Samart Telcoms

Investment thesis

SAMTEL’s project backlog will re-build in 4Q14 through 1H15 as state agencies open projects to tender that had been delayed. In the interim, earnings will bounce in 4Q14. In 2015, the firm will tender for a slate of projects under the govt’s Digital Economy plan (high-speed broadband, wireless Internet network, digital TV and contents and applications). Any contracts in the slate that it wins would constitute upside to our FY15 forecast. Our BUY rating stands. 

Insights into 3Q14—a core profit tumble 

We estimate a Bt165m net profit for 3Q14, down by 26% YoY and 12% QoQ. Excluding a Bt1m FX gain and a Bt17m gain from the sale of securities in 3Q14, core earnings would be Bt147m, down 39% YoY but up 26% QoQ. The assumed YoY core profit dive is attributable to lower revenue because of delays to tenders opening for state agency projects during 1H14 and heavier SG&A expenses. The expected QoQ core profit rise is due mostly to seasonally higher revenue (the govt’s fiscal-year ends in Sept). We estimate a Bt1.6bn top-line for 3Q14 (down 36% YoY but up 8% QoQ). GM is assumed at 20%, up from 18.6% in 3Q13. 

The estimated Bt1.6bn in revenue comprises Bt1.1bn from projects signed before end-June 2014 and Bt472m from new contracts signed during 3Q14. SAMTEL inked new contracts worth Bt1.1bn during the quarter—the Royal Thai Armed Force’s military communication network system development project (Bt500m), the EDC and PIN PAD project (Bt150m) and others (Bt463m). The project backlog declined slightly to Bt5.06bn at end-Sept from Bt5.52bn at end-June. 

The FY14-15 earnings forecast downgrades

We have cut our top-line projections by 7% to Bt7.3bn for FY14 and by 7% to Bt8.1bn for FY15 to factor in a diminished expectation for 3Q14 and uncertainties surrounding planned state project tenders. As such, our net profit forecasts slip by 7% to Bt777m for this year and by 7% to Bt972m for next. Also, our YE15 target price dips 4% to Bt23. 

The project backlog recovery expected in 4Q14 

Management expects to sign another Bt6.7bn in new projects during Nov-Dec 2014 (not including the Bt2.1bn CUTE Outsource Phase 2 project, which was inked in Oct 2014). New projects expected to be signed in Nov-Dec are AOT’s APPS project (Bt3.4bn), the BMA’s Digital Trunked Radio (Bt850m), Channel 5’s Digital Low Power (Bt450m), the PEA’s Add-on AMR Order Phase 2 (Bt250m) and others (Bt1.4bn). SAMTEL targets a YE14 backlog of Bt12bn, up 137% QoQ. 

We conservatively assume Bt7bn in new contracts in 4Q14—AOT’s Bt2.1bn CUTE Outsource Phase 2 project, AOT’s Bt3.4bn APPS project and Bt1.5bn (others)—in which case the YE14 project backlog would jump to Bt10bn, up by 32% YoY and 98% QoQ.