Goodpack - Near term vulnerability (DBSVickers)

HOLD S$1.48 STI : 2,640.30

Price Target : 12-Month S$ 1.35 (Prev S$ 1.69)

Reason for Report : Increasing equity risk premium

Potential Catalyst: Automotive parts contract wins

DBSV vs Consensus: Below consensus on slower IBC additions

• In the last GFC, FY09 earnings fell 12% on lower demand for natural rubber (NR) and 50% jump in overheads

• Higher share in synthetic rubber implies greater vulnerability to recession

• Raised ERP to 10.5% on slower GDP growth forecast. Thus cut TP to S$1.35

• Maintain Hold – cautious on potential near-term volume cut back

Performance likely to follow last GFC. Goodpack’s top line grew 3% y-o-y in FY09, as its market share for SR increased from 10% in FY08 to 15.3%; while its NR revenues dropped by 19%. The tepid revenue growth was insufficient to compensate for higher costs base from prior year’s investment in intermediate bulk container (IBC) fleet as well as expansion of international network. Consequently, FY09 earnings fell by 12%, as overheads surged 50% – while depreciation jumped by 31%. Rise in effective tax rate to 9.4% from 7.2% further dragged earnings.

More vulnerable in potential recession, as Goodpack has increased its exposure to the more volatile SR market (54% of FY11 revenues) – demand of which typically falls nearly twice that of NR in downturns. The ability of SR revenues to offset lower NR revenues is further reduced given its higher market share in SR now (27% share in FY11).

TP lowered to S$1.35 due to higher equity risk premium (ERP) in our DCF estimates to 10.5% from 6.5% to account for slower GDP outlook. No change in earnings forecasts made. In a worst case scenario, the counter could be de-rated to -1 standard deviation PE of 11.3x equal to S$1.14 per share.

Hold call maintained on 9% downside to our revised TP of S$1.35. We are cautious on near term outlook as weaker consumer sentiment could further delay replacement demand for tyres and hence lower usage of Goodpack’s IBCs. However, we maintain HOLD for its global dominance, unique business model as well as stronger financial position.