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Brambles Limited (BXB)

Monday October 13, 2008, 1:37 pm

Recommendations: Buy

BXB's current stock prices

Investment Rating:

BXB is a premier Australian growth company. It is now focused on CHEP and Recall following a wholesale restructure, divestment and unification program. CHEP provides the bulk of earnings and growth. Global scale and 50 years learning experience provide competitive advantages. It is a strong cash generator with generous operating margins and limited capital requirements. Growth is available through increased penetration of existing markets and extension to new geographies and services. As most earnings are offshore, exchange rate moves will impact through the translation of foreign earnings. Long term value remains for growth investors.

Event:

CHEP USA has completed its renegotiation of arrangements with retail giant Walmart (WMT). Some of uncertainties pressuring the share price have been reduced.

Under the previous Total Pallet Management with WMT, CHEP would inspect and sort CHEP pallets at WMT distribution centres (DCs). Now, WMT will have third party service providers inspect and sort pallets at the service providers' facilities or WMT DCs.

CHEP pallets needing repair will continue to be processed at CHEP service centres before being reissued. Therefore, importantly, quality control will remain with CHEP.

A number of CHEP service centres are already located near the WMT service provider facilities. CHEP will now construct additional centres near to WMT service provider facilities to save transport costs.

Management reinforce that new arrangements have no impact on sales revenue or issue volumes. Guidance is for net operating costs to increase by US$5m pa because CHEP will no longer receive income from the sale of non-CHEP 'white wood' pallets that it previously collected from WMT DCs, but this is offset by the ceasing of inspecting and sorting costs at WMT DCs and reduced transport costs by the greater number of service centres near WMT facilities. Pre-tax one-off costs were $11m in FY08 and are expected to be $30m in FY09.

Impact:

A trading update will be provided at the AGM on November 25. Our underlying NPAT forecasts are reduced marginally to reflect lower expected volume growth through Europe, USA and Asia in the next 2 years. Forecasts are displayed in A$. Our exchange rate assumption is changed from US$0.90 to US$0.80. Fair Value is unchanged. Our positive view on this business as a solid long term investment remains.

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