Still Stacking Up

Brambles reported trading in the first few months of FY18 in line with our forecasts and guidance, with total sales revenue from continuing operations up 6% in constant-currency terms.

 

We believe Brambles still ‘stacks up’, and we maintain our Buy recommendation on the stock with a $12.65 target price.

 

The February result will be telling in terms of how Brambles has handled industry cost pressures, but we think there are enough mitigating factors to challenge the now-consensus view that US margins are headed for collapse.

 

  • CHEP Americas – The US pallet pooling business grew revenue by 4%, comprising 3% from net new business wins and 1% from organic volume growth. We estimate the three-year contract with large beverage-maker Cott Corporation contributed 1% to business wins, with the balance of new customers coming mainly from small to medium enterprises (SME), such as Jel Sert, owner of brands such as Slush Puppie, Baskin Robbins, Sunkist and Hershey’s. Pricing was flat, which was pleasing given the 3% deflation seen in the fourth-quarter FY17.
  • CHEP EMEA – 8% growth in constant-currency terms was above our 5% forecast, likely driven by a stronger-than-expected conversion rate – we forecast 2%, but the real figure may be 4–5%.
  • IFCO, US conversions – We believe constant-currency revenue growth of 9% was good, although it was below our expectation of 11%. Industry discussions lead us to believe the company may have raised US prices at the expense of customer conversions. Despite this, we continue to believe investors underestimate IFCO’s longer-term growth opportunities, and we estimate the addressable market remains very large.

Brambles remains our sector preference. At current share price levels, our $12.65 target price implies a potential total return of about 40% (including dividends), the highest projected within our coverage universe. 

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