Phone 1300 980 849 Email research@tradingequities.com.au INDEPTH RESEARCH NOTE Brambles Ltd Buy Price: A$9.74 Price Target: A$10.65 ASX: BXB 20 February 2018 Brambles (BXB) 1H18 results were mixed in our view with pleasing top line growth in much discussed CHEP Americas business was offset but disappointing earnings performance due to significant input cost pressures. In constant currency terms on prior year, group revenue was up +5% (in line with guidance of mid-single digit growth) and operating earnings (EBIT) up +1%. The CHEP Americas (39% of group sales) business reported solid +5% revenue growth (constant currency) on improved volumes, with management noting market share gains despite competitive pressures. However, earnings (underlying profit) in the US business remain under pressure, which declined -9% on pcp due to significant input cost pressure (transport, labour and lumber costs). Management intends on recovering some of these cost pressures from price increases via surcharges and on contract renewals (one-third of BXB s contracts come up for renewal every year). With a competitive market (i.e. competitors willing to offer value to win contracts such as take on transport costs), investors will have to assess whether BXB can push through price increases. In our view, input costs inflation is as much an industry issue as it is a BXB issue (it makes sense for some market rationality) and BXB has significant scale relative to competitors. Further, the Company will also look to increase automation at its US service centres (20% automated), given the positive experience with automation in its European business (80% automated). Maintain Buy US issues are largely temporary and remaining two thirds of the business continues to perform well. Key 1H18 headline numbers. (1) Brambles 1H18 underlying NPAT of US$322.7m was up +5% in constant currency terms. (2) Group revenue was up +5% on constant currency terms on prior year, driven by improved growth momentum in US pallets and strong organic and new business growth across Europe and Latin America pallets and IFCO RPCs, which offset losses experienced in CHEP Asia-Pacific due to the wind-down of the Australian automotive industry. (3) Underlying profit of US$493.7m was up +1% in constant currency, impacted by the loss of a large RPC contract, significant items relating to the HFG joint venture and cessation of a few automotive contracts in CHEP Australia. Cost pressures in North America pallets were offset by increased collection of asset compensations and lower corporate costs. (4) The 1H18 interim dividend was declared at AU14.5cps. Cost pressures: a tail of two regions (Europe / North America). BXB noted further acceleration in market cost inflation during 1H18 which is expected to continue into 2H18. In transport, increased economic activity alongside labour shortages, increasing fuel prices and regulatory changes reducing market capacity have contributed to market inflation of +5% in the US and +4% in Europe, increasing transport costs by US$12m in 1H18. Similarly, lumber inflation driven by improved economic activity and a resurgent housing market have increased unit capital cost of pallets, increasing capex by US$6m in 1H18. Whilst the Americas business struggled to recover these cost pressures (revenue +5%, underlying profit -9%), in the CHEP EMEA segment margins were maintain (revenue +7%; underlying profit +7%), as price indexations and efficiencies (automation) offset direct cost inflation. Management believes, just like the European business, automation presents a material opportunity for their US service centres, which have limited automation (US 20% vs. Europe 80%). However, in the US much of the capacity is contracted plants hence BXB s ability to automate is not straight forward and carries execution risk (despite management noting that they have significant oversight in operating of these plants). Effects of the US Tax Reform. BXB is currently reviewing the implications of the US tax reform for the Company from FY19 onwards however management stated that no significant ongoing impact is currently expected, and the effective tax rate is anticipated to be between 27-29%.
