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 growing level of recurring income. These strengths are partially offset by fluctuations in the trading/turnkey business and moderate financial leverage.
The “stable” outlook reflects favorable prospects for the IT industry and the expectation that SAMTEL will remain competitive when bidding for public projects. The debt to capitalization ratio should not exceed 60% for a sustained period in order for SAMTEL to maintain its credit quality.
SAMTEL's downside risk is limited over the next 12-18 months considering the prospects of the IT industry. However, SAMTEL's credit profile could be negatively affected if the credit profile of SAMART, SAMTEL's parent company, is pressured by sizable debt-funded investments or weaker performance in the mobile handset operations.
The credit upside for SAMTEL is in the case that recurring service contract income and operating cash flow are higher than expected. At the same time, the company can maintain the operating margin in a range of 26%-30% and keep the ratio of FFO to total debt above 40% on a sustainable basis.
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 communications system services. At the end of August 2014, the company was 70% owned by Samart Corporation PLC (SAMART), a holding company which has invested in telecommunication and communication networks, and provides engineering services.
SAMTEL’s strong business profile reflects its leading market position and proven track record of undertaking a broad range of IT projects. The business profile is also supported by the recurring income from service contracts. The term of a service contract typically ranges from three to five years, but most contracts are extendable. For the first nine months of 2014, SAMTEL’s revenue stood at Bt5.1 billion, of which 47% was revenue from service contracts.
SAMTEL’s risk profile takes into account the volatile performance of its trading/turnkey projects. Its operation is also exposed to uncertainty and sometimes a lack of continuity in the public IT budgets. The recent political instability has caused delays in several public IT projects. However, TRIS Rating believes that SAMTEL's downside risk is limited considering the company's projects in the pipeline and Thailand's need for IT infrastructure developments.
At the end of 2014, the value of SAMTEL’s project backlog is estimated at Bt7.1 billion. The backlog will secure Bt2.9 billion of revenue in 2015. The remaining portion of the backlog is mostly service income to be received in 2016 and 2017. Many service projects, which will be ending over the next 1-3 years, are expected to be extended. As a result, TRIS Rating estimates that service contracts will generate at least Bt3 billion in revenue per annum during 2015-2017. More service contracts will secure SAMTEL's revenue base and reduce the effect of volatility of the revenues from the trading/turnkey projects.
Under TRIS Rating’s base case scenario, SAMTEL is expected to generate at least Bt7.3 billion in revenue per annum during 2015-2017, taking into account good prospects for the IT developments needed to improve the efficiency of both public and private agencies. SAMTEL’s operating margin, defined as operating income before depreciation and amortization as a percentage of revenue, stayed above 22% during the past three years. The margin stayed high because of a growing portion of recurring income projects, which carry higher operating margins than trading/turnkey projects. TRIS Rating expects SAMTEL’s operating margins to stay above 23% from 2015-2017. TRIS Rating's base case expects SAMTEL to generate funds from operations (FFO) at least Bt1.3 billion per annum during 2015-2017.
SAMTEL's leverage profile has continued to improve, following the completion of the 3G project for TOT PLC (TOT) and the improved cash collections from Portalnet Co., Ltd.’s project. At the end of September 2014, the debt to capitalization ratio was 56.8%. Under TRIS Rating's base case scenario, the leverage ratio is not expected to be materially higher than the current level during 2015-2017, taking into account SAMTEL's investment and funding plans. SAMTEL is expected to spend capital expenditure around Bt3.1 billion in total during 2015-2017. This level incorporates SAMTEL's major potential new projects, including Airports of Thailand PLC's (AOT) Advance Passenger Processing System (APPS) project.
SAMTEL's liquidity profile is satisfactory. Over the next 12 months, SAMTEL's liquidity sources are expected FFO of Bt1.3 billion. In addition, as of September 2014, the company had cash on hand of Bt700 million and undrawn credit facilities of approximately Bt5 billion. This amount is sufficient to fund its planned capital expenditures of Bt2 billion and service its financial obligations of Bt1 billion over the next 12 months. In the medium term, TRIS Rating expects SAMTEL’s EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio to stay above 6 times and the ratio of FFO to total debt to stay above 25% on average during 2015-2017.
Samart Telcoms PLC (SAMTEL)
Company Rating: BBB+
Rating Outlook: Stable