Morningstar | Americas Margin Recovery In Sight For Wide-Moat Brambles; FVE Unchanged on Analyst Transfer. See Updated Analyst Note from 14 Jun 2019
We retain our fair value estimate of AUD 11.20 per share for wide-moat Brambles following a transfer to another analyst. Our expectations for solid earnings growth are unchanged with an average EPS growth rate forecast of 8.0% for the five years to fiscal 2023, driven by continued expansion in emerging markets and efficiency initiatives across the global pallet-pooling network. Revenue growth in the core regions is likely to remain modest, driven by a consumption of economic growth and gradual conversion of users away from white wood, offset by greater gains in developing markets such as China. But after a solid run, Brambles’ shares screen as slightly expensive, trading at about 15% premium to our fair value estimate.We forecast average group revenue growth of 1.0% over the next five years, with top-line growth suppressed by the IFCO divestment in June 2019. Excluding this transaction, we see mid-single-digit annual revenue gains for the firm. We expect average EBITDA margins of about 27.7% in fiscal 2018 will remain steady over the next five years, albeit with a dip to about 26% in fiscal 2019 as the firm aims to pass through higher transport and lumber costs. An improvement in the margin will depend on improved scale in emerging markets and greater automation in North America. We forecast capital expenditure will remain high at above USD 1 billion in fiscal 2019, reflecting Brambles' ongoing growth opportunities. Capital expenditure is well covered by operating cash flow.
We retain our wide-moat and medium uncertainty ratings. Brambles’ pallet pools and pallet service centres form part of a hub-and-spoke network. Sustainable cost advantages flow to Brambles as new and existing customers bring greater crate volumes into one of Brambles’ pooling networks, creating a virtuous circle of scale-related operational cost and asset-efficiency advantages. We expect the return on invested capital will remain robust, at an average 15.5% over the next five years.
Brambles is a supply-chain logistics company operating primarily through the CHEP and IFCO brands. Co. has three segments: Pallets segment, which primarily serves the consumer goods, fresh produce and beverage industries, and sub-divided into three regions: Americas, Europe, Middle East and Africa, and Asia-Pacific; Reusable Plastic or Produce Crates segment, which serves the fresh produce and food industry and comprising the IFCO RPC pooling business worldwide and the CHEP RPC pooling businesses in Australia, New Zealand and South Africa; and Containers segment, which comprises four business units: Automotive, Intermediate Bulk Containers, Oil and Gas, and Aerospace.
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