TRIS Rating has affirmed 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 multimedia. SAMART’s business profile is enhanced by its diversified range of businesses and cash flow stability in air traffic control services in Cambodia. The rating is partly offset by intense competition in the mobile handset distribution industry, fluctuations in the IT trading/turnkey business segment, and a potential rise in leverage.
The “stable” outlook reflects the expectation that SAMART will maintain its competitive strengths in its major lines of business and deliver sound performance.
Any downside pressure on the rating would stem from a large debt-funded investment, which could weaken SAMART’s financial profile materially, or if SAMART’s profitability deteriorates over a prolonged period of time. SAMART's rating could be upgraded, should its financial profile grow healthier, enhanced by its ability to generate larger cash flows and a larger amount of 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 2015, the Vilailuck family owned 45% of SAMART’s outstanding shares.
SAMART is a holding company, with five major lines of business: IT solutions, mobile multimedia, contact center services, technology-related businesses, 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 contact center service is the responsibility of One To One Contacts PLC (OTO). The remaining lines of business are operated by SAMART’s unlisted subsidiaries. As of December 2015, SAMART held about 70% of SAMTEL, 70% of SIM, and 70% of OTO.
SAMART’s revenue totaled Bt23,880 million in 2014 and Bt14,557 million for the first nine months of 2015. The major revenue generator is the mobile multimedia segment, contributing 44% of total revenue, followed by the IT solutions segment (31%). The IT solutions segment contributed nearly 50% of SAMART’s EBITDA (earnings before interest, tax, depreciation, and amortization).
SAMART's business profile is supported by the strong competitive positions of SAMTEL and SIM. SAMTEL has a proven record of undertaking a broad range of IT projects and earning recurring income from service contracts. SIM is among top-selling mobile device distributors in Thailand, with about 7% market share by volume. SIM’s strengths are its flagship house-brand “i-mobile” and its wide distribution network. SAMART’s business profile is also supported by the stable cash flows from providing air traffic control services in Cambodia. SAMART’s risk profile takes into account the lumpy nature of turnkey projects, plus intensified competition and rapid changes in the mobile handset market. SIM's mobile device sales last year was negatively affected by the Thai economic slowdown and the subsidized handsets of wireless telecom operators.
For the first nine months of 2015, SAMART’s revenues slipped by 20% year-on-year (y-o-y) due mainly to a 25% decline of handset volume sales, and an 11% drop in SAMTEL's revenue as the the bidding for government projects delayed. SAMART’s operating margin (operating income before depreciation and amortization as a percentage of sales) improved from 16.6% in 2014 to 17.7% for the first nine months of 2015. The rise was driven by SAMTEL's high operating profit margin of 28% and improved margins at SAMART's unlisted subsidiaries. Despite intense competition, SIM held its profit margin at about 8% during 2014 through the first nine months of 2015. Funds from operations (FFO) was relatively stable at about Bt3,200 million per annum during 2013 and 2014, and stood at Bt2,032 million for the first nine months of 2015.
During 2016-2018, TRIS Rating expects SAMART's revenue to stay over Bt20,000 million per annum. The growth driver is SAMTEL’s large projects in pipelines of nearly Bt9,000 million at the end of 2015, plus its opportunity for new projects in the IT solutions segment. Despite benefit from the 4G (fourth generation) transition, SIM’s handset distribution will be pressured by the intense competition. However, SIM is expected to boost its revenues in international markets and from the e-commerce business platform, while gaining more subscribers on its wireless communication services. SAMART's revenue upside could come from new contracts for electricity substations projects, plus utility and transportation projects. During 2016-2018, the operating margin is projected to stay over 17%, based on the assumptions that SAMTEL’s operating margin will hold over 25% while SIM's margin is expected to be under pressure from intense competition. FFO will range up to Bt3,100 million per annum. SAMART has annual long-term debt obligations of about Bt300 million due in 2016 and 2017, and Bt1,250 million in 2018. The liquidity profile is expected to remain acceptable, measured by the ratio of EBITDA interest coverage of 5-6 times. FFO to total debt ratio will be in a range of 17%-20%.
SAMART's leverage remained elevated during the last two years, due mainly to a rise in short-term loans to meet SIM’s working capital needs and to support SAMTEL's new projects. SIM's account receivable turnover climbed from 175 days in 2014 to about 300 days at the end of September 2015, a result of the economic slowdown. SAMART's debt to capitalization ratio was 61.8% in 2014 and 63.9% at the end of September 2015, compared with an average of 55% during 2011-2013. TRIS Rating expects SAMART to make capital expenditures of about Bt10,000 million in total during 2016-2018. The fund is mainly to support SAMTEL’s service projects and SAMART's energy projects. Accounts receivable at SIM are expected to gradually decrease and cut its working capital needs. The rating incorporates a projected dividend payout ratio of about 60% of profits and the planned capital expenditures. Without any large debt-funded acquisitions or investment, SAMART’s debt to capitalization ratio will stay at about 65% during 2016-2018.
SAMART is seeking opportunities in the energy segment in Thailand and in neighboring countries. Any future large investments or acquisitions may require SAMART to take on more debt, which may weaken SAMART’s financial strength. The rating will take into consideration the quality of investment projects along with the funding sources. However, SAMART has a policy to finance new investments with debt to equity at a ratio below 3:1. TRIS Rating expects SAMART to manage the capital structure properly and not to significantly deteriorate the financial profile over the extended period.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2016, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.