London price & ML research

BIL saw some positive price and volume action o'nite on the London market.
l/s 315.5p up 3.5p = 1.12% hod:320p lod 312.5p vol.:12.2mil.
London market details for BIL:
http://www.prices.londonstockexchange.com/info.asp?sedol=3061673
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Australian Research Team - Friday, 21 June 2002

Brambles Industries Limited

Strong Buy

Trading statement was procedural rather than precautionary
Reason for Report: Company Update
Trading statement was procedural rather than precautionary - this was not a profit warning as feared by some in the market (and as reflected in the recent weakness in the share price). Statement is consistent with the company's projection made at the time of the February 1HFY02 result announcement.
Specific comments on CHEP indicates that management will be providing an update at the Friday analysts briefing in Orlando on the issues we raised in our recent note titled "Ten must ask questions for the upcoming analysts tour". Based on the trading statement, it would appear that management is able to report positive progress on many of these issues.
In particular:
"Channel Pricing has been fully implemented" - this means that manufacturers in the US are now receiving a penalty payment for pallets delivered to NPD's (non-participating distributors). This will not only recover costs associated with recent leakage of pallets to NPD's, but will also incentivise the conversion of NPD's into the CHEP system.
"Transport costs are falling" (in the US) - We estimate transport costs have increased by A$80m (impacting margins by over 2pp) in the last two years due to the decision to abandon the use of pallet recyclers. CHEP have now reversed that decision and have not only reintroduced the recyclers into the pallet recovery cycle, but are also in the process of renegotiating transport contracts. It would appear that progress is being made.
"Asset productivity is improving" (in the US and Europe) - A key indicator relating to the recent concern over CHEP's performance has been the deterioration in the Asset Turn ratio (Sales/Assets) from 0.97x in FY99 to <0.7x in FY02. This statement would suggest this trend is now reversing based on improved recovery of pallets from NPD's.
"new Wal*Mart contract ... contributing to better performance for CHEP" - this appears to be outright confirmation that CHEP has been able to regain lost ground resulting from the unilateral decision by Wal*Mart to use the pallets in the secondary circuit. There has been concern that CHEP would be unable to renegotiate improved terms with Wal*Mart, whereas this statement would appear to contradict that concern.
Overall, we see the update as being a positive statement, consistent with our forecasts for FY02 and supporting some of our assumptions for an improvement in performance in FY03 and beyond. The statement tends to suggest the Orlando briefing will have a positive overtone. We reiterate our STRONG BUY recommendation.


STRONG BUY
Investment Opinion: B-1-1-7
Volatility Risk: Average
Price: A$8.86