BXB Details

Brambles Limited (ASX: BXB) is one of the most sustainable logistics businesses globally. The company through its circular business model is engaged in the sharing and reusing of the world’s largest pool of reusable pallets and containers. This share and reuse model enables the company to move more goods to more people in more places compared to any other organisation. It operates across 60 countries through the CHEP brand.

Decent Performance in FY21 (For the Year Ended 30 June 2021)

• The company has recorded a growth of 7% YoY in its sales revenue from continuing operations in constant currency to US$5,209.8 million in FY21 supported by volume and price realisation in the global pallets business and the benefit of a progressive recovery in the automotive business.
• It reported 8% growth in its underlying profit driven by contributions from pricing, surcharge income, cost efficiencies, and return on supply chain investments, which helped to equipoise the impact of cost pressure.
• Underlying EPS increased by 15% to 37.8 US cents due to the benefit of higher earnings as well as the advantage of 1.8 US cents (or 5pts) from the share buy-back program.

Exhibit 1: Profitability Performance Trend

Source: Analysis by Kalkine Group

Share Buy Back Program

The company on its investor day briefing on 13th September announced the restart of its on-market share buy-back program. The share buy-back is expected to be completed in FY22.

Guidance for FY22

The company has guided achieving revenue growth of 5-6% in FY22. It also expects to attain underlying profit growth of 1%-2% in FY22 including short-term transformation costs of ~$US50 million. It also expects to witness an outflow of ~US$200 million in its free cash flow owing to the impact of the reversal of US$215 million of FY21 timing benefits. Due to the likely effect of the rise in US, UK, and Spanish tax rates, it predicts an increase in its underlying effective tax rate for FY22 by ~1.5pts.

Key Metrics

The company’s gross margin remained largely steady over the years as it stood at 48.2% in FY21 compared to 47.1% in FY17. However, the company’s current ratio stood at 0.73x. Notably, the company’s cash conversion cycle has significantly improved over FY17 to FY21 as it has reduced to 1.5 days in FY21 from 37.9 days in FY17.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 22.95% of the total shareholding while the top four constitute the maximum holding. Notably, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.04% and 3.17%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company’s operations are exposed to the risks of economic uncertainty arising from the Covid-19 pandemic. It operates in competitive markets. Higher competitive intensity could affect its market penetration and financial performance. The demand of its current services offerings could be impacted by the industry trends.

Outlook

The company will augment investments in FY22 to aid in revenue growth as well as provide operating leverage and free cash flow generation across the group from FY23 onwards. The company has identified new prospects to advance on its transformation goal through its Shaping Our Future programme to boost its competitive positioning and drive value creation.

The company has guided for high single-digit underlying profit growth in FY23-FY25 (including $20million transformation costs in FY23).

Besides, the company on its investor day presentation 2021 stated that CHEP Europe is better positioned to drive growth through its focus on growth opportunities, digital transformation, and cost leadership initiatives. The company’s business in Latin America is expected to maintain strong revenue growth and profitability despite the prevailing inflationary pressures and challenging economic environments across the region. Further, it will sustain investments in automation and quality in CHEP US to enhance safety, along with expanding capacity, deliver cost efficiencies, and consistency.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period) 

Stock Recommendation

The stock is trading towards the 52-week lower levels. Therefore, it can be said that the current juncture is offering decent opportunity for accumulation.

The stock has been valued using an EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/EBITDA multiple (NTM basis) considering strategic investments to drive growth as well as robust balance sheet position.

For the purpose of relative valuation, peers like AMA Group Ltd (AMA.AX), Ai-Media Technologies Ltd (AIM.AX), among others have been considered.

Considering the aforementioned factors along with its decent outlook, we give a “Buy” recommendation on the stock at the current market price of $10.12 per share, down by 1.557% on 13^th October 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices