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Copyright © Colin Nicholson

Stock Journal

Brambles

Important I am publishing stock investment journals of stocks I own (or consider owning, but decide against doing so) only to provide examples to teach the way I think about investing. In doing so, I am neither making nor implying any recommendation for anyone to invest in this or any other stock.

Therefore, the stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

You need to assess the relevance of anything in this journal to your investment plan, seeking advice from a licensed adviser if you are not able to make such an assessment for yourself.

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Terms and acronyms used in this journal See the Glossary page on the Free Resources menu for definitions. There are also articles on some of the ratios on the Fundamental Analysis Articles page on the Copyright Materials page.

If I use a term or acronym that is not in the Glossary, please email me for an explanation and I will add it to the Glossary page.

The ratios used in my analysis are set out in the document Ratios Used in my Analysis on the Stock Investment Journals page on the Building Wealth Resources menu. It includes a basic definition of annualised data.


How I found this stock Brambles had come up a while ago on my weekly scans for stocks making new 52-week highs. It was on my watch list, but had not quite met my investment plan criteria (a bit too highly priced).

My recent change in thinking about the absence of ideal stocks to buy has caused me to relax my criteria until such time as good opportunities emerge, when I will switch out of solid stocks like this one into better prospects.

Company profile


Source: Brambles Investor Pack

EMEA = Europe, Middle East & Africa

Source: FY2013 Preliminary Final Report


Which model?

Brambles clearly has a value model chart.

It has broken out upwards from a wide accumulation pattern and is trending upward.

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Earnings and dividend quality

There are several features to this graph:

1. There has not been much growth over the longer term. 2. The business is clearly cyclical and this pattern can be seen in the earnings. 3. The last two years have seen rising earnings, though dividends have been held steady. This

leaves scope for increasing dividends once the new strategies and demerger of Recall are bedded down.

Return on equity is shown in the graph below:

As expected, there is also cyclicality in return on equity. After a sharp fall, return on equity has stabilised in the low 20% range, well above my cost of capital (12.5%) and my hurdle rate for stock selection (15%). As will be noted in the next section, StockDoctor calculates a higher return on equity than Morningstar, whose data I used for the above graph.


Pre-purchase checklist

I am buying this stock with the knowledge that it is overpriced on my normal criteria and possibly lower growth than I aim to find. This short-term deviation from my investment plan is fully discussed in my Weekly Market and Portfolio Journal of 23 August 2013.

ASX CodeModelStage

Mkt Av AssessmentPlan Req V Plan

Price Earnings Ratio 21.33 17.29 High My plan is to switch to stocks that better meet my criteria as and when they emerge.

Dividend Yield 2.91% 4.00% Low As for PER

Franking 30% Yes Not OK

My plan prefers fully franked dividends or higher than average dividends to compensate. In this case, Brambles earnings may get a lift in earnings and dividends from a fall in the AUD to partially compensate.

Return on Equity 22.4% >15% OKThis is the Morningstar ratio. StockDoctor makes it 31.3%. I don't know the reason for the difference.

Debt/Equity Ratio 95% <60% OK Interest cover is 8 times, so I am reasonably confident Brambles can service its debt OK.

Mkt Capitalisation $13.9b >$100m OKLiquidity (22-day Av) $40-60m Enough OK

Guidance4% - 8% growth ex Recall.

CommentsMargin of safety criteria Stock

BXBValue

Breakout and trending


Chart analysis

The above chart to 19 August (when I bought Brambles) shows the wide accumulation pattern that formed after the low of 2009.

The price has broken out of the pattern and is trending upward. In recent months it has formed a sideways trading range as it waited for the full year earnings report, which will be released on 22 August. I was travelling overseas at the time and had I been home I might have waited to see the profit report. My travel schedule was not going to let me do that easily, so I had to act while I had a safe internet connection to make the purchase.

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Set stops

The trend was unfolding in sideways trading ranges. I set my stops below the one previous to the one being currently formed.

The low of that pattern was $8.01, so my soft stop is $8.00 and my hard stop is 2% lower at $7.84 as shown on the above chart.

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Calculate position size

The above position size calculation was unremarkable. Investing 2% of capital would risk 0.31% of capital back to my stop.

On 19 August 2013, I bought 4,700 shares at an average price of $9.25

Position size 1st trancheTotal Capital 2,172,444

Buy Price 9.250Hard Sell-Stop 7.840Risk 1.410

% Capital to Invest 2Position it buys 4,697

Max % Capital to Risk 0.5Maximum Position 7,704

Position allowed 4,700

% capital at risk 0.31

% capital invested 2.0


Managing the investment The full year earnings were announced on 22 August 2013. The price spiked lower, but held above my stops and closed well of the lows:

Since then, to the close of 4 September 2013, the price has recovered somewhat as shown on the chart below:

Clearly, the challenge now is for the price to deal with the strong resistance represented by the sideways pattern of trading that sits above it.

