Early last week Brambles (BXB) downgraded its sales and EBIT guidance to +5% and +3% respectively for 1h17 (on a constant currency basis). This compares to previous full year FY17 guidance of 7–9% sales and 9–11% EBIT growth, affirmed as recently as November. Management has pinned the downgrade to issues in the North American pallets business, namely; 1) Retailer de-stocking in the back-end of 4Q, resulting in slower pallet issues and accelerated collection and repair costs. 2) Deferral by prospective new customers of decisions to convert to pooled pallets. 3) Pricing pressure in recycled (white wood) pallet operations due to excess supply.

The company also flagged a small loss in the Hoover-Ferguson JV and an impairment review of its $350m book value. Otherwise, all divisions are in revenue and EBIT growth, in line with expectations.

BXB confirmed no business had been lost to competitors, and fundamentals remain strong with a solid conversion pipeline.

We are surprised by these revelations, and find them difficult to reconcile to the relatively solid economy in the US and the company's predominant exposure to FMCG. While there is some evidence of softer nondurables consumption in December, there seems to be little corroboration for any material market de-stocking event in the FMCG sector. Perhaps management had simply been too bullish on FY17 growth prospects?

BXB talk about increased use of procurement advisors being a cause of new business deferral, but we also think the US Election may have contributed, and potentially the weakness in white wood pallet prices. However, this apparent excess supply issue is itself at odds with seeming stable white wood supply and ongoing US economic strength. One theory is that recent weak agricultural production volumes have impacted on demand for white wood pallets.

BXB will now provide updated guidance for FY17 at the interim result, after collating January volumes, and reviewing internal data against 4Q sales of FMCG customers and Government inventories data.

We think the issues experienced by BXB are most likely temporary in nature, rather than structural. Hence the sharp sell-off post the downgrade appears overdone. Nevertheless, we have reduced our overweight position in BXB to reflect the greater risk the incoming CEO, Graham Chipchase, uses this hiccup to further re-base expectations. Whether or not this happens, there is likely to be heightened uncertainty for some time.

Written by   Joh Snyman, Investment Analyst at UBS:  (VIEW LINK)


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James Marlay

Nice summary, thanks for sharing.