Company Reports

Brambles is focused on the supply of pallets for consumer staples, which accounts for about 85% of revenue. Its market is primarily fast-moving consumer goods, or FMCG, including packaged food, beverages, fresh food, and personal healthcare.

We raise our fair value estimate for Brambles by 36% to AUD 19 from AUD 14 with the transition of coverage to a new analyst. A key driver of the upgrade is our expectation for a much higher midcycle operating income margin of 21% from 16% previously. We expect the firm’s recent investment in digitalization and operating efficiency to improve transport and repair costs incrementally, and customer service and sales offerings. We also anticipate higher revenue growth, averaging 6% for our 10-year forecast period, from 4% previously. This is predicated on higher volumes in the largest segment of the United States and higher prices in the second-largest segment of Europe, the Middle East, and Asia. We assume Brambles increases pricing broadly with inflation, with volume gains to increase with consumer spending and share gains in existing and new markets.

Wide-moat Brambles' revenue in the first three quarters of fiscal 2024 increased 7% on a constant-currency basis versus the previous corresponding period, or PCP. Revenue growth is being driven by price increases, with volumes down modestly as customers destock pallets they hoarded over the pandemic due to supply chain issues.

Brambles is the only scale provider of pallet-pooling services operating globally. Brambles' scale underpins its cost advantage, particularly in North America, and its extensive network of depots and service centers helps to maintain high levels of service and further facilitates customer growth. Capital and operating efficiency from the large pallet pool underpin excess returns and a wide economic moat.

Brambles' first-half fiscal 2024 underlying EBIT beat our expectations, increasing 19% on a constant-currency basis to USD 665 million versus the previous corresponding period. This reflects stronger customer pricing, productivity improvements, and cost deflation in lumber, energy, and transportation. The firm also announced extraordinarily high pallet returns from customer destocking, lowering capital expenditure from purchasing fewer new pallets.

Economic activity is set to slow across Brambles’ core markets in fiscal 2024. In the U.S., where Brambles generates an estimated third of operating earnings, we expect real gross domestic product to grow 1.6% over calendar 2024, a marked slowdown from forecast growth of 2.5% in 2023. U.S. nonfarm inventories, a barometer for Brambles’ operating conditions, jumped in the September quarter of 2023. But we think this will likely prove an aberration from a downward trend as the economy slows and firms pare stock levels.

Brambles is the only scale provider of pallet-pooling services operating globally. Brambles' scale underpins its cost advantage, particularly in North America, and its extensive network of depots and service centers helps to maintain high levels of service and further facilitates customer growth. Capital and operating efficiency from the large pallet pool underpin excess returns and a wide economic moat.

Brambles' fiscal 2023 constant-currency sales growth of 14% was reflective of pricing increases and operating efficiency, despite lower volumes. Volume declined by 2% lower versus the prior corresponding period, or PCP, with a pallet shortage in the first half, and customers holding less inventory than in the prior year. Underlying profit of USD 1 billion was 19% higher than the PCP on a constant-currency basis, with improved pricing offsetting cost inflation. Brambles declared a final fiscal 2023 dividend of USD 14 cents per share, for full-year dividends totaling USD 26.25 cents per share, 35% franked.

Wide-moat Brambles has continued to manage challenging operating conditions in the third quarter of fiscal 2022. Over the first three quarters, Brambles has experienced a range of operating headwinds including pallet cycle time disruptions and material inflation across labour, lumber, and transport. These have been further compounded by the ongoing conflict in Ukraine. With group year-to-date volumes flat on the previous corresponding period, constant currency sales growth of 8% largely reflects pricing initiatives to pass cost headwinds to customers. We have slightly increased our full-year underlying profit forecast by 2% to USD 939 million, inclusive of short-term transformation costs. Our revised forecast reflects the success of Brambles pricing initiatives and operational efficiency programs which exceeded our prior expectations. Our forecast sits at the midpoint of management’s updated year-on-year growth estimate of 6%-7%, inclusive of transformation costs. The change to our full-year earnings outlook has negligible impact on our fair value estimate which remains unchanged at AUD 12.70 per share.

We maintain our AUD 12.70 per share fair value estimate for wide-moat Brambles following the release of first-half fiscal 2022 results. EBIT of USD 481 million, inclusive of short-term transformation costs, was slightly higher than we had anticipated. We increase our full-year EBIT forecast by 3% to USD 920 million, towards the upper end of management’s revised year-on-year growth estimate of 3%-5%, inclusive of transformation costs. We have also increased our full-year capital expenditure forecast by 19% to USD 1.8 billion. Brambles is currently experiencing material lumber inflation requiring greater-than-anticipated investment in its pallet pool. While the higher capital spending is a near-term headwind, we expect the increase in pallet costs will be recouped through price increases over the medium term. The shares trade at an attractive 29% discount to our fair value estimate.

Following a fiscal 2021 characterised by coronavirus-heightened pallet demand, we expect earnings growth to be more elusive for wide-moat Brambles in fiscal 2022. Pallet demand maintained at robust levels into the final quarter of fiscal 2021, contributing to a healthy 8% increase in full-year operating income. With net new business wins in the Americas segment evading Brambles in late fiscal 2021, the result was modestly short of our expectations for 9% EBIT growth year on year. Nonetheless, the strong result bettered Brambles’ full-year EBIT growth guidance range of 5%-7%.

