Why the Brambles (ASX:BXB) share price is surging higher today

The Brambles Limited (ASX: BXB) share price is surging higher today following the release of its quarterly update for FY21.

At the time of writing, shares in the supply-chain logistics company are up 6.2% to $10.15.

Let’s see what Brambles recorded for the three months.

Trading update

For the period ending September 30, Brambles reported a solid growth, underpinned by increased sales, particularly in the Americas market.

Revenue grew to US$1.18 billion, representing a 6% gain on the same FX rates over the prior corresponding period. This was underpinned by a 5% uplift in group sales which was driven by customer demand and ongoing price realisation.

Overall demand for pallets in grocery supply chains such as such as beverages, cleaning products and home DIY remained strong. Retailers have increased inventory levels in preparation of the holiday season and potential COVID-19 second-wave lockdown.

Further weighing down the positive results, its automotive and Kegstar businesses declined by 20% in revenue. As expected, the pandemic severely impacted the automotive industry and out-of-home consumption on beer.

Management commentary

Commenting on the update, Brambles CEO Graham Chipchase said:

Trading conditions in the first quarter were characterised by stronger than expected demand for consumer staples. Our teams continue to show resilience and dedication, overcoming challenges to successfully provide customers with uninterrupted supply of pallets, crates and containers.

Mr Chipchase said demand patterns were constantly changing, thus elevating business costs. In addition, labour shortages, lack of third-party transport and strong demand in the United States lumber market resulted in inflationary cost pressures.

However, he said the rising costs were offset by higher pricing and surcharges:

Our teams continue to focus on the delivery of strategic supply chain initiatives such as the US automation programme and further productivity improvements across our operations to offset higher operating costs in this environment with the clear aim of delivering operating leverage in this financial year.

What’s ahead for the Brambles share price?

Brambles updated its FY21 outlook to reflect the sales and cash flow performance achieved for the first quarter. The company narrowed its guidance within the upper end considering the ongoing economic, operating and COVID-19 developments.

For the remaining financial year, Brambles is forecasting sales revenue growth between 2% and 4% at constant FX rates.

Underlying profit is predicted to improve within 3% and 5%, and free cash flow is expected to fund business expenditure.

Brambles reported that its dividend pay-out ratio would be consistent with its policy of 45% to 60% for FY21.

In addition, the company will look to continue its share buy-back program subject to funding and liquidity requirements.

Brambles anticipates a U-shaped economic recovery, with headwinds to persist for the duration of FY21. Furthermore, the company is calculating a progressive turn-around in its automotive and Kegstar business over the next 12 to 18 months.

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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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