Goodpack Ltd - Strong FY11 performance (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$1.64

Fair Value: S$2.15

FY11 results exceed expectations. Goodpack reported a strong set of results with a 28% YoY growth in FY11 revenue to US$158.6m on the back of increased demand from customers and higher penetration in existing markets. Synthetic rubber continued to be the top revenue contributor (54% of revenue) while natural rubber provided 33%. PATMI grew 28.7% YoY to US$43.2m despite increases in logistic and handling costs (+32.7% YoY) as a result of the surge in fuel prices over the past year, and interest expenses (+79.9% YoY) related to higher loan balances. Goodpack's results exceeded our expectations with both top and bottom line figures beating our forecasts by 3.7%and 7.9%, respectively. Goodpack also proposed a final and special dividend totaling S$0.03 per share, which translates to a dividend yield of 1.8% (previous year: S$0.05 per share; 3.0% dividend yield)

Exploring new opportunities for the future. Management has been exploring opportunities in the automotive space, and has already initiated trials with global car manufacturers (OEMs) and car parts suppliers. Goodpack seeks to replace the current disposable packaging utilized by these companies with its IBCS. While nothing significant (in terms of brand recognition and order size) has been finalized at the moment, management is confident of its ability to secure orders eventually. Should that occur, it is a potential new market segment for Goodpack. In addition, any IBC supply shortfalls can be covered relatively quickly given Goodpack's leasing agreement with CIMC (a three-month notice period is required for CIMC to add additional IBC production lines.)

Increase rates to boost top line. Management also intends to boost its top line by increasing rates on renewed contracts by a total of 10-15% over the life of the contract (typically three years). Furthermore, it has embarked on a RFID tagging initiative for its IBCs to enhance its utilization and tracking abilities.

Maintain BUY with fair value of S$2.15. Although the market has built-in expectations for a possible economic downturn, we note that the group survived the 2009 financial crisis pretty much unscathed and even managed to post a revenue growth of 2.9%. While current conditions may not be identical to 2009, we continue to like Goodpack for its strong fundamentals and promising growth potential. Hence, we fine-tuned our Free-Cash-Flow-to-Equity Model (FCFE) to incorporate a modest revenue growth rate of 8% (+3% previously) to reflect the additional rate increases, and raise our fair value estimate to S$2.15 (S$2.12 previously), which implies a valuation of 18.2x FY12F EPS. Maintain BUY.