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Updated to 29 October 2013 Since the beginning of September, Brambles has overcome the resistance and by 28 October 2013 had made a new high for the trend:

I decided to raise my stops to just below the August low:

Low price used to base stops $8.14 Soft stop (one minimum bid lower) $8.13 Hard stop (2% below soft stop) $7.97

This was only a relatively minor movement, but was consistent with my investment plan. The chart now looked like this:

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I now also decided to increase my position from 2% of capital invested to 4%. Here is my position size calculation for the second tranche:

To invest another 2% of capital I would be risking 0.36% back to my hard stop.

On 29 October 2013 I bought another 4,600 shares at $9.61.

Position size 1st tranche 2nd trancheTotal Capital 2,172,444 2,241,011

Buy Price 9.250 9.700Hard Sell-Stop 7.840 7.970Risk 1.410 1.730

% Capital to Invest 2 2Position it buys 4,697 4,621

Max % Capital to Risk 0.5 0.5Maximum Position 7,704 6,477

Position allowed 4,700 4,600

% capital at risk 0.31 0.36

% capital invested 2.0 2.0


Updated to 10 December 2013 On 10 December 2013, Brambles began trading ex the demerger of Recall Holdings.

This is Brambles advice on the tax implications:

And

I have waited a few days to see if Brambles advised the apportionment factor, but they do not seem to have done so. This means that, until they do so, I need to make my own calculation.

This is what I have done:

1. There is no adjustment necessary to the number of Brambles shares held. 2. Recall Holdings began trading at $4.15 on 10 December 2013. I have used this as the cost

base for the Recall Holdings shares pending Brambles advice on the apportionment factor. 3. Recall Holdings shares were issued one for each five Brambles shares. So, for each parcel of

Brambles shares, the cost base must be reduced using the factor = Original cost of Brambles shares – (No of Brambles shares ÷ 5 × 4.15).

When Brambles advise the apportionment factor, I can finalise this adjustment. The above is necessary now for portfolio management purposes.

Note that there were some special arrangements for small holders and foreign shareholders, but these do not apply to me and I have not considered them above.


Updated to 27 December 2013 After the demerger of Recall Holdings, it was necessary to adjust the stops for Brambles. There was no pressing need to do so. Instead I waited for the adjusted chart once the demerger had been reflected in the database Manager. I took the opportunity to raise the stop very slightly to under the low of the low of the last trough in the trend:

Low price (adjusted) used to base stops $7.68 Soft stop (one minimum bid lower) $6.67 Hard stop (2% below soft stop) $7.51

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Updated to 3 January 2014 With Brambles making new highs for the trend, I decided to invest a third tranche of 2% of capital. However, the demerger of Recall Holdings had reduced the cost of my first two tranches of 2% of capital, so that my holding was only 3.64% of capital. The intent in investing a third tranche of 2% of capital was to bring my holding to 6% of capital invested. The way I dealt with this in the position size calculation was to make the final tranche 6% - 3.64% = 2.36% of capital:

The position size calculator also adjusts the Maximum risk from 0.5% of capital to 0.59% to recognise the increased size of the tranche from 2% to 2.35% of capital.

In investing a further 2.36% of capital, I am risking a further 0.42% of capital back to my hard stop.

On 3 January 2014, I bought 6,000 shares at $9.12.

Position size 1st tranche 2nd tranche 3rd trancheTotal Capital 2,172,444 2,241,011 2,310,987

Buy Price 9.250 9.700 9.130Hard Sell-Stop 7.840 7.970 7.520Risk 1.410 1.730 1.610

% Capital to Invest 2 2 2.36Position it buys 4,697 4,621 5,974

Max % Capital to Risk 0.5 0.5 0.59Maximum Position 7,704 6,477 8,469

Position allowed 4,700 4,600 6,000

% capital at risk 0.31 0.36 0.42

% capital invested 2.00 1.99 2.37


Updated to 7 March 2014 Through February and early March 2014, Brambles has moved higher:

This clear new high for the trend gives me the opportunity to raise my stops under the last trough:


This is the chart to 7 March 2014 with the new hard stop shown:

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Further Thoughts on the Purpose of Journals There had not seemed to be any pressing need to review and update the Brambles journal since I last raised my stops early in March 2014. However, as discussed in the Amcor journal update to 26 December 2014, this is a long time to go without a comment. In the past I have mostly revised journals on the basis that, after I had dealt with stock selection and position building, their purpose was primarily management of the portfolio stocks with respect to risk management, which was a focus on price alone.

