A Pallet(able) Choice

Brambles recently reported its first-half FY19 result. An underlying net profit of US$326.7m came in 6.7% above our forecast, but was down 3.8% on the same period last year. This included an increased non-cash contribution from accounting standard AASB15 restatement of US$10m pre tax (or US$7.0m post tax) during the half. A 65%-franked interim dividend of 14.5cps was declared, versus our forecast of 14.5cps (30% franked).


We were pleased by CHEP USA’s top-line constant currency growth 5%, comprising 3% from rate increases, 1% from organic volume growth and 1% from net new business wins. We note that in addition to the 3% rate increase, CHEP USA recouped a further 2% from surcharges, implying an effective price increase of 5% during the half. However, the acceleration in input-cost inflation during the period weighed more heavily on margins than we expected.


The other segment results all came in above our estimates, with CHEP EMEA being the standout, and we have increased our net profit forecasts by 3.0% in FY19 and 0.5% in FY20.


Separately, Brambles has entered into a binding agreement to sell its IFCO reusable plastic containers business to Triton and Luxinva, a wholly-owned subsidiary of the Abu Dhabi Investment Authority, for an enterprise value of US$2.5bn. The sale price equates to 9.3x our forecast FY19 operating earnings (EBITDA) – Brambles paid 7.2x EBITDA in 2011 for IFCO – and is 8.3% below our valuation of US$2.7bn. We note existing investors will be unable to benefit from the likely longer-term turnaround in IFCO North American earnings and cash flows.


We are encouraged by the operating trends across Brambles’ key businesses, as well as the outlook commentary provided by management at the result – in particular, its expectation that input cost-inflation should ease in the second half of FY19 and beyond. Brambles remains our key preference in the sector and we maintain our Buy recommendation with a $12.55 target price.

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