TRIS Rating has assigned the company rating of Samart Corporation PLC (SAMART) at “BBB+” with “stable” outlook. The rating reflects SAMART’s strong competitive position and its proven records in its main lines of business: information technology (IT) solutions and mobile handset. SAMART’s business profile is enhanced by its diversified portfolio of businesses and cash flow stability in air traffic control services and electricity businesses in Cambodia. The rating is partly offset by moderate competition in IT services, intense competition in mobile handset industry, fluctuations in the IT trading/turnkey business segment, and a potential rise in leverage from business expansions.
The “stable” outlook reflects an expectation that SAMART will maintain its competitive strengths in its major lines of business. The outlook also reflects the expectation that the company will balance its growth plans with its capital structure, so as to maintain the debt to capitalization ratio about 60%.
The rating downside is the large debt-funded investment which could weaken SAMART’s financial profile materially. The downside also includes SIM’s weaker-than-expected profitability due to intense competition. The rating upside is considered when SAMART’s financial profile is stronger than expected, enhanced by its ability to generate larger cash flows and contribution from recurring income.
SAMART was founded by the Vilailuck family in 1950 and was listed on the Stock Exchange of Thailand (SET) in 1993. At the end of 2014, the Vilailuck family owned 44% of SAMART’s total outstanding shares.
SAMART is a holding company, with four major lines of business: IT solutions, mobile multimedia, technology-related businesses including call center services, and utilities and transportation services. The IT solutions segment is operated by Samart Telcoms PLC (SAMTEL). The mobile multimedia segment is operated by Samart I-Mobile PLC (SIM). The technology-related businesses and utilities and transportation services are operated by SAMART’s non SET-listed subsidiaries and call center service by 9One To One Contacts PLC (OTO). At the end of 2014, SAMART held 70% of SAMTEL, 70% of SIM, and 70% of OTO.
SAMART’s total revenue was Bt23,880 million in 2014. The mobile multimedia segment was the major revenue generator, contributing 52% of total revenue for 2014. The IT solutions segment contributed about 27%. The IT solutions segment contributed nearly 50% of SAMART’s earnings before interest, tax, depreciation, and amortization (EBITDA), while the mobile multimedia segment contributed about 28%.
SAMART’s business profile is driven by the strong business positions of SAMTEL and SIM. SAMTEL has a proven record of undertaking a broad range of IT projects and an ability to create recurring income from service contracts. SAMART’s business profile is also supported by the stable cash flow from providing air traffic control services and electric power plant in Cambodia. However, the operations in Cambodia remain small, at about 9% of SAMART’s EBITDA. SIM is the third-largest seller of mobile devices in Thailand, with 10% market share by value. SIM’s strengths are its flagship house-brand “i-mobile”, and its wide distribution network. SAMART’s risk profile takes into account the lumpy nature of turnkey projects and intensified competition in the handset market.
During 2015-2017, TRIS Rating’s base-case expects SAMART to generate revenue of at least Bt24 billion per annum. The growth driver is expected to come from SIM’s performance, driven by the popularity of smart phones and bulk sales of mobile devices to mobile phone service providers. Revenue upside could come from sales of set-top boxes and antennas for digital televisions and new contracts for transportation projects and electricity substations. SAMTEL’s revenue upside from large recurring service projects are affected by the delay of government budget approval.
SAMART’s operating margin (operating income before depreciation and amortization as a percentage of sales) improved to 18%-19% during 2012-2013, compared with an average of 12% during 2009-2011. The improvement came from both SIM and SAMTEL. However, the operating margin for 2014 slightly dropped to 15.9%, due to lower margins in mobile handset segment caused by an economic slowdown and intense competition. During 2015-2017, TRIS Rating’s base-case expects SAMART’s operating margin to stay above 15%. This reflects the expectation that SIM’s revenue will grow while its operating margin will be under competitive pressure. SAMTEL’s operating margin will stay above 23%, on average, during 2015-2017.
During 2015-2017, TRIS Rating expects SAMART to generate funds from operations (FFO) of at least Bt2,600 million per annum. The EBITDA interest coverage ratio is expected to stay above 7 times. The FFO to total debt ratio is expected to stay over 18%.
SAMART’s debt to capitalization ratio was 61.8% at the end of 2014, up from 53% in 2013. The rise was due mainly to a rise in short-term loans to meet SIM’s working capital needs and to fund SAMART’s purchase of SIM’s shares. TRIS Rating expects SIM to reduce its account receivables and inventory and thus debt to fund working capital. SAMART’s capital expenditures are expected to total at Bt4,000 million during 2015-2017, mainly to support SAMTEL’s service projects. The rating incorporates dividend payout ratio at about 60% of profits, potential business expansion, and acquisitions to an extent that SAMART’s debt to capitalization ratio will stay about 60% during 2015-2017.
SAMART is seeking opportunities in the utility segment, such as power plants in Thailand and in neighboring countries. Any future expansion will bring growth opportunities, but may require SAMART to take on more debt. A large debt-financed investment or acquisition may impact SAMART’s financial strength. However, the rating will take into consideration the quality of investment projects along with the funding sources.
Samart Corporation PLC (SAMART)
Company Rating: BBB+
Rating Outlook: Stable