Australia | May 03 2012
– Brambles trading update largely as expected
– Margins remain a point of focus given flat volumes
– Earnings growth outlook remains solid
– Brokers remain favourable towards the stock
By Chris Shaw
A third quarter trading update from Brambles ((BXB)) yesterday was broadly in line with the market's expectations as management reiterated earnings guidance for the full year despite still challenging operating conditions.
A highlight for Deutsche Bank was management indicating sales growth in the key divisions of Pallets Americas and RPCs was stronger than had been expected. Growth in Pallets was 6% against Deutsche's forecast of 4%, this despite a forecast organic volume growth of around 2%. This implies some market share gains and possibly some price improvement.
As well, Morgan Stanley notes management continues to look for cost efficiencies to restore margins going forward, which is a positive for the earnings outlook given the trading environment remains difficult. Morgan Stanley expects pallet margins to gradually improve in coming years.
A gradual improvement is most likely in the view of JP Morgan, the broker expecting the passing through of cost inflation will take some time given the likelihood CHEP delays price increases to grow volumes and customer satisfaction. Such a move would ensure CHEP maintains its scale advantage, which JP Morgan notes is a key barrier to entry in the market.
BA Merrill Lynch agrees margins should slowly improve but remains cautious in terms of expectations. As an example, while management at Brambles is forecasting 18% EBIT (earnings before interest and tax) margins for Pallets Americas in FY12, BA-ML is forecasting a margin of 17.4%.
There was little new news with respect to any sale of the Recall business, with the indicative sale timetable unchanged. While supportive of a sale, JP Morgan suggests Brambles should retain the business if a price of at least US$1.8 billion cannot be achieved.
With full year earnings guidance for EBIT of US$1.05-$1.08 billion maintained, changes to broker earnings forecasts post the update have been modest. This means little change in price targets as well, the exceptions including Credit Suisse lifting its target to $8.40 from $7.70 and Goldman Sachs increasing its target to $8.49 from $7.98 while retaining a Buy recommendation.
The consensus price target for Brambles according to the FNArena database now stands at $7.83, which is up from $7.72 prior to the update. Targets within the database range from Citi at $7.15 to Credit Suisse at $8.40.
Ratings are also unchanged post the result, the database showing Brambles is rated as Buy seven times and Hold once, this courtesy of BA-ML. This view reflects the weak volume outlook in the current market, which BA-ML suggests makes a conservative view appropriate. If volumes were to hold up and margin targets are achieved BA-ML concedes there is some upside risk to its FY12 earnings estimates.
Morgan Stanley is not in the FNArena database but also rates Brambles as Equal-Weight as part of an In-Line industry view, seeing the stock as fairly valued at current levels. For Morgan Stanley, Asciano ((AIO)) and QR National ((QRN)) offer better value at present.
JP Morgan is one to argue the Buy case for Brambles, the broker attracted to the expectation of double-digit earnings per share growth through FY15. Deutche Bank is similarly positive given the view Brambles is the best way to play a US recovery theme.
As well, the RPC business offers an attractive longer-term growth platform according to Deutsche given at present the business only has around 7% market share in the US and 13% in Europe. Growth in this division in the US should be underpinned by attractive pricing in Deutsche's view, as the RPC offering from Brambles costs US93c per trip against up to US$1.25 per trip for cardboard.
RBS Australia also rates Brambles as a Buy, taking the view while a FY13 earnings multiple of 15 times is not cheap it is justified given the company has a strong market position, quality management and offers a better growth outlook than peers.
Brambles shares today are down slightly in a weaker market and as at 11.20am the stock was 6c lower at $7.34. This compares to a range over the past year of $5.79 to $7.59 and implies upside relative to the consensus price target in the FNArena database of around 6%.
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