Brambles (ASX: BXB) announced the separation of its $1.8bn fresh produce container business during its fiscal 2018 earnings call.

Management announced underlying net profits increased 4 per cent to US$996 million in fiscal 2018, while headline profit tripled to US$ 747 million in the financial year ended 30 June.

This in-line result was attributed primarily to its CHEP pallet operations in Europe and IFCO. Cost control and higher asset compensations in CHEP Asia-Pacific also contributed, offsetting several profit headwinds.

These headwinds included accelerating inflation in developed markets, cost challenges in CHEP Americas and a 0.2 per cent profit decline in the group's Asia-Pacific operations.
IFCO is the logistics company's reusable plastic container business, which contributed around 20 per cent of overall group revenue in fiscal 2018.

It remains unclear what form the separation will take, according to Morningstar's director of equity research, Adam Fleck. Though Brambles management appears to favour de-merging - potentially as a separately-listed entity – it would also consider a sale of the business, he says.

pallets logistics CHEP

 

Brambles will focus more fully on its pallet business following the demerger

Fleck believes management's rationale behind the IFCO separation is an unwillingness to make the required ongoing investments in the business.

Since it was acquired in fiscal 2011, "margins have stayed around 12 to 13 per cent, versus around 25 per cent within CHEP Europe," Fleck says.

"They had never really integrated it with the rest of the business, so management felt they were running two separate companies [in its CHEP operations and IFCO], with two very different investment needs."

On the broader financial result, Fleck says it was marginally better than anticipated, as Brambles has continued to win new business and continues to drive price inflation in various markets.

Brambles acquired IFCO in 2010 for US$1.25 billion. Brambles management described the separation of IFCO as "a value creation opportunity for shareholders".

"Brambles has made substantial investments and has grown the [IFCO] business to the scale, market share and competitive position it holds today," said Brambles CEO Graham Chipchase.

The overall group's net debt of $2.3 billion was down $265 million for the year, driven by strong operating cash flow and the divestment of its Chep Recycled business.
Free cash flow of US$ 202.4, after dividends, increased from a shortfall of US$ 123.8 million loss last year.

Brambles also announced a final dividend of 14.5 cents a share, 30 per cent franked – in line with its fiscal 2017 dividend.

 

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Glenn Freeman is senior editor, Morningstar Australia

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