s claim has no merit and therefore this claim has no material impact on the financial results of the Group.

    4

    The Group, in its ordinary course of business, is subject to proceedings, lawsuits and other claims. However, these matters are not expected to have any material impact on the stc’s financial position or on the results of its operations as reflected in consolidated financial statements.

    5

    The Group received the Appeal Committee for Tax and Disputes’ decision with respect to the withholding tax assessment on international operators’ networks rentals for the years from 2004 to 2015, rejecting its appeal with an amount of SAR 1,500 million. The Group submitted a petition for reconsideration as it believes that Saudi tax regulations do not impose withholding tax on the rental of international operators’ networks since the source of income does not occur inside the Kingdom, and therefore these services should not be subject to withholding tax. During the year 2022, the Group received the minutes of meeting of the Appeal Committee for Tax Violations and Disputes’ regarding the petition for reconsideration which included the rejection of the petition by the Group. The Group submitted a petition for reconsideration based on new development on this matter. Based on the opinions of tax specialists, the nature of the technical dispute, and new development on this matter, the Group believes that this assessment will not result into additional provisions.

    6

    The Group received claims from Communications, Space & Technology Commission (CST) related to imposing government fees on devices sold in instalments for the period from 2018 until the end of the first quarter of 2021, totaling SAR 782 million. The Group has objected to these claims within the statutory deadline and an appeal court ruling was issued in favor of the Group in regards to one of the claims amounting to SAR 641 million. CST has objected to the ruling in front of the supreme court and still awaits its decision, as at 31 December 2022. A preliminary court ruling was issued in favor of the Group in regards to the remaining claims amounting to SAR 141 million. An appeal court ruling was issued in favor of the Group for part of the claims (SAR 83 million) and another appeal court ruling was issued in favor of CST for the remaining claims (SAR 58 million).