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Aussie Stock Update: Brambles

 

MARKET CAP : $1.6 BILLION

SECTOR - LOGISTICS

EST. DIVIDEND YIELD (HISTORICAL): 3.2%

PRICE - EARNINGS RATIO 23.5

PRICE/FAIR VALUE 0.82

 

Brambles are showing signs of life, following a change in leadership on the back of CEO Tom Gorman leaving in March last year. The past 12 months for Brambles can be summed up as a restructure and refocus.

 Graham Chipchase is well known for focusing on core operations and divesting of noncore  assets that fail to provide a sufficient return to justify their use of capital. Prior to joining Brambles,  Graham Chipchase was the CEO of Rexam, a British-based  multinational consumer packaging  company  headquartered in London, before being acquired  by Ball Corporation.  During his tenure at Rexam Graham Chipchase was known for his aggressive approach to divestment  of non-core  assets and cost cutting, which has been applied to Brambles.

Graham Chipchase has been quick to act in implementing a strategic review of operations and looking for areas to strengthen margins & improve efficiency. Since becoming  CEO, Brambles have divested of CHEP Recycled, their North American recycled whitewood pallet business for $115m.  “Our strategic review highlighted that CHEP Recycled is not a core part of Brambles and that the business has not delivered the financial returns we require to generate sustainable shareholder value,” Graham Chipchase, Brambles’ CEO.

 While more recently, Brambles decided to divest of their 50% Joint Venture stake in Hoover Ferguson  to a private equity firm, First Reserve. The consideration for this transaction includes the repayment of a US$150m subordinated shareholder loan, along with a $77m payment for the 50% JV share.  Of the total $77m, $37m has been deferred and guaranteed by First Reserve until 2026 at the latest, while interest is payable at 6.25% p.a. On the basis of the strategic review, the Board no longer considered exposure to the Oil & Gas  sector  via Hoover Ferguson  to be part of their core business, nor did the business prove a sufficient return on capital.

The funds raised from selling their 50% stake in Hoover Ferguson  and the repayment of the shareholder loan will be applied to paying down debt and further investment into automation technologies to increase pallet pooling efficiency.

In regards  to automation  technologies, when pallets enter an automated CHEP service centre the screening, sorting and stacking processes are fully automated. Only the repair process requires manual intervention, although management believes this process can also be automated. Brambles intend to roll out this technology across the US, which should increase  capacity by 30% and reduce unnecessary transport costs caused by capacity constraints. Brambles is targeting a 2-3% improvement in operating margins through automation,  centralized procurement and surcharging  over the next 3 years.

Brambles is investing US $150-$160m in automation  technologies from FY19 to FY21, with a four year payback  period. The first 2 years of funding is to be sourced from the $100m received from the sale of CHEP Recycled, while the remaining $50-$60m is to be funded through their CAPEX programme.

The Balance Sheet remains relatively strong, undrawn credit facilities of US$1.8Bn, an average  term to maturity of committed  credit facilities of 4.7 years, and an investment grade credit rating of BBB+ from Standard & Poor’s. With regards  to financing costs, Brambles enjoy an EBITDA/net financing cost ratio of 14.7 times, which is very strong.

 Brambles is on the road to recovery and we're confident that patience for current investors will be rewarded.


 

 

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