More upside to come
Goodpack posted steady results in the last two quarters, recovering from a slowdown in the replacement tyre market. We believe that the positive trend will continue in 2014, with the expected earnings growth catalyst from the strong synthetic rubber demand in the short term.
In the longer term, we believe that Goodpack will have a breakthrough in the auto parts market, which will take its earnings to the next level. Under our new rating structure, our rating changes from Outperform to Add. Our target price remains unchanged at S$2.23, based on 15x FY15 P/E (historical average). The growing demand for synthetic rubber is the main short-term catalyst.
Capturing growth in the synthetic rubber market
Goodpack estimates that the synthetic rubber market has an addressable size of US$360m, of which it has a 30% market share. We expect Goodpack to benefit from market share gains and growth in synthetic rubber demand. Goodpack currently has strong market penetration in Asia (39%), Europe, the Middle East and
Africa (EMEA, 44%) and America (39%) but is relatively new in Russia, Japan and China. We believe that Goodpack is on track to secure new contracts in these markets by 2014, which will drive earnings growth.
Auto parts will improve trade lane matching
The flaw in Goodpack‟s business model is that most of its shipments move from Asia to America and Europe but few shipments move in the reverse direction. However, Goodpack is working hard to secure auto parts contracts with OEM manufacturers for shipments from Europe to Asia. This will improve its trade lane matching and billable days. Goodpack is confident that it will secure the auto parts contracts, as it has aggressively expanded its IBC fleet to accommodate larger volumes.
Look forward to strong 2014
We believe that Goodpack will continue to deliver strong results in 2014 on the back of the following trends: 1) the recovery in replacement tyre demand as customers are no longer stretching the useful lives of their tyres, 2) the robust global automotive sales, and 3) the growing synthetic rubber market, with new production plants coming up. Goodpack has also conscientiously put cost control initiatives in place (automation in depots to reduce staff cost and network optimisation to reduce logistics cost), which will improve its profit margins.
Publish date: 29/11/13