GPacket- a bet on WIMAX's success

On May 13th, I have posted about GPacket's breakout above its medium-term downtrend line (go here). I have concluded that post with this comment:

Based on the high risk involved in the new WIMAX venture & the uncertainties surrounding the recovery of its existing operation, I believe that investors would likely wait for a few quarters of results before buying into GPacket again. For now, one may take comfort that GPacket's downside risk is lower with the breakout above the downtrend line. GPacket is likely to trade in the range of RM2.00 to RM3.00 for sometime before a new trend appears.

A few days later, GPacket announced that Intel, via its global investment arm, Intel Capital, had also proposed to subscribe for RM50 million of four-year redeemable convertible exchangeable bonds in the company. The bonds, which will carry a 4.5% coupon rate, will be converted into either Green Packet or P1 shares, should the latter seek a separate listing during the period. This announcement could be viewed as a coup for GPacket, but it also served the interest of Intel- one of the biggest promoters for WiMAX technology in the world- in its plans to push out WiMAX enabled laptops over the coming months. As part of the joint marketing collaboration, all laptops embedded with the Intel WiMAX chipset will be bundled with P1 broadband services for a 30-day trial period. This will greatly enhance the company’s customer reach and is a potentially key advantage over its competitors.

On the same day, GPacket announced its results for 1Q2008 ending 31/3/2008. For the first time since its listing, GPacket slipped into the red & reported a net loss of RM2.7 million on the back of a turnover of RM22.3 million.



I have tabulated the segmental results for QE31/3/2008, QE31/12/2007 & QE31/3/2007. We can see that the main performer, Software & Applications Division has seen a steady drop in its turnover & profit contribution. The other 2 profit-making divisions, Engineering Services & Solutions and Discounted Telephony Services are still profitable but too small to make a difference. Meanwhile, the new Broadband Services & Solutions Division chalked up a start-up loss, which dragged GPacket into the red.



From this, GPacket has pretty much become a bet on the success of the first WIMAX venture in Malaysia. And, the precipitous drop in its share price that followed is telling us that some investors are not comfortable. In the recent announcements to the Exchange, we can see that Goldman Sachs has been aggressively selling GPacket shares in the market.

From the weekly chart below, we can see that GPacket broke its recent low of RM2.06 yesterday when it closed at RM1.95. As at 4.30pm, the stock is trading at RM1.80, down 15 sen.


Chart: GPackets weekly chart as at May 28th, 2008 (source: Quickcharts)

Based on the above, I believe that we should avoid GPacket until we have seen a turnaround in its financial performance.

Note: For a different take on GPacket's prospect, please check out the article entitled "Still upbeat on Green Packet" from the EdgeDaily.