Brambles Limited (Brambles, the Group, ASX: BXB) is a global supply chain logistics business that operates under the CHEP banner and services customers in the fast-moving consumer goods, fresh produce, beverage, retail and general manufacturing industries. Founded in 1875 and listed on the ASX since 2006, Brambles currently employs 13,000 people and conducts operations in about 60 countries.
Concentrated market power with monopolistic attributes
Brambles controls the world’s largest pool of pallets and containers with monopolistic-style market positioning in Australia and the United Kingdom where it has an estimated 80 percent and 70 percent market share respectively. It’s well positioned in North America too with an estimated 50 percent market share. Having critical mass in these key markets provides operational scale and with that, cost efficiencies. These attributes are high barriers to entry for new entrants because of the density of the existing service centre network and associated infrastructure, and the relationship with key customers is difficult and expensive to replicate.
The unrivalled density of Brambles’ service centre network means that Brambles generally has less distance to transport pallets and containers between customers and a service centre and fewer “empty transport miles”. Transport costs account for around 25 percent of Brambles’ costs and its concentrated delivery and handling infrastructure delivers a material operating cost advantage over its competitors.
With market power comes pricing power and this enables Brambles to apply pricing mechanisms and incentives for pallets and containers to be returned by customers and without damage. Pricing power also extends to passing on price increases to customers in response to the high inflation environment. These conditions contributed to a US$105 million reduction in the provision expense for uncompensated lost pallets and containers in FY24.
Upbeat FY25 outlook and beyond
Brambles has issued positive FY25 earnings guidance with Sales Revenue growth of between 4 and 6 percent, and Underlying Profit growth of 8 to 11 percent, driven by price increases in response to the ongoing high inflation environment. The recently announced higher dividend payout ratio of 50 – 70 percent of Underlying Profit is anticipated to be paid from the estimated US$750 to US$850 million Free Cash Flow in FY25. The Group has also foreshadowed an on-market share buy-back of up to US$500 million in FY25, subject to market conditions.
Looking beyond FY25, there is a lot to like about Brambles. It is an uncomplicated business that relies on a circular business model of sharing and reuse of the world’s largest pool of reusable pallets and shipping containers.
Brambles’ clients are generally in the fast-moving consumer goods sector and instead of burdening themselves by buying, maintaining and repairing pallets and containers, most suppliers simply rent pallets from pooling companies. Brambles is the world’s biggest largest pallet pooler with 350 million pallets, crates and containers, making it a virtual monopoly in its main geographies. The products that go on pallets and in containers are predominantly food, beverages, and fast-moving consumables. These are staple products that are largely insulated from a slowing global economy. This creates earnings resilience and pricing power by owning and managing a system-wide global pallet and container pool at scale, resulting in consistent earnings and dependable cash flows.
Discerning investors can reasonably anticipate steady earnings and dividend growth over the medium term.
