BUY Maintain
Price RM2.92
Target RM5.70

Green Packet
Encountering Turbulence

GRPB’s share price has suffered a whiplash on renewed concerns of earnings risks and the dearth of new contracts from China (>50% of revenues and earnings). Much of the uncertainties reflect extended delays in the award of 3G licenses by the China government which indirectly affect procurement policies of telcos and in turn orders to GRPB. Recent management changes at few telcos may have also contributed to the delays as new policies and guidelines distract operational execution. We see the challenges as temporary blips that should clear-up over the course of the next few quarters. Anecdotal evidence suggests that the China government will likely award the licenses before the Beijing Olympics slated for mid-2008. We put our forecast under review for a possible downgrade to reflect the interim earnings slowdown (9MFY07 results are due Nov 14). Hence, there is downside to our target price of RM5.70 which imputes a 30% discount to the blue-sky target P/E of 24x FY08 EPS.

1Q08 launch for WiMAX. We understand GRPB will fast track the launch of WiMAX to 1Q08 from the earlier guidance of 2H08. It will be the first among the four 2.3GHz spectrum holders to unveil the high speed metropolitan area network. While management remains fully committed to the sharing of WiMAX infrastructure in reducing capex, it is nevertheless mindful of possible setbacks as discussions with other operators could take a long time, and hence derail GRPB’s internal targets and rollout plans. Checks with industry sources revealed that only GRPB and YTL ESolutions are moving full steam on their respective WiMAX deployments (YTL recently announced the plan to participate in the WiMAX Spectrum Owners Alliance- WiSOA) with GRPB already ahead of the curve with physical infrastructure in place. Recall that GRPB was the earliest to deploy its wireless network in 2H06 although coverage is still limited to key suburbs fringing the Central Business District (CBS). Its hybrid Wi-Fi service (up to 1Mbps) has attracted 14k subscribers (mostly small and medium scale enterprises) since the soft launch in July’07. The government has set a target for WiMAX operators to meet the minimum 25% population coverage by end-2008.

…slow start though. The key risks of an early WiMAX rollout are (i) ability to capture a critical base of users as cheap customer premise equipment (CPE) may not be available until 2009 and (ii) technological advancements for mobile broadband on the GSM standard (3G/HDSPA) which is already ubiquitous. On the positive side, we note the recent ratification of WiMAX as an official ITU standard that should reduce rollout risks and improve the commercial value proposition of the technology. Intel, which is an active proponent of WiMAX is likely to launch its very own WiMAX chipset for notebooks in 2008. More recently, Qualcomm announced that it will introduce a universal chipset, called Gobi, next year that will allow notebooks and mobile consumer devices access to wireless broadband across the full spectrum of wireless standards available today.

Good traction in the Middle East. Despite the challenges facing its solution business in China, GRPB has done reasonably well in the Middle East. We understand a multi-million SONaccess contract was inked recently with an undisclosed Middle East telco. The 40:60 JV with Kalaam Telecom for SONmetro which started commercial operations in July’07 has seen billings trickling- in although this is not expected to exceed RM1m for FY07. As revenue contribution from SONmetro is still <10% coupled with start-up costs (including that of Malaysia) for the new broadband business, positive earnings are not expected until FY09.

NexTel to bite the bullet in 3Q07. We understand from management that 75%-owned discounted call services provider, Nextel will likely veer into losses in 3Q07 versus a marginal profit of RM1.1m in 2Q07 owing to some write-downs. Recall that Nextel’s performance has been impacted by collection issues and margin compression from significantly higher traffic costs and competition in the mobile space. The promoters of Nextel had provided a RM6m profit guarantee for FY07.

RECOMMENDATION

Downside bias to forecast but selling overdone. We are likely to trim our forecasts following the release of the 3Q07 results to account for the following :

(i) delays in the award of new SONaccess contracts from China that will push-out earnings recognition to FY08 from FY07. Our current forecast assumes a 31% growth in solution sales for FY07.
(ii) possible execution risks relating to the nascent broadband venture. Management is guiding for a breakeven of the broadband business in FY09 based on 250k subscriber threshold.

Our current earnings estimate for FY07 of RM77.6m and FY08 of RM107.9m compare with consensus projections of RM70.2m and RM107.3m respectively. Although the market has pricedin the risks of another negative earnings surprise as reflected in the 20% de-rating suffered over the past 2 weeks, we think the selling has been overdone. Our target price of RM5.70 is premised on a 30% discount to factor- in execution and earnings risks from the blue sky valuation of RM8.00 (24x FY08 EPS). Our forecast is under review for a possible downgrade.

Now if i put this into perspective, I would say, LKT is a stock which has done tremendously well since its fy 2003. And what it has done in fy 2004 and fy 2005, it's simply fantastico. Which explains why the stock has performed wonderfully since 2005 when it trading around 1.50.

But that was then. This is now. We cannot delve too much in the past and neither can we invest using the rear view mirror.

Currently, with the current fiscal year earnings showing a downtrend, a sell down at this moment of time would be best interpretated in my opinion as something could be amiss (but we can never be too sure), however, as it is, some funds had sold down the stock. Are their reasoning justifiable? Do they know something we don't?

How?

Me? I would not be a hero here. Stocks do not get sell down without a reason and until I know some sort of reasoning, there isn't much point trying to outsmart these guys.

What say you?