A Better Brambles Exudes Confidence

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

Early signs of destocking in key markets should assist Brambles in addressing pent-up demand and improve the company’s outlook. 

-Brambles lifts full year guidance with signs of destocking set to boost results over the second half
-Destocking looks to improve pallet supply, allowing the company to address demand backlog
-Increased pallet supply likely to see some increase in repair and transport costs 

By Danielle Austin

With early signs of destocking emerging in the first half, Brambles ((BXB)) has expressed confidence in the trend continuing with management lifting guidance for both revenue and earnings growth for the full fiscal year. The company now anticipates revenue growth of 12-14% from a previous 7-10%, and growth in earnings of 15-18% from a previous 8-11%. 

With destocking appearing to take place in major markets, Brambles anticipates the return of 5-6m additional pallets over the second half. Improved supply will allow the company to address pent-up demand and pursue new business, increase network efficiency and lower capital expenditure to improve cash flow. 

This trend was touched on by Morgans in its post result review with the broker noting despite early signs of improved pallet returns in both the US and the UK, signs of destocking, and subsequent improved pallet cycle times, are yet to emerge in Australia. Morgans highlights the benefits of improved pallet supply should outweigh the additional cost of repair and transport to service centres. 

Updated company guidance saw the broker lifting earnings forecasts 7-9% for the years ahead. Morgans does see the stock as fully valued at current levels.

Brambles increased underlying profit in H1 by 14% year-on-year to $549m. By region, and on a constant currency basis, CHEP America increased earnings 26%, CHEP Europe and the Middle East increased earnings 16% while CHEP Asia Pacific increased earnings 31%. All regions were demonstrative of price increases and the company’s cross-market pricing power. 

Pricing power underpins the first half 'beat'.

Brokers within the FNArena coverage are split with four citing a Buy equivalent rating and two sticking with an equivalent Hold rating. 

It is Macquarie’s view that Brambles is a structurally better business following the implementation of recent initiatives, which is reflected in the company’s guidance upgrade. Though the broker (Neutral, target price $12.90) remains cautious, as inflation looks set to slow. 

On the other side of the ledger, Credit Suisse (Outperform, target price $15.30) highlighted the return of 5-6m pallets would leave a shortfall of up to -2.5m pallets for Brambles to address. While noting further cash outflow after dividends is expected for the full year, albeit a smaller outflow than in the previous fiscal year, this broker has moved earnings estimate up by 6% to the top end of company guidance. 

Ord Minnett (Accumulate, target price $14.00) pointed out Brambles' first half beat expectations, largely given the company was able to implement 15% year-on-year price increases on the back of the ongoing pallet shortfall, a sentiment largely echoed by Morgan Stanley (Equal-weight, target price $13.20) and UBS (Buy, target price $15.00). The latter expects market forecasts to improve off new company guidance.

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