GREEN Packet (84 sen) will remain in the red for the current year due, primarily, to high upfront costs for its WiMAX broadband services. But we are cautiously optimistic that the company's key businesses will turn the corner later in the year and return to profitability in 2010.

If all goes to plan, earnings growth will pick up pace once its subscriber base hits critical mass - gains from economies of scale will translate into rapid expansion in its margins. Current valuations for the stock would, in turn, fall quickly.

In short, we believe the upside potential for Green Packet shares are substantial from hereon compared to the downside risks. Its shares are currently trading below net tangible assets of 95 sen per share at end-March 2009.

Encouraging signs in 1Q09
Whilst staying in the red, Green Packet's earnings results in the first quarter of 2009 (1Q09) do offer some positive signs. Net loss narrowed to RM22.2 million, from RM37.1 million in 4Q08, with smaller losses from both the broadband services and software and applications businesses.

The biggest drag was, unsurprisingly, its broadband services - housed under P1 - where operating loss before interest and tax totalled RM18.9 million in 1Q09. This was widely anticipated given the high upfront costs, which include network rollout costs and depreciation, advertising and promotional expenses as well as new subscriber acquisition costs.

Positively, sales rose to RM23.3 million in 1Q09 compared to just RM2.6 million in 4Q08 on the back of a larger subscriber base. Green Packet signed up some 35,000 subscribers by end-1Q09, up from less than 10,000 at end-2008.

Subscribers to grow exponentially in coming months
For now, the company is targeting the fixed broadband market segment, previously dominated by Streamyx. Anecdotal evidence suggests that it is doing very well, capturing almost one-third of all new fixed broadband subscribers nationwide in 1Q09, especially considering its still relatively limited coverage.

Subscriber acquisition is expected to grow exponentially as the company expands its coverage areas across the peninsula. It is on track to deploy up to 700 sites and achieve the target of 250,000 subscribers by end-2009.

The company aims to achieve positive operating earnings before depreciation later this year and turn a profit in 2010.

Strong balance sheet to support rollout plans
Green Packet's balance sheet remains in good shape despite having spent just under RM200 million, so far, on its WiMAX network rollout. It was in marginal net cash position at end-1Q09.

An additional capital expenditure of about RM230 million is planned for 2009-2010, by which time the company will hit 45% population coverage. The wider coverage will place Green Packet in a strong position to capture a slice of the fast-growing mobile broadband market segment.

Its tie-up with global chipmaker Intel will give the company an added advantage. Green Packet will be the default broadband service provider for all WiMAX-enabled laptops using Intel chipsets by next year.

Also on the drawing board are the launchings of fixed telephony services and a short-term pre-paid pass for broadband access later this year. The additional services are part of the company's bigger plan to eventually become a full-range telecommunications services provider.

Green Packet has proposed a 1-for-2 rights issue priced at 50 sen apiece. As a sweetener, shareholders will also receive one free warrant for every rights share issued. The rights issue is expected to raise some RM100 million for its future expansion purposes. Looking further ahead, it is also considering the separate listing of P1 for greater access to the capital market.

Software and applications on the mend after business revamp
The company's other key business, software and applications, registered improved sales of RM8.8 million, up from RM3.3 million in 4Q08, but were insufficient to turn a profit yet. Still, operating loss narrowed to RM2 million in 1Q09, down from a loss of about RM7 million in 4Q08.

We expect the business will continue to improve as Green Packet reaps results from its various strategic alliances set up over the past year. Indeed, we expect the unit to return to the black in the second half of 2009 (2H09).

Alliances with global players like Alcatel-Lucent, Motorola and Cisco have boosted sales for the company's software solution and WiMAX CPE (customer premise equipment). Most recently, Green Packet secured a contract from Tatung Infocomm, a WiMAX service provider in Taiwan, to provide customised Intouch Connection Management Platform. The platform enables seamless handoff between WiMAX and WiFi networks without having to reestablish a connection. Earlier in the year, the company inked a similar deal with PCCW, one of the largest telcos in Hong Kong.

Green Packet is also redoubling its marketing efforts in China, whose mobile networks are currently based on multiple platforms. This translates into opportunities for the company's seamless roaming solutions to integrate the various networks.

China has just awarded 3G licences to the three state-run telcos - China Mobile, China Unicom and China Telecom. The government has dictated that each network will be based on different platforms. Capital spending on 3G-network rollout this year alone is estimated at US$20 billion (RM70.6 billion). Green Packet already has working relationships with major Chinese telcos - the company secured its very first deal in China, with China Telecom, way back in 2003.

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.