BXB Details

Brambles Ltd (ASX: BXB), through its circular business model, is engaged in the sharing and reusing of the world’s largest pool of reusable pallets and containers. This share and reuse model enables the company to move more goods to more people at more places compared to any other organization. It operates across 60 countries through the CHEP brand.

Trading Update (For the First Nine Months of FY21 Ended 30 June 2021)

• Rise in Revenue: The company has recorded a growth of 8% YoY in its sales revenue from continuing operations to US$3,794.1 million in 9MFY21 from US$3,5118 million in the PCP. While as per constant currency, the growth stood at 6% YoY.
• Growth Across Regions: It reported sales revenue growth across regions as CHEP Americas sales revenue grew by 7% at constant FX rates, and sales revenue from CHEP EMEA and CHEP Asia-Pacific increased 4% and 8%, respectively.
• Reported a Volume and Price Growth of 3%: The company witnessed a volume growth of 3% driven by higher demand in the global Pallets and Australian RPCs businesses that equipoise the reduction in Automotive.

Exhibit 1: Sales Revenue Performance

Source: Company Reports

Completion Of the Merger of Kegstar Keg Rental Business with Microstar

Following the announcement on 10 February 2021 regarding the formation of an agreement to merge its Kegstar keg rental business with MicroStar, a major player in providing beer keg solutions in the US, the company has completed the merger. In a step forward, the company on 16 April 2021, has successfully completed the merger between Kegstar and MicroStar after bagging the necessary regulatory approvals.

Became Carbon Neutral Company

The company, on 23 June 2021, declared that it has reduced the net CO₂ emissions derived from its own operations to zero, thus enabling the company to become carbon neutral company.

The carbon neutral was achieved across the scope 1 (eg: direct emissions produced from the burning of fuel) as well as in scope 2 (that is indirect emissions generating from the production of electricity that is purchased) of the standardised Greenhouse gas (GHG) Protocol. This marks a giant leap towards its 2025 Sustainability Targets.

Key Metrics

BXB continued to witness improvement in revenue and gross profit from FY18. The company’s gross margin remained steady over the years as it stood at 48.9% in FY20 that was higher than the industry median of 35.7%. Further, the company continued to witness improvement in its current ratio from FY18. The company’s current ratio rose to 1.12x from 0.72x in FY18. The improvement in the current ratio indicates that the company possesses better capabilities to meet the short-term obligations. Notably, the company’s cash conversion cycle has significantly improved over FY18 to FY20 as it is reduced to 2.7 days in FY20 from 34.2 days in FY18.

Exhibit 2: Key Financial Metrics

Source: Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form 22.76% of the total shareholding while the top four constitute the maximum holding. Notably, The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 5.48% and 3.17%, respectively, as also highlighted in the chart below.

Exhibit 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Risks

The company’s operations are exposed to the risks of economic uncertainty arising from the Covid-19 pandemic. It operates in competitive markets. Higher competitive intensity could affect its market penetration and financial performance. The demand of its current service offerings could be impacted by the industry trends.

Outlook

The company is making significant strides in the implementation of its US automation programme. It stays on track to achieve an improvement in US margins and group operating leverage in FY21.

The company has maintained its guidance for FY21 and sales revenue growth is expected to stay between 4-6% at constant FX rates. It is also expecting an improved underlying profit margins for FY21 and has also guided its underlying profit growth to remain in the range of 5-7% at constant FX rates. Further, the dividend payout ratio is expected to be between 5-7% at constant FX rates. Moreover, it highlighted the continuation of the share buy-back programme for the rest of FY21.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

Over the last 3 months, the stock was up by ~+8.65% and, over the last 6 months, the stock was up by ~+8.34%. Currently, the stock is trading above the average of the 52-week high and low range of $9.54-$11.88.

We have applied EV/EBITDA multiple based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/EBITDA multiple (NTM basis) considering improved guidance on underlying profit margins, returns to shareholders via continued share buy back programme, and strong liquidity position.

For the purpose of valuation, few peers like Cleanaway Waste Management Ltd (ASX: CWY), Ai-Media Technologies Ltd (ASX: AIM), SG Fleet Group Ltd (ASX: SGF) and HRL Holdings Ltd (ASX: HRL) have been considered.

Considering the aforementioned factors, we give a “Buy” recommendation on the stock at the current market price of $11.55 per share on 11^th August 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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