MARKET COMMENT
Brambles -- Overlooked And Unloved

By James Carlisle
November 21, 2002

No one seems to care much about Brambles (LSE: BI.). The 'little Aussie battler' has only managed to generate 14 posts on its discussion board since it was individually listed in London last year after GKN (LSE: GKN) spun out its stake in the business. There aren't even any posts (yet) this morning after a slump of 33% in the shares following today's warning that profits are 9% down for the first four months of this financial year.

Despite being overlooked, Brambles had been a well-loved company in the past, evidenced by a PE of 30 when it entered the FTSE 100 last year. Since then, the European business in particular has looked sicker and sicker and the shares have lost 65% of their 380p listing price. So now they're overlooked and unloved. That can be a pretty compelling combination in the stock market, so long as the business itself retains its long-term potential. And that, of course, is the problem.

The big story behind Brambles is its CHEP pallet leasing business. It sounds dull, indeed it is pretty dull, but it adds a lot of value in the red hot world of supply chain management. It's also by far the strongest player in its field. But CHEP's business requires a huge ongoing investment into its pallets and its business is all about squeezing a return out of that investment.

What upset the market today is the admission that it has been doing a bad job of it, particularly in Europe. Separate management in different countries around Europe has resulted in an excess of small pallet depots, too many pallets and an inefficient utilisation of assets. Apparently "the structure has also become more costly, less efficient and less customer friendly as the single European market has evolved". The net result is a 33% drop in the profits of CHEP Europe in the first four months of the year.

The good news is that similar issues in CHEP's American operations, which were identified earlier, are responding well to their 'improvement programme', with profits 22% ahead of last year. The other main group businesses, Cleanaway and Recall, are operating at around last year's level.

Maintaining an acceptable return on capital has always been the major issue for CHEP -- indeed it's what the business is all about. Today's announcement is therefore a big disappointment. However, the group is taking the appropriate action and expects dividends, in cash terms, to appear quickly. If you think that pallet leasing is the way forward in supply chain management, then Brambles remains firmly in the box seat. The overlooked and unloved status of the shares may provide a good opportunity to pick some up. At least that's better than doing it when they're flavour of the month.