Brambles (BXB) Update

Submitted by Jim Thesiger on 26 May, 2008 - 16:54

Brambles (BXB) has a share price target of $9.20 from Australian stockmarket analyst Macquarie Research Equities.

Brambles (BXB) Fuel cost pressures likely to hurt Crown

30% rise in pump prices will hurt CHEP Europe:

Gasoline and diesel pump prices in the USA and Europe are up around 25-30% this calendar year. Brambles spends just over US$0.8bn on transport, of which we estimate around 40% is made up of direct or indirect fuel consumption. The freight industry typically has monthly pass though mechanisms, but CHEP Europe is impeded by a 12-month lag, and other parts of CHEP and Recall generally have a 3-month lag. We estimate a 30% rise in fuel price could add c.US$60m in costs over the next 12-month period, which equates to 5% of group EBIT.

Downgrading forecasts by 8%:

We are reducing our A$ EPS forecasts by 2% in FY08 and 8% in FY09 to reflect higher transport costs, updated currency assumptions, and lower EPS accretion from the slower buyback.

Reduction in premium rating reflects emerging earnings risks:

Brambles has de-rated from a 30% to a 15% premium to the Australian Industrials average P/E, reflecting emerging earnings risk from the Wal-Mart inspired changes to downstream pallet management, fuel cost pressures, and a weaker global growth outlook. We believe our numbers reflect these risks, and suspect the stock has been oversold. However, we see little in the way of catalysts to achieve a re-rating, and the market remains nervous on premium-rated stocks exposed to global growth. Brambles' trading update on the 24th June will be the next key catalyst.

Valuation / Price target reduced to A$9.20 (was A$10.00)

Our valuation and price target are derived from a sum of the parts DCF.

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