Brambles (BXB) Management held an operational briefing on 'Understand CHEP' yesterday aimed at providing greater insights into the company's business model.
We also preview the upcoming First Half 2009 results on 19 February in light of adjusting our earnings against Macquarie Economics' revised economic growth and currency assumptions.
Impact
The operational briefing gave away little information on trading conditions, however the key points of interest in our view were admissions of increasing pallet storage costs, as well as CHEP providing higher quality or new pallets to its biggest customers.
Within the business model it is clear that each year up to 10% of the pallet pool requires replacing, leading to significant maintenance capital expenditure regardless of organic growth prospects.
We expect weak First Half 2009 earnings relative to prior corresponding period, with Wal-Mat costs, ongoing quality initiatives and higher storage costs all negatively impacting operating margins.
Earnings revision
Minor short term downgrades after putting through revised currency and economic estimates; Financial Year 2009 earnings per share -3.7%.
Price catalyst
12-month price target: $8.22.
Catalyst: The interim results on 19 February should provide greater clarity on customer wins and the impact of the recession on plant costs.
Action and recommendation
Despite its strong underlying business model, BXB's operations in the short to medium term remain clouded by operational issues and negative exposures to worsening US and European economies.
Our expectations for Financial Year 2009 are fractionally below consensus, however we believe risks for Financial Year 2010 remain to the downside. Neutral recommendation retained.
BXB Price at posting:
$6.84 Sentiment: None Disclosure: Not Held
A personalised tool to help users track selected stocks. Delivering real-time notifications on price updates, announcements, and performance stats on each to help make informed investment decisions.
(20min delay)