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Brambles Gains More Confidence

Australia | Nov 04 2020

This story features BRAMBLES LIMITED. For more info SHARE ANALYSIS: BXB

Brambles has a defensive business with a dominant global position and is now more confident in the FY21 outlook.

-Slowdown as US inventory stockpiling eases
-More moderate growth expected in second half
-Return to profitability in automotive/Kegstar expected


By Eva Brocklehurst

Demand for consumer staples during the pandemic has meant pallet movements have been robust and Brambles ((BXB)) has tightened FY21 guidance to 3-5% revenue growth from 0-5%, revealing more clarity on the outlook.

First quarter revenue was up 5% on a constant currency basis. There was a sequential improvement in automotive/Kegstar business from the prior quarter. CHEP Americas delivered 7% constant currency growth while growth in EMEA (Europe, Middle East Africa) and Asia-Pacific was 2%.

Morgan Stanley welcomes the update, as it demonstrates the resilience of the business and also reflects a weaker Australian dollar. The broker notes the share price has fallen -15% since the August result.

UBS also highlights the share price has been under pressure, underperforming the local market by -8% over the past month as many on the buy-side feared a negative impact on the automotive business from closures in Europe as well as the pallets business more broadly.

Hence, the latest guidance should alleviate fears for the short term. The second half is expected to show more moderate growth from first quarter levels as CHEP cycles a strong comparable, which included record levels of pallet demand following the outbreak of coronavirus.

Macquarie, having been cautious ahead of the first quarter outcome, agrees the update is illustrative of the strength in the pallet business, despite volatility stemming from the pandemic.

The broker is not concerned by the margin impacts of higher costs as, importantly, operating leverage has returned, supported by expectations of margin improvement in the US.

Morgans upgrades to Add from Hold and finds the valuation attractive for a defensive business with a dominant global position. CHEP Americas stood out, with strong like-for-like volume growth in US and Canadian pallets.

Sales growth was driven by demand for pallets at grocery supply chains as customers increased inventory in the US in preparation for holidays and ahead of any further lockdown measures.

Still, management has indicated a slowing towards the end of October, and demand associated with US inventory stockpiling is not expected to continue for the balance of FY21.

Goldman Sachs had anticipated guidance would be upgraded, given conditions were normalising in both Europe and North America, presenting upside for Brambles across pallet and container businesses.

The broker, not one of the seven monitored daily on the FNArena database, reiterates a Buy rating with a $13.69 target because of the defensive position the company holds in an uncertain environment.

Underlying conditions are expected to continue returning to normal over coming months and should result in more stability in customer ordering and the lowering of abnormal costs. The broker expects a return to profitability in the automotive/Kegstar business amid the return of pricing power for the company.

FNArena's database has five Buy ratings and one Hold (UBS). The consensus target is $12.24, suggesting 21.2% upside to the last share price.

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