Brambles Leverages Deep Data Analysis

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

Informed by data analysis, Brambles sets new medium-term targets with an eye to material volume growth potential over the longer-term.

-The opportunity for Brambles from deep data analysis
-Increased digital spending to expand addressable markets
-New targets out to FY28 in line with consensus expectations

By Mark Woodruff

Following on from consensus-beating FY24 results, management at Brambles ((BXB)) has embarked on an investor tour across the USA highlighting the material global opportunity from improved asset tracking and productivity.

Decisions made by management around pricing, pallet recovery and repair, and asset allocation are being increasingly informed by deep data, highlights Morgan Stanley, resulting in the more analytical organisation focused on optimising profitability apparent in recent years.

As part of a broader strategy to enhance supply chain efficiency and asset management, Brambles will outlay -US$60m in FY25 for the Serialisation Plus program, with future spending based on benefits and a return on invested capital (ROIC) hurdle of over 15%.

Historically, further penetration of global markets has been a compelling source of growth, but outcomes have slowed down in recent years, points out UBS.

By converting new customers to a share and reuse’ model, management sees volume growth potential in the US, Germany and Italy of 60%, 70%, and 70%, respectively.

With a pool of over 350m wooden pallets, Brambles is highly penetrated into the fast-moving consumer goods (FMCG) supply chain.

In Chile over FY24, management incurred capex of -US$10m (which includes infrastructure) on serialising 2.6m pallets. The 350m global number above helps explain how the spend is stepping-up to -US$60m in FY25, explains Citi.

Specialising in pooled assets across wood and plastic pallets and containers, Brambles is the global leader in reusable pooling solutions, operating in 50 countries across Europe, the Americas, Africa and Asia-Pacific.

In terms of divisional earnings, CHEP Americas and CHEP EMEA each contribute around 45% each to the group total with CHEP Asia Pacific providing the balance.

The opportunity and the cost

An increasing digital spend by Brambles could unlock direct revenue from retailers, highlights UBS.

Beginning with between US$5-10m of sales in FY25, management is targeting over $100m per annum of revenue in the long-term due to an expanded addressable market from better data usage and asset control.

In a nutshell, management has identified previously unaddressed opportunities to convert new customers to its ‘share and reuse’ model in key growth markets.

A multi-layered deployment strategy -the Serialisation Plus program- utilising pallet and smart tags aims to reduce pallet losses, reduce uncompensated reuse, and improve the customer experience.

As pointed out by Morgan Stanley, scope for further profitability improvement, aided by this serialisation and improved pallet tracking, increases Brambles’ moat relative to pooling or white wood competitors.

While new targets presented by management for FY26-28 were largely in line with FY25 guidance, Citi draws attention to the mix, noting more traditional operating efficiencies will be contributing most of the growth.

Specifically, the twin benefits of automation and operating expense moderation will be the key drivers of margin expansion, according to the broker, while contributions from digital asset initiatives, the Irrecoverable Pooling Equipment Provision (IPEP), and Customer Solutions should be less material.

Automation and cost control inherently carry less execution risk, point out the analysts, happy there is no over-reliance by management on less-proven digital strategies to hit future targets.

Consistent with the sustainably lower IPEP number in FY24, suggests UBS, management is aiming for margin expansion of more than 2 percentage points out to FY28 from supply chain productivity, asset efficiencies, and overheads.

Targets out to FY28

Brambles is budgeting for FY26-28 Non-Pooling Capex across FY26-28 of between -US$200-300m (including digital and automation).

Over that period, management is targeting sales and EBIT growth of between 4-6% and high single digits, respectively.

At more than US$750m per year (pre dividends), free cash flow (FCF) growth will be slower than EBIT growth due to reinvestment in growth to support volumes and non-pooling initiatives.

This FCF guidance is broadly flat compared to FY24, observes Citi, probably due to the material spend on serialisation.

So far, there is no guidance on serialisation capex beyond FY25 given Brambles is still determining the best model(s), explains the analyst.

However, given a decent ROIC and the base FCF, this investment is considered valuable for the longer-term.

Outlook for the pooling program

In anticipation of recovering white wood prices, and as customers recognise the benefits of the pooling program, management’s FY25 guidance assumes volume increases from new business wins in FY25 and FY26 of 1% and between 1-2%, respectively.

Overall, UBS is more optimistic on management’s current direction, compared to previous strategies such as BXB Digital, due to better available data and a growing customer need, while Morgan Stanley suspects the new targets set by management out to FY28 are conservative.

UBS now has greater confidence in the outlook for Brambles due to the new FCF floor regardless of the pace of investment, yet the new targets across FY26-28 won’t necessarily drive upgrades to consensus forecasts.

Indeed, this outcome looks to be playing out, with the average target price of six covering brokers in the FNArena database only rising by 19 cents to $18.95 following the strategy day. Both Morgans and Macquarie are yet to refresh their research.

The average target price broadly aligns with the present share price.

Of those six daily updated brokers, four have Buy (or equivalent ratings) and two remain on Hold.

Outside of daily monitoring, Jarden has an unchanged Overweight rating and $17.90 target.

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