Brambles: Disrupting itself

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
16 September 2021, 8:00 AM
Sectors Covered:
Industrials

  • BXB’s 2021 Investor Day focused on transforming the business through a range of initiatives  that  management  expects  will  support  revenue  growth,  operating leverage and FCF generation from FY23 onwards. 
  • Transformation however will require significant investment in both opex and capex with FY22 margins to be impacted by higher transformation and digital costs. Operating leverage should improve over the medium term as investment benefits are realised.  
  • FY22 guidance was weaker than we anticipated with BXB targeting constant FX revenue growth of 5-6% (vs MorgansF +5%) and underlying EBIT growth of 1-2% (vs MorgansF +5%).  
  • We adjust FY22F/FY23F/FY24F underlying EBIT by  -3%/-2%/+1%. Our target price falls to (login to view) and we maintain our Hold rating

FY22-25 financial targets provided

BXB  provided  financial  targets  for  FY22  as  well  as  FY23-25.  For  FY22, management has guided to constant FX revenue growth of 5-6% and underlying EBIT growth of 1-2%. FY22 will be a year of investment including US$50m in transformation costs, which is intended to drive a step change in earnings growth from FY23 onwards.  

For FY23-25, revenue growth is expected to be 5-7% pa while underlying EBIT growth is expected to be high single-digits pa. BXB also introduced its total value creation model of 10%+ pa from FY23 comprised of high single-digit EPS growth and a 2-3% dividend yield. 

Shaping Our Future

The Shaping Our Future strategy is made up of four pillars that are intended to drive  increased  performance  from  the  current  business  as  well  as  higher investment to accelerate longer term growth.

These comprise: 1) Asset Efficiency & Network Productivity - improve plant efficiencies through further automation, reduce transport miles travelled through optimised route planning and customer collaboration,  increase  pallet  durability,  minimise  pallet  loss;  2)  Business excellence - simplify processes and improve technology; 3) Digital transformation - tracking pallet movements to improve loss rates, pricing and asset efficiency; and 4) Customer Value - better service through investments in customers’ systems, data and insights.  

In  our  view,  the  initiatives  make  sense  but  with  significant  total  FY22-25 investments on Transformation (~US$70m), Digital (opex of up to ~US$410m, capex of up to ~US$210m) and Supply Chain (capex of up to ~US$415m), the key over the next few years will be execution and proving up returns. 

Plastic pallet trials with Costco remain a risk 

BXB provided more detail on the plastic pallet trials with Costco in the US and importantly, outlined the criteria that will determine BXB’s decision on whether to proceed with the investment (decision expected in 2H22).

The criteria rely on several commitments from Costco and its suppliers but ultimately comes down to BXB’s forecast returns, noting that plastic pallets are ~3x the cost of wood and will require a price premium. If ROIC is >15%, BXB will proceed.

If ROIC is single digit, BXB will not proceed. If ROIC is in between these ranges, further assessment will be required.

While we commend management for maintaining financial discipline, Costco nonetheless represents ~10% of BXB’s pallet volumes in the US and should BXB decide not to proceed, the lost Costco volumes would take years to replace. On the other hand, going ahead with the investment will require capex of US$450-700m over ~3 years during a period of spend that is already elevated. 

Changes to earnings forecasts and investment view

We  adjust  FY22F/FY23F/FY24F  underlying  EBIT  by  -3%/-2%/+1%  while underlying NPAT changes by -6%/-5%/-1% due to a higher effective tax rate. 

We continue to see BXB as a defensive business with strong market positions and a healthy balance sheet. However, trading on 22.0x FY22F PE and 2.5% yield with modest earnings growth in the near term and uncertainty around the Costco plastic pallet trials, we retain our Hold rating.

Our PE-based target price decreases to (login to view) with the next catalyst expected to be the 1Q22 sales trading update, likely on 19 October. 

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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