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.

Result Performance for H1FY22 (For the Half-Year Ended 31 December 2021)

• The company has recorded a growth of 8% YoY in its sales revenue driven by price realisation in all regions to recover inflationary cost pressures and other cost-to-serve increases.
• However, COVID-19 related demand in H1FY21 and pallet availability constraints in the current period impacted the volume growth.
• It reported 4% growth in its underlying profit ahead of FY22 guidance and it included US$24.4 million of short-term transformation costs pertaining to the Shaping Our Future programme outlined at Brambles’ 2021 Investor Day.

Exhibit 1: Performance Trend

Source: Analysis by Kalkine Group

Decent Dividend and Capital Management

The company has declared an increased FY22 interim dividend of 10.75 US cents in H1FY22 (1H21: US10.0 cents) with payout ratio of 50%. To date, BXB has returned ~A$2.6 billion from the proceeds of the IFCO sale to shareholders, signifying 92% of the A$2.8 billion Capital Management Programme started in June 2019.

Future Transformation Programme in Progress

The company is making significant strides in its four-year transformation programme, Shaping Our Future, which focuses on using data and analytics insights to improve customers’ growth as well as to pioneer smarter, more sustainable regenerative supply chains. Currently, the company’s Shaping Our Future transformation programme with supply chain automation projects, along with the asset productivity initiatives and digital trials are in progress. All these initiatives will be instrumental in assisting the company to steer challenging market dynamics as well as deliver value for its stakeholders and sustain its global leadership position in sustainability.

Strong Balance Sheet and Liquidity Position

BXB continues to hold a strong balance sheet and liquidity position with undrawn committed bank facilities of US$1.1 billion and cash of US$0.2 billion as on 31 December 2021. Further, the net debt to EBITDA ratio stays well within financial policy of <2.0x.

Key Metrics

The company’s gross margin and ROE grew sharply in FY21 over FY17. However, the company’s current ratio reduced slightly to 0.74x in FY21 from 0.75x in FY17. Notably, Debt to Equity ratio improved to 0.92x in FY21 compared to 0.96x in FY17, depicting reasonable leverage position of the company.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form ~24.20% of the total shareholding while the top four constitute the maximum holding.

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 service offerings could be impacted by the industry trends.

Outlook

Driven by its H1FY22 trading results and the current operating environment, the company has upgraded the sales and earnings guidance ranges for FY22 to sales growth between 6-8% (previous guidance of 5-7%) and Underlying Profit growth in the range of 3-5% at constant currency (previous guidance of 1-2%) including approximately US$50 million of short-term transformation costs. Without taking into consideration the short-term transformation costs, Underlying Profit growth is expected to stay between 8-10% (previous guidance of 6-7%). The company has also revised its FY22 Free Cash Flow after dividends outlook guidance to a net outflow of US$350 million against its earlier guidance for an outflow of US$200 million representing increased lumber inflation and pallet purchases due to extended cycle times and lower pallet returns in all regions.

Further, the company forecasts the FY22 dividends to remain in line with its policy to pay out between 45-60% of Underlying Profit after finance costs and tax in US dollar terms.

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 strong EPS growth in H1FY22 as well as improved FY22 sales and profit guidance.

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

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the aforementioned factors along with its decent outlook, we give a “Buy” recommendation on the stock at the closing market price of $9.670 per share, down by 1.428% on 6^th April 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