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 track records in undertaking public sector projects, and its moderate level of recurring income. These strengths are partially offset by high financial leverage and fluctuations in the trading/turnkey business. The rating also takes into consideration the ongoing political uncertainty, which may cause delays in some public IT projects. The “stable” outlook reflects the expectation that SAMTEL will remain competitive when bidding for public projects. SAMTEL is expected to follow a prudent financing policy by retaining an appropriate liquidity cushion when undertaking large projects. The debt-to-capitalization ratio should not exceed 60% for a sustained period in order to maintain the credit quality.
SAMTEL was founded by the Vilailuck family in 1986. The company operates an integrated telecommunication network and an IT service business. SAMTEL also provides IT and communication system services. At the end of August 2013, the company was 71% owned by Samart Corporation PLC (SAMART), a holding company which has invested in telecommunication and communication networks, and provides engineering services.
SAMTEL’s business profile is strong, reflecting its leading market position, as well as its proven record of undertaking a broad range of IT projects. The business profile is also supported by recurring income from service contracts. The service contract terms typically range from three to five years, but most contracts are extendable. In 2013, SAMTEL’s revenue stood at Bt9.3 billion, of which 36% was revenue from service contracts.
The volatile performances from turnkey projects with varying sizes are associated into SAMTEL’s risk profile. There has been a delay in the formation of a new government after the recent election. The delay will affect the allocation of the government budget for fiscal year 2015. Certain large public IT projects are likely to be postponed or divided into smaller phases. However, TRIS Rating believes the downside risk is limited. At the end of 2013, SAMTEL’s project backlog stood at Bt7.5 billion. This sizable backlog will translate into around Bt3.9 billion in revenue in 2014. The remaining portion of the backlog is mostly service income to be received in 2015 and 2016. In addition, many contracted projects, which will be ending soon, are expected to be extended. As a result, TRIS Rating believes service contracts will comprise at least Bt3 billion per annum during 2015 and 2016. Under TRIS Rating’s base-case scenario, SAMTEL is expected to generate at least Bt7.2 billion in revenue per annum during 2014-2016, taken into consideration the risk of delays in several IT projects due to political instability.
SAMTEL’s operating margin, defined as operating income before depreciation and amortization as a percentage of revenue, stayed above 22% during the past two years, owing to the growing portion of recurring income projects. Recurring income carries a high operating margin. TRIS Rating expects SAMTEL’s operating margins will stay above 22% from 2014 through 2016.
At the end of 2013, SAMTEL’s debt-to-capitalization ratio improved to 64.9%, from 70.6% in 2012. The improvement was due mainly to progress on TOT PLC’s (TOT) 3G project and Portalnet Co., Ltd.’s project. TRIS Rating expects that SAMTEL will be able to make sizable reductions in its receivables and accrued income in 2014, after the completion of TOT’s 3G project and improvement in cash collection from Portalnet’s projects. The debt-to-capitalization ratio is expected to stay below 60% from 2014 through 2016. Similarly, the ratio of interest-bearing debt to equity will stay below 1.5 times between 2014 and 2016. The ratio of secured-debt-to-total-assets was 35% at the end of 2013. As a result, the company’s issue rating for its senior unsecured debts will likely be one notch below its company credit rating.
SAMTEL’s liquidity profile is acceptable. Funds from operations (FFO) is expected to amount to at least Bt1.1 billion per year during 2014 through 2016. SAMTEL had undrawn credit facilities of approximately Bt4 billion at the end of 2013. As a result, SAMTEL should be able to meet its financial obligations over the next 12 months. TRIS Rating expects SAMTEL’s EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio to stay above 5 times and the ratio of FFO-to-total-debt to stay above 25% between 2014 and 2016.
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