GPack registered a 13.4% yoy and 2.6% qoq growth in topline for 2Q09 on the back an increase in fleet size. Revenue in 1H09 was 57% of our earlier full year forecast. Net profit declined marginally in 2Q09 on a yoy basis mainly due to higher finance costs and depreciation charges. Net profit in 1H09 accounted for 63% of our full year forecast.

Gpack delivered on its cost-cutting initiatives as logistics and handling expenses declined to just 32% of revenue, from about 40% in 1Q09. The in-house cleaning depots opened in US and Europe reduced cleaning costs per box. Freight costs, which make up the bulk of logistics costs, had also declined due to lower fuel charges and more tradelane matches.

We expect net debt-to-equity ratio of 0.63x to be lowered as the Group intends to pare down its loans in two years, with the support of its strong operating cash flow. 1H09 operating cash flow of US$26m was enhanced by an improvement in receivable turn-days, which declined from 146 days as of Jun-08 to 117 days as of Dec-08.

We still expect slightly less than 100,000 IBCs to be added to its fleet of 1.9m by Jun-09, fully funded by internal resources. In view of the challenge to demand, we conservatively assume that the fleet size will remain constant at 2.0m from Jun-09 onwards. Gpack is currently in talks with its IBC supplier to lease additional IBCs for two to three years to meet its fleet size target of 2.5m.

We are estimating a gentle 2.6% CAGR for the topline in the next three years. Cost-cutting initiatives are expected to drive margins expansion despite the tough business environment. We have raised our FY09 revenue and net profit estimates by about 7% and 13%, respectively. The share price has corrected 22% since our last report in Jan. This has brought valuations below the lower end of its 8-year PER band. We upgrade the stock to BUY, while maintaining our target price at $1.04.