Stacking Up

Ord Minnett has recently resumed coverage of Brambles with a Buy recommendation and a price target of $12.65, underpinned by its view that concerns over the company's CHEP USA operations are overdone.


Pallets will remain an essential part of the fast-moving consumer-goods supply chain, and within that, pooling continues to stack-up as the best economic solution for manufacturers.


Growth should return as cyclical factors normalise. We estimate 39% of group earnings should be generated by Pallets Americas, and CHEP USA is the key driver of this segment. Our expectation is for earnings growth to return from FY18 onwards as the cyclical factors which are currently dragging down this year’s earnings dissipate.


Outside of the Pallets Americas business, the rest of Brambles, which accounts for the other 61% of group earnings, is doing well. Pallets EMEA and APAC continue to deliver constant currency growth of 3–5% per annum and returns on invested capital (ROICs) of 20% or more. Top-line growth is not the problem for reusable plastic containers either; rather it is ROIC due to the burden of $900 million of goodwill paid in the 2011 IFCO acquisition.


Ord Minnett highlights that the company's withdrawal of the FY19 ROIC target of 20% does not mean Brambles is abandoning its focus on returns altogether. Rather, it remains a key performance metric and the largest component of key performance indicators for management's short- and long-term incentives, with 30% and 50% weightings, respectively. We view it as an acknowledgement that there is a fine balance between growth and ROIC – which we note is currently a very respectable 16%.


In any case, we suspect that not many investors really factored in a 20% ROIC by FY19. We also note that the new CEO, Graham Chipchase, seemed to get the balance right in his last role at Rexam, making us comfortable with the current situation.

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