Australia | Aug 19 2022
This story features BRAMBLES LIMITED. For more info SHARE ANALYSIS: BXB
Following FY22 results for Brambles, brokers set higher price targets following good cost control and higher pricing, though free cash flow concerns weigh.
-Brambles FY22 results and outlook exceed forecasts
-Pricing lifts the Americas, while cost control benefits EMEA
-Citi highlights two structural improvements
-Management continues to focus on margins in the Americas
-Free cash flow concerns continue to weigh
By Mark Woodruff
All but one of the seven brokers in the FNArena database set higher 12-month target prices for supply-chain logistics company Brambles ((BXB)) following FY22 results, which came in above expectations and April guidance.
Earnings of US$930m compared to a consensus expectation for US$922m, though Citi notes corporate costs were US$30m higher-than-expected, somewhat masking a higher quality operational result.
Profit for CHEP Americas was ahead of forecast on higher pricing, while profit for CHEP Europe, the Middle East and Africa (EMEA) beat expectation, largely due to better cost control, explains Credit Suisse.
Earnings for both regions make up around 85% of total group earnings, in a fairly equal split. The highlight for Morgans was a 25% jump in CHEP Americas earnings on a constant currency basis, mainly on the stronger pricing.
This increase in earnings was achieved despite lower like-for-like volumes, due to pallet availability constraints and softening customer demand.
Better pricing/mix benefits, increased asset compensations and moderating US transport inflation, according to Macquarie, resulted in a stronger-than expected fourth quarter. These trends are expected to continue into FY23.
New FY23 management guidance, on a constant-currency basis, is for 7-10% revenue growth supported by pricing and indexation, and 8-11% underlying profit growth.
While FY23 guidance appears to exceed expectations, Underweight-rated Morgan Stanley cautions any beat may be eroded by currency fluctuations.
On the one hand, Citi sees structural improvement for the business from improved data analytics, which is providing a better understanding of costs and movements for the company’s pooled assets across wood and plastic pallets and containers.
Both Citi and Macquarie also note further structural gains via inflation protection from input cost surcharges.
On the other hand, Macquarie points out free cash flow continues to disappoint, with a -US$219m outflow after dividends in FY22, largely arising from significant lumber inflation.
The unit cost of a pallet rose by around 40% in FY22, with lumber accounting for 80% of the total cost, and management expects unit costs could rise further into FY23.
UBS also raises the issue of free cash flow, though feels headwinds are only temporary. Apart from lumber costs, high loss provisions also lead to replacement spending. Once these headwinds resolve, the broker forecasts strong FY24 cash flow.
A 35%-franked final dividend of US12cps was declared, taking the full year dividend to US22.8cps.
Management’s increased focus on the Americas business
Historically, margins for the Americas business (which is mostly in the US) have been significantly lower than for EMEA and the Asia Pacific region.
This difference is partly attributable to tougher conditions, including longer distances to traverse, explains Credit Suisse, though inaccuracy in pricing customer contracts has also weighed.
Pricing is impacted by pallet loss, damage rates and the cycle time, and a greater handle on these issues led to recent pricing increases, explains the broker. It’s thought these increases accounted for most of the average 17% price and mix benefit for the US market in the second half.
Management expects the challenging operating conditions to persist in FY23 due to ongoing supply chain disruptions, inflationary pressures and geopolitical unrest, leading to increased market uncertainty and volatility.
While Neutral-rated Macquarie notes Brambles is a robust and defensive business, a slowdown could occur in 2023. Free cashflow after dividends may not break even until FY25, especially with low visibility on lumber pricing.
Morgans agrees on the defensive nature of the business and notes a solid growth trajectory. However, the stock is considered fully valued and the lack of free cash flow generation remains a concern. Also, price increases may be hard to implement should customer demand wane, inflation moderate and pallet availability improve.
Ord Minnett raises its earnings forecasts by around 2% over FY23 and FY24 to reflect operating leverage. In the near-term, prices are expected to remain supportive, while supply chain pressures should ease, and inventories should normalise from the second half of FY23.
Jarden, not one of the seven brokers updated daily in the FNArena database, believes an improvement in free cash flow generation is needed before a share price re-rating occurs. The broker retains its Overweight rating for Brambles and raises its target to $12.60 from $11.60.
The average target price set by brokers in the FNArena database rises to $13.00 from $12.14, suggesting 2.9% upside to the latest share price. There are seven broker ratings, with four Buys (or equivalent), two Holds and one Sell rating.
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