TRIS Rating affirms the company rating of Samart Corporation PLC (SAMART) at “BBB+”. At the same time, TRIS Rating revises the rating outlook of SAMART to “negative” from “stable”. The “negative” outlook reflects a weaker equity base and the risk that a substantial amount of the remaining overdue account receivables would be deemed uncollectible, thereby further depleting its equity.
The rating continues to reflect SAMART’s diverse lines of business and sources of income, as well as a strong competitive position in the information technology (IT) segment. The rating also takes into consideration fluctuations in trading/turnkey projects in the IT and utility segments, plus a weaker financial risk profile.
KEY RATING CONSIDERATIONS
Substantial amount of overdue account receivables
As of December 2017, SAMART carried on its books of Bt5,536 million account receivables with more than 12 months past due. Most of the past due receivables were from the mobile handset distribution business operated by Samart Digital PLC (SDC) a few years ago. Of the amount past due, only about 30% has been set aside as a provision through an allowance for doubtful debts. A further write-down of up to Bt3,000 million in overdue receivables could be ahead in the coming years.
SAMART has a weak capital base and needs to strengthen it through improved profitability or capital injection. If the write-off comes before the equity base is re-built, SAMART might violate a financial covenant in its outstanding debentures. Under the terms of the debentures, SAMART is required to keep the ratio of net interest bearing debt to equity below 3 times.
Diverse business lines and sources of income
SAMART’s business portfolio covers five key segments including IT solutions, digital solutions, contact center services, technology-related businesses, and utility and transportation services. The broad product line, wide market coverage, and different types of customers mitigate some of the effects of economic downturns and provide diverse sources of income. This enhances SAMART’s business profile. In addition, the company has a strong competitive position in the IT solutions segment. The company has a proven record of undertaking a broad range of IT projects for a number of government agencies.
Base of recurring revenue
SAMART’s revenue base is secured by recurring service income from the IT solutions segment and steady cash flow from providing air traffic control service in Cambodia. In 2017, these two lines of business generated approximately Bt5,200 million in revenue or about 40% of total revenue. TRIS Rating forecasts revenue from these two segments to be Bt5,000-Bt5,500 million per annum over the next three years. These stable sources of revenue provide a cushion and reduce the volatility of SAMART’s operating performance.
In 2017, SAMART reported revenue of Bt13,023 million, down by 4.8% from 2016, due mainly to declines in mobile handset sales. Over the next three years, a sizable backlog will secure the revenue base. The backlog, mainly from Samart Telcoms PLC (SAMTEL), TEDA Co., Ltd, and One To One Contacts PLC (OTO), will yield revenue of Bt5,000 million in 2018, Bt2,600 million in 2019, and Bt1,200 million in 2020. In addition, air traffic control service in Cambodia is expected to bring in at least Bt1,700 million in revenue per year.
During 2018-2020, TRIS Rating’s base case assumes revenue will range from Bt14,600-Bt16,400 million per annum. The forecast takes into account the backlog, new projects at SAMTEL’s, and a trunk radio and co-tower projects at SDC. Capital expenditures are estimated at Bt8,000-Bt10,000 million in total during 2018-2020.
Financial risk profile deteriorates
SAMART’s financial profile materially weakened in 2017 due to poor operating results at SDC. Funds from operations (FFO) dropped from Bt1,891 million in 2016 to Bt36 million in 2017, due mainly to a Bt1,535 million provision for doubtful debts at SDC. FFO will remain under pressure in 2018, especially if SAMART must make another large provision. FFO is forecast to return to Bt2,800-Bt3,000 million per annum in 2019-2020.
SDC has transformed from a mobile handset distributor to a provider of digital services and solutions. However, the new business lines will take time to come to fruition. Thus, TRIS Rating holds the view that SAMART’s financial risk will stay elevated during the next one to two years.
SAMART’s capital structure weakened due mainly to operating losses at SDC’s and a deteriorated equity base. Although the company’s outstanding debt declined from Bt13,241 million at the end of 2016 to Bt12,474 million at the end of 2017, the debt to capitalization ratio rose from 62.61% in 2016 to 66.98% in 2017 as the equity eroded.
Without a fresh capital injection, the debt to capitalization ratio is expected to stay above 70% during 2018-2020. This forecast takes into account the potential adverse effect of additional provisions for doubtful debts, new borrowing to fund the trunk radio and co-tower projects at SDC, as well as new service projects at SAMTEL. The high level of leverage is a negative factor.
RATING OUTLOOK
The “negative” outlook reflects SAMART’s deteriorating financial profile and our concern over SAMART’s weakening capital base which might potentially trigger the breach of a financial covenant.
RATING SENSITIVITIES
The rating downgrade pressure could be triggered if SAMART’s financial profile deteriorates further and the company fails to manage its capital base so that the debt to capitalization ratio stays above 70% on sustained basis. The outlook could be revised to “stable” if the company strengthens its balance sheet or improves its operations, adding more financial flexibility.
COMPANY OVERVIEW
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 2017, the Vilailuck family owned about 45% of SAMART’s outstanding shares. The business profile of SAMART is underpinned by its diverse sources of revenue from five major lines of business: IT solutions, mobile multimedia, contact center services, technology-related businesses, and utility and transportation services.
The IT solutions segment is operated by SAMTEL. The mobile multimedia segment is operated by SDC. Contact center services are the responsibility of OTO. The remaining lines of business are operated by SAMART and SAMART’s unlisted subsidiaries.
As of December 2017, SAMART held about 70% of SAMTEL, 71% of SDC, and 68% of OTO. The major revenue generator is the IT solutions segment, contributing 53% of total revenue, followed by utility and transportation services (27%), and the digital solutions segment (10%).
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