Goodpack

Kim Eng on 12 Mar 2012

A game changer, this time for the auto sector. Goodpack recently announced its maiden contract from the auto sector. We believe the agreement with General Motors South Africa (GMSA) will spearhead the implementation of its IBC solution within the entire GM Group and put pressure on GM’s competitors to follow suit. Assuming a similar trajectory to the synthetic rubber market, we estimate revenue will double within three years, turning Goodpack into a US$1.8b market cap company. This would imply a share price of S$4.00.


Aggressive capex needed. Our discussions with management also suggest that the group is considering M&A activities to accelerate its entry into the auto sector. This market is at least four times the size of Goodpack’s existing rubber and juices market, which are still growing. Any IBC fleet expansion requirement would therefore be on top of the guided 250k-300k (current fleet size of 2.1m) per annum increment. This would necessitate more aggressive capex, though it is obviously a happy problem to have, given the attractive margins of around 25%.


Capital recycling engine. Capex may run up to almost US$900m over the next three years. Management will have to find alternative ways to finance this requirement. It could spin off its IBC fleet into a business trust, a solution we first mooted in our strategy report, Private Screening, dated 3 October 2011. We believe this would be a positive development towards creating a capital recycling engine.


Not paying for auto potential at current price. The stock has fallen by 15% over the past 12 months, as the market remained doubtful about its penetration into the auto sector. However, we would like to highlight that at the current price, investors are paying only for an exgrowth value for a company with one of the highest barriers of entry in our stock coverage universe. Discounting the stable cash flow to be generated over the next five years plus the scrap value of its IBC fleet would already give us a value equivalent to its current market cap.


Don’t miss the boat. We expect Goodpack to gain good traction in the auto sector over the next 12 months, which will re-rate the stock to above its historical PER mean. Our conservative estimates only take into account Goodpack fulfilling less than 15% of GM’s potential requirement by 2014. We upgrade our 12-month target price to $2.65, pegged at 20x FY13F earnings, for an upside of 63%. Reiterate Buy.