Description

Summary

Goodpack leases a fleet of ~3 million steel crates (Intermediate Bulk Containers, or IBCs) to companies shipping rubber, liquids, and auto parts. For the last 20 years, it has steadily taken share from less efficient cardboard boxes and wooden crates. Within its niche it enjoys little competition and scale advantages that allow it to utilize its IBCs efficiently, due to the network effect. Consistent price increases demonstrate the strength of its position, as does its record of never losing a customer. Goodpack will grow unit volume by further penetrating its existing markets and expanding the types of products shipped in its IBCs. Capital spent on new crates will earn at least a high-teens rate of return at low risk. Even without unit growth, we expect maintenance free cash flow to grow at least as fast as inflation, due to price increases and ongoing efficiency improvements. Its founder and Chairman controls over $250 million worth of stock and has not sold a share in six years. The market has been frustrated with lack of progress in the auto parts vertical, which combined with softness in rubber demand from Europe has unfairly depressed its stock price.

What does Goodpack Do?

Companies contract with Goodpack in order to request that Goodpack pre-position a certain number of steel boxes on a certain date at a specific drop-off point. Once Goodpack’s boxes arrive, the rental period begins and the customer can load the boxes with cargo and transport them to their intended destinations, usually along a long-haul intercontinental route. When the IBCs arrive at their journey’s end, their contents are unloaded and they are folded, stacked, and made ready for pickup, at which point the rental period ends. Customers typically pay on a per-IBC per-day basis.

Fleet

Goodpack’s fleet presently consists of ~3 million IBCs, about 450,000 of which are leased and 2.55 million are owned. Steel IBCs can be folded flat (for storage), stacked up to 5 units high, and with proper maintenance can last 35-40 years. Owing to its high-strength, more rubber can be compressed into a steel IBC than a comparable-sized wood crate. These features form part of the cost-savings equation of using a Goodpack IBC, and require some tweaks to rubber shippers’ operations and loading methodologies. This creates customer stickiness and moderate switching costs, as evidenced by the fact that in 18 years with the company, CEO Michael Liew notes that he’s never lost a customer.

Three years ago Goodpack began to add IBCs on a leased basis when implied lease financing rates were more attractive than using a mixture of debt/equity; though recently this relationship has reversed, leading to a preference to purchase new IBCs. Incremental accretion achieved via leasing was never material, and for purposes of modeling simplicity we will assume that all incremental IBCs are purchased, even though 15-30% are likely to be leased.

Competition

While there are various providers of IBC rentals that service domestic or intra-continental customers or even simple inter-continental routes (GPS, Sonoco, Bemis), Goodpack has no meaningful pooled IBC competitor in the inter-continental rubber market, which is a harder market in which to compete owing to problems of theft and logistics. Further barriers to entry stem from Goodpack having operated in the rubber vertical for 22 years and earned a reputation for reliability. This is important, as large rubber consumers depend on Goodpack to form a link in a supply chain that is nearly just-in-time.

Finally, Goodpack is well-protected against competition because of in relation to the value of the contents inside the IBC, the cost of using the IBC is very small. Goodpack’s IBC can hold about $3400 of rubber at today’s prices, while an average IBC trip costs about $36. A new entrant would have to propose a sizeable discount to get noticed, and would likely be so big as to compromise their potential returns. Recall that Goodpack needed to undergo lengthy trials and offer a 20% discount to wood/cardboard in order to win business. Most likely, any supposed benefit from using a competing offering would not be viewed as worth the risk.

Brambles (Australia, publicly-traded) does have a competitive presence in that it offers a pooled IBC solution of mostly plastic containers, and they have amassed a small fleet.  Its disclosed strategy is not to compete with its IBCs in rubber (a vertical that they admit is dominated by Goodpack), though they do have an offering within auto parts (more below). Brambles’ strategy is to build off of the adjacencies they have from their palate business within food, fast-moving consumer goods, and other greenfield verticals, and usually on easier shorter-haul intra-continental routes. They have no adjacencies in rubber, where jockeying for market share would make little sense.

Scale advantage

As the first-mover, Goodpack benefits from the network effect and sets its price at a level that keeps competition out while keeping returns on capital attractive. Goodpack presently achieves a 58% utilization rate on its fleet of IBCs, a number that has been rising with its scale. By comparison, an insourced alternative (a hypothetical internal closed-loop system of boxes moving back-and-forth) would get a maximum theoretical utilization of 50%, though in practice maintenance, cleaning, other inefficiencies drive utilization substantially lower. To achieve gains meaningfully higher than this <50% closed-loop norm, pooled fleets must minimize empty box trips through their scale, geographic reach, and varied industry verticals.

Auto Parts

After having made substantial market share gains in natural rubber by securing contracts with global tire giants like Goodyear, Goodpack subsequently succeeded in convincing chemical companies to use its IBCs for intercontinental shipping. Goodpack’s share of the synthetic rubber market went from zero (in 2005) to 30% (in 2013). Note that synthetic rubber’s addressable market is twice as large as natural rubber’s.

Auto parts have been more difficult to penetrate for several reasons:

• Despite dominating the rubber shipping market, Goodpack enjoys no significant brand recognition among auto OEMs and parts suppliers.
• Goodpack has no adjacencies to this vertical, unlike synthetic rubber having been adjacent to natural rubber.
• Competitor Brambles already provides certain OEMs and parts suppliers with palates, putting them at an advantage when competing for certain auto parts contracts.
• Qualification times tend to be longer. At Tier I OEMs, any proposed supply chain modifications require a dozen or two layers of internal approval, despite the demonstrable cost savings. Synthetic rubber, whose customers are more nimble, required 24 months of trials before contracts began to be secured.

