Citi 07/10/2009 5 Downgrade to Sell from Hold, Medium Risk $6.75...

Citi 07/10/2009 5 Downgrade to Sell from Hold, Medium Risk $6.75 - 9.4%
The US Pallet review is done and has highlighted the key changes needed to improve CHEP USA.

And while the broker knows this work needed to be done, and is glad it was, it notes margins are going to take a big hit. This sees the broker predict "depressed earnings over next two years".

FY10-12 net profit forecasts are cut by 7%, 12% and 9% on the re-based earnings post the review.

These lower earnings assumptions, coupled with the broker's view of the "the true cyclicality of CHEP" see it downgrade its call to Sell from Hold.

BA-Merrill Lynch 07/10/2009 5 Downgrade to Underperform from Buy, Medium Risk $7.20 - 3.4%
Brambles' US CHEP pallet review has gone the way the broker expected, with the company spending money to repair pallets to a much higher standard as customers had demanded. But while this will help ward off the competition, the broker notes the cost has been higher than expected. In the meantime, operating margins have been lower than expected.

This leads the broker to reduce its valuation by 6% following forecast earnings reductions of 14%, 10% and 8% in FY10-12. Target falls from $7.66 to $7.20. Downgrade straight to Underperform.

JP Morgan 07/10/2009 1 Overweight $8.20 10.1%
Target $8.20 (was $8.50). The broker thinks the move to spend more on pallet repairs will improve product quality, but given there will be ongoing costs, it has trimmed its earnings estimates, which pushes down its price target on the stock.

The move should address the service quality issues the company has had in the US and so the broker retains its Overweight rating.

UBS 07/10/2009 1 Buy $8.60 15.4%
UBS sees the company’s US review results as a “mix of positives and negatives” with an extra $110m in investment in pallet quality, which is expected to impact CHEP’s profitability over the next three years, the analysts say.

As for positives, the broker says management guidance for around 25% pre-tax earnings margin is conservative, with better pallets predicted to allow for faster market penetration.

Near term earnings forecasts have been cut by 6% in FY10 and FY11 due to the pallet costs and the stronger AUD.

Target falls 30c to $8.90.

RBS Australia 07/10/2009 1 Buy $8.25 10.7%
The company has indicated it will lift spending on pallet repairs in the US and while there is a minor negative earnings impact, the broker is positive on the move longer-term, as it believes it will lift customer service levels.

The broker also expects the market will react positively to the appointment of Tom Gorman as the new CEO of the company

There is no change to the broker's Buy rating on the stock or its $8.25 price target.

Deutsche Bank 07/10/2009 3 Hold $6.75 - 9.4%
The US pallet review is done and the broker expects Brambles will need to spend US$110m on a "fast-track implementation cost" plus at least an extra US$50m per year just to protect its existing market position.

The hit margins will take from these extra costs mean that any improving earnings from a US cyclical recovery will be delayed, says the broker.

Hold and $6.75 price target maintained.