TRIS Rating affirms the company rating on Samart Telcoms PLC (SAMTEL) at “BBB+”. The rating continues to reflect SAMTEL’s strong competitive position in information technology (IT) network and outsourcing services, proven track record of undertaking public sector projects, moderate level of recurring income, and moderate financial risk profile. The rating also takes into account the fluctuations in undertaking trading/turnkey projects which rely heavily on government sector IT budgets.
The “negative” outlook reflects the rating outlook on Samart Corporation PLC (SAMART), SAMTEL’s parent company. Although SAMTEL’s operation remains strong, TRIS Rating is of the view that the company is a core member of the SAMART Group and the ratings of SAMTEL and SAMART are linked.
KEY RATING CONSIDERATIONS
Credit profile is linked to SAMART’s
SAMTEL’s credit rating is linked to the quality of SAMART’s credit profile. SAMART owns 71% of SAMTEL, and SAMTEL is the main contributor of revenue to the SAMART Group. In addition, their management and group strategies are highly integrated. SAMTEL’s rating takes into consideration the high degree of interdependence between SAMART and SAMTEL. TRIS Rating considers SAMTEL to be a core member of the Group according to our Group Rating Methodology published in July 2015. As a result, the rating assigned to SAMTEL is the same level as the rating of SAMART.
Strong business profile
SAMTEL’s strong business profile reflects its leading position and proven track record of undertaking a broad range of IT projects, especially public sector projects. The business profile is also supported by the recurring income from service contracts, which adds a measure of stability to the company's overall performance. For 2018, SAMTEL reported revenue of Bt7.7 billion, 43% of which was revenue from service contracts. TRIS Rating forecasts service contracts will provide at least Bt3-Bt3.3 billion per annum in revenue during 2019-2021. Higher recurring revenue will further strengthen SAMTEL’s business risk profile.
Fluctuations in size and continuity of trading/turnkey projects
SAMTEL’s risk profile takes into account the volatility of its performance, which reflects the nature of 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 will not face material downside risk considering the number of projects in the pipeline and Thailand's need to develop its IT infrastructure.
Backlog secures revenue base
The value of SAMTEL’s project backlog at the end of 2018 was Bt7.7 billion. The backlog will translate into around Bt4.4 billion of revenue in 2019, Bt2 billion in 2020, and Bt800 million in 2021. Many service contracts, which will be ending over the next one to three years, are expected to be extended.
Under TRIS Rating’s base case scenario, SAMTEL’s revenue is forecast at Bt7-Bt9 billion per annum during 2019-2021, taking into account the IT development needed to improve the efficiency of both public and private agencies. However, delays in some projects are to be expected.
High profitability
The company’s profitability is high. SAMTEL’s operating margin, operating income before depreciation and amortization as a percentage of revenue, was 22.4% in 2018, down from 24.8% in 2017. The decline in operating margin was due in part to higher portion of trading/turnkey projects which carry lower operating margins. However, SAMTEL’s profitability was still higher than that of peers listed on the Stock Exchange of Thailand (SET). TRIS Rating is of the view that SAMTEL’s profitability will continue to be pressured by competition and delays in projects. We forecast SAMTEL’s operating margin to stay between 20%-23% during 2019-2021. TRIS Rating's base case assumes the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) will be Bt1.5-Bt1.8 billion per annum during 2019-2021.
Sound financial profile
SAMTEL’s financial profile remains sound. Most of SAMTEL’s debts to fund its projects are short-term. As most of SAMTEL’s projects are from the public sector, reliable cash receipts help facilitate the project financing process and secure favorable credit terms with lenders.
TRIS Rating’s base case forecasts SAMTEL’s capital investments to total around Bt4-Bt4.3 billion during 2019-2021, mainly to invest in the Advance Passenger Processing System (APPS) service contract and the Common Use Terminal Equipment (CUTE) projects for Airports of Thailand PLC (AOT), and the CBS Phase 2 project for the Provincial Electricity Authority (PEA). The company’s adjusted debt to capitalization ratio will range from 43%-52% over 2019-2021, while the adjusted debt to EBITDA will range 1.5-2.5 times during the same period.
In 2018, the company’s adjusted total debt to capitalization ratio was 43.1% and the adjusted debt to EBITDA was 1.6 times.
Adequate liquidity
Over the next 12 months, SAMTEL is expected to have sufficient liquidity to cover its uses of cash. Sources of funds include EBITDA of Bt1.5-Bt1.6 billion, cash and cash equivalents of Bt358 million on hand at the end of 2018, and undrawn credit facilities of approximately Bt6 billion. The uses of funds will be capital expenditures of Bt1.2 billion and financial obligations of Bt3 billion coming due over the next 12 months.
BASE-CASE ASSUMPTIONS
• Under TRIS Rating’s base case scenario, we assume that SAMTEL’s revenues will range between Bt7-Bt9 billion per annum during 2019-2021.
• We expect SAMTEL’s operating profit margin will stay at around 20%-23% during 2019-2021.
• Total capital spending will be Bt1.2 billion in 2019 and Bt2.9-Bt3.1 billion in total during 2020-2021.
RATING OUTLOOK
The “negative” outlook reflects the rating outlook on SAMART, SAMTEL’s parent company, based on our Group Rating Methodology. SAMTEL is a core member of the SAMART Group and the ratings of SAMTEL and SAMART are linked.
RATING SENSITIVITIES
Any change in SAMTEL’s rating is dependent on the rating of SAMART based on TRIS Rating’s Group Rating Methodology.
COMPANY OVERVIEW
SAMTEL was founded by the Vilailuck family in 1986. The company operates an integrated telecommunications network and an IT service business. At the end of August 2018, the company was 71% owned by SAMART, a holding company which has invested in telecommunication and communication networks and provides engineering services.
RELATED CRITERIA
- Key Financial Ratios and Adjustments, 5 September 2018
- Group Rating Methodology, 10 July 2015
- Rating Methodology – Corporate, 31 October 2007
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2019, 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.