FY18 Outlook. Management did not provide specific guidance figures however did make the following comments in regards to FY18 guidance; (1) expecting Underlying profit growth in excess of sales revenue growth through the cycle (2) return on capital invested is expected in the mid-teens (3) underlying profit growth is expected to be impacted by loss of large Australian RPC contract (US$23m), increase in BXB digital investment ($15-$17m in FY18) and full 12 month inclusion of losses incurred in the HFG joint venture. Investment Thesis We rate BXB as a Buy for the following reasons: Figure 1: Revenue by segment High barriers to entry for the market, solidifies BXB s market-leading position. IFCO, 20% CHEP Americas, 38% Massive opportunity to convert white-wood users as well as the palletization of emerging markets. Strong management team with proven ability to maintain cost margins amidst cost pressures through strategic business efficiencies. CHEP Asia- Pacific, 9% Volume growth in the US Pallet business remains strong and is still expected to grow. Appreciation of the US dollar would have a positive impact on BXB s earnings as most of its earnings are in this currency. CHEP EMEA,32% Source: Company BXB s scale, existing customer base and balance sheet will ensure it remains a market leader in the mid-to-long term. Key Risks We see the following key risks to our investment thesis: Competitive pressures and cost inflation leading to margin erosion, particularly in the North American market. Operations are very capital intensive. Any further loss of large contracts significantly reducing revenue and earnings. Weak economic conditions will lead to less consumption of FMCG, and hence less use of pallets. Volatile whitewood prices. Exposed to a wide range of currency and political risks. Company Description Brambles Limited (ASX: BXB) is a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP and IFCO brands. Headquartered in Sydney, its largest operations are in North America and Western Europe. The company s main segments are: pallets, reusable produce crate (RPCs) and containers. It services customers in the fast-moving consumer goods industries and also operates specialist container logistics businesses serving the automotive, aerospace, and oil and gas
sectors. It employs more than 14,500 people and owns more than 550 million pallets, crates and containers through a network of more than 850 service centres. 1H18 Results Summary Key 1H18 results compared to prior year are provided in the table below. Figure 2: Summary of Results (US$m) 1H18 1H17 % Change Sales Revenue CHEP Americas 1,082.3 1,022.4 5.9% CHEP EMEA 882.9 779.3 13% CHEP Asia - Pacific 238.1 243.6-2% IFCO 542.8 478.1 14% Total Segement Revenue 2,746.1 2,523.4 9% Underlying Profit 493.7 470.6 5% Significant items -4.7 - Operating Profit 489.0 332.1 47% Net finance expenses -52.7-50.1-5% Tax benefit/(expense) 13.6-117.0 Profit after tax from continued operations 449.9 164.1 174% Loss from discontinued operations -2.7-17.9 Profit after tax 447.2 146.2 206% Basic EPS (US cents) 28.1 9.2 DPS (Australian cents) 14.5 14.5 Source: Company; BTIG Figure 3: Group profit analysis (USD$m) Source: Company
CHEP Americas (~38% of Group revenue). CHEP Americas revenue was up +5.9%, driven by double digit revenue growth in Latin America pallets and improved sales momentum in US pallets. Like for like volume growth of US pallets grew to +2%, reflecting growth with existing customers in beverage and grocery sectors. However underlying profit fell -9% on a constant currency basis driven by direct increases in US pallets, with transport inflation, increased transport moved and inefficiencies in pallet repair and handling costs. Containers sales revenue was up +14% on pcp in a constant currency basis, primarily driven by automotive contracts won in the previous year. Figure 4: US general freight trucking (long-distance) Figure 5: Lumber price 550 500 450 400 350 300 250 200 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 Jan 14 Mar 14 May 14 Jul 14 Sep 14 Nov 14 Jan 15 Mar 15 May 15 Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Nov 17 Jan 18 Source: FRED Source: Bloomberg CHEP EMEA (~32% of Group revenue). EMEA saw strong volume growth across the region and price increases in Africa, India and the Middle East, with pallet revenue up +6% on pcp. Europe pallets continued to perform well and gain increasing market share with net new business growth of +5% and like for like volume growth at +2%. Margins were in line with pcp at 24.7%, with efficiencies and price indexation offsetting cost increases from transport cost inflation. CHEP Asia-Pacific (~9% of Group revenue). Sales revenue in the Asia Pacific business declined -5% on a constant currency basis due to the loss of a large RPC contract and the wind down of the automotive industry in Australia which was previously flagged. On an underlying basis, profit grew +3% on overhead cost reductions and increased collection of asset compensations in Australia and China. IFCO (~20% of Group revenue). IFCO recorded +9% growth in sales revenue in constant currency, driven by volume growth and produce and product mix benefits. Margins remained stable as strong top line growth were offset by increased depreciation costs and strong transport inflation. Underlying profit grew +6% on pcp on a constant currency basis. Capital expenditure + balance sheet position. Total PP&E Capex grew +9% or US$45m in 1H18 to offset higher pallet costs in the future. Net debt grew US$134.7m, driven by FX movements however the average term of committed facilities rose from 3.7 years to 4.7 years. Net debt/ebitda rose from 1.68x to 1.74x in 1H18.