However, as an investor, I am focussed even more on the performance of the business and the journals should therefore record my thinking with respect to all aspects of monitoring the performance of my investments, not just on price for purposes of risk management. For example, in the case of Brambles, I had not made any comment on the earnings report to 30 June 2014. This is so for many stocks in my portfolio, but not all of them. I was reviewing the 30 June earnings reports for my portfolio stocks and was conscious that I might have been writing up my thoughts. However, I was constrained for time by how busy I was travelling around the country, preparing and delivering various speaking engagements this year.

During 2014, I made 29 presentations, one of which was a full day and four of which were half days. At some point this year I spoke in every state (four cities in Queensland) except Tasmania and Northern Territory plus Auckland in New Zealand. An hour and a half presentation can take up to a week to prepare properly. While I emphasise all the time that teaching investing leads to more and better insights for me, I am intending to cut down to some extent on this schedule going forward to better balance my teaching efforts between the website and the speaking platform.

The changes I have made in the content and updating rota for the website were also intended to free up time to focus on quality rather than volume of website updates. Over time I have ideas to improve the website material further and extend it.

Not only are my journals written for my own investment selection and management. They are also intended as teaching tools for those members who wish to follow my thinking using my portfolio as specific and timely examples. Opening the Brambles journal to review the investment and update the journal on my new monthly rota has highlighted how important it is to make regular reviews as detailed in the Amcor journal for my own investing and to improve the teaching/learning content.


Updated to 30 December 2014 When I last raised my stops in early March 2014, Brambles share price was rising strongly.

By the end of March the rise was consolidating:

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The consolidation continued through April:






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May saw a sharp downward spike, followed by a recovery toward the high of the trend:

There did not seem to be any reason for this spike. Such spikes, upward and downward, are seen at other times on the Brambles chart:

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On the daily chart, the spike even looks like an error, however, there seems to have been significant volume transacted at the low when I looked at the course of sales that day, so it remains a mystery:

June saw considerable weakness and a retest of the spike low:

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July saw a gradual recovery as we came into the reporting season:






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Brambles announced its results for the year to 30 June 2014 on 20 August 2014. This is my analysis of their performance. In analysing the Brambles accounts, as with Amcor and the demerger of Orora, there is a complication in the demerger of Recall Holdings. While accounts were provided for Recall Holdings in the demerger document they were only pro-forma accounts. I am not persuaded that it is worth the effort to try to unpick it all and get closer to a truly precise/accurate analysis of Brambles past performance, especially as some time has now passed and we are approaching the half year 2015 report, which will be a better guide. This analysis primarily prepares a platform for analysis going forward.

Business Performance

Operating Revenue

The last three years show a steadily rising trend.






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NPAT

The downward trend to 2012 Has been arrested, but growth was less in the last year. Note my preliminary comments on the demerger.

EBITDA

This view basically echoes NPAT in recent years.

Cash Flow There is always a potential problem with profit measures like NPAT and EBITDA, both of which can be manipulated. It can be a sign of problems when cash flow diverges too far from EBITDA. I track both Operating Cash Flow and Free Cash Flow (OCF – Capex).

Operating cash flow is close to EBITDA, though the last year did not reflect the EBITDA rise.


Free cash flow is half or less than EBITDA, which reflects an ongoing significant capital expenditure.

Earnings and Dividend Quality

Earnings per share have risen strongly in the last two years. Dividends have risen less strongly, reducing the payout ratio. This provides greater security for dividends and scope to increase dividends going forward. With a return on equity above my cost of capital (see below) I am not concerned that Brambles is reinvesting retained earnings.

Financial Risk Financial risk is one of the main risks we have to manage in investing – is the business soundly financed. I start with the working capital ratios, which focus on liquidity.

Current Ratio

The current ratio has slipped a bit, but is still within the range in which Brambles has operated before.


Quick Ratio

The more demanding quick ratio is relatively stable.

Days Stock Held

Brambles hold minimal inventories, so this ratio is unimportant.

Days Receivables

After resolving the problems back in 2005 – 2007, Brambles are collecting their revenue at consistently good levels.

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Days Payables

The same observation pertains here.

The other important element in assessing whether a business is conservatively and soundly financed is to examine the debt ratios. I calculated a number of debt ratios below.

Debt to Equity

Brambles have reduced the risk level with regard to debt progressively in recent years.

Net Debt to Equity

This picture is similar.


Gearing Managements prefer this measure because it is always lower than debt to equity and looks better. However, it never fools aware analysts and really gives no further information. It is useful to calculate it because when looking at the investor presentations of competing firms for comparison, this is the ratio they will usually show.

