GoodPack anemic growth over the next two quarters likely

OCBC - Fair Value S$1.70

Weaker performance amidst uncertainty. Goodpack announced that its 1Q12 revenue fell 4.1% QoQ to US$43.6m as a result of the global economic slowdown although revenue grew 25.1% YoY on the back of increased demand from existing customers and deeper penetration into existing markets. Given the QoQ decline in revenue generation, logistics and handling costs also fell correspondingly by 1.5% to US$16.9m. This fall in costs helped to offset the impact of lower revenue on the company's PATMI, which showed a slight improvement of 0.5% QoQ to US$11.8m. In terms of its profitability ratios, Goodpack saw small improvements in its operating and net margins, which gained one percentage point each to 34.9% and 27.1% respectively.

Managing costs will be vital in the near-term. Going forward, we expect cost management to play a vital role in maintaining margins - at least at their current levels. Back in 4Q11, management made a pledge to rein in logistics and handling costs. Although it is too still too early to judge management's success in this aspect, but with the recent moderation in fuel prices, Goodpack could experience some cost reprieve over the next quarter.

Yet to see implementation of price hikes. Management's intention to boost its top-line by increasing rates on renewed contracts by a total of 10- 15% over the life of the contract (typically three years) has not yet materialized in the performance this quarter. In addition, the company has yet to announce any major contract wins despite having initiated trials with global car manufacturers (OEMs) and car parts suppliers in the automotive space. The lack of developments on both these fronts will negatively impact its revenue growth potential for the year especially with its relatively saturation in the natural and synthetic rubber markets.

Anemic growth over the next two quarters likely; downgrade to HOLD. Should current poor economic conditions prevail, Goodpack will most likely experience anemic growth over the next two quarters. Furthermore, any intentions to implement price increases might face some difficulties while fresh business opportunities could also be hard to come by. Therefore, we decide to adopt a cautious approach in our valuation, and reduce our FY12 revenue growth forecast by five percentage points to 3%, which in turn reduces our fair value estimate to S$1.70 from S$1.90 previously.