Monday, February 21, 2011

Green Packet to face liquidity trouble in 12 months time?

In a financial report, you can cheat (or disguise) a P&L or even your balance sheet, but you cannot hide your cashflow statement. I am not claiming that Green Packet (GP) disguise its financials but here to study GP, perhaps the best numbers come from the cashflow statement not the P&L.

In my previous post, I did question why companies such as GP bother to compete against incumbents such as Maxis, Axiata, TM as the telco business is a very high capex business and you need financial muscle to fight, here it is you can see that GP spent a lot for its size and almost getting nowhere:

Over the last 8 quarters, GP faced a negative free cashflow of RM770 million (a sum which is not large for companies like TM, Maxis but excessive for GP). If you notice, its current cash position is around RM172 million, but more importantly, it is facing negative operational cashflow quarter after quarter. Positive operational cashflow is what you need to repay your loan. The rate it is going, it may be some time before it will achieve a positive operational cashflow, but time is what GP may not have. (but of course unless it raises another round of fund as what it did with SK Telecom- this of course I do not know) If you look at its total borrowings, it did not move much, most probably to its inability to raise funds from the debt market.

Cashflow expenses for a player like GP are probably as follows:
  • equipment purchase i.e. PPE expenses (probably the largest in the context of GP) which includes telco tower equipment and Consumer Premise Equipment;
  • marketing and advertisement expenses which I believe depends on whenever GP has the funds;
  • costs for access such as payment to TM, TimeDotCom etc.;
  • other operational expenses like staff costs, acquisition costs.
If GP wants to remain in the business, the expenses that GP can reduce are the marketing and advertising expenses. It cannot stop expanding hence stopping the expansion of its coverage would be futile for its business and planning. How much coverage it already has is not known though (for me). By my reckoning, without inclusion of the PPE expenses, GP's negative operational cashflow is around RM20 - 30 million per quarter. Hence, if you look at the cash position against the debt that GP has, it could already be in trouble.
It is always tough to compete against incumbents that already have positive operational cashflow. GP is just squeezed in all areas i.e. size, costs structure, economies of scale, funding abilities. Any aggressive action that the other competitors take would just kill GP! And I really see that happening. Hope I am wrong, but in my mind GP just took the wrong fight!

Serious Investing!

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