Samart Telcoms

Samart Telcoms Plc (SAMTEL)

Investment thesis: We have re-initiated SAMTEL coverage with a BUY rating in anticipation of project backlog expansion through to YE13, a cheap valuation and scope for earnings and valuation upside if the firm were to win two big contracts—AOT’s Advance Passenger Processing Service (APPS) project and the TOT’s 3G Network Installation Phase 2. We estimate that the APPS project would add Bt0.85/share, while the 3G Phase 2 would add Bt5.95/share to our YE13 target price. SAMTEL’s FY13 PER of 10.1x looks cheap compared to its 14.6x long-term mean. We have not yet factored the incremental value of these two projects into our model.
Estimated YE12 project backlog of Bt14bn: Assuming that SAMTEL were to win the APPS contract (its portion would be Bt6bn) in Oct 2012, we estimate that its project backlog would rise to Bt14.2bn by YE12, up 39% YoY, with six major projects: 1) AOT’s APPS, 2) PEA’s PortalNet, 3) TOT’s 3G Network Installation Phase 1, 4) TOT’s SchoolNet Extension, 5) AOT’s CUTE Outsource, 6) the PEA’s AMR Phase 2.
YE13 project backlog to jump to Bt20-22bn: Our base-case scenario is that SAMTEL wins the TOT’s 3G Network Installation Phase 2 (Bt25bn; SAMTEL’s portion Bt16.3bn) in 1H13, in which case its YE13 project backlog would jump to Bt22bn, up 56% YoY. The key projects are TOT’s 3G Network Installation Phase 2 and other newly signed projects worth Bt6bn. Assuming the low-case scenario of Bt13bn for SAMTEL, we estimate that its YE13 backlog would rise to Bt20bn, up 39% YoY.
Upside from APPS and TOT’s 3G Phase 2 projects: We think that SAMTEL is well placed to win both the APPS and TOT’s 3G Network Installation Phase 2 projects, which would mean scope for upside to our model. If it were to win the APPS project, our FY13 and FY14 net profit forecasts would rise by 5% and 7%, respectively. Assuming the base-case scenario of SAMTEL winning Bt16.3bn of TOT’s 3G Phase 2 project, our FY13 and FY14 net profit forecasts would rise by 36% and 69%, respectively. The two projects would add Bt6.8/share to our YE13 target price.
Outlook
Huge contract backlog worth Bt7.8bn at end-June: SAMTEL’s project contract backlog value was Bt7.8bn at mid-year. The four key projects are: 1) TOT’s 3G Network Installation Phase 1 (Bt3.1bn to be recognized during 3Q12-1Q13), 2) TOT’s SchoolNet Extension (Bt1.7bn), 3) AOT’s CUTE Outsource (Bt959m) and 4) PEA’s Automatic Meter Reading (AMR) Phase 2 (Bt938m). The details of the four projects follow:
• Common Use Terminal Equipment System (CUTE) with AOT—Bt2.13bn in total project value (5 years; Oct 2009-Nov 2013). A shared airline check-in, transfer and gate counter application system. 
• SchoolNet Extension with TOT—Bt2.29bn in total project value (5 years; March 2011-Feb 2016). The project links the IPSTAR satellite to 10,000 secondary schools nationwide providing voice and Internet access.
• TOT’s 3G Network Installation Phase 1—Bt16bn in total project value (2 years; 2Q11-1Q13; SAMTEL’s portion is Bt10.4bn). 5,320 3G base stations covering 59 provinces. Revenue recognition started in May 2011. 3,500 base stations so far have been installed and another 500-800 base stations are expected by YE12. The remaining 1,000-1,300 base stations should be installed in 1Q13.
• PEA’s Automatic Meter Reading (AMR) Phase 2—Bt1.45bn in total project value (5 years; Nov 2011-Nov 2016). The installation of 50,000 wireless metering units for the Provincial Electricity Authority of Thailand (PEA).
• PEA’s PortalNet—Bt3.2bn in total project value (5 years; Dec 2011-Nov 2016). PortalNet has a five-year contract to lease Enterprise Resource Planning (ERP) software to PEA. SAMTEL bought PortalNet from MLINK in July
The monthly revenue to be booked from the contract, starting 3Q12, is Bt53.2m.
Upside from APPS and TOT’s 3G Phase 2 projects: We think that SAMTEL is well-placed to win both the Advanced Passenger Processing Service (APPS) and TOT’s 3G Network Installation Phase 2 projects, which would mean scope for upside to our FY13-15 earnings forecasts and our YE13 target price. The details of the two projects are below: 
• Advanced Passenger Processing Service (APPS) for AOT—Bt13bn in total project value; SAMTEL’s portion would be Bt6bn (10 years; March 2013-March 2023). The system would enable state agencies to view the data of travelers in advance of their arrival/departure and provide warnings of suspected persons. The project tender is expected in October 2012. Installation would take 4-6 months and revenue would be recognized in March 2013 onward. SAMTEL’s revenue per passenger would be Bt12. 
