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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.
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