Figure 6: BXB Financial Summary Year-end June ($USD millions) PROFIT & LOSS (P&L) FY15A FY16A FY17A FY18E FY19E FY20E Sales Revenue 5,440.5 4,900.1 5,104.3 5,431.5 5,893.0 6,394.6 Operating Expenses 3,952.1 3,413.5 3,620.1 3,888.8 4,210.4 4,555.6 EBITDA 1,488.4 1,486.6 1,484.2 1,542.8 1,682.6 1,839.0 % Margin 27.4% 30.3% 29.1% 28.4% 28.6% 28.8% Depreciation & Amortisation 549.0 502.1 526.7 563.2 618.6 643.8 EBIT 939.4 984.5 957.5 979.6 1,064.0 1,195.2 % Margin 17.3% 20.1% 18.8% 18.0% 18.1% 18.7% NPAT 584.4 592.3 444.9 621.1 693.5 767.9 Underlying NPAT 618.6 619.1 611.4 621.1 693.5 767.9 Underlying EPS (cps) 0.40 0.39 0.38 0.39 0.44 0.48 DPS (cps) 0.20 0.22 0.22 0.25 0.25 0.25 Growth Rates: Revenue -9.9% 4.2% 6.4% 8.5% 8.5% EBIT 4.8% -2.7% 2.3% 8.6% 12.3% Underlying NPAT 0.1% -1.2% 1.6% 11.7% 10.7% VALUATION FY15A FY16A FY17A FY18E FY19E FY20E PE multiple (x) 19.5 19.7 20.1 19.7 17.7 16.0 P/B ratio (x) 4.9 4.8 5.0 3.7 3.4 3.1 Dividend Yield (%) 2.7 2.8 2.9 3.2 3.2 3.2 EV/Sales (x) 2.8 3.1 2.9 2.8 2.5 2.3 EV/EBIT (x) 15.9 15.2 15.6 15.3 14.1 12.5 BALANCE SHEET SUMMARY FY12A FY13A FY14A FY15A FY16A FY17A Cash 174.2 128.9 222.3 166.2 156.1 159.7 Current Receivables 805.6 871.8 831.5 802.4 889.7 969.3 Current Inventories 48.2 56.2 66.9 81.3 86.2 56.8 Property, Plant & Equipment 4,138.6 4,407.9 4,367.5 4,424.7 4,732.3 4,861.1 Other 2,379.1 2,487.1 1,949.5 2,120.0 2,032.0 1,700.8 Total Assets 7,545.7 7,951.9 7,437.7 7,594.6 7,896.3 7,747.7 Current Payables 458.5 469.0 480.1 496.9 396.5 423.3 Total Debt 2,864.1 2,843.3 2,584.0 2,855.1 2,777.9 2,732.4 Other Liabilities 1,482.7 1,614.2 1,622.6 1,601.5 1,766.8 1,745.3 Total Liabilities 4,805.3 4,926.5 4,686.7 4,953.5 4,941.2 4,901.0 Shareholders Equity 2,740.4 3,025.4 2,751.0 2,641.1 2,955.1 2,846.7 Net Debt / Equity 98.2% 89.7% 85.8% 101.8% 88.7% 90.4% Net Debt / (ND+E) 49.5% 47.3% 46.2% 50.4% 47.0% 47.5% CASH FLOW SUMMARY FY12A FY13A FY14A FY15A FY16A FY17A Net Income 576.3 640.6 1,267.7 584.4 587.7 182.9 Depn & Amortisation 552.2 557.0 560.4 549.0 548.2 548.2 Other Non-cash Adj. 153.0 141.1-526.5 144.0 149.7 522.6 Changes in Non-cash capital -192.3 1.2-33.7 45.8-118.7-42.5 Operating Cash Flow 1,089.2 1,339.9 1,267.9 1,323.2 1,166.9 1,211.2 Capital Expenditure -949.4-905.1-889.5-983.6-1,080.7-1,077.7 Free Cash Flow 139.8 434.8 378.4 339.6 86.2 133.5 Source: BTIG, Company, Bloomberg
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