Wide-moat Brambles' (ASX: BXB) revenue in the first three quarters of fiscal 2024 increased 7% on a constant-currency basis versus the previous corresponding period, or PCP.
Revenue growth is being driven by price increases, with volumes down modestly as customers destock pallets they hoarded over the pandemic due to supply chain issues.

The result is in line with our expectations and we maintain our full-year forecasts. Our fiscal 2024 revenue forecast of USD 6.9 billion reflects 8% revenue growth from the PCP—at the upper end of guidance. Shares trade at a modest premium to our unchanged $14 per share fair value estimate.

Most of the sales growth is from improved pricing. In Europe and the United States, about 80% of customer contracts have a surcharge for cost inflation, which may include lumber, fuel, transport, and labor.

Brambles' revenue in the US and Europe is mostly derived from issuing a pallet to a customer as opposed to time on issue. As such, pallets languishing with these customers provide no ongoing revenue and the firm needs to replace lost stock to maintain its pallet pool. Consequently, more pallet returns are a boon for Brambles, because pallet replacement represents most of the firm’s capital expenses.

In the first nine months of fiscal 2024 the company had 11 million pallets returned and is expecting a further two to three million more over the remainder of the fiscal year. For comparison, in fiscal 2023, returns were about half this. As such, we forecast capital expenditure as a percentage of sales averaging about 17% over our 10-year forecast horizon, from 22% in the 10 years prior, due to a greater volume of pallets in the firm’s pallet pool significantly lowering capital costs.

Business strategy and outlook

Brambles is the only scale provider of pallet-pooling services operating globally. Brambles' scale underpins its cost advantage, particularly in North America, and its extensive network of depots and service centers helps to maintain high levels of service and further facilitates customer growth. Capital and operating efficiency from the large pallet pool underpin excess returns and a wide economic moat.

Following the divestment of its returnable plastic crates business and its North American recycling business, Brambles is focused on operating its closed pool pallet businesses efficiently, expanding services into new high-growth geographies such as India, the Middle East, and Africa, and incrementally growing share in North America, Europe, and Australia.

The business is allocating capital to improve efficiency through the deployment of automated repair infrastructure and enabling tracking to reduce pallet losses. Capital is also being allocated to enable low volume collections and as incentives to pallet recyclers to keep more Chep pallets in circulation. It is also investing in repairable smart plastic pallets as an emerging commercial customer pallet solution.

Brambles benefited from a shortage of pallets with the rise in lumber prices associated with COVID-19. But we expect COVID-19-related market share gains and prices to normalize as timber prices revert to long-term averages and market pallet availability improves. This may see pallet pool utilization rates decline.

A key focus for Brambles is to retain customers gained in the pandemic and maintain high pallet pool utilization to maintain profitability. A recession would be a headwind to pallet utilization, but Brambles’ market share and customer exposures position it favorably against subscale, higher cost competitors with less resilient customers.

Moat rating

Read more about finding a company with a sustainable competitive advantage or moat.

We ascribe Brambles a wide moat underpinned by its operating scale and likely excess returns in all geographic segments—Americas, EMEA, and Asia-Pacific. Brambles can achieve healthy ROIC despite the relatively low technology, commoditized and undifferentiated product of soft wood pallets. This points to the size and scale of Brambles’ pallet pool, manufacturing and repair infrastructure, distribution and logistics services as key elements of its competitive cost advantage which combines to provide a lower cost to serve. This lower cost to serve converts into ongoing incremental volume growth and reinforces Brambles’ dominant market share across the various geographies it operates in.

While individual countries have their own competitive dynamics, Brambles usually operates with the largest closed pallet pool and service center network. As pallets are transported to and from manufacturers and their customers, Brambles’ ability to efficiently manage pallet availability and transportation generates cost savings.

The density of Brambles service center network means pallets travel shorter distances relative to competitor pallets thus minimizing empty transport miles. This results in improved pallet availability and a cost advantage over competitors with own smaller pallet pools with lower availability. Moreover, Brambles’ pallet customers are unlikely to switch to direct pallet ownership or deal with multiple subscale pallet companies, given likely greater cost and inefficiencies.

Brambles’ cost advantage is durable. Brambles’ attractive competitive position has built on a first mover advantage within individual markets. This unlocked the reinforcing cycle of scale growth and cost efficiencies. With critical mass, cost advantages from service center density, and pallet utilization forming an entry barrier.

Brambles is the dominant pallet pooling company in the Americas with a pool more than four times the size of its largest competitor. Brambles' estimated share of the North American market, consisting of the U.S. and Canada, is 45%, and its Latin American market share is 35%. Brambles’ largest competitor in North America is Peco Pallet, which has approximately 10% market share and highlights the relative scale.

In the Europe, Middle East, and Africa segment, Brambles operates Europe’s largest closed pallet pool. Relative to its closest competitor, Brambles pallet pool is about five times larger with twice as many service centers. Brambles’ estimated share of the European pallet market is 33% or 500 million pallets. Brambles’ closest European competitor is La Palette Rouge, holding a 7% market share with just over 100 million pallets.

The Asia-Pacific segment is Brambles' smallest, accounting for about 15% of earnings. Here, the pallet pool is again about four times its nearest competitor. Brambles' Chep holds around 75% market share in Australia versus 25% for closest competitor, Loscam.

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