We recently recommended Brambles (ASX:BXB) in The Dynamic Investor. Our view was that the BXB was an opportunity on weakness. Market concerns about weakening demand across all operating segments had weighed on sentiment. Since that time, the shares have gained over 10%. Ahead of its results release (due 21 August), do current levels still present an attractive entry point?
About Brambles
Brambles is the largest provider of pallet services. The Company’s main operations comprise the CHEP (pallets) division, which has operations in Americas, Europe, Middle East & Africa (EMEA) and Asia. In the US, Europe and Australia, CHEP’s market share is estimated to be 55%, 25% and 70%, respectively.
Key Fundamental Drivers
Volume Growth May Surprise on the Upside
Overall volume growth for the six months to 31 December 2023 (1H24) remained subdued, at -1%. This reflected a softer macroeconomic environment and ongoing customer de-stocking in North America and Europe. Excluding the impact from customer de-stocking, volumes increased by 1%.
Reported group volume growth for the third quarter (3Q24) showed no improvement from 1H24 (also -1%) and continued to be impacted by de-stocking. However, the Company noted that the pace of de-stocking has started to moderate, which in turn bodes positively for improvements in volumes into FY25.
Headwinds from pallet returns should lessen from 4Q24 as the Company cycles the ramp-up of return flows from the prior year. BXB has guided to flat volumes for FY24, implying positive volumes in 4Q24. This sets up 1H25 strongly for volume growth. Further, any moderation in industry pricing declines could provide a more stable environment for new customer contract wins. The latter becomes increasingly likely as customers gain a better idea of relative pricing between whitewood/recycled wood pallets and the pooling service alternatives offered by Brambles.
Upside Risks to Margin Forecasts
While key revenue drivers (pricing and volumes) are receding, the potential remains for higher operating leverage (i.e. earnings growth above revenue growth). In particular, BXB can still generate operating leverage in a low single digit volume growth environment (as was the case in FY21), particularly if operating cost inflation moderates.
A key risk to operating leverage is price deflation. However, recent trends across key input cost categories – such as transport (via freight rates), lumber and diesel pricing – support the view that BXB is unlikely to encounter price deflation in its key US Pallets business through FY25.
Balance Sheet Flexibility Remains
Gearing (on a net debt to EBITDA basis) as at 31 December 2023 was 1.2x and has largely remained unchanged from recent periods. Importantly, gearing remains well below management’s target of <2.0x and is supported by stronger free cashflow.
The current level of gearing also provides scope for to pursue small acquisitions. Should the Company proceed with same, there would still be ample liquidity to undertake a $500-$750m share buyback. Having said that, any acquisitions may impact the duration of the share buyback as well as the frequency of future share buybacks.
Fundamental View
The pull-back in the shares prior to our report saw Brambles trading on a 1-year forward P/E multiple of ~15.5x. This was below the average multiple over the last three years of ~17.5x and at the lower end of the long-term trading range. While the shares have since re-rated back to its 3-year average, there is scope for further upside. In particular, the upcoming results release may be a catalyst. Key signals include evidence of volume growth improvement in 4Q24 and clearer signs that the de-stocking cycle is coming to an end.
Charting View
Brambles has been trading in a channel since early 2022. At the time of our recent report, it was trading at the lower end of the channel, which put it back in the buy zone. Now that it has been trading higher again, we would be targeting levels up near the top the channel, which is over $16.

Michael Gable is managing director of Fairmont Equities.
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