BXB is a core holding for me. I have held for a number of years now in a smaller %age but took a 5% position 18/12 ago.
My rationale is that its a wide moat, quality company that if it sticks to its knitting, continues expanding its digitisation, and doesn't do anything stupid*; they can gradually improve its margins, increase its market share in the countries in which it operates and also expand into more geographies.
This result and the commentary accompanying it would support that thesis.
Integral of ever improving efficiency and margins, is the use of data, which is why I have reproduced the recent update from MS. However, I was also excited by the Serialisation+ pilot in Chile which will now be rolled out in major markets. This is one of those real world applications of AI that I have been looking for in non-tech companies.
I spent a bit of time yesterday interrogating Perplexity and have concluded that if applied to all of BXB's markets it could improve margins by fully 3% and FCF by 24%. I take the actual numbers with a grain of salt, however, if they achieve even half this, it would be significant, and AI is only going to get better at this. So interesting stuff
*I am reasonably confident those days are behind us, there has historically been a lot of value destruction with bad capital allocation.
Brambles Earnings: Data Strategy Continues to Drive Margin Improvement
Brambles' fiscal 2025 underlying profit of USD 1.4 billion was 10% ahead of the prior year. Most of the growth was due to a 130-basis-point increase in underlying EBIT margin, with the group investing in technology and data programs to improve pallet pooling operations.
Why it matters: The result was broadly in line with our expectations. We expected slightly higher revenue, but macrouncertainty weighed on volume demand. Most sales are to the fast-moving consumer goods sector, where consumers are pulling back on discretionary spending.
- We are impressed by how well the data-driven strategy is working for Brambles. Rolled out across the business, it has driven improvements in repair scheduling and quality control, managing stock levels, increasing product usage, and more, with demonstrable margin and lower capital expenditure.
The bottom line: We raise our fair value estimate by 4% to AUD 25 per share for wide-moat Brambles. Most of the change is due to the time value of money. Shares are close to fairly valued.
- We anticipate lower near-term sales volumes, offset by modest increases in adjusted EBIT margin from the firm's data-driven strategy. We expect this strategy to add about 300 basis points to the underlying EBIT margin by fiscal 2028, from 2022 levels.
- Pallet tracking using data has considerably reduced lost pallets. The cost of new pallet purchases in fiscal 2025 was 12% of capital expenses/sales compared with about 30% three years prior. We think better pallet retrieval is a permanent business improvement and estimate midcycle pallet capex/sales of 16%.
Between the lines: Most contracts allow Brambles to claw back inflationary impacts on the cost of serving customers, underpinning low-single-digit price increases. The remainder of revenue growth is from increased volume usage and new business wins as the company gains scale in a region.
Business Strategy and Outlook
Brambles is focused on the supply of pallets for consumer staples, which accounts for about 85% of revenue. Its market is primarily fast-moving consumer goods, or FMCG, including packaged food, beverages, fresh food, and personal healthcare.
Already in 60 countries, Brambles’ expansion strategy is to increase market share in developing markets. This includes Eastern Europe, parts of Southeast Asia, Turkey, Middle East, Sub-Saharan Africa, China, and India. Within its established regions of Australia, Western Europe, and North America, we expect the firm to continue to acquire new customers and volume growth as it benefits from scale.
Most of the firm’s capital costs are related to the replacement of lost or irreparable pallets. Over the pandemic many customers hoarded and reused pallets due to a shortage given end-customer demand for fast-moving consumer goods and supply chain issues which led to less reliable pallet supply. However, over fiscal 2023 and 2024, customers have returned stockpiled pallets en masse. The benefit of this is lower capital costs as fewer pallets require replacing. We forecast capital costs for new pallets averaging about 16% of sales over our 10-year forecast period, from an elevated average of 24% over three years historically to fiscal 2023.
Brambles invests in efficiency initiatives such as the deployment of automated repair infrastructure and digital improvements enabling tracking to reduce pallet losses and improve transportation routes. Repairs and maintenance and transportation each account for about one-fourth of group operating costs and our midcycle EBIT forecast of 23% is predicated on efficiency improvements driving lower expenses.
In the largest regions of North America and Europe, most customer agreements permit the firm to pass through high inflationary price increases through surcharges or pricing increases tied to indexes. Over fiscal 2021 to 2023, group revenue growth averaging 10% was mainly due to pricing changes and surcharge revenue given high inflation. However, we expect mid-single-digit revenue growth over our 10-year forecast period to fiscal 2034 as inflation normalizes.