Notes on GoodPack

Since I last looked at it, the profile of this company has changed a little.

Note their financial year ends June.

Cashflows

Having being leasing IBC's for the past few years, they have been able to generate free cashflows (yellow below):

But from this year onwards, Capex will rise as they go back to buying IBCs. As of 3Q 2013 (May), they have already spent 102m on PPE.  Both OCBC and DBS-Vickers predicted higher capex for 2013 and 2014.

:

Balance sheet

As of May 2013, total debt was USD 266m, offset by 176m of cash.  Although net debt is about the same as a few years ago, its now only 2X earnings.

Most of their debt is long term fixed rate (~ 4.7+ percent); Medium Term Notes:

• Probably 25m short term bank loans
• 100m MTN due July 2013.
• 120m MTN due in 2016/17.
• 30m MTN due 2023
• 50m MTN due 2023 (issued end-Apr: not part of the 266m debt above)

Looks Like they will be taking on more debt in future.  Their medium term note program has increased from 300m to 600m, to be issued whenever they want.

Operating lease commitments as of Jun 2012 were 14m (vs 177m revenue, 47m profit, and 6m finance costs).  Few of these last longer than a year, but I think that they have to renew them, else risk their IBC suppliers becoming compeditors.

 

Cyclical

Would they be affected by a downturn/recession?  Probably.

From CIMB:  In 2008 and 2009: "there was a temporary dip in Goodpack’s earnings when its major clients (tyre producers) failed to fulfil their contractual obligations of moving promised rubber volumes. The sharp dip in tyre demand had caught many tyre producers by surprise with manufacturers like Michelin, Goodyear and Bridgestone suffering huge losses. With excess inventories of raw materials (rubber), Goodpack’s clients were unable to move their obligated rubber volumes. As an act of goodwill, Goodpack allowed its major clients to renege on their contracts temporarily, which hurt its bottom line. Goodpack was able to mitigate the pain by increasing its market share in the synthetic rubber transportation segment."   They do not see this occurring again.

On the positive side,  DBS Vickers predicted a bounce in tire demand (replacements) in Mar 2013, which they are still waiting for. Also due to 2 new Synthetic Rubber factories being built on Jurong Island, starting production in 2014.

Valuations

At 1.57 (SGD), trailing PE is 14.4.   Assuming 3c (SGD) earnings in 4th Quarter, forward PE is 13.  Not cheap, but not bad in an expensive market.

During the entire 2011, the stock dropped 40+% on fears of a slowdown, to a trough of 7.7 forward PE.  In 2009, the trough was a (trailing) PE of 7.2.

My guess is that from here, there's equal upside and downside: depending on if there is a slowdown/recession, or if the DBS's projected recovery occurs.

Support at around 1.30 (projected FY 2013 PE of 10.7), would probably buy there.

Goodpack

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:

	06	07	08	09
CFO (incl. dividends)	14.8	22.5	28.1	42.5
CFI (all outflows)	51	34.3	81.9	59.4
CFF (new bank borrowings)	34.1	23.5	68	15.1
FCF	36.2	11.8	53.8	16.9

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:

Segment	07	08	09	Notes
Synthetic Rubber	25.7	36.3	43.3
Natural Rubber	36.6	42.4	34.6	Downturn in 09 - only 5 months good sales
Juices & others	12.8	20.9	24.5	Drought in 07
Total	75.2	99.6	102.4

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:
Growth.
- 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.

Conclusion:
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.