Brambles: Pallets coming back

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Alex Lu
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By Alex Lu
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Date posted:
27 February 2023, 7:00 AM
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  • Brambles' (ASX:BXB) 1H23 result overall was above expectations with upgraded FY23 guidance the key highlight.
  • Management has increased FY23 guidance (constant FX) for revenue by ~5% and underlying EBIT by 7% at the midpoint.
  • CHEP Americas EBIT rose 24% (+7% vs MorgansF), CHEP EMEA EBIT fell 1% (+5% vs MorgansF) and CHEP Asia-Pacific EBIT grew 19% (+31% vs MorgansF).
  • We increase our FY23-25 underlying EBIT forecasts by between 7-9%.
  • Our target price rises to (login to view) and we maintain our Hold rating.

Solid 1H23 result

1H23 underlying EBIT increased 14% to US$549m (or +25% in constant FX), which was 10% above our forecast and 9% ahead of Visible Alpha consensus.

Earnings however benefitted from deferred plant and transport costs due to lower pallet return rates (~US$35m) and one-off insurance proceeds (US$8m). Excluding these items, underlying EBIT was 2% above our forecast.

Most key financial metrics were healthy with underlying EBIT margin up 130bp to 18.7%, ROIC increased 60bp to 19.8%, and ND/EBITDA was 1.5x (1H22: 1.4x), which is well below management’s target of <2.0x.

Free cash flow (after dividends) however was -US$147m (1H22: -US$148m) with management continuing to expect an improvement in FY23 but to remain negative.

Pallet return rates improving

BXB said it was seeing some early signs of improved pallet return rates from manufacturers and retailers in North America and the UK and expects progressive inventory destocking in North America and Europe in 2H23. However, it is yet to see material signs of destocking or improved cycle times in Australia.

Management anticipates that progressive destocking could see 5-6m additional pallets returned in 2H23, which will allow BXB to service pent-up demand and pursue new business, increase network efficiency and plant utilisation, and improve cash flow by lowering capex.

These benefits are expected to outweigh higher repair and transport costs as more pallets are returned to service centres for repair.

Growth was strong in all regions

CHEP Americas EBIT (constant FX) increased 26% (+7% vs MorgansF) on the back of strong pricing to recover higher cost to serve despite lower like-for-like (LFL) volumes (US pallets LFL volumes -6%) due to pallet availability constraints and softening consumer demand. EBIT margin rose 120bp to 19.2% as increased pricing and surcharges more than offset operating cost increases.

CHEP EMEA EBIT (constant FX) rose 16% (+5% vs MorgansF) largely reflecting price increases and net new business wins. LFL volumes in the key European pallets business declined 4% due to softening consumer demand and challenging macro conditions.

CHEP Asia-Pac EBIT (constant FX) grew 31% (+31% vs MorgansF) due to higher prices, improved mix and volume growth with existing customers as well as US$8m in one-of insurance proceeds and ~US$6m in timing benefits from deferred plant costs due to lower pallet return rates. Excluding these benefits, EBIT rose 13%.

FY23 guidance upgraded

Management has upgraded FY23 guidance (constant FX) with revenue now expected to be up 12-14% (vs 7-10% previously) and underlying EBIT up 15-18% (vs 8-11% previously, including ~US$25m in transformation costs).

Changes to earnings forecasts and investment view

We increase FY23-25F underlying EBIT by between 7-9% on the back of updated guidance and adjustments to FX assumptions. On the back of these changes, our PE-based target price increases to (login to view).

We see BXB as a good, defensive business with strong market positions. However, trading on 18x FY24F PE and 3% yield we think the stock is fully valued with the lack of FCF generation remaining a concern.

Price increases could also be harder to push through if inflation moderates and there are signs that consumer demand in the US and Europe is softening. Hold rating maintained.

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