Price movement
We are
revisiting Brambles Industries,
which we covered in April last
year when the price was at
$10.20, having already dropped
from its $12.80 highs. Our
negative review suggested that
its operational problems with
CHEP Europe were a major cause
for concern due to profit margins
weakening. The price has
recently bounced off $4 and
indications are the worst may be
behind it.
Profile
Brambles operates in
more than 30 countries and its
businesses are centred on three
core activities. The CHEP
business provides pallet pooling
services with 180 million pallets
worldwide and is a global leader.
Its Cleanaway division collects,
treats, recycles and disposes
hazardous and non-hazardous
waste. The Recall division
provides a service to cover the
management of physical and
electronic documents for
businesses globally.
Alongside these three main
divisions, Brambles operates a
range of industrial services and
regional businesses. These
include Interlake materials
handling, Meineke discount
muffler shops and a range of
other smaller businesses.
Current details
Brambles
reported a net profit of $274
million for the half-year ending in
December. This was in line with
expectations and was consistent
with management forecasts.
Previous profit results had
disappointed the market and
consequently the share price has
fallen. CHEP Europe's earnings
were down 25 per cent. However,
its CHEP Americas saw earnings
improve by 33 per cent.
The CHEP Europe division has
been targeted for major
restructuring during the next 2 1/2
years, focusing on optimising its
pallet network, reducing
overheads and capital
expenditure. This division is the
main area of concern to the
market and if it can be turned
around it will have the ability to
boost the share price valuations.
Management has budgeted $112
million of cost savings to 2005.
The full 2003 June year's net
profit is forecast to be $430
million and $500 million is
forecast for the 2004 June year;
$600 million in 2005. This would
place the company on a P/E of 12
times (2004 year) and it has a 20
cent fully franked dividend (4.4
per cent).
Sector
The company's
geographic spread is 53 per cent
Europe, 27 per cent North
America and 18 per cent
Australasia. With the trend for
the US dollar weakening against
the euro this will be beneficial to
profits. As an industrial services
company, its businesses are
usually stable but rely on
efficient logistics management.
Part of its European overheads
reduction will come from
streamlining 17 country-based
management structures into one
operation with two headquarters:
UK and Spain.
Worth buying?
Management's
task is to convince investors that
they are turning around the
CHEP Europe business by
increasing margins in the next
full year's profit result. With
ongoing global uncertainties the
risk is that changes will take
longer than expected. However,
the 4.4 per cent dividend yield
makes it a stock to accumulate
now and for it to be a prime
recovery stock.
Geoffrey Hill is presenter of ABC
News Radio's daily afternoon
finance report and is an
independent private client adviser.
Email gh@ghill.com.au