• TOT’s 3G Network Installation Phase 2—TOT’s board approved a 3G Phase 2 project budget of Bt30bn on Sept 17, 2012. The 3G Phase 2 plan will be submitted to the ICT Ministry later this month, then proceed to the NESDB for budget approval before being considered by Cabinet in 4Q12. The project is expected to open to tender in 1H13. Network installation would take about two years, 2H13-2H15. 
Upside from APPS and TOT’s 3G Phase 2 projects: We think that SAMTEL is well-placed to win both the Advanced Passenger Processing Service (APPS) and TOT’s 3G Network Installation Phase 2 projects, which would mean scope for upside to our FY13-15 earnings forecasts and our YE13 target price. The details of the two projects are below: 
• Advanced Passenger Processing Service (APPS) for AOT—Bt13bn in total project value; SAMTEL’s portion would be Bt6bn (10 years; March 2013-March 2023). The system would enable state agencies to view the data of travelers in advance of their arrival/departure and provide warnings of suspected persons. The project tender is expected in October 2012. Installation would take 4-6 months and revenue would be recognized in March 2013 onward. SAMTEL’s revenue per passenger would be Bt12. 
• TOT’s 3G Network Installation Phase 2—TOT’s board approved a 3G Phase 2 project budget of Bt30bn on Sept 17, 2012. The 3G Phase 2 plan will be submitted to the ICT Ministry later this month, then proceed to the NESDB for budget approval before being considered by Cabinet in 4Q12. The project is expected to open to tender in 1H13. Network installation would take about two years, 2H13-2H15. 
Bt13-16bn SAMTEL share in 3G Phase 2 consortium: We conservatively assume that the project value will be revised down to Bt25bn as our base-case scenario and to Bt20bn as our low-case scenario. Applying an assumed 65% stake for SAMTEL in the consortium (LOXLEY would take 35%), we estimate that SAMTEL’s portion would be Bt16.3bn under our base-case scenario and Bt13bn under our low-case scenario.
Estimated project backlog worth Bt14.2bn at YE12: Assuming that the firm were to win the APPS project (SAMTEL’s portion Bt6bn) in Oct 2012, we estimate that its project backlog would rise to Bt14.2bn by YE12, up 39% YoY. The six key projects making up the backlog would then be: 1) AOT’s APPS project (Bt6bn), 2) PEA’s PortalNet (Bt2.5bn), 3) TOT’s 3G Network Installation Phase 1 (Bt715m), 4) TOT’s SchoolNet Extension (Bt1.5bn), 5) AOT’s CUTE Outsource (Bt746m) and 6) PEA’s AMR Phase 2 (Bt642m).
YE13 project backlog to jump to Bt20-22bn: Our base-case scenario is that SAMTEL wins the TOT’s 3G Network Installation Phase 2 (Bt25bn; SAMTEL’s portion Bt16.3bn) in 1H13, in which case its YE13 project backlog would jump to Bt22bn, up 56% YoY. The key projects are TOT’s 3G Network Installation Phase 2 and other newly signed projects worth Bt6bn. Assuming the low-case scenario of Bt13bn for SAMTEL, we estimate that its YE13 backlog would rise to Bt20bn, up 39% YoY.
Revenue forecast upgrades if SAMTEL wins TOT 3G Phase 2: Assuming that the firm were to win two projects—TOT’s 3G Phase 2 (Bt16.3bn for SAMTEL) and APPS (Bt6bn for SAMTEL)—we would upgrade our current FY13 revenue forecast by 45% to Bt14.3bn to factor in six months of revenue recognition of TOT 3G Phase 2 and nine months of revenue recognition of the APPS project. Moreover, we would revise up our revenue forecasts by 83% to Bt19.1bn for FY14 and by 42% to Bt15.6bn for FY15.
Solid net margins for both projects: The net margin for TOT’s 3G Network Installation Phase 1 is roughly 8%. SAMTEL guides that the NM for Phase 2 should be equal to Phase 1’s and that the NM of the APPS project will be in the 12-16% range during 2013-23. We assume NMs of 8% for TOT’s 3G Phase 2 and 12% for the APPS project.
