- Transpacific refinancing removes a headwind
- Company should benefit from improved management focus
- Goldman Sachs upgrades to a Buy rating

By Chris Shaw

Transpacific Industries ((TPI)) has undergone significant changes since 2009, with a new chairman and senior management team and new governance functions in place. The final step needed was a debt restructuring and capital raising, which is now underway.

A debt refinancing for $1.5 billion has been achieved on improved terms and a total of $300 million is to be raised from institutional and general shareholders.

For Goldman Sachs, the news of the recapitalisation has been enough to justify upgrading to a Buy rating from Hold previously. The move to raise funds should see Transpacific's balance sheet return to a more normal gearing level over the next three years, which implies a move to interest cover of more than three times. This should make the stock more attractive to a wider range of investors.

As well, the restructuring means no debt matures between now and November 2014, something Goldman Sachs suggests will allow management to run the business with a view to what is in the longer-term best interests of the group without the distraction of debt issues.

In terms of Transpacific's operations, market growth about equal to that of GDP growth is a reasonable expectation in the view of Goldman Sachs. This should translate into solid growth for Transpacific given strong market positions, the company enjoying about a 20% share of key operating markets in the industrial cleaning, recycling and waste management sectors.

Under such an assumption the stock appears to offer value at current levels, as Goldman Sachs estimates Transpacific is trading on an earnings multiple of around 9.8 times in FY13 and 8.4 times in FY14.

This is based on Goldman Sachs's earnings per share (EPS) forecasts of 5.2c for FY12, 7.6c for FY13 and 8.9c for FY14. These estimates compare to consensus EPS forecasts according to the FNArena database of 6.4c for FY12 and 8.1c for FY13.

Assuming the Transpacific balance sheet returns to more normal levels, Goldman Sachs sees scope for the current discount to the Small Industrials index of 1% for FY13 and 7% for FY14 to be unwound. This should also see the current 20% earnings multiple discount relative to global peers come in from what are seen as excessive levels at present.

Goldman Sachs has not been the only broker to turn more positive on Transpacific on the back of the debt restructuring. Both Credit Suisse and RBS Australia have similarly upgraded to Buy ratings from previous Hold recommendations.