2006-09-26 Macquarie: BIL - Survey Shows CHEP US on Track

Trading Pick of the Day

Shares in Brambles (BIL) have been one of the standout performers on the Aussie market for the calendar year to date, returning over 16% versus a return of ~ 5% for the S&PASX 200 since the start of January.  Macquarie Research Equities (MRE) have been a believer in this stock for some time and recently completed a survey of pallet manufacturers in the US to obtain a better understanding of the pallet industry. The aim of the survey was to gauge feedback on the prospects for one of BIL’s biggest earnings contributors, CHEP US.
Overall, the feedback on CHEP was positive. This increases MRE’s earnings certainty for CHEP Americas, which will comprise ~40% of Brambles EBIT in FY07. CHEP appears to have significantly increased orders for new pallets in FY07. This indicates that revenue growth will again be very strong and suggests that penetration in the US continues to grow. MRE expect this growth driver will continue to swamp small changes in underlying economic growth in the US. However, part of the growth may also reflect a buffer, to cope with the important Christmas period and seasonality.

MRE received a number of negative comments about IFCO (the largest US pallet recycler). In essence, it appears that its immigration/staffing problems are perceived to have had a material impact on its performance. In a number of instances, CHEP was seen as a potential beneficiary of this. MRE again encountered the recurring theme of deterioration of the quality of white wood pallets (seemingly driven by higher lumber prices in recent years). MRE continue to see this as a growth catalyst for pooled pallets of which CHEP is by far the dominant player in the US.

The perfect plant concept appears to be gaining momentum with cost reductions, quality improvements and time efficiencies noted by a number of industry sources. Encouragingly, a number of respondents also noted that the number of stray CHEP pallets (ie outside the pool) continues to decline

The outlook for CHEP Americas remains very encouraging. MRE’s survey arguably highlights its strong strategic positioning in the US and a high level of earnings certainty. MRE reiterate their outperform recommendation and 12-month price target of $13.10.

Traders looking for maximum exposure to short-term movements in the BIL share price should consider the following equity warrants for a high-risk, high-return strategy.

Investors and traders looking for short to medium-term leveraged exposure to the BIL share price should consider Macquarie Instalments for a higher risk, higher return alternative to direct share investment.