Saturday, June 26, 2010


Since the market's doing nothing, decided to go back to fundamental research for companies to buy during the next bear market.

Goodpack is probably the closest thing on SGX to a CANSLIM company. It has shown profitable profitable growth for at least the past 4 years, is entering new markets, and while being the largest player in its segments, still has room to grow. On the negative side, its market is cyclical. And it has consumed cash for at least the past 4 years due to high capex.

1) Business Model

They rent IBC containers for customers to transport their transport natural rubber, synthetic rubber and juices, from one point to another. For the past 4 years, all profits, plus money from additional debt and share issues, have gone towards building up their fleet of IBCs.

a) From their 09 P&L:
  • Main costs are for logistics and handling (40%), staff expenses (8%) and depreciation (15%). The last two are fixed, the first looks like a variable cost but cannot be sure.
  • Nett profit margin of 30% is very high.
b) From their 09 cashflows:

CFO (incl. dividends)
CFI (all outflows)
CFF (new bank borrowings)

The company still requires cash to grow, probably a long time from being a cash cow. Most of the cash used is for purchasing Property Plant and Equipment (95% of PPE held on balance sheet are IBCs).

There's also a small drain in cashflow for working capital - for the past 3 years, the increases in inventories or accts receivables could be justified by a corresponding increase in sales.

c) From their 09 balance sheet:
  • Long term borrowings are 107m, abt 4.1 times their 09 profit. Quite high, but still manageable.
  • All of their debt is floating rate (as of June 09, there is no hedging - item 4bii footnotes).
  • Most of their debt is unsecured at SIBOR+1%, but the latest (Aug 08) 20m loan is at SIBOR+3%. Are they finding it harder to borrow?
  • Vast majority of their long term assets held are PPE, which consists of IBCs.
  • Minimal operating lease commitments (~ 3m), but this may increase later as Goodpack leases IBCs from its supplier.
My view is that their debt is manageable now... But it could be a risk if they keep rolling it over or adding to it.

On Jun 18, they announced a 300m medium-term note program where the company may issue these notes when appropriate. 300m is a bit much, zero interest rates will not last forever.

From a Aug 09 article:"Asked about the supply of additional IBCs for the new business to come, David said Goodpack will not be coming up with money for the capex. Its Chinese supplier, who is also a shareholder of Goodpack, has agreed to build the IBCs for lease exclusively to Goodpack."

2) Competitive Advantage
IBCs are supposed to be cheaper and more environmentally friendly that the conventional wooden pellet packaging. It is also cleaner with less contamination, esp. for rubber.

a) How big a player is Goodpack?

Estimated market share from Kim Eng (19 Mar 2010) report:
They are trying to gain an advantage being the first mover and largest player in the IBC space.

David Lam in a Dec 07 interview: “One of the reasons, our customers prefer to work with us is because we have the global presence. Our nearest competitor has 60,000 IBCs compared to our 1.6 million. They are after just a niche market."

b) Goodpacks IBC design is patented. (I think this is for the rubber IBC). The patent was sold by the founder to the company in 09.
The carrying amount of patent at June 30, 2009 is US$4,700,000 (2008: US$Nil) and the remaining amortization period for the patent is 20 years (09 AR, footnote 16). Why 20 years (from now)? This is the normal patent life, I don't see how it would apply unless the patent application was just made.

c) Sample compeditor is CHEP: subsiduiary of brambles: "issues, collects, repairs, washes and reissues more than 255 million pallets (mostly wooden) and intermediate bulk containers worldwide."

3) Cyclical Aspects
Their main business is shipping natural/synthetic rubber (~75% revenue in 09). The main usage of rubber is for car tires. And they are also looking to gain entry into shipping parts for the automotive industry. Thus they will be mostly dependent on the automotive industry cycle, which (I think) depends on the general economy.

In 09, revenue from natural rubber fell approx 18% due to 8 months of bad sales that year.

4) Growth and Valuation

Revenue growth for at least the past 3 years:

Synthetic Rubber

Natural Rubber
Downturn in 09 - only 5 months good sales
Juices & others
Drought in 07

The natural rubber market is probably saturated (see 2a), but the growth is expected in Synthetic rubber. The natural rubber market size is 6.8m tonnes, synthetic rubber is 13m. The company is also trying to break into automotive parts and ink.

5) Summary

The Good:
- Is a leader in its segments, but still has room to grow (synthetic rubber, juice).
- Entering new markets (auto, ink).

The Bad:
- Cyclical, mostly based on auto market. Witness the 09 decline in natural rubber revenue. Do not know if the largest expense on their income statement ("Logistics and Handling") is a fixed or variable cost.
Debt - Already quite high at 4X 09 earnings. Why the 300m note program? Zero interest rates will not last forever.

Wait till after cyclical downturn to buy.
Watch their debt. Including any new operating leases for IBCs from their supplier.
If their revenue drops, try to confirm whether their "logistics and handling" costs are fixed or variable.

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