Fair value S$2.17
add: 12m dividend forecast S$0.05
versus: Current price S$1.85
A promising 2014
We met up with Goodpack’s management and better understood their growth drivers in 2014. While the impact of economic recoveries in the US and Europe on Goodpack’s growth is likely to be limited, we expect new SR accounts to be the key driver for growth over FY14/15 as Goodpack continues to engage auto parts manufacturers. In addition, we believe that, given the cost savings of up to 20% and Goodpack’s proactive role as an on-the-ground partner, scaling up and adoption will feature more prominently in Goodpack’s earnings profile from 2QFY15 onwards. Upgrade to BUY with new fair value estimate of S$2.17 from S$1.87 due to change in analyst and updated assumptions.
New accounts and segments are aces
Management has guided that new accounts and segments can drive topline growth into regions of above 10%. In FY14/15, Goodpack’s growth will be driven by new synthetic rubber (SR) accounts and its next growth level will come from gaining a foothold in the auto parts market. We believe there will be a network effect whereby other non-clients adjacent to clients in the supply chain will adopt Goodpack’s intermediate Bulk Containers (IBCs) so as to minimise the number of logistics handling systems involved. In our view, the securing of new accounts will then have the potential to create accelerated earnings in a few years’ time - a point which is likely overlooked by the market.
Limited measurable progress ≠ ground progress
Management has guided that sales cycle may take up to a few years, noting that the first SR contract took four years to begin running at full scale. Other than just negotiating lease terms, a sales cycle also involves working with 1) labour unions, 2) various players in the supply chain to ensure their logistics capabilities can handle IBCs from Goodpack’s clients and 3) technical checks on the auto parts’ intactness. We expect the earnings impact from this to kick in more prominently from 2QFY15 onwards due to the compelling cost savings of up to 20% for the auto parts manufacturers and Goodpack being an on-the-ground partner.
Europe and US recoveries are positives but limited
Europe’s and US’ turnaround stories have increasingly caught on, which are positives for Goodpack given its 45.3% Europe and North America exposure in FY13. However, with only somewhat positive forecasted GDP growths of 2.6% for US and 1.3% for Europe, these are just icings for Goodpack’s revenue growth ahead.
Upgrade to BUY
Due to a change in analyst and assumptions, the DCF-based fair value is raised to S$2.17 from S$1.87 with a BUY call.
Publish date: 05/02/14