Brambles: Pricing mechanisms kick in

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
20 October 2021, 7:30 AM
Sectors Covered:
Industrials

  • Brambles' (ASX:BXB) 1Q22 sales trading update was ahead of our expectations driven mainly by price increases to offset inflationary cost pressures.
  • Management has adjusted FY22 guidance slightly with revenue growth (constant FX) now expected to be 5-7% (vs 5-6% previously) while underlying EBIT growth remains unchanged at 1-2% (including US$50m of short-term transformation costs) owing to the higher cost environment.
  • Our FY22F revenue forecast rises marginally (+1%) while underlying EBIT remains unchanged at US$917m. On a constant FX basis, our forecasts imply 6% revenue growth and 2% underlying EBIT growth.
  • We maintain our PE-based target price of (login to view) and Hold rating on BXB.

Pricing was the key driver of 1Q22 revenue growth

Group constant FX revenue rose 9% (or 11% including FX), which was above our 5% forecast. Growth reflected pricing benefits to recover inflation and other cost-to-serve increases in all regions.

Volumes were in line with the pcp as net new business growth of 2% (primarily in Europe and Australian RPC) was offset by lower LFL volumes in North America largely due to pallet availability constraints.

In our view, the strong uplift in 1Q22 revenue shows BXB’s pricing and surcharge mechanisms are working but the cost environment remains challenging with ongoing pallet, labour and transport inflation. BXB expects inflationary pressures to remain for the balance of FY22.

Pallets remain difficult to obtain

CHEP Americas revenue (constant FX) increased 9% (vs MorgansF +6%) due to higher prices to recover cost-to-serve. Net new business wins growth was modest and LFL volumes fell due to the cycling of strong COVID-related demand in the pcp and pallet availability issues.

BXB does not expect a return to more normal pallet levels in North America until 4Q22.

CHEP EMEA revenue (constant FX) rose 8% (vs MorgansF +5%) driven by price growth, net new business wins in Southern, Central and Eastern Europe and a recovery in the Auto business following COVID-related shutdowns last year.

CHEP Asia-Pacific revenue (constant FX) jumped 11% (vs MorgansF +3%) reflecting higher prices and increased demand in Australia on the back of increased at-home consumption driven by COVID lockdowns. The Australian RPC business also grew strongly due to the contribution from a large contract win in the prior year

FY22 revenue guidance adjusted slightly

Management has slightly upgraded FY22 revenue growth guidance to 5-7% (vs 5- 6% previously) with the expected moderation from 9% growth in 1Q22 due to stronger comparatives for the balance of FY22.

FY22 underlying EBIT growth guidance remains unchanged at 1-2% (including ~US$50m of short-term transformation costs). Excluding short-term transformation costs, underlying EBIT is expected to be up 6-7%. Free cash outflow guidance also remains unchanged at ~US$200m.

Minimal changes to earnings forecasts

Our FY22 revenue forecast rises marginally (+1%) while underlying EBIT remains unchanged at US$917m.

On a constant FX basis, our forecasts imply 6% revenue growth and 2% underlying EBIT growth.

Investment view

Following the recent pullback in the share price, BXB is now trading on 20.3x FY22F PE and 2.7% yield. While the stock is starting to look more attractive, we see minimal potential for a rerating in the short term while there is ongoing uncertainty around the Costco plastic pallet trials in the US (a decision from BXB is not expected until 2H22).

This will have an impact on medium-term earnings growth and capex and until we get further clarity, we maintain our Hold rating.

Risks

Downside risks include a deterioration in the global macroeconomic environment, a rise in competitive threats from new potential pallet operators, and loss of Costco volumes.

Upside risks relate to better-than-expected earnings growth in the key US and European markets and higher cost efficiencies.

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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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