Brambles In The Weeds Over Plastic Indecision

Australia | Apr 26 2022

This story features BRAMBLES LIMITED, and other companies. For more info SHARE ANALYSIS: BXB

Year-to-date results suggest Brambles is confidently navigating an inflationary environment, with price recovery initiatives driving 8% group constant sales growth despite pressures.

-Price increases pay off for Brambles in year-to-date sales growth
-Offshore growth drove results, with CHEP Americas reporting sales growth of 13%
-Analysts largely agree a plastic pallets investment decision is key to the company’s outlook

By Danielle Austin

Third quarter results from Brambles ((BXB)) have demonstrated the company’s strong ability to respond to inflationary pressures and maintain profit margins, delivering sales growth despite flat volumes year-to-date. The company not only reported 8% constant sales growth year-to-date, but also upgraded its full year guidance despite providing prior guidance just two months ago. Brambles now guides to full year sales growth of 8-9%, from a previous 6-8%, and full year earnings growth of 6-7%, up from a previous 3-5%, as well as reducing cash outflow guidance to a -US$300-350m range from a previous flat -US$350m.

With cost inflation impacting, sales growth is testament to Brambles’ price recovery initiatives and pricing power, with ongoing price rises being implemented to offset inflationary pressures and recover higher costs, largely from lumber and transport pricing.

With sales growth in Australia Pacific remaining largely flat in the quarter, growth in offshore regions drove the result. CHEP Americas reported 13% sales growth, despite a -2% volume decline driven by cycling elevated covid-driven demand in the previous comparable period. CHEP EMEA similarly reported 6% sales growth, while net new business wins in all regions, but particularly the EMEA and Australia Pacific businesses, also served to offset lower volumes from existing customers.

The market has responded positively to the company’s update, with brokers within our coverage largely issuing increases to target prices following the results release.

Investment indecision key to outlook

Investment in plastic pallets could remain on the cards for Brambles, with a decision expected by the end of the financial year. The most recent commentary from company management has suggested the capital investment will only proceed if it appears it will not be dilutive to returns on invested capital, which have averaged out at around 18% over the last five years, following an initial ramp-up period.

Significant plastic pallet investment will be necessary for Brambles to move ahead with its Costco deal, and the company had previously suggested it would undertake the investment with a lower 15% return on invested capital margin.

With six of the seven brokers within FNArena's broker database commenting on Bramble’s third quarter update, four are Buy rated or equivalent, one is Hold rated and one is Sell rated, and they collectively offer an average target price of $11.94.

Credit Suisse, Outperform rated with a target price of $13.15, described Brambles’ pricing power execution in recent years as outstanding and finds the market to be undervaluing the resilience and quality of the company. The broker anticipates Brambles will benefit from cash flow improvement as lumber prices moderate moving forward. The broker lifted its full year earnings expectations by 2.5% to US$926m.

At $10.20, and with an Underweight rating, Morgan Stanley holds the lowest target price of covering brokers, but did lift its full year earnings forecast 2% to US$924m given the stronger than expected margins and cost recovery from CHEP Americas and EMEA. Despite Brambles strong management of inflationary pressures, Morgan Stanley expects the stock is unlikely to outperform until a decision on plastic pallet investment is made. Further, Morgan Stanley analysts expect an investment in plastic pallets will be dilutive to returns on invested capital, at least in the first few years and noted it prefers Amcor ((AMC)) for its better cash flow and dividend yield.

Citi increased profit forecasts 2.0% and 1.2% for FY23 and FY24 respectively based on upgraded company guidance, retaining a Buy rating and increasing its target price to $12.29. Unlike other brokers, analysts at Citi noted they not only assume Brambles will go ahead with an investment in plastic pallets, but investment is key to the broker’s above market margin outlook for the company in coming years. Citi expects the investment to be not only earnings accretive, but to provide as much as a 35-basis point boost to margins annually for the next three years.

The only broker in our coverage to reduce its target price, Ord Minnett is Buy rated with a reduced target price of $11.95. The broker attributed the target price decline to earnings forecast adjustments, driven by a roll forward of its valuation and a more conservative capital expenditure forecast. Analysts from Ord Minnett noted that they had expected a plastic pallet trial to proceed with a returns margin of 10-15%, so an investment decision with returns of 18% would be more positive than anticipated.

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