Big profit forecast upgrades if SAMTEL wins TOT’s 3G Phase 2: Our sensitivity analysis suggests that if SAMTEL were to win the APPS project, our FY13 and FY14 net profit forecasts would rise by 5% and 7%, respectively. With regard to TOT’s 3G Phase 2, assuming the base-case scenario of SAMTEL winning Bt16.3bn, our FY13 and FY14 net profit forecasts would rise by 36% and 69%, respectively. Assuming the low-case scenario—SAMTEL’s portion being Bt13bn—our FY13 and FY14 profit forecasts would rise by 29% and 55%, respectively.
Weak 3Q12, but robust 4Q12 earnings: We estimate Bt210m in 3Q12 earnings, down by 20% YoY and 9% QoQ, given that only 500 sites of the TOT 3G Phase 1 project were installed in 3Q12. We assume Bt732m revenue from Phase 1 in 3Q12, much lower than the Bt2.6bn posted for the project in 3Q11. But we anticipate a Bt275m net profit for 4Q12, up by 80% YoY and 31% QoQ, thanks to the low 4Q11 base comparison when flooding disrupted work on the 3G Phase 1 network installation. We estimate a 9% YoY rise in FY12 earnings, underpinned by Bt4bn in revenue from the TOT 3G Phase 1, PortalNet, CUTE outsource and AMR Phase 2 projects.

Recommendation and valuation
The PEG-based YE13 target price of Bt19: We have derived SAMTEL’s YE13 target price at Bt19 through the PEG approach where we obtained a 13.3x implied PER. Our PER was based on the following assumptions—a risk-free rate of 5%, Beta of 1, a dividend payout ratio of 51%, perpetual ROE of 21%, a perpetual growth rate of 10.4%, an after-tax cost of debt of 6.25% and a debt-to-capital ratio of 0.53x. We also tried other approaches—DCF (Discounted Cash Flow) and DDM (Dividend Discounted Model) and derived YE13 target prices ranging Bt19-19.60.
Very cheap valuation: SAMTEL trades at PERs of 10.6x FY12 and 10.1x FY13. Its long-term mean is 14.6x. We estimate that if it were to win the 3G Phase 2 and APPS projects, its PER would even be lower—10.2x FY12 and 7.9x FY13. There aren’t any direct comparisons with SAMTEL, in our view. With regard to JAS, 70% of its revenue comes from broadband Internet (PERs of 14.2x FY12 and 12.4x FY13). 25-30% of LOXLEY’s revenue comes from its trading and service businesses (24.1x FY12 and 19.9x FY13). SAMTEL is so much bigger than other firms that concentrate on state agency IT contracts, such as FORTH, AIT (8.3x FY12 and 7.5x FY13) and JTS, that we don’t think a comparison is appropriate. SAMTEL’s revenue base is twice that of AIT, seven times higher than JTS’s and three times that of FORTH.
Possible private placement on winning TOT 3G Phase 2 contract: We assume that the firm might need to increase capital through a private placement (PP) in FY13 if it were to win the TOT’s 3G Phase 2 in 1H13. We estimate the share dilution impact of the PP at 17%, assuming that 120m new shares were issued at a Bt20 apiece. Assuming a 2:1 debt-to-equity ratio for the funding of 3G Phase 2, we estimate that the new debt/equity ratio would be 1.98x. 
APPS project would add Bt0.85/share: Assuming that SAMTEL were to win the APPS contract, we estimate that its FY13 net profit would increase by Bt46m (fully diluted EPS would rise Bt0.064), based on a project NM of 12%. Applying the 13.3x implied PER, the incremental value of this project would be Bt0.85/share (a 4% rise).
TOT’s 3G Phase 2 to add Bt5.95/share: Assuming that SAMTEL were to win the TOT’s 3G Phase 2 contract (Bt16.3bn for SAMTEL’s portion), we estimate that the FY13 net profit would increase by Bt325m (fully diluted EPS would rise Bt0.45), based on a project NM of 8%. Applying the 13.3x implied PER, the incremental value of the project would be Bt5.95/share (a 30% rise).
Bt6.8/share incremental value from both projects:  Based on the above estimates, the two projects would add Bt6.8/share to our YE13 PER-based target price.
Re-initiated SAMTEL with a BUY: We have re-initiated SAMTEL coverage with a BUY rating in anticipation of project backlog expansion through to YE13, a cheap valuation and scope for earnings and valuation upside if the firm were to win two projects—AOT’s Advance Passenger Processing Service (APPS) project and the TOT’s 3G Network Installation Phase 2. We estimate that the APPS project would add Bt0.85/share, while the 3G Phase 2 would add Bt5.95/share to our YE13 target price. SAMTEL’s FY13 PER of 10.1x looks cheap compared to its 14.6x long-term mean. We have not yet factored the incremental value of these two projects into our model