Confidence In Brambles Edges Higher

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Brokers are modestly confident Brambles can negotiate a tough macro outlook and provide reasonable revenue growth in FY20.

-Currency appears to be more of a headwind than previously anticipated
-Margin expansion expected in the second half for CHEP Americas
-Top-line strength continues despite soft global outlook
 

By Eva Brocklehurst

Price increases and new contracts helped Brambles ((BXB)) maintain strong revenue growth of 5% in the September quarter. The first quarter performance was mixed geographically versus broker estimates.

CHEP Americas, with 7% revenue growth, stood out, while Asia-Pacific was weaker than some expected, but managed 2% growth. Europe disappointed some brokers with a flat outcome in terms of volumes.

However, given economic headwinds and difficult comparables, UBS was pleased with Europe's 4% revenue growth versus the 8% reported in the prior corresponding period. India and the Middle East were the stand-out geographies for Citi, amid price increases in developing markets such as Turkey and new customer gains in India and the Middle East.

Management has maintained FY20 guidance for constant currency sales growth at the lower end of its mid single-digit target, with underlying earnings (EBIT) growth in line or slightly above sales growth.

UBS is incrementally more confident guidance will be achieved following the update while Morgan Stanley suggests currency appears to be more of a headwind than previously anticipated. Yet, given constant currency revenue growth is tracking ahead of expectations this de-risks the top-line component of guidance, in the broker's estimates, potentially providing some relief from macro uncertainty.

Citi forecasts constant currency revenue growth of 3.9% in FY20 and underlying earnings growth of 5.4% and suspects inflation headwinds are fading in the US, which should support underlying CHEP Americas margins. Additionally, price increases are sticking, the broker observes.

Flat margins are expected in CHEP Americas in the first half before expansion in the second half, driven by automation and the cycling of higher cost inflation as well as the benefits from procurement initiatives in US pallets. The company has reiterated guidance for US margin improvement, although Morgan Stanley notes this is likely to be weighted to the second half.

Brokers note the stock has underperformed the market by -15% since the August report , largely, in Citi's view, because of negative sentiment around the FY20 outlook. Nevertheless, top-line strength continues, despite the soft global outlook, and UBS estimates there is potential for a re-rating over the next 2-3 years if consensus forecasts are met and the shares trade back to the historical premium to the market of 10%.

That said, UBS remains concerned about network inefficiencies in the Americas and the potential for a negative surprise when the results are reported. Morgans is optimistic about the start to FY20, although acknowledges the global outlook is uncertain and cost pressures continue.

Credit Suisse upgrades to Neutral from Underperform on valuation grounds, forecasting constant currency revenue growth of 4.9% in FY20. The broker concludes fair value in the stock sits at $11.20, based on a five-year average valuation multiple.

FNArena's database has five Hold ratings and one Buy (Citi). The consensus target is $11.92, suggesting 2.7% upside to the last share price. Targets range from $11.20 (Credit Suisse) to $13.30 (Citi).

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