Written by InsiderAsia
Tuesday, 15 September 2009 17:07
GROWTH for Green Packet's (68.5 sen) core businesses — software and applications and broadband — is expected to gain traction over the coming months.
In fact, the software and applications arm had already turned around in the last quarter. The business reported earnings before interest and tax (EBIT) of RM6.3 million in the second quarter of 2009 (2Q09), a sharp reversal from loss before interest and tax (LBIT) of RM2 million in the immediate preceding quarter.
Although its broadband business — housed under P1 — will remain in the red for the rest of this year, it too is expected to turn around in 2010. The company is stepping up its marketing and promotional activities in line with its network coverage expansion. P1 has signed up 80,000 subscribers by its 1st anniversary, on Aug 19, 2009, and aims to hit 200,000 subscribers by end-2009.
If all goes to plan, Green Packet will return to profitability in 2010. We estimate the company will make pre-tax profit of roughly RM31 million next year, a reversal from our estimated pre-tax loss of about RM82.6 million in 2009.
Thereafter, earnings growth will be strong, as P1's margins and profits should widen exponentially once its subscriber base hits critical mass.
Software and applications boost in 2Q09
Even though net loss widened to RM27.9 million, from a loss of RM22.2 million in 1Q09, Green Packet's latest set of earnings results for 2Q09 were, nonetheless, encouraging.
In particular, the software and applications unit fared well, reporting EBIT of RM6.3 million in 2Q09, a sharp reversal from LBIT of RM2 million in the immediate preceding quarter. We expect the business will continue to grow going forward.
The company is seeing returns from the various strategic alliances with leading equipment vendors, such as Alcatel-Lucent, Huawei and ZTE Corp, put in place over the past year. It is estimated that Green Packet supplied over 11% of the total WiMAX customer premise equipment (CPE) sold to service providers around the world.
It is also one of the world's largest providers of WiMAX connection manager, which includes the enabling of seamless roaming between WiMAX and WiFi networks. Some of the company's customers include Craig Wireless, Tatung Infocomm (Taiwan), Globe Telecom (Philippines) and PCCW (Hong Kong).
As one of the world's leading WiMAX broadband services providers, Green Packet plans to market its experience and services to other WiMAX operators. The company may even take a strategic stake in promising ventures.
P1 celebrates 1st anniversary
A year after launching Malaysia's first WiMAX broadband service, P1 continues to lead, by far, its peers both in terms of rollout, coverage and subscriber numbers.
P1 added about 25,000 new subscribers in 2Q09 bringing the total subscriber base to 60,000. The number is below its initial target due to the addition, and equipment integration, of a second vendor, ZTE. The company adopted a multi-vendor strategy, to hasten its network deployment.
Following the successful integration of ZTE equipment, P1 has, once again, stepped up its site rollout plans. We estimate it has, at end-June 2009, achieved about 60% of its 700 sites target by end-2009 and remains on track to hit 45% population coverage by end-2010.
P1 has also re-energised its marketing campaign with special promotions in conjunction with the celebration of its 1st anniversary. So far, feedback from subscribers has been broadly positive. P1 estimates its churn rate has fallen to just about 5% in June 2009.
Gaining market share in fixed broadband
Indeed, it has been getting a good share of new broadband subscribers in the country, especially considering its still limited coverage, while maintaining a decent ARPU (average revenue per user) of about RM87 per month.
As a comparison, Telekom Malaysia — the country's largest fixed broadband service provider (Streamyx) — reported 40,000 net subscriber additions in 2Q09. Streamyx currently has about 1.37 million subscribers.
With the increased number of sites and coverage areas, P1's subscriber acquisition is expected to gather pace in the coming months. The company indicated that the momentum has picked up since end-June 2009, with subscribers increasing to 80,000 by mid-August 2009.
On the drawing board are plans to expand its distribution network, such as an increased physical retail presence and P1 Direct, a call-to-purchase channel, as well as a string of new products. The latter includes prepaid broadband in 4Q09 and fixed voice 2.0 in 2010.
Foray into mobile broadband
The company's foray into the mobile broadband market segment was marked by the introduction of the WIGGY in 2Q09. The portable modem offers download speed of up to 10 Mbps and a fair usage of 10GB for RM149 per month. This was followed with the WIGGY 69 in July 2009. With download speed of up to 800kbps and fair usage of 5GB, the WIGGY 69 has received very good response.
Mobile broadband is a fast-growing market segment, what with the increasing demand for broadband-on-the-go. The service is currently offered by all three telcos, Celcom, Maxis and DiGi, using their 3G platforms.
As P1 widens its network coverage, the company should be able to compete more effectively in this market. The expected introduction of WiMAX-enabled laptops — thus, negating the need for portable modems altogether — next year will further enhance the company's competitiveness in the broadband market.
The growth prospects are good given the country's still low broadband penetration rate, currently estimated at about 27%, compared to countries like South Korea, Singapore, Taiwan, Australia and Japan, where penetration rate ranges from 60%-100%. Our government targets a 50% penetration rate by end-2010.
P1 to turn around in 2010
P1 is expected to remain in the red this year but the company is optimistic that the business can achieve positive earnings before interest, tax, depreciation and amortisation (EBITDA) by end-2009 and report profits in 2010.
It will be the primary earnings growth driver thereafter as margins and profits should widen exponentially once its subscriber base goes beyond critical mass. Local telcos are estimated to earn EBITDA margins of more than 40%. P1 should achieve similar levels within the next three-four years.
Hence, for investors with a longer investment timeframe, Green Packet shares offer significant upside potential from hereon.
The company's balance sheet is fairly solid with net debt of RM49.6 million or gearing of just about 14% at end-June 2009. It will receive an additional RM98 million from its soon-to-be-completed 1-for-2 rights issue.
We estimate its book value at roughly 70 sen per share by end-2009, after taking into account the rights issue exercise and losses for the year.
Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.