Shares in Brambles (ASX:BXB) have re-rated over the last ~12 months. A key contributing factor is that the Company has implemented structural improvements in asset efficiency levels. These have underpinned scope for ongoing margin expansion and stronger free cashflow generation.
We recently researched the Company in The Dynamic Investor. Our view was that the shares offered limited valuation support despite coming off recent highs. Since our report, the shares have continued to weaken. Accordingly, we consider whether current levels present a more attractive entry opportunity.
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 Slowing
BXB reported Like-For-Like (LFL) volume growth of -1% for FY25. LFL volumes were weaker than expected due to soft consumer demand and appeared to have slowed further in the latter stages of FY25 (-4%). The weakness in volumes is expected to continue into FY26 and is embedded into sales guidance in FY26.
BXB’s FY26 guidance assumes +1-3% volume growth. Importantly, there is upside risk to this guidance over the medium term given the defensive nature of end products (e.g. Fast-moving consumer goods, beverage, fresh produce, etc). Further, the outlook for slower LFL volume growth is offset by other growth drivers. These include business improvement measures (i.e. Serialisation+), further new business wins and increased asset efficiency. (Serialisation+ is an enhanced product identification and tracking system designed to improve sustainability, cost-efficiency, transparency and compliance)
Is There Scope for Further Price Increases?
Pricing is not expected to be the main contributor to revenue growth in FY26. (BXB’s guidance assumes a similar rate of pricing growth to FY25 of ~+2%). A likely reason for this is that a higher focus on pricing may challenge CHEP’s positioning as a higher priced, but better quality/availability value proposition against competitors. In addition, overall customer satisfaction towards CHEP has since dropped compared to FY25.
It is also worth noting that price contribution to US Pallets revenue growth diminished and turned negative in 4Q25. A key factor for this is that BXB shared of some of the cost-out delivered with customers through 2H25.
Momentum in New Business Wins to Continue
One of the highlights of the FY25 result was that despite the fall in LFL volumes, growth in new business wins picked up to +3% in 4Q25. The new customer wins primarily reflect new customer conversions from white wood pallets in the US. Customers were won over by the advantages of the pallet-pooling model. This trend is expected to underpin further net new business growth in FY26. In particular, the Company remains optimistic around US whitewood conversions.
Further Margin Expansion Expected
The degree of operating leverage guided by BXB for FY26 (i.e. relative to +3-5% sales growth) is more than historical levels. The Company has flagged further costs savings, with the full annual benefit of these expected in FY27. In addition, the margin expansion target has been lifted to ~3 percentage points (previously ~2 percentage points) from FY24 to FY28. This is due to the Company making good progress on supply chain productivity, asset efficiency and overhead productivity.
Balance Sheet Flexibility Remains
Gearing (on a net debt to EBITDA basis) as at 30 June 2025 was 1.1x and remains well below management’s target of 1.5x-2.0x. Expectations for continued strong growth in free cashflow supports a further decline in the gearing level. In addition, strong balance sheet capacity could fund further capital management initiatives beyond the on-market share buy-back of up to US$400m announced for FY26.
Fundamental View
Despite the recent weakness in the shares, valuation support remains limited. The shares are currently trading on a 1-year forward P/E multiple of ~21x, which is above the average multiple over the last three years of ~19x and at the upper end of the trading range over this period. Notwithstanding limited valuation support, Serialisation+ may create a step change in earnings quality/valuation if successful.
Charting View
We have looked at the BXB chart on a couple of occasions in the past year in The Dynamic Investor and noted that it should continue to head higher. After rallying strongly in August, the stock then eased back to consolidate the move. Once again, a consolidation like this is healthy for the overall uptrend and we expect BXB to continue to push higher from here. A break under $23 would be viewed as a negative.
Michael Gable is managing director of Fairmont Equities.
CLICK HERE to read our Testimonials.
Current share prices available here.
You can learn more about technical analysis in this article.
An 8-week FREE TRIAL to The Dynamic Investor can be found HERE.
Would you like us to call you when we have a recommendation? Check out our services.
Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.
Like this article? Share it now on Facebook and X!