Brambles’ Slow Start Of Little Concern

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

Brambles posted weaker than expected first quarter sales, but a number of impacting factors leave analysts confident FY25 guidance will be met as conditions improve.

-Brambles’ first quarter sales below consensus/guidance
-Analysts suspect a pull-forward into the previous quarter
-New business wins and improving efficiency
-FY25 guidance unchanged

By Greg Peel

Brambles’ ((BXB)) roots go back to 1875 and the development of a transport and logistics company. Brambles owes a lot to US forces stationed in Australia during World War II. When the war ended and the Americans departed, they left behind a bounty of wooden structures known as pallets. The Australian government adopted these marvels as part of its Commonwealth Handling Equipment Pool. In 1958, CHEP was sold to Brambles.

Today, the company engages in the pooling of unit-load equipment and associated services, focusing on the outsourced management of pallets, crates, and containers. It serves customers in the fast-moving consumer goods, fresh produce, beverage, retail, and general manufacturing industries in the Asia-Pacific, Americas, and Europe and the Middle East (EMEA).

Brambles last week reported first quarter FY25 revenue growth of 3% — below consensus forecasts and management’s full-year guidance of 4-6%. But despite the run-rate miss, full-year guidance has been maintained.

Slow Start

Guidance is left unchanged as a number of factors contributed to the slow start to the year.

With first quarter sales below the sales guidance range, Brambles now requires 4-7% growth for the remainder of FY25. But based on management’s existing commentary that volumes would be more weighted towards the second half, particularly in winning new business, UBS suggests the slower start to the year is broadly consistent with the basis of guidance.

The first quarter FY25 was always going to be weaker than the first quarter FY24, in which Brambles posted a 13% sales increase on a 13% price increase, and is more consistent with 2% in the third quarter of FY24 and 5% in the fourth (on constant currency).

Citi suggests the slip in sales growth from 5% in the fourth quarter to 3% in the first implies pull-forward or timing benefit that may have assisted Brambles in achieving FY24 aspirations. Morgans notes softness in the US reflected an earlier produce season bringing forward volumes into the fourth quarter, as well as broader macroeconomic conditions resulting in lower manufacturer and retailer inventory levels, lower US produce volumes, a return to seasonal patterns and normalisation of pallets on hire in Australia.

A decline in like-for-like volumes of -1% aligns with recent results in the fast-moving consumer goods and bottler sectors, Ord Minnett notes.

Group sales only grew 3% in the first quarter due to a 3% price increase, with volumes flat. The Americas reported 5% growth and EMEA 1%, while APAC was flat. Like-for-like volumes were down -1% but offset by 1% growth in net new business, particularly in the US.

New Business and Efficiency

Brambles achieved 1% volume growth through new business wins in the US, driven by a strategy to activate dormant leads as pallet availability improved and white wood prices stabilised.

Management also pointed to improving industry dynamics – higher whitewood prices and lower availability of quality pallets are seen to encourage a shift to pooling. Dual sourcing activity is also moderating. Brambles expects an acceleration in new business wins through FY25 – thus far Americas and APAC have recorded 1% net new business wins, Macquarie notes, while EMEA’s wins of 1% were neutralised by prior contract losses.

Price contributed 3% to revenue, partially offset by improved asset efficiency, which, despite impacting price, benefits margins and cash flow through better cycle times and lower loss rates, Ord Minnett notes.

Top-line performance was marginally below management expectations, Macquarie points out, as asset efficiency continues to improve. Management noted, specifically in EMEA, pricing mechanisms linked to asset efficiency led to lower revenues. But this has incentivised lower loss rates and better cycle times. Brambles is focused on getting IPEP (Irrecoverable Pooling Equipment Provision) to 2% of sales by FY28 and adding 50bps to margin through asset efficiency, while lower loss rates and productivity improvement are targeted to add 100bps in margin over the timeframe.

Jarden still sees overall profitability for Brambles being supported by the normalisation of IPEP charges through FY25 in conjunction with cost-to-serve benefits and network efficiency initiatives (improved procurement).

Valuation

With US$750m of buybacks per annum, Brambles anticipates approximately 15% earnings per share growth per annum and a balance sheet geared at 1.4x by FY27, within a target range of less than 2x.

For the first time in several years, notes UBS (Buy), Brambles’ multiple has started to re-rate following the FY24 results day and subsequent investor day. However, at a 19x one-year forward PE, the stock is still trading -16% below the ASX Industrials (ex Financials/Healthcare), well below its pre-covid average premium of 12%.

UBS is not suggesting Brambles will return to or exceed that historical level in the near term, since the context and strategy have changed, but does expect the market to continue building confidence in Brambles’ free cash flow generation, especially as the company delivers under more normal trading conditions.

UBS does not expect the softness in first quarter like-for-like volumes to impact free cash flow this year since it also means less need to buy more capacity/replacement pallets. The broker believes it’s being conservative on the benefits from the growing budget of non-pooling capex (ie automation and digital), however it may take several years to properly observe the outcomes of these investments.

Morgans (Hold) notes Brambles is a global, defensive business with strong market positions and continues to demonstrate its ability to pass higher costs onto customers through increased pricing despite ongoing weak macroeconomic conditions. In addition, Morgans believes the structural improvements in asset efficiency will drive further operating leverage and free cash flow generation. But despite a stronger growth outlook, this broker currently sees the stock as fully valued.

Noting guidance is maintained, and given management’s track record, Macquarie (Outperform) is confident the company will meet it, albeit at the lower end. New business momentum is to set to improve while efficiency and productivity appear to be driving expected operating leverage-driven gains.

Citi (Neutral) suggests, on first pass, it appears volume turn is evident and on track, however given flat European pricing, US pricing will need maintain strength through the second half to hit management’s target.

Brambles has continued to manage the top line well with price, Morgan Stanley (Overweight) believes. As volumes, particularly net new business, gain traction, this broker thinks the company is well positioned to deliver top-line growth, incremental earnings leverage and strong cash flow.

That leaves four Buy or equivalent ratings among brokers monitored daily by FNArena, and two Hold. The consensus target is $19.01, on a range of $17.85 (Macquarie) to $20.60 (Ord Minnett).

Not monitored daily, Jarden notes its conversations with investors had anticipated an improving earnings outlook through FY25, and earnings upgrades, which may still come (primarily from operating leverage/margin improvement) at the first half result.

With only modest progress on Brambles’ on-market share buyback, Jarden sees the share price as being largely supported in the near term. Key elements to the outlook remain: improvement in underlying volume performance; maintaining new business wins; and earnings margin initiatives.

Jarden is Overweight with a $17.90 target.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArenais proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms