Brambles Industries (BIL) to Outperform

Shares in Brambles Industries (BIL) have gained more than 7% since announcing in late November that it plans to divest its Cleanaway business, end its dual-listed structure and return at least $2.8bn of excess capital. The company now plans to focus on building its high-growth CHEP and Recall businesses, a move that investors have applauded. Post the recent BIL’s investor presentation, Macquarie Research Equities (MRE) have increased their medium term growth assumptions and outlook for CHEP. MRE reiterate their outperform recommendation with a 12-month price target of $11.00.

CHEP’s revenue growth is now likely to increase beyond that seen in recent years. This follows a period of relatively measured revenue growth, whereby a number of business-building initiatives were achieved. MRE now expect that it is logical for CHEP to more actively leverage its scale advantage in core markets like the US. The world’s largest pallet producer has also signalled its intentions to enter new markets, including China, albeit in a measured fashion with partners. In early 2004, CHEP forecast overall revenue growth of 7-9% as part of its objectives and milestones for the period to 2008. MRE now believe this is more likely to be in the range of 9-11% and have revised their forecasts to ~10%.

Additional growth will likely come with higher capital expenditure. The automation of about 60 CHEP repair plants over the next three years will add significantly to earnings, with MRE estimating about US$60m by 2009. Within the last 18 months, CHEP’s guidance was for capital expenditure to grow at around 50% of revenue growth. MRE however, have forecasted about $200m above the amount implied by this 50% sales growth benchmark, reflecting a combination of plant and new market investment. They note that they are probably being too conservative in their forecasts, but nevertheless CHEP’s cash return on assets remains very strong.

BIL’s renewed commitment on its CHEP and Recall businesses is a positive for the stock. A plethora of positive news flow over the medium term should also help to stoke sentiment for the company. MRE reiterate their outperform recommendation and 12-month price target of $11.00.

http://www.macquarie.com.au/