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Morningstar | Brambles Boasts Growth in Price and Volume, but Cost Pressures Persist; Shares Slightly Overvalued

We make no changes to our AUD 11.20 per share fair value estimate for Brambles following a trading update for the third quarter of fiscal 2019. Over the first nine months of the fiscal year, Brambles continues to pass through price increases, without sacrificing volumes, illustrative of the firm's wide economic moat. Last trading at AUD 11.98, shares in Brambles screen as slightly overvalued.

Brambles enjoyed strong sales growth in the quarter, lifting revenue in all divisions on a constant currency basis. Reported revenue--including the negative impact of a stronger U.S. dollar--grew 2%. While this is lower than our 5% full-year forecast, the currency movements should also lead to lower costs, dampening some of the impact. Management’s full-year expectations remain intact, with “modest” underlying constant-currency pricing growth tracking our full-year forecast.

Constant currency growth of 7% remains in line with our full-year forecast. This was achieved through volume growth of 5% and price of 2%, representing no change from the first-half results. Due to economic pressures in the region, like-for-like volume growth remains slow in CHEP EMEA, Brambles' second-largest segment representing 40% of continuing revenue. However, Brambles grew both volume and price in the region, leading to 8% constant-currency growth, implying market share gains. We forecast mid-single-digit annual revenue gains and flat profitability over the next several years for this region.

However, with only revenue numbers provided in the update, we are unable to ascertain whether increases in price are sufficient to offset increases in cost. In the firm's first-half results, we observed elevated lumber and transport costs squeezing the firm's operating margins. The firm noted that cost pressure is most acute in CHEP Americas--almost 50% of the firm's continuing revenue. We expect the firm can continue to offset this with further cost-out programs, productivity gains, and pricing actions.

Brambles' IFCO RPC business remains on track to be sold by the end of fiscal 2019 (within the next three months). Net proceeds of USD 2.36 billion will be used toward a share buyback, capital return of AUD 29 cents per share, and further pay down debt. The planned buyback will begin shortly after the completion of the transaction, and capital return will be outlined at the AGM in October 2019.