STI : 3,186.12
Price Target: 12-Month S$2.25 (Prev: S$2.00)
Proxy to US/Europe recovery
• 1Q14 results largely in line
• Prime beneficiary of US/Europe recovery
• New auto part contract is a strong re-rating catalyst
• Reiterate BUY, TP raised to S$2.25
Prudent business model and market share gain bolster Goodpack's earnings during downturn.
1Q14 in line. Goodpack 1Q14 (FYE June) net profit grew 7% y-o-y to US$13m, on the back of an 8% increase in revenue. This forms 24% of our FY14F earnings, in line with our estimate of US$14m for the quarter. Other operating expenses were higher than expected, but this was offset by forex gains. Utilisation rate was stable at 58%. Goodpack has added about 100k new IBCs in 1Q14, bringing its fleet to c.3m.
Stronger growth ahead; spotlight on autoparts. On the back of stronger SR volume, we expect Goodpack to deliver US$14-15m profit (+26-35% y-o-y) in 2Q14, depending on the duration of the traditional year-end closing of factories in Dec. In the near term, we are hopeful that one of the major auto part contracts will be finalised. While the longawaited European OEM contract is pending approval, Goodpack has gained traction with another US-based automotive-related supplier.
Benefits from US/Europe recovery. Goodpack is one of the best proxies to US/Europe recovery with almost half of its revenue from that region. Share price has risen 25% since our upgrade at end-July. We believe the macro recovery, coupled with positive earnings delivery and conclusions of auto contracts would continue to drive share price upwards. We have raised our terminal growth rate assumption by 1ppt to 2% in view of the improved outlook and growth prospects. As such, we lift our TP to S$2.25, which translates to 17x FY14F PE and 2.6x P/BV, in line with its 10-year historical mean. Goodpack also offers 3-4% dividend yields based on 45% dividend payout ratio. Reiterate BUY on Goodpack for potential total return of 21%.
Automotive - the near term price catalyst
Autoparts segment is making good progress, albeit slowly… Goodpack has won a total of 16 contracts from autopart customers as of end FY13. Stronger brand awareness from this new segment has generated more enquiries and trials. The company is currently working on a strong pipeline of over 50 projects.
We understand that Goodpack is working on a second contract with GM Korea to ship parts to China and is in active talks with a few European OEMs of major automakers and one US-based autopart player (which is close to finalizing commercial terms).
Huge potential from the automotive market. Based on management’s assessment that the addressable automotive market is worth US$1.9bn, Goodpack’s market share is a mere 0.05%. A larger presence in the autopart market should propel Goodpack to its next growth phase.
Healthy balance sheet
Healthy financials. As of end Sept 2013, Goodpack’s net gearing ratio stood at a healthy 0.25x. The company has been very prudent in keeping the ratio below 1x over the past 10 years, with a high of 0.56x as of end FY09. Management aims to keep it below 0.6x in the foreseeable future. We expect net gearing ratio to stay at around 0.3x as there is sufficient operating cashflows to fund its capex requirements and dividend payout.
90% of debt is on fixed rate. We estimate that < 10% of Goodpack’s debts are from short term bank loans on floating rates, with the remainder consisting of medium term notes at fixed rates. Stripping out the S$100m notes that were recently repaid, Goodpack has S$317m (or US$252m) medium term notes outstanding, maturing in five years at an average interest cost of 4.5%.
Beneficiary of US/Europe recovery. Theoretically, if rate hikes do come through in the next few months, this could imply a healthier economic environment in the US. Recovery in US/Europe is positive for overall rubber and tyre demand and thus, also positive for Goodpack. Almost half of Goodpack’s revenue is derived from America and Europe.
Trading below mean
Valuation remains undemanding at 0.5SD below mean. Goodpack’s share price has rebounded 25% since our upgrade on July 26. Valuations remain undemanding at 14x FY14PE and 2.2x P/BV, representing 0.5SD below its 10-year historical average forward PE and P/BV valuations of 16.8x and 3.1x respectively. We have raised our terminal growth rate assumption by 1ppt to 2% in view of the improved outlook and growth prospects. TP is hence lifted to S$2.25 (WACC 9.2%; terminal growth 2%), and translates to 17x FY14F PE and 2.6x P/BV, in line with its 10-year historical mean. Goodpack also offers 3-4% dividend yields based on 45% dividend payout ratio. Reiterate BUY on Goodpack with potential total return of 21%