Samart Corporation

Samart Corporation Plc (SAMART) 

 

Investment thesis

Despite diminished 3Q15 earnings expectations for SAMART, SIM and SAMTEL and further FY15-16 earnings cuts for the firms, we think that their earnings look set to bottom out in FY15 before strong FY16 recoveries—SAMART (up 28% YoY), SAMTEL (up 32% YoY) and SIM (up 43% YoY). SAMART and SAMTEL’s recent share price tumbles related to the allegations of illegal radio equipment installation is too great an overreaction and we believe that SAMTEL will be found innocent of this charge once the Royal Thai Police (RTP) probe concludes. Hence, it is a good timing to accumulate the stock on its share price weakness. Our BUY rating stands, based on a FY16 recovery (led by SAMTEL and SIM) and upsides from a Cambodian power plant and MEA’s underground cable installation project.  

Insights into 3Q15—SIM and unlisted firms are major drags 

We estimate a Bt220m 3Q15 net profit for SAMART, down 37% YoY and 20% QoQ. Excluding extra items in 3Q15—a Bt5m FX loss and a Bt7m loss from the sale of marketable securities—core profit would be Bt232m, down 21% YoY and 20% QoQ. The YoY core profit tumble is attributable to core profit drops at SIM, OTO and its four unlisted firms—Kampot Power Plant (KPP), Samart Engineering (SE), Vision and Security System (VSS) and Samart U-Trans (SUT)—which will outweigh the core profit rises at SAMTEL and its one unlisted firm—Cambodia Air Traffic Services (CATS). SIM remains the major drag on SAMART’s consolidated earnings in this quarter (details on Page 4).

Further earnings cuts at SIM, SAMTEL and SAMART

We cut our SAMART net profit forecasts 19% for FY15 (to Bt1.05bn) and 10% for FY16 (to Bt1.34bn) to reflect diminished expectations for profits at SIM (cut 46% for FY15 and 34% for FY16) and SAMTEL (cut 24% for FY15 and 16% for FY16). We assume a lower handset sales volume for SIM in FY15-16 (from 3.5m to 3.2m units for FY15) and lower revenue and GM for SAMTEL in FY15-16 (led by lower margin from new projects). We rolled over our target price to YE16 and derived the new sum-of-its-parts target of Bt30.50, pegged to these YE16 target prices—SIM (Bt1.40), SAMTEL (Bt24) and OTO (Bt7.50). 

More clarifications for SAMTEL  

Regarding the accusation that SAMTEL had illegally installed radio equipment on Baiyoke Tower II, management insisted it was holding the work installation order from the RTP and it had completed installing the quantity of radio equipment as set out in the work order requirements. The firm had already approached the RTP to provide that evidence and clarify itself. We expect the investigation of this issue to make progress by YE15. Management asserts that the RTP’s Bt3.4bn Digital APCO project, which SAMTEL won and which is pending cabinet approval is unconnected to and will be unaffected by that investigation. We expect the Digital APCO project to be officially signed once the investigation by the RTP has been wrapped up.