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 fluctuations in the trading/turnkey business and rising 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. SAMTEL's credit downside could be triggered if the debt to capitalization ratio exceeds 60% for a sustained period. In addition, SAMTEL's credit profile could be pressured if the credit quality of its parent company, SAMART, is deteriorated by its weakened performance or sizable debt-funded investments. 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. At the end of August 2015, 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 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, which adds a measure of stability to the overall performance. For the first nine months of 2015, SAMTEL’s revenue stood at Bt4.58 billion, half of which 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. 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.
The value of SAMTEL’s project backlog as at the end of 2015 is estimated at Bt8.6 billion. The backlog will secure Bt3.3 billion of revenue in 2016. The remaining portion of the backlog is mostly service income to be received in 2017-2018. Many service projects, which will be ending over the next one to three 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 2016-2018. Under TRIS Rating’s base case scenario, SAMTEL is expected to generate an average of Bt8 billion in revenue per annum during 2016-2018, taking into account 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, has improved to 28% during the past two years due to the completion of thin margin turnkey projects and growing portion of recurring income projects which carry higher operating margins. TRIS Rating expects SAMTEL’s operating margins to stay above 25% from 2016-2018. TRIS Rating's base case expects SAMTEL to generate funds from operations (FFO) of approximately Bt1.7 billion per annum during 2016-2018.
SAMTEL's leverage rose. The ratio of total debt to capitalization increased from 52% at the end of 2014 to 60.4% at the end of September 2015. Higher leverage was due mainly to capital spending in the Advance Passenger Processing System (APPS) service contract. The leverage is expected to stay alleviated over the next 12-24 months as SAMTEL plans to secure more outsourcing service contracts which required upfront capital investment. SAMTEL is expected to spend capital expenditure around Bt3.3 billion in total during 2016-2018. TRIS Rating expects the debt to capitalization ratio to stay at 57%-61% in 2016-2017 and then will gradually reduce to stay at around 50%.
SAMTEL's liquidity profile is fair. Over the next 12 months, SAMTEL's liquidity sources are expected to come from FFO of Bt1.5 billion. In addition, as of September 2015, the company had cash on hand of Bt465 million and undrawn credit facilities of approximately Bt6 billion. These amounts are sufficient to fund its planned capital expenditures of Bt2.7 billion and service its financial obligations of Bt2.8 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 2016-2018.
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