Samart Telcoms

Samart Telcoms Plc (SAMTEL)

Investment thesis

While its FY15 fundamentals remain strong on its core profit and project backlog recovery, we believe its current share price has factored in speculation over potential project signings, such as the AOT’s Advanced Passenger Processing Service (APPS) expected in 1Q15. Its fully stretched valuation means we have downgraded it from BUY to HOLD.

Insights into 4Q14—a QoQ core profit recovery 

We estimate a Bt146m net profit for 4Q14, down 26% YoY and 8% QoQ. Excluding a Bt3m FX gain and a Bt70m loss from the sale of assets in 4Q14, core earnings would be Bt219m, up 4% YoY and 56% QoQ. The assumed modest YoY core profit rise is due to the drop in tax expense, which should outweigh the effect of lower gross profit (caused by lower revenue related to delays in tenders opening for state agency projects during 9M14) and a rise in SG&A expenses. The expected QoQ core profit jump is due to the greater value of new projects signed in 4Q14—Bt3.3bn in 4Q14 against Bt1.1bn in 3Q14 and Bt1.8bn in 4Q13. 

We estimate a Bt1.9bn top line for 4Q14 (down 18% YoY but up 20% QoQ). GM is assumed at 22.5% in 4Q14, up from 20.5% in 4Q13 and 19.7% in 3Q14. The estimated Bt1.9bn in revenue comprises Bt1.3bn revenue from projects signed before end-Sept 2014 and Bt575m revenue from new contracts signed during 4Q14. SAMTEL signed new contracts worth Bt3.3bn in 4Q14—AOT’s Five-Year Extension of its Common User Terminal Equipment (CUTE) Outsource project (Bt2.13bn), the Ministry of Transport’s Terrestrial Trunked Radio (TETRA) project (Bt365m), CAT’s Dense Wavelength Division Multiplexing (DWDM) project (Bt118m), the Ministry of Education’s distance learning project (Bt100m) and others (Bt569m). The project backlog increased to Bt6.91bn at end-Dec from Bt5.07bn at end-Sept. 

Earnings downgrades for FY14-15 

We have cut our top-line forecasts by 4% to Bt7.02bn for FY14 and by 4% to Bt7.83bn for FY15 to factor in the diminished 4Q14 earnings expectation and slower-than-assumed progress on planned state project tenders. Our net profit forecasts declined 7% to Bt700m for FY14 and 8% to Bt895m for FY15 to factor in the revenue cuts and the higher SG&A assumptions. Our PEG-based YE15 target price dips 7% to Bt21.50 (pegged with the implied FY15 PER of 14.9x). 

Targeted new projects valued at Bt20bn in FY15 

Management expects to sign another Bt20bn in new projects in FY15, which include 1) AOT’s APPS project (Bt3.9bn), 2) The Royal Thai Police’s Digital APCO System project (Bt3.3bn), 3) the State Railway of Thailand’s national fiber project (Bt3bn), 4) the Bangkok Metropolitan Administration’s digital trunk and security projects (Bt1.6bn) and 5) the Department of Land’s Information Center Phase 2 (Bt800m). We conservatively assume Bt10bn in new projects to be signed in FY15.