Believing in Brambles
By Frank Jasper, Chief Investment Officer
05 July, 2018
Last month I was in Wellington where I had the chance to meet with some clients. As I am originally from the Hutt Valley I can say this; Wellington was on its very best Wellington behaviour. It was tempestuous, with that special horizontal rain that I am convinced blows straight in from Antarctica and has a gift for finding a way down the neck of your jacket and then chills you to the bone.
One of the things I covered in my presentation was the idea that building long-term wealth requires a little bravery — being brave enough to take positions that feel a little uncomfortable at the time or that may even seem counterintuitive. Ultimately, though, swimming against the popular tide has on many occasions resulted in our best long-term successes.
While the environment for one of the Australian companies in our portfolio Brambles, hasn't been quite as tempestuous as a Wellington southerly, it has been difficult. On this occasion though we think the storm has delivered us the opportunity to increase our investment at a very reasonable price. While it takes a little bravery to add to an investment when the news on the company isn't exactly great, this is precisely the right time to do it, given our belief that Brambles is a high quality company with sound long-term growth prospects.
Brambles is the leading global supplier of pooled pallet and reusable crate solutions to its customers, primarily in the fast moving consumer goods sector. The company has a long history of generating shareholder wealth and a track record of making smart strategic decisions.
At the moment, Brambles is facing transport and plant cost pressures in its key US pallets market. The list of challenges is long; higher fuel prices, driver shortages, some changes in customer behaviour in response to higher transport costs, higher lumber costs, inefficiencies due to capacity constraints, and changes in commercial relations with some retailers. These headwinds have pressured Brambles' profit margins in the US.
The company is working to relieve these pressures by implementing surcharges and adjusting contract terms as contracts roll over. It is also investing in a plant automation programme that will modernise its US service centre network to a standard similar to its more efficient European network. While these initiatives all make sense to us, these actions with the exception of surcharges, are not a short-term fix and we expect pressure to still be evident on the company's near-term earnings.
Brambles' balance sheet pressures are currently being reflected in its share price, and the valuation of the company, based on metrics like the price to earnings ratio, is sitting at five year lows. We believe this is the opportunity. Brambles is growing its revenues in mid-single digit levels, and we believe the company will continue to keep growing at such rates for years to come. As Brambles solves its short-term cost challenges, margins should improve turning forecast revenue growth into even healthier profit growth.
We love buying shares in high quality, growing companies on sale and have added to our investment in Brambles. We believe now is the time to be patient, ride out the storm and enjoy the good weather to come. We all know you can't beat Wellington on a good day. Fingers crossed out increased investment in Brambles gives us that same warm feeling.