Brambles offers attractive value

Vince Pezzullo

Brambles (ASX:BXB) is a supply-chain logistics company operating primarily through the CHEP and IFCO brands, in over 50 countries. BXB specialises in the pooling of unit-load equipment and engages in the provision of supply chain support services. BXB owns 290 million pallets and 294 million reusable plastic containers, with a network of more than 850 service centres. Brambles ranks as a top 20 ASX listed company with a market capitalisation of approximately A$17.4 billion. As at 30 September 2018 our portfolio allocation to BXB was 2.5%.

We believe BXB has been operating in a tough operating environment lately, especially in the US. Brambles pooled pallet business in the US has had to contend with increasing labour costs and higher Lumber and Transport costs. Despite its market dominance, Brambles US pooled pallet business saw significant margin compression over the last 6-9 months.

Whilst BXB once traded at a market premium we believe that at the recent price lows BXB was trading at a market discount. While the US Pallets business experienced margin compression, BXB management has reset the return on invested capital target to a level which is achievable through the cycle.

Brambles has also built a robust pooled pallet business in Europe which has delivering consistent margins. The European business now generates more for the group than the US pallets business. The one criticism has been the poor (relative to its market position) free cash flow that the business generated. With a new management team at the helm and a renewed focus on free cash flow and operating efficiencies, we believe the stock at the recent lows offered an attractive entry point.

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