Green Packet: Stepping up subscriber acquisition

Green Packet (RM0.98) is preparing for a fresh wave of sales and marketing activities, redoubling its efforts to gain new subscribers. P1, the company’s WiMAX business unit, targets to grow its subscriber base to 280,000 by the end of the year — from 196,000 at end-June 2010.

The acquisition of new subscribers slowed to 35,000 in 1Q10, after hitting a high of 43,000 in 4Q09, and declined further to 21,000 in 2Q10. This was partly attributed to the company’s move to focus on enhancing its network quality — including additional capacity for congested sites — and customer service in the last few months. On the positive note, P1 indicated that its churn rate has dropped to 3% in 2Q10, lower than the industry average of about 5%.

The company intends to pick up the pace again, both in terms of network coverage and subscriber acquisitions.

Target 65% coverage by 2012
An additional 231 RFS sites is planned for 2H10 to reach the target of 1,000 sites by end-2010, whereby coverage will extend to some 45% of the population. A total of RM500 million for capital expenditure has been budgeted for the next two years to expand coverage to 65% of the country’s population.

With its increasing network coverage, P1 is hoping to gain a slice of the fast-growing mobile broadband market.

The recent introduction of WiMAX-embedded laptops from major manufacturers like Acer, ASUS and Lenovo — more models are on the drawing board — will help spur take-up for its mobile broadband services. Basically, laptops that come with the WiMAX chipset will be able to log on to P1’s network without the need for a USB dongle. A dongle is required for laptops/netbooks to access the Internet via any of the cellular operators’ 3G networks.


Rejuvenated Streamyx steps up competitive pressure
Nevertheless, we expect P1’s primary target market in the near to medium term will continue to be the fixed home broadband segment where Streamyx is the main competitor. The latter has stepped up its quality of service this year to regain the upper hand in terms of attracting new subscribers. Streamyx added 110,000 new subscribers in 1H10 — almost double that of P1.

Despite the intense competition, ARPU has held up well for both fixed broadband service providers, averaging above RM80 per month. Going forward, P1 has indicated its preferred strategy for bundling value added services — such as fixed broadband-voice and mobile-fixed broadband packages — over price-cutting.

Having said that, P1 did recently slash the monthly subscription for its higher-value package (2.4Mbps) to RM139, down from RM199, but with lower fair usage. This was done to encourage higher take up, which will boost overall ARPU. We suspect the lower pricing is also to keep P1 in touch with Telekom Malaysia’s high-speed broadband services, UniFi. The

Visitors checking out the P1 booth during the KL PC Fair in August

latter’s cheapest package (for speed of up to 5Mbps) is priced at RM149 per month.

UniFi is targeting to offer its fibre to the home broadband services to some 1.3 million households by end-2012, most of which are likely upgrades from existing Streamyx customers on copper lines. As such, P1 believes there remains significant portion of Malaysia’s 6.3 million households that are currently underserved — and still up for grabs. Household penetration rate for broadband is estimated at some 37.5% at end-June 2010.

Working with SKT to ramp up subscriber acquisition
P1 has set its sights to sign up 280,000 customers by end-2010. It is working closely with its new strategic partner, SK Telecom, given the company’s extensive experience in its home market. South Korea has one of the highest broadband penetration rates in the world.
Indeed, depending on the momentum, P1 may ramp up its subscriber acquisition activities further — on expectations that the acquisition costs will likely rise in step with the country’s broadband penetration rate.

If so, we could see a slight delay in its timeframe for achieving operating and overall breakeven. But a larger subscriber base will translate into steeper turnaround, albeit slightly further down the road.


Ebitda breakeven by 1Q11
For the moment, Green Packet expects to break even at the Ebitda level (earnings before interest, tax and depreciation) by 1Q11, at the latest. The company’s losses have been narrowing over the past two quarters. It could achieve overall profitability, albeit a marginal one, in 2011. That would still be a very good result for a business that has just crossed its second anniversary.


Still value to be had over the longer-term
Thus, we believe the stock still offers upside potential for investors. For starters, SK Telecom acquired a 25.8% stake in P1 for US$100 million (RM310 million), valuing the unit at roughly RM1.22 billion. As such, Green Packet’s 57.1% stake in P1 alone would be worth some RM700 million, compared with its current market capitalisation of RM641 million.

Green Packet’s two other businesses — software and applications and communications/voice services — are profitable. The units collectively reported EBIT totaling RM5.73 million in 1H10.

We believe the market will re-rate the stock higher when it returns to the black. Margins are expected to widen quickly beyond the initial breakeven point, given the high fixed-to-variable costs structure for a typical telco operator. Hence, we should see steep increases for the company’s earnings in 2012-2013.

Despite the high upfront capital expenditure, Green Packet’s balance sheet remains in good shape. Net debt stood at RM148 million at end-June 2010, which will reverse into a net cash position after taking into account the RM323 million cash investment from SK Telecom in 3Q10. Improving cashflow from operations, from a growing subscriber base, will fund expansion going forward.


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.


This article appeared in The Edge Financial Daily, September 22, 2010.