Brambles: Pulling the price lever

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Alex Lu
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By Alex Lu
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Date posted:
28 February 2022, 11:30 AM
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  • Brambles' (ASX:BXB) 1H22 result was broadly in line with our expectations, although on a constant FX basis, underlying EBIT growth was above our forecast.
  • Key positives: Upgraded FY22 earnings guidance; CHEP Americas EBIT growth was well above (+10%) our expectation.
  • Key negatives: Free cash flow (after dividends) was weak (-US$148m) with full year guidance downgraded; ROIC fell 40bp to 18.8%.
  • FY22F/FY23F/FY24F underlying EBIT changes by -2%/-1%/0%.
  • Our target price decreases to (login to view). Hold rating maintained.

1H22 result was broadly inline with expectations

U1H22 underlying EBIT was up 3% to US$481m (-1% vs MorgansF) and underlying NPAT rose 3% to US$305m (+2% vs MorgansF). On a constant FX basis, underlying EBIT increased 4% which was ahead of our 1% growth forecast and management’s previous FY22 guidance of 1-2% growth.

Earnings were driven mainly by price increases, surcharges, and supply chain efficiencies which more than offset higher operating costs and incremental investment in Shaping Our Future transformation initiatives, including digital.

BXB’s balance sheet remains healthy with 1H22 ND/EBITDA at 1.4x (FY21: 1.2x) remaining well below management’s target of <2.0x. The on-market buyback is now ~90% of the way through with completion expected by the end of FY22

CHEP Americas was a standout

CHEP Americas was the key highlight with EBIT (constant FX) up 19% (+10% vs MorgansF) on the back of price increases and surcharges in the US (despite LFL volumes falling 5% due to the cycling of strong COVID-related growth in the pcp) as well as robust growth in Canada and Latin America. Management expects pricing momentum to continue in 2H22, although volumes including new business wins will likely remain constrained.

CHEP EMEA EBIT (constant FX) rose 4% (-3% vs MorgansF) reflecting price increases and net new business wins despite lower LFL volumes as the business cycled strong COVID and Brexit related demand in the pcp. For the remainder of FY22, management expects additional price rises to recover higher costs with supply chain challenges (lumber, transport and labour) to persist.

CHEP Asia-Pacific EBIT (constant FX) jumped 15% (+6% vs MorgansF) driven by price realisation and pallet volume growth in Australia and higher volumes in China. Earnings also benefitted from an incremental contribution from a large Australian RPC contract which commenced part way through the pcp. Lower transport costs due to lower pallet returns offset supply chain cost inflation, which helped lift the EBIT margin by 180bp to 28.8%. Management expects pallet availability disruptions to persist in 2H22.


FY22 guidance has been upgraded with constant FX sales now expected to be up 6-8% (vs 5-7% previously) with underlying EBIT growth of 3-5% (vs 1-2% previously) including ~US$50m of short-term transformation costs. For FY22, we forecast constant FX sales growth of 7% and underlying EBIT growth of 4%.

Free cash flow guidance has been downgraded with FY22 FCF (after dividends) now expected to be -US$350m (vs -US$200m previously). The increased outflow expectation reflects additional lumber inflation and pallet purchases due to extended cycle times and lower pallet returns in all regions.

Changes to earnings forecasts and investment view

Despite increases to our underlying earnings assumptions, FY22F underlying EBIT decreases by 2% and underlying NPAT remains broadly unchanged following updates to FX. Our PE-based target price falls to (login to view) and we maintain our Hold rating.

BXB is currently trading on 18.5x FY22F PE and 3.0% yield. While we think the stock is inexpensive, the lack of FCF generation is an issue with ongoing uncertainty around the Costco pallet trials. BXB's decision (due 2H22) on whether to proceed or not will have an impact on its medium-term earnings growth and capex profile and until we get further clarity, we maintain our Hold rating.

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Disclaimer: Analyst may own shares. 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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