1Q18 trading update
Brambles (BXB) 1Q18 sales trading update was slightly better than we expected. CHEP Americas, CHEP Asia-Pacific and IFCO constant currency sales growth was largely in line with our forecasts, while CHEP EMEA was better than expected. Group sales growth (constant currency) was 6% and remains in line with management outlook guidance for mid-single digit sales growth through the cycle. While we don't get transparency on how margins are tracking, management noted the operating environment remains challenging with cost pressures across the portfolio (particularly in the US pallets business). Given this we maintain our estimate for a 60bps decrease in EBIT margin to 18.2% in FY18.
CHEP EMEA the standout
CHEP EMEA was the standout for us with constant currency sales growth of 8% an acceleration on FY17 levels (5%). The result was driven by the European pallets business which delivered strong volume growth with net new business wins and solid demand from existing customers. CHEP Americas grew constant currency sales by 5% (4% for FY17). The result reflected strong net new business growth on the back of new customer contract wins in 4Q17 and 1Q18. CHEP Asia-Pacific sales fell 5% versus 3% growth in FY17. The result was due to a wind-down of a large RPC contract and a number of automotive contracts in Australia, which was previously flagged. IFCO continues to show good momentum with growth of 9%. While the growth rate slowed from FY17 levels (12%), it was still a solid result in our view on the back of expansion with existing retailers in Europe and mix benefits in North America.
Minor increases to earnings forecasts
Given the slightly better-than-expected 1Q18 sales result, we have increased FY18F underlying EBIT by 2% to US$1,006m. Our earnings forecasts also benefit from minor adjustments to FX forecasts, which have been favourable to earnings translation to USD for reporting purposes.
At its core we believe Brambles is a strong business with dominant global market positions, high barriers to entry and relatively defensive characteristics. However, in the short term we believe the operating environment remains challenging (especially in the US) and ongoing cost pressures are likely to limit earnings growth over the next few years.
We maintain our Hold recommendation.
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