insider asia
THE share price for Green Packet (RM1.11) has done well in recent months, although it has given back some gains after surging to a year-high of RM1.68 earlier this month.
Green Packet reported net loss totalling RM31.8 million in its latest earnings results for the third quarter of 2009 (3QFYDec09) — and is expected to remain in the red for the next few quarters. However, we are sanguine that increased coverage and subscribers will gradually pare losses for the company's WiMAX broadband business, housed under P1.
The turnaround — likely in the second half of 2010 (2H10) — is expected to be catalyst for another upward rerating for the stock. We estimate the company will return to the black in 2010, with net profit of RM24.4 million following losses totalling RM111.9 million this year.
Earnings are expected to grow strongly thereafter on the back of increasing economies of scale once subscriber numbers move beyond critical mass. Hence, we believe there remains good upside potential for the stock over the longer term.
Losses as P1 accelerates rollout
Green Packet's losses in 3Q09 widened to RM31.8 million, up from RM27.9 million in 2Q09 and RM10.3 million in the previous corresponding quarter.
This was due to high startup costs — such as marketing and promotional expenses, subscriber acquisition cost and depreciation costs — for its broadband business. P1's subscriber base increased by about 36,000 to 96,000 at end-September 2009, still well short of the estimate of 250,000 subscribers needed to achieve operating breakeven.
Although P1's subscriber base is still off its year-end target of 200,000, the company has done admirably in winning market share in the fixed broadband segment. Telekom Malaysia with its wide nationwide coverage only managed to add about 28,000 fixed broadband subscribers (residential and business) in 3Q09 for its Streamyx unit.
Product and solution and communication arms profitable
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Green Packet's other business units, the product and solution and communication and voice, turned in small profits in 3Q09.
The product and solution arm made earnings before interest and tax (Ebit) totalling RM2 million — underpinned by increasing sales of WiMAX CPE (customer premise equipment), on the back of more network rollouts globally, as well as revenue from several software projects. Green Packet currently ranks 3rd in terms of global sales of WiMAX CPE devices, behind Motorola and Samsung.
The communication and voice arm generated turnover totalling RM13.5 million in the last quarter. The international wholesale voice services unit, based in Singapore, in particular, is faring well. But earnings were hurt by startup costs for its discounted telephony business in Thailand and MVNO (mobile virtual network operator) projects. The business reported Ebit of RM300,000 million in 3Q09.
Building earnings base on fixed broadband
The broadband business will be the key driver for growth for the foreseeable future.
Green Packet has been busy over the past few months. In addition to widening its coverage area and marketing blitz, the company received approval to operate in East Malaysia as well as acquired spectrum to deploy wireless broadband services in Singapore.
P1 has redoubled its marketing efforts in recent weeks, following slower-than-expected takeup rate in 3Q09, in order to meet — or least close the gap to — its target of 200,000 subscribers by end-2009.
Its "Cut now!" campaign was expanded to include the company's first advertisements on television and radio, in addition to the more traditional print media and billboards.
Anecdotal evidence is positive. About one-third of its new subscribers acquired in the last quarter were those switching from other service providers. The campaign has generated a lot of publicity, raised P1's visibility and announced its intentions to be a key player in the broadband market.
Further growth booster from mobile broadband
The government's decision to provide a tax relief on broadband subscription fee of up to RM500 for 2010-2012 should help improve penetration rate in the country.
However, as mentioned above, takeup rate for fixed broadband has slowed, likely cannibalised by increasing user preference for mobile broadband. Current trends suggest that the latter will be the faster growing segment of the market for the foreseeable future.
Demand for mobile broadband will be underpinned by the long list of new launches for devices such as smart phones and netbooks as well as users' increasing need to be connected at anytime and everywhere.
There were an estimated 1.43 million and 0.72 million fixed and mobile broadband subscribers, respectively at end-1H09. Industry observers indicate that new subscribers for mobile broadband could easily double that for fixed broadband in absolute numbers next year.
Widening coverage will strengthen P1's position
Currently, the mobile broadband segment is dominated by the telcos, with services provided via their 2.5G/3G platforms.
Although P1's nomadic broadband cannot yet offer ubiquitous mobile broadband services, WiMAX has a much larger capacity and up to 10 times the speed of 2.5G/3G platforms. With a wider coverage, WiMAX can provide a competitive alternative, especially within the cities.
In this respect, P1 has stepped up its network rollout. It is the only WiMAX operator to have achieved the targets specified by the Malaysian Communications and Multimedia Commission (MCMC) under the licence agreements. Earlier last month, the regulator imposed fines on the other three licensees for failing to achieve their coverage targets.
P1 currently has about 600 sites and expects to hit 700-800 sites by end-2009, covering over 35% of our population. It plans to spend another RM155 million by mid-2010 to extend its coverage to 45% of the population. By 2012, P1 intends to achieve 65% population coverage.
Widening coverage will boost the company's push into the mobile broadband market segment, as is the imminent launch of WiMAX-embedded laptops and netbooks. For instance, the strategic tie-up with Intel Corp will offer P1 as the default broadband service operator in all future WiMAX-enabled laptops using the Intel chipset.
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Upsell range of products via bundling
With its range of products, P1 is able to bundle fixed and nomadic broadband services for users. For instance, the company recently launched another promotion package to spearhead its foray into the mobile broadband segment.
The package, a followup to its earlier "Cut now!" promotion, offers a free modem for nomadic broadband services (the W1GGY) — that comes with a 4GB prepaid pass and 30-day validity -— to subscribers of any of its existing fixed broadband packages. Subscribers can purchase additional prepaid passes valued at RM20 (500MB or 15 days validity) and RM50 (2GB or 30 days).
In addition, the company plans to extend fixed voice services to customers by 1H2010. The business, currently dominated by Telekom Malaysia, is another potential revenue generator.
Expanding footprint in the region
P1's plans to expand its footprint into East Malaysia and the region (in at least three other markets) will give it a strategic advantage. For instance, once its network is deployed in Singapore, the company can offer broadband roaming services to customers frequenting the two countries.
The company plans to start network rollout in East Malaysia — in big cities like Kota Kinabalu, Miri, Tawau, Bintulu, Sandakan and Kuching — in 1Q10. If all goes to plan, it could launch services by 2H10.
Green Packet believes the market in East Malaysia has big potential with broadband penetration rates still low at about 13.6% in Sarawak and 9.5% in Sabah. Despite the vastness of the two states, their population is relatively concentrated within major cities, which will ease deployment.
To be sure, competition is expected to intensify between the key operators. In addition to Celcom, Maxis and DiGi, the YTL group is slated to launch its WiMAX broadband services nationwide in 2010.
But we believe Green Packet has the expertise and experience to win a fair share of this rapid growing market. We estimate its subscriber base to reach 180,000 by end-2009 and 500,000 by 2010.
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.
