Investment Merits

• Vying to be an end-to-end provider of smart services and the IoT

• webe (formerly P1 Networks) has ceased to be equity accounted from 4Q16

• Earnings are at an inflection point

Company Profile

Green Packet is a technology-based company originally founded in Silicon Valley. It is principally involved in the provision of solutions and devices for various telecommunications technologies. The firm is also engaged in the wholesaling of voice traffic.

Highlights

At an inflection point (webe is history). Having posted cumulative losses since 2010, FY17 would be at an earnings inflection point for Green Packet as the company no longer bears the losses from webe – Telekom Malaysia’s (TM) converged 4G operator – from 4Q16. To recap, the company’s stake in webe was reduced to 18.9% in 3Q16 (from 31.1%) after TM exercised its rights under an earlier convertible medium-term notes (MTN) programme. We expect the profitable core segments of communications and solutions to drive a steady stream of recurring earnings moving forward, with the new digital investments fuelling a stronger earnings recovery from FY18.

Internet of Things (IoT) and smart services – the icing on the cake. Green Packet has singled-out e-services and IoT to be the new growth engines and has embarked on several related M&As to strengthen its execution capabilities. Among the notable acquisitions were a 22% stake in listed Yen Global (Yen) for MYR18.2m (Aug 2016) and a 20% stake in Shenzhen Memo Technology Co Ltd (Memohi) for MYR6.4m. Yen’s subsidiary, Atilze Digital SB (Atilze) is rolling out the long range, low power wide area (LoRA) network in the country, which would be used for the deployment of IoT via embedded sensors.

Emerging financial technology (fintech) play. Green Packet has put in place a payment platform to provide end-to-end solutions for its digital ambitions. In Aug 2016, it purchased an 80% stake in WOL – a Bank Negara Malaysia (BNM) e-wallet license holder – for MYR9m to facilitate cashless and card-less transactions. The company has also set-up a mobile wallet application – Kiple (kiplepay.com) – to tap on the rapidly-growing e-commerce segment. Green Packet is also collaborating with the Government on a cashless/smart payment card that would eventually be rolled out in schools nationwide. The smart preloaded card would eventually replace cash payments by students at cafeterias, canteens and bookshops, and would ride on WOL’s infrastructure. We see good potential for recurring revenues from the project, given the captive market and high volume of transactions.

Company Report Card

Latest results. Green Packet booked headline earnings of MYR1.2m in 4Q16. This brought FY16 reported earnings to MYR71.5m on the back of MYR371.8m in revenue. Full-year numbers were, however, impacted by several one-offs, most notably the gain dilution of interest in webe, fair value gain of long-term investments on the reclassification from interest in webe, and related impairments/write-offs. Stripping-out the one-offs, and share of webe losses (effectively ceased to be equity accounted from 4Q16), Green Packet posted an operating profit (EBIT) of MYR8.8m in 4Q16 (FY16: MYR13.9m). This compares with an EBIT loss of MYR3m in 4Q15 (FY15: MYR8.1m profit).

ROE. The firm has been bleeding red ink since FY10 due to the extended losses at webe, which ceased to be equity accounted in 3Q16.

Dividend. Green Packet does not observe a formal dividend policy and has not been paying diviends due to its operational losses. We do not expect any dividends to be declared in the medium term either, as cash is deployed for suitable M&As.

Balance sheet. The company’s debt stood at MYR216.4m in FY16. This is largely made up of the exchangeable bonds (MTN) issued as part of TM’s acquisition of webe in 2014. The MTN is to be converted into shares in webe by TM when fully redeemed by 2022 (no cash repayment) and backed by its investment cost in webe (to be offset at the point of full redemption). Green Packet’s balance sheet is backed by a strong cash balance of MYR61.1m.

Management. Green Packet is majority owned by founder and controlling shareholder Mr Puan Chan Cheong who has a 31.6% stake. Mr Puan is a successful entrepreneur with over 20 years of diversified business experience. He was previously the CEO of webe (afer relinquishing his position as group managing director/CEO of Green Packet in Oct 2014). Mr Puan is currently a non-independent, nonexecutive director with the firm, providing strategic advice and vision. The day-to-day operations of Green Packet are led by group CEO Mr Tan Kay Yen and CFO Mr Liew Kok Seong alongside a team of senior managers.

Recommendation

Fair value of MYR0.38. We apply a SOP valuation on the stock, ascribing target EV/EBITDA multiples of 10x and 9x respectively on the projected FY18 EBITDA of its legacy communications and solutions businesses. At the same time, we value the new digital ventures (IoT and fintech) based on acquisiton prices and/or market valutions to be conservative. This translates into a fair value of MYR0.38, or an implied 11.6x FY18F EV/EBITDA. We believe the valuations are fair, considering the anticipated recovery in earnings and the revenue scability of its new businesses – weighing-in potential execution risks and the gestation period involved.

Source: RHB Securities Research - 5 May 2017