TRIS Rating has affirmed the company rating of Samart Telcoms PLC (SAMTEL) at “BBB+” with “stable” outlook. The rating reflects SAMTEL’s strong competitive positions in information technology (IT) network and outsourcing services, proven records in undertaking public projects, and moderate level of recurring income. The rating is partly offset by fluctuations in the trading/turnkey business, concentration risks in clients and projects, and high financial leverage. The “stable” outlook reflects the expectation that SAMTEL will remain competitive when bidding for public projects and will follow a prudent financing policy by retaining an appropriate liquidity cushion when undertaking sizable projects. SAMTEL’s financial profile should fall below the current rating if the debt-to-capitalization ratio stays higher than 60% for a sustained period.
SAMTEL was founded by the Vilailuck family in 1986. The company is engaged in the operation of an integrated telecommunication network and IT business, as well as the provisions of IT and communication system services. At the end of February 2013, 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 not capped by, but partly linked to credit quality of SAMART.
SAMTEL’s business profile is strong, reflecting its leading market position, as well as a proven record of undertaking a broad range of IT projects. The business profile is also supported by recurring income from service contracts. SAMTEL’s revenue stood at Bt7.5 billion in 2012, of which Bt2.4 billion was recurring service income.
SAMTEL’s risk profile takes into account volatile performances from turnkey projects with varying sizes. Operating performance is also exposed to uncertainty and sometimes a lack of continuity in the government IT budgets. SAMTEL’s credit profile is weighed by a concentration risk as its revenues depend heavily on projects from TOT PLC (TOT).
SAMTEL’s project backlog at the end of 2012 stood at Bt9.7 billion, securing around Bt6 billion of revenue in 2013. TRIS Rating assumes SAMTEL’s baseline revenue of Bt10-Bt16 billion per annum for the next three years, taken into consideration revenue from the second phase of TOT’s 3G project.
TRIS Rating expects SAMTEL’s operating margins (operating income before depreciation and amortization as a percentage of revenue) over the next three years to remain under pressure as the company plans to participate in several large project sizes, especially the second phase of TOT’s 3G project. Under the stress scenario, SAMTEL’s operating margin is expected to stay above 16% on average for the next three years.
At the end of 2012, SAMTEL’s debt to capitalization ratio was 70.9%, up from 65.5% in 2011 and 48.6% in 2010. The rise in the leverage level was higher and longer than expected as there were delays in cash collections from TOT’s 3G and Portalnet Co., Ltd.’s projects. The delays drove SAMTEL’s receivables and accrued income to Bt7.3 billion in 2012, from Bt5.1 billion in 2011, and Bt1.9 billion in 2010.
TRIS Rating estimates that SAMTEL will be able to reduce its receivables and accrued income meaningfully within 2013, thus lowering its debt to capitalization ratio to stay around 60% in the medium term. Should SAMTEL’s receivables and accrued income continue to stay elevated, TRIS Rating will likely reassess the company’s business risk profile since undertaking large projects from certain public entities could have more negative implications than previous estimate. With the secured debt to total asset ratio at 45% at the end of 2012, the company’s issue rating for senior debentures will likely be one notch below its company rating.
SAMTEL’s liquidity measures weakened in 2012. The liquidity is also tightened as certain debts will be mature in the next 12-18 months. However, SAMTEL’s liquidity sources both internal and via capital markets should provide adequate headroom for the company to meet the obligations. As of year-end 2012, SAMTEL’s total debts due within 2013 valued at Bt5.5 billion, of which Bt2.2 billion was project-financed loans for projects with significant delays in cash collections (TOT’s 3G and Portnet’s projects), and Bt1 billion was short-term securities. SAMTEL’s management informed that the company will be able to collect all the delay payments within 2013. In the meantime, SAMTEL plans to repay the debts with the proceeds from the issuance of new short-term securities and from other undrawn project-financed loans. In the medium term, SAMTEL’s EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage is expected to stay above 5 times and FFO (funds from operations) to total debt ratio is expected to stay above 20%.
TRIS Rating maintains a stable outlook for the IT industry. The growth prospects for the industry are favorable over the next 12-18 months. Both public and private sectors are expected to continue to increase their spending on IT systems. The IT related industries have evolved rapidly, suggesting potential growth opportunities in several existing and new service areas.
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