Brambles Limited

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

Decent Trading Performance for Q1FY22

The company has recorded sales revenue from continuing operations of US$1,292.1 million for the first three months of the financial year ending 30 June 2022, demonstrated an increase of 11% over the pcp at actual FX rates. However, on constant FX rates basis, group sales revenue grew by 9% YoY due to the rollover pricing benefits from the prior year and continuing commercial discipline. Volumes stayed in line compared to the pcp as the benefit of net new business growth of 2%, mainly in the European pallets and Australian RPC businesses, was equipoised by the impact of lower like-for-like volumes in North America owing to pallet availability constraints.

Guidance for FY22

The company has guided achieving revenue growth of 5-7% in FY22 in constant-currency terms. It also expects to attain underlying profit growth between 1% to 2% in FY22 that will contain short-term transformation costs of ~$US50 million. Without taking into consideration these short-term transformation costs, underlying profit growth is expected to remain between 6-7%. It also expects to witness an outflow of ~US$200 million in its free cash flow. Additionally, BXB expects dividends to stay in line with its policy to pay out between 45-60% of underlying profit after finance costs and tax in US dollar terms.

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. The company’s current ratio remained volatile over the years as it stood at 0.73x in FY21 against 0.75x in FY17. Notably, the company’s cash conversion cycle has significantly improved over FY17 to FY21 as it 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 23.01% 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 4.59% and 3.19%, 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’s main focus across all regions is increasing pallet balances throughout its plant network to service its existing customers and aiding both growth and improved network efficiency. The company is gradually rebuilding its pallet pools by way of procuring new pallets as supply becomes available as well as sustaining its asset efficiency improvement initiatives. Moreover, owing to limited access to lumber and new pallets and prevailing global supply chains disruptions, BXB is not assuming pallet availability and balances across its North American network to back to more normal levels until the fourth quarter of the fiscal year.

Besides, globally the company continue to collaborate with its customers and retailers to reduce the disruptions to the supply chain and effectively manage the flow of its pallets and other platforms in such unique conditions.

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 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 its focus on growth opportunities and better net margin at 10.3% in FY21 versus industry median at 8.2% and higher ROE at 19.6% in FY21 compared to the industry median at 10.8%.

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 $9.550 per share (Time: 11:32 AM (GMT +10), Sydney, Australia) on 9^th February 2022.

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