Brambles is the largest and only global provider of pallet-pooling services. The scale and density of its market leading networks provide it with cost advantages, and the extensive network helps to lock in customers. Competitive advantages, attractive margins, and high average returns on invested capital earn Brambles a wide economic moat.

Brambles is on track for a strong finish to fiscal 2021, with elevated at-home consumption patterns in North America and Europe—amid the ongoing pandemic—persisting into its third quarter. Accordingly, we upgrade our full-year fiscal 2021 EBIT forecast by 2.5% to USD 872 million, representing robust year-on-year growth of about 9.6%. Notably, our upgraded EBIT forecast sits above Brambles’ reaffirmed guidance for 5%–7% EBIT growth in fiscal 2021. Brambles’ unchanged guidance incorporates an expectation that volume growth in the remainder of fiscal 2021 will soften appreciably relative to the first nine months of the year, as it cycles a tough fourth-quarter comparative which also benefited from a pandemic-inspired increase in pallet demand. While we also expect volume growth to soften in late fiscal 2021, we think Brambles’ full-year guidance will likely prove conservative with pallet demand likely to remain strong throughout the remainder of fiscal 2021.

Brambles is the largest and only global provider of pallet-pooling services. The scale and density of its market leading networks provide it with cost advantages, and the extensive network helps to lock in customers. Competitive advantages, attractive margins, and high average returns on invested capital earn Brambles a wide economic moat.

Strong volume momentum persisted into Brambles’ first half of fiscal 2021, reflecting the ongoing increase in at-home consumption of fast-moving consumer goods and consumer staple categories amid the coronavirus pandemic and market share gains in central Europe for the Europe, Middle East, and Africa segment. With pallet demand in early fiscal 2021 tracking ahead of our full-year expectations for Brambles’ global franchise, we increase our full-year 2021 EBIT estimate by 3% to USD 851 million. The upgrade to our fiscal 2021 EBIT estimate implies 7% year-on-year growth and sits at the top end of Brambles’ upwardly revised fiscal 2021 EBIT guidance of 5% to 7% growth.

Shares in best idea Brambles remain attractive, trading at a 15% discount to our revised AUD 12.90 per share fair value estimate. We’ve raised our valuation for the wide-moat name by 8% following a review of Brambles’ long-term potential in key emerging markets. The opportunity for Brambles to secure substantial long-term growth from already large and fast developing emerging markets, or EMs, is immense. As the global leader in supply chain pallet pooling solutions, Brambles possesses all the necessary attributes to ultimately unlock value in EMs. Specifically, first-mover advantages, global industry leadership and a rich track record of prior expansion success are key attributes that deliver confidence in Brambles’ ability to establish flourishing EM businesses. Despite these credentials--and an existing portfolio of fledgling EM positions--equity markets presently fail to fully appreciate Brambles’ long-term EM potential.

Brambles is the largest and only global provider of pallet-pooling services. The scale and density of its market leading networks provide it with cost advantages, and the extensive network helps to lock in customers. Competitive advantages, attractive margins, and high average returns on invested capital earn Brambles a wide economic moat.

Best Idea Brambles’ fiscal 2021 year-to-date performance exhibited all of the resilience to coronavirus pandemic-induced economic fallout that we’d expected. Constant currency sales grew 5% in the first quarter, with demand for its global pallet pooling franchise unabated despite the materially weakened macroeconomic backdrop in Brambles’ key geographies of the U.S., Europe, and Australasia. Investors cheered the impervious first-quarter sales performance, pushing the stock an approximate 6% higher following the announcement. Nonetheless, we continue to see further upside in the wide-moat name with Brambles’ long runway of secular growth and defensive characteristics remaining compelling. Brambles trades at an approximate 15% discount to our unchanged AUD 12.00 per share fair value estimate.

The coronavirus pandemic provided only a marginal hindrance to wide-moat Brambles’ top line in the second half of fiscal 2020. The top line grew 3%, excluding lost revenue from the IFCO crate business that was divested during the period, largely tracking our full-year expectations. Nonetheless, growth in fiscal 2020 did track below our long-term, mid-single-digit sales growth forecast for Brambles’ global business. We expect the global consumer will weaken further from coronavirus fallout in the near term. Therefore, we continue to anticipate soft organic volume and earnings growth over fiscal 2021-22. Nonetheless, Brambles’ pallet pools remain underpenetrated in its key regions of Europe and North America. On this basis, we continue to forecast solid, mid-single-digit earnings growth over the coming decade. With our long-term expectations for the wide-moat name unchanged, we retain our AUD 12 per share fair value estimate. Brambles screens as fairly valued.

The advent of the COVID-19 pandemic does not alter our long-term expectations for Brambles. While we expect near-term earnings to soften from contracting economic activity, the long-term secular growth opportunity for Brambles’ market leading pallet pools in Europe and North America remain intact. On this basis, we make no change to our AUD 12.00 per share fair value estimate and view the sell-off of Brambles’ shares amid the COVID-19 equity market rout as overdone. Of equal importance to compelling valuation in the current, highly uncertain environment is unquestionable balance sheet strength. Brambles fits in the bill in this regard, with ample liquidity to fund its operations for an extended period should external financing become problematic. Leverage also remains conservative with substantial headroom to debt covenants existing. Therefore, with confidence that Brambles has the ability to fund its operations through the medium term, we view Brambles’ present share price--having last traded at an approximate 5% discount to our unchanged fair value estimate for the wide-moat name--screens as modestly undervalued.