TRIS Rating Co., Ltd. has affirmed the company rating of Samart Telcoms PLC (SAMTEL) at “BBB+” with “stable” outlook. The rating reflects SAMTEL’s strong competitive positions in network and outsourcing services, proven record in undertaking public projects, and moderate recurring income. The rating is partly offset by fluctuations in the trading/turnkey business, concentration risk in project owners, and an expected elevation in leverage level. The “stable” outlook reflects the expectation that SAMTEL will remain competitive when bidding for public projects and follow a prudent financing policy by retaining an appropriate cushion when undertaking sizable projects. SAMTEL’s headroom for higher leverage is limited. Its financial profile should fall below the current rating if the debt to capitalization stays above 50% for a prolonged period. However, higher leverage risk could be partly mitigated should the company’s outsourcing revenue and operating margin increase satisfactorily.
TRIS Rating reported that SAMTEL was founded by the Vilailuck family in 1986. At the end of 2011, the company was 71% owned by Samart Corporation PLC (SAMART), a holding company investing in telecommunications and communications networks and engineering services. SAMTEL’s credit rating is influenced in part by the quality of SAMART’s credit profile.
TRIS Rating said, SAMTEL’s business profile is strong, reflecting its leading position as an integrated information technology (IT) solutions provider, as well as a proven record of undertaking a broad range of IT projects. This is underscored by a consecutive stream of successful bids over the past few years. The business profile is also supported by recurring income from service contracts, which adds a measure of stability to the overall performance.
SAMTEL’s risk profile takes into account volatile performances from turnkey projects. Its operation is also exposed to uncertainty and sometimes a lack of continuity in the public IT budgets. In addition, SAMTEL’s credit profile is weighed down by a concentration risk as its revenues depend heavily on projects from TOT PLC (TOT).
SAMTEL’s project backlog at the end of 2011 was Bt11.1 billion, already securing Bt7.4 billion of revenue in 2012. TRIS Rating assumes SAMTEL’s baseline revenue of Bt10 billion per annum for the next three years. Revenue during 2013-2014 could be higher than the baseline if SAMTEL could secure the second phase of TOT’s wireless third-generation (3G) project. The rating already takes into account potential revenue of Bt638 million per annum from the acquisition of Portal Net Co., Ltd. (Portal Net).
SAMTEL’s operating margin before depreciation and amortization has been under pressure, largely due to competition and a strong growth in the lower-margin trading/turnkey projects. The company’s operating margin was 15.9% in 2011. TRIS Rating expects SAMTEL’s operating margin to remain under pressure for the next 1-2 years owing to TOT’s 3G project. The margin is then expected to improve gradually to 18%-20% from an increase in service revenue portion.
At the end of 2011, the debt to capitalization ratio was 65.5%, up from 48.6% in 2010. Higher leverage is due to the TOT’s 3G project. TRIS Rating’s baseline estimates that SAMTEL’s debt to capitalization ratio will continue to stay at current level for the next few years. This reflects SAMTEL’s appetite to secure more outsourcing contracts, which require upfront capital investments. The rating already reflects a potential debt financing for the acquisition of Portal Net.
SAMTEL’s liquidity profile is acceptable. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratios for the past three years have been quite stable, ranging between 7-9 times. The funds from operations (FFOs) to total debt was 31.8% in 2011. The FFOs to total debt ratio is expected to stay above 20% for the next three years. With the ratio of secured debts to total assets over 40% at the end of 2011, any of the company’s issue rating for senior debentures will likely be one notch below its company rating.
TRIS Rating maintains a stable outlook for the IT industry. The growth prospects of the industry are favourable over the next 12-18 months. Both public and private sectors are expected to continue spending on IT systems to remain competitive. The technology-related industry is expected to continue evolving, suggesting potential growth opportunities in several existing and new service areas, said TRIS Rating. — End
Company Rating: Affirmed at BBB+ Rating Outlook: Stable
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