Samart Corporation

Samart Corporation Plc (SAMART) 

 

Investment thesis

Despite its FY15-16 earnings cuts led by diminished earnings expectations for SIM and SAMTEL, we believe that SAMART’s net profit will bottom out in 2Q15 and its core profit will start to recover QoQ from 2Q15. SAMTEL and One-to-One Contacts (OTO) will be key 2H15 earnings drivers, underpinned by the greater value from newly signed projects and a major jump in their YE15 project backlogs. The share price is oversold on expected weak 1H15 earnings and lack of news flow on energy projects. We recommend investors re-accumulate the stock ahead of 2H15 earnings recovery and progress of the waste and Cambodian power projects in 2H15-1H16. Our BUY rating stands, looking to a 2H15 earnings recovery and scope for upside from a 2000-MW coal-fired power plant.  

Insights into 2Q15—SIM to lead YoY core profit drop 

We estimate a Bt260m 2Q15 net profit for SAMART, down 37% YoY and 5% QoQ. Excluding extra items in 2Q15—a Bt39m one-time provision for Aeronautical Radio of Thailand’s Air Traffic Management project related to late equipment delivery from suppliers, a Bt5m FX gain and a Bt2m gain from the sale of marketable securities—core profit would be Bt292m, down 12% YoY but up 14% QoQ. The YoY core profit slippage is due to core profit drops at SIM, OTO and its three unlisted firms.

Earnings cuts at SIM, SAMTEL and SAMART

We cut our SAMART net profit forecasts 18% for FY15 (to Bt1.29bn) and 16% for FY16 (to Bt1.49bn) to reflect diminished expectations for 1H15 profits at SIM (cut 29% for FY15 and 23% for FY16) and SAMTEL (cut 10% for FY15 and 6% for FY16). We now assume a lower handset sales volume and a squeezed GM during FY15-16 for SIM and a lower GM for SAMTEL during FY15-16 (due to the lower margin of new opening tenders). As such, our YE15 sum-of-its-parts target price slips 13% to Bt33, pegged to the following new YE15 target prices—SIM (Bt2) and SAMTEL (Bt27). 

Progress of renewable and coal-fired power plants in 2H15 

The applications for the PPAs of the firm’s waste-to-energy plants are expected in October, followed by the short list of candidates (by YE15 or 1H16) and the signing of Power Purchase Agreements (PPA) with EGAT (in mid-2016). The commercial operational date is expected by YE17. The firm plans to apply six locations—Chiang Mai, Chiang Rai, Buriram, Chonburi, Lamphun and one other—for the PPAs and will announce the signing of MOUs at Chiang Rai and Lamphun locations in August. With regard to the 2,000-MW coal-fired power plant, the financial advisor has completed the study and will start negotiating the tariff with EGAT. We expect it to sign the MOU for that tariff by 4Q15 and the PPA with EGAT in 2016-17.