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Price Performance Drives Brambles’ Turnaround

Australia | Oct 20 2022

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

Despite cycling tough comparables and potential weakening volumes, Brambles could deliver a comeback story off the back of a strong first quarter. 

-Analysts reacted positively to Brambles’ first quarter results and sales growth
-Group sales lifted 14% supported by rollover of strong pricing
-Volumes remained constrained as elevated stock levels slow cycles times

By Danielle Austin

Brambles ((BXB)) appears poised for a comeback story this year following a strong first quarter result. The company delivered sales growth of 14% in the first three months, but has retained its full-year sales growth guidance of 7-10% and underlying profit guidance of 8-11%. Brambles also expects free cash flow improvement but a net outflow to remain. Anticipated ongoing pallet constraints through the second half of the year, a result of global supply chain constraints and customers holding higher inventories, should benefit. 

Strong performance from CHEP Americas continued to be a key driver of results, with the division reporting a 16% revenue increase, while CHEP Europe, Middle East and Africa also delivered a 14% revenue increase. Both geographies were supported by strong price performance, with pricing up 18% in the Americas and 10% in EMEA, and the ongoing pass-through of increasing costs. A smaller 9% revenue increase was reported by CHEP Asia-Pacific, supported by a 5% price growth. Growth is largely anticipated to moderate in the second half given strong achieved pricing in the second half of the previous year, as well as wider macroeconomic uncertainty. 

While group volumes have remained largely flat in recent quarters, with growth constrained by pallet availability as elevated inventories continue to impact on cycle times, Brambles has warned of potential volume-weakening in the second half. The company expects some global destocking could drive higher return rates and lower volumes. 

Analysts are a mixed bag on Brambles’ outlook

Six FNArena database brokers have offered four equivalent Buy ratings, one equivalent Hold and one equivalent Sell, with an average target price of $13.46 ranging from $11.80 to $15.30.

Anticipating the strong first quarter result will support a first half guidance beat from Brambles, Citi (Buy, target price $13.59) also sees potential for the company to deliver high single digit price growth in the second half despite cycling tough comparables. The broker issued an upgrade to full year underlying earnings, largely weighted to the first half. Citi remains positive on the stock, anticipating volumes will start to offset price as availability increases. 

UBS (Buy, target price $14.50) agrees with the company’s choice to reiterate guidance, finding it too early to update despite the strong quarter. Credit Suisse (Outperform, target price $15.30) similarly supports the decision not to upgrade guidance given an expectation for slowing growth in the year. Despite positive reaction to Brambles’ first quarter, UBS highlights the underlying story of strong sales growth, underpinned by pricing and volumes constrained by availability, remains the same as in recent quarters. UBS anticipates US pricing could slow, but prices in the UK and Europe could accelerate through the remainder of the year. 

Both Morgans (Hold, target price $12.15) and Ord Minnett (Buy, target price $13.40) expect full year revenue and earnings at the upper end of company guidance. Morgans does anticipate a -5% earnings decline each year through to FY25, largely due to the impact of a stronger US dollar. The broker considers Brambles a more attractive buy following a recent share price decline, and warns price increase could become harder to push through from FY24.

With the only Sell-equivalent rating and the lowest target price, Morgan Stanley (Underweight, target price $11.80) focused on an outlook for slowing demand. The broker pointed to cost inflation acceleration in Europe and North America, an increase in competition intensity, and negative impacts from plastic pallet demand as potential downside risks for the stock. 

Outside of database coverage, Jarden (Overweight, target price $12.30) sees accelerating sales growth and reaffirmed full year guidance despite potential weakness in the second half as indicating confidence in Brambles’ ability to leverage pricing.

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