Samart Corporation

Investment thesis

We recommend looking past expected weak 3Q14 numbers to an earnings bounce in 4Q14 (led by digital set-top box and antenna sales and a big-lot sale for SIM). Moreover, the first of a planned raft of domestic garbage biomass projects is likely to be announced by YE14 (the remainder in FY15) and an coal-fired power plant deal in Cambodia is expected to be sealed in 1H15. The planned projects constitute scope for upside to our valuation. BUY!     

Insights into 3Q14—the core profit drop 

A Bt350m net profit is expected for 3Q14, down by 11% YoY and 15% QoQ. Excluding a Bt10m FX gain, core profit would be Bt340m, down 15% YoY but up 2% QoQ. We expect a YoY core profit drop, due to weaker core numbers for SIM and SAMTEL, which we assume outweighed the effect of stronger numbers at non-listed subsidiaries. Our 3Q14 earnings estimates for subsidiaries are as follow:

- SIM: A Bt138m core profit, down by 34% YoY and 51% QoQ, due to heavier marketing expenses in an environment of intensifying handset sale competition and weak consumption spending.

- SAMTEL: A Bt147m core profit, down 39% YoY (but up 26% QoQ), due to delays to planned tenders for state projects. SAMTEL signed Bt1.1bn in new projects during the quarter.  

- OTO: A Bt21m net profit, up 4% YoY but down 8% QoQ (SG&A expenses tied to depreciation of fixed assets plus heavier OPEX for the Phnom Penh call center). OTO signed new projects worth only Bt14m during the quarter.

- Non-listed firms: We estimate an aggregate earnings rise for non-listed subsidiaries of 59% YoY, led by Samart U-Trans, Cambodia Air Traffic Services and the Kampot power plant. 

FY14-15 earnings cut at SIM, SAMTEL, OTO and SAMART

We have cut our SAMART FY14 profit forecasts by 10% for FY14 to Bt1.61bn and 6% for FY15 to Bt1.93bn to reflect diminished expectations for 2H14-FY15 profits at SIM (cut by 18% for FY14 and 15% for FY15), SAMTEL (cut by 7% for both FY14 and FY15) and OTO (cut by 19% for FY14 and 16% for FY15), due to a weak consumption environment and delays to new project tenders. As such, our YE15 target price slips 3% to Bt33.85. 

Bottom in 3Q14; earnings to bounce in 4Q14 

SAMART targets selling 1.5m digital set-top boxes and 1m antennas in 4Q14. We conservatively assume sales of only 1m set-top boxes and 0.5m antennas in 4Q14. SIM’s 4Q14 earnings will be bolstered by a 500k-unit big-lot handset sale to DTAC. We preliminarily estimate a Bt450m net profit for 4Q14, up by 26% YoY and 29% QoQ.