Brambles (BXB) Update

Submitted by Craig Strzelecki on 14 May, 2007 - 19:50

Brambles (BXB) has an initiated coverage with a Buy broker call and a $15.30 price target from sharemarket analyst Citi Investment Research. De-equitisation and Growth: A unique business with a diversity of global cash-flows, an abundance of the financial flexibility and minimal impediments to stable growth. Key Issue 1: Optimal Gearing: The analysts assume Brambles (BXB) undertakes a US$5bn on market buy back over next five years and buys back one-third of its issued capital. This de-equitisation adds $2.00 to our standalone valuation of $13.25 - $13.50. Key Issue 2: Growth or Cyclical — Definitely growth. Analyst standalone valuation assumes 14% CAGR in FCF by 2015e. This is a demanding growth profile but CHEP and Recall can sustain 2-3x GDP growth. The analyst's are bullish on growth in CHEP Germany but believe CHEP USA holds the key to medium term growth as penetration increases from 38% to 55% and ROIC breaks through 30%. Key Issue 3: Divest Recall — Divest over next 1-2 years when margins improve. There are few global synergies with CHEP and a trade sale could achieve at least US$1.5bn. Any disposal would expose CHEP "rump" as a prime takeover target and may prompt management to leverage CHEP cash flows for protection. Valuation: Premium Rating Justified — PE Rel falls from 1.6 to 1.3 if CIR notionally adjust the depreciation policy for a longer useful pallet life. Also CHEP’s high growth/high ROIC (>30% pre-tax by 2010e) supports higher ratings. Catalysts and Risks for Brambles (BXB): Key upcoming events are: (i) trading update (21 June); (ii) FY07e result (22 August) and (iii) US and UK site visits for CHEP and Recall (24-29 October). CIR have confidence management will deliver on growth and cap management or face risk of private equity advances.

Brambles Limited is listed on the Australian Stock Exchange (ASX) under stock code BXB. You can view their investor website here. Find out the meaning of the recommendations in this primer. BXB was listed on the ASX on 27 November, 2006. Brambles is a provider of equipment pooling and information management services through its CHEP and Recall businesses. The CEO is Michael Ihlein and the chairman is Donald Robert Argus, AO. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade BXB. Check your charts and good luck with your share trading!