Clients whose investment portfolio is managed in conjunction with Elston, the following update is available:
ELSTON: Brambles Trade Rationale
Across investor accounts that have selected the “Income” Australian Equity option, we have bought Brambles (ASX: BXB), a supply-chain logistics company operating in more than 60 countries, primarily through the CHEP brand.
We view Brambles as a high-quality, moderate growth business with a relatively high degree of predictability. Brambles is a global provider of pallets, crates and containers used to transport fast-moving consumer goods through the supply channel. The business operates 750 service centres across 60 countries.
Its global pool comprises 330m pallets, creates and containers providing scale-based cost advantages unmatched by any competitor and a strong barrier to entry as replicating Brambles pallet pool would require a material capital investment. As the market leader, Brambles has the densest customer network resulting in strong network benefits, higher pallet turnover and greater profit per pallet.
We think the longer-term outlook for Brambles is robust. Its exposure to the fast-moving consumer goods sector and the recent renegotiation of customer contracts provide a degree of protection during periods of broader economic weakness or cost inflation. The business should be capable of generating stable mid-single-digit revenue growth and, through the use of automation led efficiency gains, achieve profit margin expansion resulting in low double-digit profit growth.
To fund the purchase of Brambles we are removing Fortescue Metals Group (ASX: FMG) from the portfolio. Fortescue’s share price has steadily appreciated on the back of increasing iron ore prices which are close to decade-long highs. Predicting short term commodity price movements is extremely difficult and whilst we recognise iron ore prices may remain elevated for some time, we believe the current levels are unsustainable over the medium to longer term.
As a side note, we are retaining the portfolio’s exposure to RIO and BHP as both businesses are diversified across multiple commodities outside of iron ore.