Australia | Aug 17 2012
– Solid full year earnings for Brambles
– Guidance for FY13 a little disappointing
– Investment to drive longer-term earnings growth
– Buy ratings continue to dominate
By Chris Shaw
Full year underlying net profit after tax for Brambles ((BXB)) was US$626 million, a result broadly in line with what the market had expected. A highlight was strength in Pallets Americas, the division showing some benefits from improved efficiencies and the winning back of some key customers.
What did disappoint the market to some extent was earnings guidance for FY13, which implies 8% growth relative to FY12 on an earnings before interest and tax (EBIT) basis. This was below most forecasts in the market, JP Morgan seeing the revised guidance as factoring in lower margins in some markets and some additional business development costs.
For Deutsche Bank, the guidance from Brambles means expectations for a margin recovery have been pushed out to FY14. This highlights what continue to be challenging operating conditions for Brambles in a number of markets.
Taking a longer-term view, UBS suggests FY13 could be something of a transition year for Brambles, as investment in emerging businesses will pressure margins in the year ahead. Beyond this the investment being made should start to deliver, as UBS expects Brambles will achieve earnings per share (EPS) growth of 11% annually for FY13 to FY16.
RBS Australia is less confident, taking the view there continue to be risks around the shape of any earnings recovery for Brambles in FY14. Earnings forecasts reflect this, as RBS has lowered its numbers and is now forecasting EPS for Brambles of US43c for FY13 and US47c for FY14.
This is well below forecasts from the likes of Macquarie of US45.8c and US52.9c respectively. Consensus EPS forecasts for Brambles according to the FNArena database stand at US44.8c for FY13 and US49.9c for FY14.
The weaker growth in earnings in FY14 assumed by RBS is enough for the broker to downgrade Brambles to a Hold rating from Buy previously. While the stock remains a quality defensive name, RBS suggests there just isn't enough fundamental valuation upside on a 12-month basis to justify a more positive rating.
This is in part a function of the economic cycle, as a weak global economy is making earnings growth tougher for Brambles to achieve. Despite this, others in the market see a more positive view on Brambles as justified as the FNArena database shows all six of the other brokers to cover the stock rate Brambles as a Buy.
Credit Suisse has chosen to look through the tough short-term outlook and focus on the investment being made in future growth options. While this will limit earnings growth short-term is sets the company up well for when the cycle improves and justifies a Buy rating in the broker's view.
BA Merrill Lynch agrees, as while conceding valuation at current share price levels is a little high, the low risks associated with earnings for Brambles and signs of improving earnings trends justify the current multiple for the broker.
Macquarie also likes the investment in new global growth opportunities, as this investment is expected to strengthen already dominant market positions in pallets in particular. As well, Macquarie suggests improved cash flow conversion offers scope for dividends to be lifted in coming years, even as all growth options remain supported by internally generated cash flows.
The consensus share price target for Brambles according to the FNArena database is $7.18, down from $7.35 prior to the full year profit result. Targets range from RBS and BA-ML at $6.70 to JP Morgan at $7.58.
The current share price implies upside of around 10% relative to this consensus price target. Shares in Brambles today are higher in a stronger overall market and as at 11.55am the stock was up 3c at $6.51. This compares to a range over the past year of $6.04 to $7.59.
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