Brambles: It’s all about price

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Alex Lu
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By Alex Lu
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Date posted:
22 April 2022, 8:00 AM
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  • Brambles (ASX:BXB) delivered 3Q22 YTD sales growth (constant currency) of 8%, which was slightly above our 7% forecast.
  • Sales growth reflected ongoing price rises to recover higher costs in all regions with group volumes broadly in line with the pcp.
  • The key highlight was the improved outlook with FY22 sales, underlying EBIT and free cash flow (after dividends) guidance all upgraded.
  • We increase FY22-24F underlying EBIT by between 0-1% with upgrades to constant currency earnings partially offset by adverse impacts from FX updates.
  • Our PE-based target price rises to (login to view) mainly on the back of a roll forward of our model to FY23 forecasts. Maintain Hold rating.

3Q22 YTD sales growth was above expectations

Total group constant currency sales growth of 8% was in line with growth in 1H22 and slightly above our 7% forecast, reflecting ongoing strong price rises to recover cost increases in all regions, including sustained levels of input cost inflation and higher cost of pallets.

The A$2.4bn on-market buyback, which commenced in June 2019, is expected to complete in FY22 with ~A$120m worth of stock left to be repurchased.

Divisional summary

CHEP Americas grew constant currency sales by 11%, which was in line with our forecast. The result reflected price rises to recover higher costs despite a 2% decline in LFL volumes in North America due to the cycling of higher COVID-related demand in the pcp.

The volume decline was partially offset by LFL volume growth in Latin America and modest net new business wins across the region.

CHEP EMEA constant currency sales growth of 6% was ahead of our 4% forecast, while reported sales growth (including FX) of 3% was due to the higher USD. The performance was driven by price rises to offset cost increases and net new business wins in European pallets.

New contract wins drove volumes up 2% despite a decline in LFL volumes from the cycling of strong COVID and Brexit related demand in the pcp.

CHEP Asia-Pacific constant currency sales were up 5%, which was slightly above our 4% forecast. The result reflected price and LFL volume growth but was partially offset by lower transport revenue from lower pallet issues and returns in Australia.

Decision on Costco plastic pallets still expected in 2H22

BXB said the Costco plastic pallet trials are ongoing with a decision still expected by the end of FY22. BXB said any investment in plastic pallets will only be made if returns are not dilutive to group ROIC after an initial ramp up period (likely 3-4 years) and will be subject to ongoing review as part of its capital allocation process. 

While no specific details were provided, ROIC was 17.8% in FY21, suggesting management has lifted the hurdle rate for the Costco plastic pallet investment from the previously stated >15% level. This could increase the likelihood of BXB not going ahead with the investment.

FY22 guidance upgraded

Management has upgraded FY22 guidance (constant currency) for sales growth of 8-9% (previously 6-8%) and underlying EBIT growth of 6-7% (previously 3-5%) including ~US$50m of short-term transformation costs.

Free cash flow (after dividends) guidance was also upgraded to between -US$300m and -US$350m (previously -US$350m).

Following the update to earnings guidance, we now forecast FY22 constant currency sales to be up 9%, underlying EBIT growth of 7%, and free cash flow (after dividends) of -US$323m.

Investment view

BXB is currently trading on 19.1x FY23F PE and 2.9% yield. While the company has delivered strong price realisation to offset higher costs, the lack of free cash flow generation remains a concern for us.

There is also ongoing uncertainty around the Costco plastic pallet trials and BXB’s decision on whether to proceed or not will have an impact on its medium-term earnings growth and capex profile. We hence maintain our Hold rating pending further details.

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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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