Maintain BUY
Previous Rating: BUY
Current Price: S$1.71
Fair Value: S$1.90
In-the-money warrants expiring in Nov 2012. Goodpack currently has 63,998,910 warrants with a strike price of S$0.68 outstanding. As a quick recap, Goodpack issued 93.3m warrants at a price of S$0.22 each in Oct 2009 to raise funds for its working capital purposes. The move was viewed then as a positive as the proceeds raised from the warrant subscription gave Goodpack the financial ability and strength to fully participate in the market recovery in 2009 and allowed it to expand into its planned new avenues of growth. These warrants are due to expire in Nov 2012 and will lapse if not exercised by then. Since its financial year-end in Jun 2011, 268,000 warrants have been exercised.
Financial flexibility from proceeds of warrant exercise. With the remaining warrants in-the-money, we expect the warrants to be fully exercised (barring any significant market event), which will add 13% more shares to its total shares outstanding and raise S$43.5m for the company. Management has communicated to us that they intend to use the proceeds from the anticipated warrant exercise to increase capital expenditure on new IBCs as well as pay down existing loans. Furthermore, given that Goodpack is in the midst of exploring opportunities in the automotive space where it has already initiated trials with global car manufacturers (OEMs) and car parts suppliers, the additional working capital from the warrant exercise should allow it the flexibility to increase their supply of IBCs when required.
Further warrant issuance unlikely. Upon the expiration of these outstanding warrants, management does not intend to pursue another round of fund raising via equity funding (at least in the near term) as existing shareholders have expressed their unwillingness to tolerate another round due to its dilutive nature.
Dilution to kick in; fair value reduced. The warrant exercise did not impact our revenue growth forecasts for the company, which remains at 8% to reflect management's intention 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). We also continue to like Goodpack for its strong fundamentals and promising growth potential. However, with the increase in shares outstanding from the warrant exercise, our valuation per share of the company will be reduced correspondingly. Assuming full conversion of the warrants by year-end FY12, our previous fair value estimate of S$2.15 is now reduced to S$1.90 in anticipation of the 13% increase in shares outstanding. Maintain BUY.
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