Brambles: Solid growth despite cost pressures

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Alex Lu
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By Alex Lu
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Date posted:
18 August 2021, 10:00 AM
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  • BXB’s FY21 result was largely in line with expectations, although on a constant FX basis, earnings were slightly ahead of forecasts.
  • Key positives: Constant FX revenue + 7% (vs management’s guidance for 4-6% growth) and underlying EBIT +8% (vs management’s guidance for 5-7% growth; All regions delivered margin expansion despite cost headwinds; Group ROIC increased 80bp to 17.8%; Balance sheet remains healthy.
  • Key negatives: Corporate costs were much higher than expected due to higher investments (Shaping Our Future, BXB Digital); Capex was impacted by lumber inflation; Asset efficiency declined due to lumber scarcity (particularly in the US).
  • Management has not provided guidance for FY22, with guidance to be provided at the investor day on 13 and 14 September along with further details on Shaping Our Future transformation plans.
  • We make minimal changes to earnings forecasts. On a constant FX basis, we forecast FY22 underlying EBIT growth of 5%.
  • Our target price increases slightly to (login to view) and with a 12-month forecast TSR of 4%, we downgrade our rating to Hold (from Add).  

FY21 result was broadly in line with expectations

FY21 underlying EBIT rose 10% to US$879m (in line with Morgans and Bloomberg consensus) while underlying NPAT increased 11% to US$558m (+2% vs Morgans and Bloomberg consensus). On a constant FX basis, underlying EBIT grew 8%, which was above our 6% forecast and management’s guidance for 5-7% growth.

Earnings were driven by pallet volume and price growth in all regions, a progressive recovery in the auto business, and surcharges and cost efficiencies, which more than offset input cost pressures (eg, lumber and transport).

BXB’s balance sheet remains strong with FY21 ND/EBITDA at 1.2x (FY20: 1.1x) remaining well below management’s target of <2.0x. The on-market buyback is now ~74% of the way through with completion expected in FY22.  

All regions delivered strong earnings growth

CHEP Americas was the key highlight with EBIT (constant FX) up 15% on the back of pallets volume growth, increased pricing and surcharges, which more than offset higher plant and transport costs. BXB also experienced lower pallet returns and higher loss rates in the US mainly due to pallet scarcity with manufacturers and retailers maintaining higher pallet stock levels to manage the variability in demand.

CHEP EMEA EBIT (constant FX) rose 8% reflecting increased demand due to COVID, price increases and net new business wins in Central & Eastern Europe (including Germany). Earnings were also supported by an improvement in the auto business which cycled shutdowns in the prior year.

CHEP Asia-Pacific EBIT (constant FX) grew 12% driven by higher pallet pricing and strong volume growth in addition to benefits from a large RPC contract win in FY20. EBIT margin increased 80bp to an historic high of 27.8%.

Changes to earnings forecasts

Our group FY22-24 earnings forecasts remain largely unchanged with upgrades to divisional earnings predominantly offset by higher corporate costs due to increased investment in Shaping Our Future and BXB Digital.

Shaping Our Future

The Shaping Our Future program is a range of initiatives that management expects will support revenue growth, operating leverage and FCF generation from FY23 onwards.

Further details on key initiatives focusing on increased operating efficiency, improved customer service and innovation, and leveraging digital and data analytics capabilities will be provided at the investor day on 13 and 14 September. FY22 guidance is also expected to be provided.

Investment view

Following changes to earnings forecasts our PE-based target price increases slightly to (login to view).

With a 12-month forecast TSR of 4%, we downgrade our rating to Hold (from Add). The next key catalyst for BXB will be the upcoming investor day.

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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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