Wednesday, 9 April 2014

Goodpack

OCBC on 2 Apr 2014

We draw investors’ attention back to fundamentals as speculation about possible share offer for Goodpack wanes. Since our last BUY call in Feb-14, the share price has gained 15%. We keep our fair value estimate of S$2.17 intact and downgrade to a HOLD. We acknowledge that Goodpack continues to hold compelling value propositions: its global presence and ~20% cost savings over alternatives. There are also barriers to entry from IBC design patent, stickiness of existing clients, and large capex spending. We believe Goodpack is among the top choices for any new synthetic rubber (SR) plant, as exemplified by Goodpack being the supplier for Singapore’s new SR plants, including the latest Sumitomo Chemical plant opened in Mar-14. Further catalysts for rerating could be 1) current trial-stage auto parts manufacturers switching over fully to IBCs before 2QFY15 as assumed in our base case, and 2) another upside risk is higher-than-expected demand from rubber industry.

Return to fundamentals as speculation eases
Goodpack recently announced that it has been approached by parties in connection with a possible transaction and discussions are on-going. Brambles, which also offers intermediate bulk containers (IBC) leasing among other packaging solutions, subsequently said it has approached Goodpack previously but it is not currently in talks. Instead of betting on whether there will be further upside through share offer, we prefer to draw investors’ attention back to fundamentals.

Competitive advantages and upside risks remain
Goodpack’s most compelling value propositions to its clients are its global presence and unique IBCs that yields ~20% cost savings over alternatives. On the other hand, there are barriers to entry in the forms of: 1) IBC design patent with 15 years remaining, 2) stickiness of existing clients, and 3) large capex spending of ~US$900m to match Goodpack’s current fleet size. Hence, we believe Goodpack’s business model is still sound and will continue to grow. We believe Goodpack is among the top choices for any new SR plant given its ~30% market share and track record. For instance, Goodpack has the supplier for new SR plants in Singapore, including the latest Sumitomo Chemical plant opened in Mar-14. We think a major upside surprise is current trial-stage auto parts manufacturers switching over fully to IBCs before 2QFY15 as assumed. We note that this is the third year of engaging auto parts clients, a relatively mature stage of the sales process. We re-iterate that accelerated growth in auto parts segment would follow due to the network effect whereby others adjacent to clients in the supply chain will switch over to minimise logistics handling system. Another upside surprise is higher-than-expected demand from rubber industry, from either existing accounts or new synthetic rubber (SR) plants. 

HOLD after 15% return
The share price has gained 15% since our BUY call on 5 Feb-14, briefly hitting an all-time high of S$2.28. We continue to like the company but are keeping our S$2.17 fair value estimate. Hence, we deem Goodpack fairly priced and change our call to a HOLD.

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