Goodpack

Kim Eng on 16 Feb 2012

Goodpack (GPACK SP) – Down but not out
Previous day closing price: $1.56
Recommendation – Buy (maintained)
Target price – $2.15 (lowered)

Below expectations. Goodpack’s 2QFY Jun12 results were below market expectations. This was due to both fundamental demand weaknesses, as well as higher-than-expected costs on its new IBC leasing programme. The bottomline for the quarter came in at US$10.7m, down 6% YoY and down 9% QoQ despite the second quarter being seasonally stronger.

Higher operating lease expenses. Goodpack originally embarked on its IBC leasing programme in order to reduce capex requirements and balance sheet debt. With the leasing service coming from a third-party financial institution, however, the associated costs on a P&L basis are at an estimated 10%, higher than earlier expectations of 6%. The effective cost (est. 7-8%) is lower though, as we understand that Goodpack can retrieve a portion of the leasing costs when it exercises the option to purchase the boxes at the end of the 3-5 year contract period.

Proforma numbers. Management published in its announcement a proforma set of numbers illustrating the impact of purchasing the IBCs (and incurring depreciation) instead of leasing them. Under such a scenario, Goodpack would have seen a 20% YoY growth in its bottomline in 1HFY Jun12, instead of 8% growth. This implies that its business held up relatively well during a difficult 2QFY Jun12, where management witnessed some slackness in its demand channels.

Time to reconsider? Given the negative cost impact from this leasing programme and the current balance sheet strength, management may limit new leasing activities and revert to its original buy model. Goodpack has a net gearing of 15% at present, and will enter a net cash position by the end of this financial year when outstanding warrants are converted as expected.

Maintain Buy. The numbers are admittedly weak, and we have lowered our estimates by 5-10% to account for higher leasing costs. However, we believe that earnings have bottomed and fundamental demand is coming back. Furthermore, its cash position is strong and there should either be a reversion to the original IBC buying model or an increased dividend payout. Maintain Buy with a target price of $2.15, pegged at 18x FY Jun12F/13F earnings (lowered from 20x to account for a slower profit growth trajectory).