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Brambles: Lessons to be learned

Peter Warnes  |  24 Feb 2017Text size  Decrease  Increase  |  

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When it comes to investing, don't buy in after the first dose of bad news as it is more likely than not more bad news will follow, Morningstar's Peter Warnes says.


This week's results from Brambles (ASX: BXB) were telegraphed to the market on 23 January via a trading update, which indicated problems had arisen in the December quarter.

In particular, there were expectations of 1H17 sales growth of approximately 5 per cent and underlying profit growth of approximately 3 per cent, followed by an admission FY17 growth in sales and underlying profit would be below guidance.

CEO Tom Gorman stated: "In the first half, we delivered sales revenue growth in every operating segment and, with the exception of our North American pallets business, we delivered underlying profit growth across the group."

It just so happens the North American pallets business is the largest and most important in the group. The share price dived almost 16 per cent.

The January trading update followed the 20 October 1Q17 update and reaffirmation of FY17 guidance at the AGM on 16 November.

Guidance was for constant-currency sales growth from continuing operations of 7-9 per cent and growth in underlying profit of 9-11 per cent to US$1.055 billion to US$1.075 billion.

The writing should have been on the wall--another disappointing announcement was in the wings. Rarely does bad news come in one dose. Just like medicine, the patient needs to absorb several doses before any recovery can gain some traction.

So it was with Brambles. The harsh lesson to be learned for investors--don't buy in after the first dose of bad news, as it is more likely than not more bad news will follow. Let the value come to you.

The 1H17 result on 20 February delivered the second dose of bad news. Growth in FY17 sales revenue guided lower to 5 per cent in constant currency but underlying profit expected to be flat on FY16. This contrasts sharply with reiterated guidance of 9-11 per cent growth at the AGM on 16 November.

Rubbing more salt into already gaping wounds, the board withdrew the FY19 return on capital invested target, seeking instead to "deliver ROCI outcomes which strike a sustainable balance between financial returns and growth". The share price fell another 10 per cent.

The double-whammy saw the share price plummet from $12.28 on 20 January to $9.30, an overall nasty slide of 24 per cent. I believe a shareholder class action is almost certain.

Tom Gorman announced his retirement on 18 August, effective 1 March 2017. A week later Gorman sold 652,304 shares for $8.42 million at an average price of $12.91 per share.

I can recall some 40 years ago, in my analyst days, interviewing the man whose vison it was to create the pallet pool. Oliver Richter was, in my opinion the best CEO the company has had in the past 50 years.

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Peter Warnes is Morningstar's head of equities research. Any Morningstar ratings/recommendations contained in this report are based on the full research report available from Morningstar.

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