GOODWAY (7192) : Goodway- The laggard on GST play
GST
implementation has been a hot topic recently. We have also seen some
stocks performed very well, and in this case, out of the 5 companies,
only IFCA, Censof and Goodway are showing profits for the last 2
quarters. Ironically, the ones that were making losses seem to be the
outperformer. Some brokers have covered IFCA and Censof, thus there is
not much value add for me to write about them.
TP: RM0.80
Current price: RM0.575
Market cap: RM63m
Upside: 39%
(A) Company Background
-Goodway
is one of the leading players specializing in compounds and other
rubber related production. Goodway is focusing in the development,
manufacturing and distribution of various compounds such as technical
compounds, retreading compounds, tyre compounds and retreading services.
-Goodway
have expanded manufacturing plants to China, Indonesia and Australia
too, they have distribution offices and warehousing facilities in Sweden
and USA too.
-Goodway uses raw rubber materials to
manufacture rubber products. Recently, the price of rubber has also
decreased about 15% from the peak this year. This has affected Goodway’s
sales as their end product is dependent on rubber price as well.
However, this division has contributed more than RM5m for the Group for
the past 2 years.
(i) Property
Recently,
the company has indicated that they will divest their business into
properties. Currently, they own a development project located in Kota
Kinabalu which will consist of development of single storey detached
warehouses cum 3-storey offices, warehouse and industrial showroom cum
offices.
(ii) GST
GST
software market is worth about RM1.7b, according to analysts. Currently
there are more than 100 authorised GST-compliant software vendors
listed in Royal Customs Department website.
Assuming
100 companies, each taking 1% market share (which is pretty
conservative) as I see most of the listed companies will have better
advantage compared to their peers, each company will probably have an
average sales of RM17m for the next 3 quarters, before April 2015. If we
assume 30% PAT margin where most of the software companies are
generating, that would be RM5m PAT into their pocket easily.
Although
IFCA and CENSOF are the front-runners of these segment, we should not
ignore the laggard – Goodway. As GST play will be in the news for the
next 2 quarters, I foresee all the GST counters to perform well just
like what had happened during H1N1, for 2 quarters of news, glove
counters rallied, and the ones that was loss making, IRCB, rallied the
most to RM1.20 before collapse. So beware of those counters that are
loss making like YGL/DGB if they have rallied too much.
In this case, GIIB Biz Solution Sdn Bhd is the authorized GST solution provider for the tax category above RM10,000,
just like IFCA and Censoft. In the last annual report and quarter
report, Goodway did not mention much about their software division. I
believe they will launch it timely before the budget announcement. Their
softwares are targeted on the retail shops, restaurants and other SMEs.
(B) Shareholders
Tai Boon Wee – 23.9% (CEO)
Tai Boon Wee – 23.9% (CEO)
Lembaga Angkatan Tentera - 11%
Oh Kim Sun – 9.05%
Sleuths Holdings - 6.95%
Lee Fook Seng - 6.72%
Billennium Capital - 6.26%
Recently,
Oh has sold some of his stake in Goodway, and I think there will be
more selling coming. However, it looks like somebody on the other hand
had absorbed his shares too. With LTAT in, it will be easier to convince
other institutional investors to invest in Goodway at this point of
time. However, due to its size, Goodway should partner with LTAT to
inject some assets in, so that they could expand beyond the RM100m
market cap for small cap funds to purchase. Recent examples shown by
IFCA, when their market cap reached RM100m, they started to meet
investors and Brahmal subsequently invested, and send the share price up
for another 50%.
(C) Financial analysis
(i) Revenue & PAT
I expect property sales to increase for the next 3 years, possibly generating more than RM50m
per year and GST software to contribute more than RM5m sales for next
year. You might see a drop in revenue and profit for H1 2014 but this
might be due to increase in operating expense from property/ GST
division because last 6 months, the company would have hired more people
for development and R&D purpose, coupled with the drop in rubber
prices, the profit margin has been affected as well, as the end product
might face downward margin pressure during a short term downtrend.
Nevertheless, I would see it as a good thing in a long run, as the
company could generate extra volume and potentially capture more markets
due to lower competitive cost structure.
(ii) Net gearing
The
only thing that concerns me is their net gearing position. It has been
over 1x for the past few years, and surged last year, probably due to
their involvement into property. The good thing is, its net gearing has
started to show improvement recently.
(D) Valuation
I have worked out Goodway’s valuation by dissecting it into a few divsions, mainly the tire division, property and GST.
Assumptions:
(i) Tire to contribute stagnant earnings
(ii) GST software sales (1% of market share, and 25% PAT margin) and 20% yearly maintenance fee
(iii) Kota Kinabalu property (a discount of 30% against its gross development profit)
(E) Technical analysis
Goodway has been riding on an uptrend and is set to test the resistance at RM0.60 soon.
S1: RM0.55, S2: RM0.52
R1: RM0.60 R2: RM0.64 R3: RM0.75
(F) Risk reward ratio
My 3-6 months TP for Goodway is RM0.80.
(i) Upside return of 37% - Using my valuation.
(ii) Downside risk of 6% - Potential support at RM0.55
R/R ratio: 6 times.
(G) Rerating factors/ Catalysts
(i) Earnings growth from property division for the next 4-5 years.
(ii) Possibly injection of more property assets/ other M&A.
(iii) Better than expected sales of GST software.
(iv) No research house covers this stock yet at the moment.
(v) Potentially increase in sales volume due to the decrease in rubber prices
(vi)
No institutional investors except LTAT, which might spur some synergy
(like OCK tied up with LTAT which has sent OCK’s share price to more
than triple in a year)
Cheers. This theme is hard to come by, do look for opportunity to buy and ride the wave. You could split your investment across all the GST players as well, but I would caution you on those loss making counters that had rallied a lot except IFCA which is a pure GST software front-runner and property software provider, backed by solid fundamentals and China’s story.
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Wednesday, 17 September 2014
