Goodpack good business with catalysts

Target Price SGD 2.35


Factoring in higher financial costs; net gearing remains healthy. Interest expenses surged 120% in 1HFY13, in tandem with a surge in bank borrowings to USD 245mn, from USD 112mn a year ago. We increase our FY13E and FY14E finance cost estimates by 43% and 50%, respectively. The group doubled the size of its multi-currency medium-term note programme (MTN) to SGD 600mn in January 2013. Net gearing increased to 20% as of 1HFY13, compared to 15% in 1HFY12 – still at a healthy level in our view.

Auto parts the key growth catalyst. Management believes the approval processes are prolonged by a slowdown in Europe and the US. We think Goodpack will eventually garner good contract flows from auto-parts given (1) its good execution track record in synthetic rubber, and (2) it is near the final bidding process with at least four global auto-parts manufacturers. We see the doubling of the borrowing facility as a positive signal on potential major contract wins coming through.

Higher barriers to entry; cash cow. Goodpack‟s large-scale, low-cost Intermediate Bulk Containers (IBC) fleet, coupled with its global network across 68 countries and long-term customer relationships, are key barriers to entry that sustained Goodpack‟s EBITDA margins at >40% in the past decade. We expect the company‟s existing business to maintain mid-teens growth over the next three years. FCF turned positive in the past three years since the leasing programme began. We expect positive FCF going forward.

A prized asset. We estimate the market value of Goodpack‟s IBCs at
USD 700mn or 80% of its enterprise value. Brambles‟ recent acquisition of Pallecon was at an EV/IBC of USD 983, 3x higher than Goodpack‟s EV/IBC value, despite Pallecon‟s smaller scale and lower margins.

Valuation and recommendation

Lowering earnings estimates
- We reduce our FY13E/FY14E EPS estimates by 12%/13%, mainly to reflect higher financing costs. We increase our FY13E/FY14E finance cost estimates by 43%/ 50%, due to higher borrowings.

- Bank borrowings rose to USD 245mn, from USD 112mn a year ago. We expect borrowings to remain high on the back of the MTN facility of SGD 600mn, which the group can readily tap. According to management, the increase in borrowings was mainly to support expansion plans and working capital.

- Despite the surge in borrowings, strong cash flow generation kept net gearing at a healthy level of 20%.

Maintain Outperform

Raising price target
 We raise our PT slightly to SGD 2.35, from SGD 2.23 previously. We switch to using the DCF methodology (from a PER-based valuation) as our primary valuation tool to capture Goodpack‟s steady cash flow and earnings growth in the long term. Our DCF-based price target translates into FY14E PER of 18.5x. We believe our target multiple, which is above the historical mean, is reasonable considering Goodpack‟s strengthening monopolistic position in reusable IBC, attractive profitability and strong cash flows (we are expecting positive free cash flow every year in the next three years).

Undemanding valuations
- Goodpack currently trades at 15x FY14E PER, in line with the five-year historical mean. The stock‟s valuation peaked at 24x in May 2008 and troughed at 6.6x in March 2009.

- Brambles‟ recent acquisition of Pallecon was at an EV/IBC of USD 983, 3x higher than Goodpack. This reflects potential value upside for Goodpack considering its large-scale lowcost IBC fleet, sticky customers and superior EBITDA margin in excess of 40% every year in the past ten years, compared to Pallecon‟s 33% EBITDA margin in FY12. Goodpack has a significantly larger scale, with an IBC fleet of 2.8mn compared to Pallecon‟s 0.18mn IBCs.

Key risks
- Slowdown in global demand for rubber, poor execution on auto-parts penetration.  Pallecon operates mainly in Western Europe, Australia and New Zealand, providing IBCs primarily for the transportation of liquids in the food, cosmetic and chemical industries. According to Goodpack, Pallecon is unlikely to be an emerging competition as it specialises in different products (Goodpack specialises in rubber transportation) and trade lanes. Goodpack‟s strength is in international transportation, while Pallecon specialises more in domestic transportation.