Addressable Market / Growth Prospects

Goodpack estimates that it presently controls about 40% of the world’s technically-specified natural rubber movement, 30% of the world’s synthetic rubber, 8% of intercontinental juice shipments, and a negligible share (0.3%) of global auto parts. In the intercontinental trade lanes in which it chooses to compete (where customs and logistics are more challenging, theft is more common, locating trusted partners is more difficult) Goodpack takes share from wood and cardboard packaging by pricing its box rental to deliver a total savings of 15-25% versus the cost of wood/cardboard. Management targets a 45-50% market share for natural rubber, 55-60% for synthetic, 15-20% for juice, and indeterminate gains in auto parts. Assuming these underlying industry verticals grow at 4% per year (2% volume, 2% pricing) and share gains take 7 years to attain, Goodpack will grow organic revenue at 12.5% annually—without including any benefit from gains within auto parts. The opportunity for shipping auto parts is still hard to measure, but management conservatively estimates it is 5-10x bigger than rubber.

Valuation / Capital allocation

Goodpack ended the September quarter with ~2.9mm IBCs. Given that each IBC can earn ~$70 per year in rental revenue, the present fleet can generate about $205mm in revenue. Excluding annual leasing expenses of ~13mm (and thus assuming a fully-owned fleet) its EBITDA margin is ~50%, and after deducting about 2.5mm of maintenance capex, the present fleet’s pretax unlevered earnings power is $100mm. Taxed, this equates to $86mm (and ignores the small benefit of depreciation tax shield exceeding maintenance capex). Versus a present enterprise value of $1,012 (adjusting for recent dividend), Goodpack offers an unlevered 8.5% cash earnings yield, which should grow at or better than inflation via pricing power.

Applying an 80% debt-to-equity capital structure targeted by management, the business will support $290mm of debt. On this levered basis and assuming a 5% interest rate, cash earnings would get reduced to $74, putting Goodpack at a 10.2% levered cash earnings yield (backing out cash from MV), which again should grow at or better than inflation via pricing power alone. 

Because Goodpack’s fleet was purchased when steel prices were lower, and because Goodpack expenses its IBC maintenance / repair costs on its income statement, standardized ROE is a flawed proxy for future levered rates of return on current / new IBCs. Book value of IBCs is essentially over-depreciated and net income is unfairly burdened by ~$18mm of annual D&A expense, which exceeds maintenance capex of ~2.5mm. We calculate cash returns on replacement equity instead.

The present replacement cost of an IBC is $250, thus fleet replacement value is about $725mm. Add working capital required to run the business (~33% of revenue) and total capital employed is roughly $795mm. With target capital structure leverage applied ($290mm of debt), replacement equity value is approximately $505mm. Earning $74 of levered cash earnings on $502mm of replacement equity gives a return on replacement equity of ~15%. This is theoretically what a competitor could earn if it were to break into the space and immediately achieve Goodpack’s 58% utilization rate and operating leverage.

However we view this 15% as the minimum rate of return that Goodpack will earn on equity capital invested in new IBCs, for four reasons:

• Management’s historical pricing decisions were made when actual IBC cost was below $250, therefore 15% understates management’s actual cash on cash historical returns;
• Included in Goodpack’s present earnings power are its earliest contracts (20+ years old). They were priced sheepishly in order to break into the space, and as a matter of strategy Goodpack had never raised these prices much beyond the inflation rate. Goodpack’s present controlling position allows them to price new business more boldly;
• Incremental IBCs from new contracts in new geographies should push up the utilization rate and reduce the fleet’s capital intensity; and
• Prospective auto parts customers are located in developed markets, where wood/corrugated containers cost more than in Southeast Asia (from which most rubber is shipped), thus leaving more pricing room. 

More likely, incremental reinvested equity capital will generate cash returns in the high teens or low 20s.

Risks

Goodpack is exposed to changes in demand for the items it ships. Cyclicality is dampened by the fact that much of rubber demand comes from replacement of existing vehicles’ tires, rather than OEM demand for tires on new vehicles.

Chairman and founder David Lam effectively controls the company, having $250mm worth of stock and having installed his brother- in-law Michael Liew as CEO. The CFO does not have an inspiring command of the relevant business metrics, and historically management can be faulted for having been too optimistic regarding prospects in the auto parts vertical. Further frustration in auto parts could cause them to pay up for an acquisition, though this risk is mitigated somewhat by David’s outsized personal stake in the company. Moreover management targets a dividend payout ratio of 30-40%, which provides some incremental protection against bad capital allocation.

Goodpack does not publish many of its underlying business metrics, explaining that they fear it would put them at a competitive disadvantage. Items like utilization and IBC count and lease expense are self-reported to brokers, and must be relied upon accordingly. Furthermore they report having purchased IBCs that were formerly operated under lease agreements, which caused the recent spike in capital expenditure. This is hard to verify, and can only be partially mitigated by tracking the overall capital intensity of the business. Goodpack’s books are audited by Deloitte, and while checks on David Lam and Michael Liew reveal a lack of sophistication regarding corporate finance, they have not turned up evidence suggesting untrustworthiness.

Though Brambles is presently uninterested in breaking into the rubber space with their IBC offering, that could change. Furthermore, though Brambles is bidding on auto parts shipping business, Goodpack management has commented that they don’t frequently compete against them, primarily because of Brambles’ preference for domestic / intra-continental business, versus Goodpack’s preference for longer-haul inter-continental routes.

Catalyst

• Broader appreciation of the ability for Goodpack to reinvest earnings at high rates of return, even if they completely fail to gain meaningful market share in auto parts.