EUR 850.00 For Business Accounts Only

Morningstar | Brambles’s 1Q Results Highlight Further Cost Inflation, but Revenue On Pace; Shares Fairly Valued

Brambles’ first-quarter fiscal 2019 trading update tracks our expectations, and we maintain our AUD 11.20 per share fair value estimate for the wide-moat firm. Revenue growth of 3% versus the previous corresponding period, or pcp, was dented by a strengthening U.S. dollar as the company converts foreign-earned sales to USD in its financial statements. However, from an Australian investor's perspective, a strengthening USD is good news as profits and dividends will be higher on translation to AUD. Revenue grew 6% on a constant-currency basis versus the pcp, tracking management’s mid-single-digit goal and our full-year forecast.

The company works to match costs with revenue by geography, so the strengthening U.S. dollar also reduces costs. However, the company cited further cost pressures that look to drive flat earnings performance in the first half of fiscal 2019 versus pcp. While the company continues to pass through cost inflation to consumers via price increases, there remains a lag effect--management noted surcharges covered about two thirds of cost inflation in the quarter, for instance. We remain comfortable with our longer-term outlook for earnings growth of about 7% to 8%, as price movements and internal cost savings support improved performance in the second half and beyond.

Geographic performance for Brambles’s core CHEP business was largely in line with our projections, excluding the impact of currency movements. CHEP Americas grew constant-currency revenue 5% versus pcp in the quarter, matching our full-year forecast, while CHEP EMEA’s 8% growth was a bit higher than our 5% outlook given inflationary cost pass-throughs. Conversely, CHEP Asia-Pacific’s 1% growth rate trails our full-year forecast of 6%, although we attribute this weakness to timing. We expect the segment to enjoy faster growth as the year progresses as the firm fully laps the prior loss of a large Australian reusable plastic crate, or RPC, contract.

The IFCO RPC segment results fell short of our expectations, as constant-currency revenue growth of 5% trails our double-digit full-year forecast. Nonetheless, we assume some of this stems from continued exits from unprofitable contracts in North America, where management called out volume declines, continuing a theme from fiscal 2018. This would suggest IFCO profit growth is stronger than revenue growth. We’re encouraged by further positive pricing in North America, and expect Brambles remains on track to sell or divest IFCO by the end of calendar 2019, as originally announced in August 2018.