Goodpack (SGX: G05.SI)

I got interested in Goodpack from looking at the list of top losers this morning on Business Times. The company manufactures specialized Intermediate Bulk Containers (IBC). G05 has EBIT margins of 32% to 33% which are remarkably good. But the news reports say that the company has engage Macquarie to sell itself. Its still profitable as of Q1 09. I suspect the reason for the management's pessimism is the US$25.88M in debt coming due this year.

I've seen quite a couple of these re-financing/ liquidity crunch situations occur over the last year. For example, Cemex (NYSE: CX). They provide a good opportunity for a bargain buy, provided that you buy in cheap enough. A good metric to check is price to book. Or EV to EBIT. Often, these companies are selling at way below book. A rule of thumb I use is a minimum price of 40% discount to book value. This accords you a margin of safety.

Risks - The 2 big risks here are first that Goodpack starts a fire sale of its assets to meet the repayment of debt. What this means is that the accounting book measure that you use might not be a good reflection of the price. 'coz assets will be sold at a deep discount to book. It also diminishes your residual book value.

Second risk is that the company gets forced into a liquidity bankruptcy. This means that the debtors put the company into bankruptcy even though the company is not insolvent (ie liabilities more than assets). I believe that the risk of this occurring is slight at best because the company is currently rated by Moody's at Aa2 (spot) and Baa3 over a 5 year median. So currently investment grade debt. This might mean a better chance of re-financing the debt. Also, the company is solidly profitable, which would obviously factor into re-financing discussions. The one concern I have with the company is its CapEx. It's been spending really large amount (in relation to its operating cash flow) on CapEx. Often the figure exceeds operating cash flow and is financed by increased debt levels. The company has a consistent policy over the last few years of spending on CapEx in excess of cash generated from operations. The wisdom of this move is questionable. Although the company has cut back on CapEx in Q1 09, I feel that this is too late.

Overall, I like this company and the business. There are 2 questions that face a value investor. The first question is whether the business can cut back on CapEx without damaging the franchise? The second question is the price. How cheap do I need to buy in to be profitable? Bearing in mind that this might be a fire sale situation or that the company might be sold to a external buyer. I need to do more research on the company both in terms of industry comps as well as historical comps.