Brambles’ growth story intact despite headwinds

Wide-moat logistics company Brambles is poised for long-term growth following strong gains in its operations in the Americas.

Morningstar analyst Grant Slade has increased his fair value estimate for Brambles (ASX: BXB) by 7 per cent to $12 per share.

At that price, Brambles shares screen as slightly overvalued, trading at roughly a 10 per cent premium to Slade’s revised valuation. The recent depreciation of the Australian dollar and the time value of money largely drive the fair value estimate upgrade.

Brambles posted a 9 per cent drop in first half net profit to $US277.9 million ($413.3 million), on a constant currency basis, compared to the prior first-half result of $US319.8 million ($475.6 million).

The result was 13 per cent lower after currency costs, but comes mostly after missing revenue from discontinued operations.

Brambles’ underlying profit was up 5 per cent at $US435.5 million ($647.7 million) for the first half—on a constant currency basis—after sales revenue of $US2.3976 billion ($3.5705 billion).

Brambles is the world’s largest pallet and container pooling provider, operating in 60 countries throughout the Americas, Europe and Asia-Pacific under its CHEP brand.

Slade says strong gains in market share in Europe and the Americas in first-half fiscal 2020 reflect the strength of Brambles’ global franchise.

More than 40 per cent of sales revenue comes from Brambles’ Americas business.

The first-half Americas segment result was strong, he says, beating his full-year top line growth and margin expectations. He has upgraded his full-year fiscal 2020 segment EBIT estimate by 13 per cent to $343 million.

The result also supports his unchanged long-term thesis that a “substantial secular growth opportunity remains in front of Brambles”.

“While Brambles is facing near-term economic headwinds in Europe and near-term cost pressures in Canada and Latin America, the continuation of strong gains in market share in Europe and the Americas in first-half fiscal 2020 only demonstrates the strength of Brambles’ global franchise.

“We continue to expect continued secular growth of the Americas’ segment pallet pools as traditional whitewood pallet use declines in the region, driving mid-single-digit top line growth in the medium term.”

Brambles said its US business margins had improved about one percentage point in the first half and they continue to aim for a 2 to 3 per cent percentage point improvement through measures such as pricing and efficiency gains.

In the European segment, Slade makes no change to his full-year fiscal 2020 EBIT forecast of $438 million.

“While Europe’s top line has tracked ahead of our expectations year to date, we expect a less favourable second half with the slowing macroeconomic environment expected to weigh more heavily on organic volumes in the second half.”

The dividend of US9c will be paid as 13.38 Australian cents.

This time last year it was 14.5 Aussie cents.