Background

GPACKET experienced its glory days when it was listed on the MESDAQ market in 2005 with market capitalisation peaking to RM2.7b two years later, the same year it transitioned to the Main Market. Things were smooth sailing until it started to venture into the broadband business through a 57%-owned P1 Networks S/B (“P1” or currently known as Webe Digital S/B (“Webe”)) riding with the WiMAX technology. Since then, the group’s performance deteriorated and only became profitable on an operational basis in end-2011 after four years of recording negative EBITDA. The path, however, remains bumpy with GPACKET continuing to make losses (as a result of the weak performance of P1’s network and operations) before the disposal of its loss-making mobile arm – P1 to Telekom Malaysia (TM) for RM350m in March-2014. Post streamlining its business operations, GPACKET is able to re-focus its roots as an integrated telecommunications solutions player anchored on the two pillars - “Solution” and “Communications” divisions, which are profitable businesses with international presence.

Key takeaways

Webe has become an investment portfolio for GPACKET after TM subscribed to the second tranche issuance of the Convertible MTN in July 2016, boosting its equity shareholding to 72.9% form 55.3% previously. Following to this, GPACKET’s stake in Webe was lowered to 13.2% (on a fully diluted basis) which ceased to be an associated company of the group. With that, GPACKET investment in Webe is reclassified as “Long-Term Investment" and hence, no equity accounting of the losses of Webe is required from 3Q16 onwards. Furthermore, fair value of the carrying value of Webe is required upon reclassification from Interest in Associate to Long-Term investment.

Besides focusing on its two core businesses, GPACKET has also started venturing into the IoT (via a 22% equity stake in Yen Global Bhd (YEN) and fintech businesses (via a 80%-owned subsidiary – Webonline Dot Com S/B, which carried BNM e-Wallet license and MSC Malaysia Status) in year 2016. YEN’s IoT division will be mainly focused on the: (i) connected vehicle platform, and (ii) LoRa technology platform to build SMART city with various IoT applications. Its fintech business, meanwhile, will emphasis on implementing an electronic lifestyle in the education industry.

GPACKET is in a much better financial position with barely any external debts aside from the exchangeable medium-term notes (MTN) attributable to its investment in Webe. The MTN loan structure is advantageous to GPACKET given the debt, cumulative of principal and interest costs are not payable until 2022 and are fully exchangeable for Webe shares held by GPACKET. Hence, there is no apparent liability exposure and GPACKET will be in a net cash position (at c. RM61m as of end 4Q16) assuming that Webe is no longer a long-term investment.

Outlook

The group’s two core businesses are expected to record an organic growth of c.5-10% in FY17 with insignificant contribution from the IoT and Fintech divisions. Nevertheless, in view of the current technology trend, GPACKET expects the latter two segments to bear fruits in FY18 and contribute 20-30% to its earnings.

Risk

• Technology obsolescence.
• Delay in rollout of new products, and expansion plans.

Conclusion

At present, the group is trading at a historical core FY16 PER of 18.3x. Moving forward, expecting an organic growth of 5-10% coupled with sustainable margins, GPACKET could potentially record c.RM15m net profit in FY17 followed by RM18-20m a year later, implying forward PERs of 12.9-17.2x. NOT RATED.

Source: Kenanga Research - 19 Apr 2017