Gearing, as with the two previous ratios is a little higher than I would like in a cyclical business, but is being steadily brought back under control.

Interest Cover The other really important debt ratio is interest cover. Interest cover shows the number of times earnings before interest and tax cover interest expenses.

Interest cover has been increased in the last two years and now looks far safer.

Debt to EBITDA Debt to EBITDA shows how many years of operating earnings would be needed to repay debt.

This ratio is very healthy.


Debt to Free Cash Flow Debt to Free Cash Flow shows how many years of free cash flow would be needed to repay debt.

This ratio blew out in 2011 and 2012, but has not been brought back under control. Like the debt ratios, I would like to see it brought a bit lower over time.

Profitability Since, as an investor, I am buying part ownership of the business, I need to ensure that the business is operating profitably. This is a more demanding ratio and the one I prefer.

Operating Profit Margin

The gross margin is holding very steady.

Net Profit Margin


Return on Assets

Brambles return on assets is improving again.

Return on Equity

My cost of capital 12.5% My hurdle rate for ROE 15% Brambles latest ROE 22% Recent trend in ROE Rising

After losing its way here from an excellent level, the turnaround is proceeding well.


Return on Invested Capital The return on invested capital is the return on debt plus equity. If the return on equity is greater, the use of debt financing is contributing to return on equity, otherwise, it is dragging it down.

Debt is boosting return on equity.

In summary, Brambles is turning around its business nicely and is nicely set up to improve even further through the ongoing expansion phase following the world financial crisis and recession.


Leading into the report in August, Brambles share price showed weakness, but by the end of the month has moved just above the high of the range over the last couple of months:

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September saw a further rise to a new high, then a retreat from it back into the range of recent months:

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October saw a fall toward the lows of the range formed since early in the year, then a recovery toward the top of the range:

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November saw a testing of the highs for the year:

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December has seen a very strong upward move that to 29 December is still in progress:

I now think that I could refine my stops marginally, ignoring the spike low, but based on the low of the last down thrust in the long almost year-long sideways pattern:


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This is how the new stops look on the chart:

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Updated to 30 January 2015 When I last updated the journal at the end of December 2014, Brambles was moving higher quite strongly. Early January 2015 saw the price move a little higher. This was followed by a moderate correction. Since then, the price has moved back up into the range of the trading around the top in late December and early January. This is how the chart looks at the end of January 2015:

So, the latest advance has so far held well above support from the 2014 trading range. Nothing that occurred in January has caused me to take any action.

As things stand at the end of January, Brambles is trending upward. There is no cause to revise my stops. I am fully invested at 6% of capital. As happens most of the time in investing, another month has passed without need to take any action, but ongoing monitoring.

It never was my thinking that made the big money for me. It always was my sitting. Jesse Livermore

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Updated to 13 March 2015 Through February 2015, up to the eve of its half-year 2015 earnings report, Brambles traded generally sideways, though it made a marginal new high just before the announcement:

Since the earnings report, Brambles has trended upward making some new weekly highs:

While it might be argued that Brambles has made a new high for the trend and I should move my stops up, I am undecided on that point. This is basically a judgement:

1. Brambles share price history has been somewhat volatile, with the occasional spike up or down. I think placing stops must recognise the character of the stock.

2. I would like the new high to be a bit more convincing.

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As always, if I do not move my stops up, but I see one of my two alternative sell signals, then I would act on those. So, I will leave my stops where they are for the present.

Now to bring my assessment of the business up to date:

Financial Risk and Liquidity

Working Capital

These ratios strengthened slightly in the last period and they remain within the range of the previous eight years. 2006 was an outlier due to a high receivables balance that year.

This ratio is not of great relevance for this business.

These ratios are within the range of recent periods.


Debt and Equity

Debt levels have risen in the last period due to acquisitions. They now look uncomfortably high for a company with a cyclical business and I would like to see some reduction in coming periods.

That said, interest cover has been maintained at a safe level for this stage in the cycle.

Debt remains quite low relative to EBITDA. Free cash flow was negative in the most recent period due to purchase of subsidiaries, which I regard as capex.

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Debt to EBITDA (times) Debt to Free Cash Flow (times)


Profitability

Trend of Sales and Earnings

Revenue has been increasing over the last three years.

Likewise, statutory profit is also increasing.

EBITDA is increasing also, but operating cash flow is a little less consistent. Free cash flow is heavily affected by acquisition of subsidiaries.


Level and Trend of Profit Margins

Margins have been maintained.

Shareholder Return

Return on equity is above my hurdle rate of 15% and has been maintained with a slight reduction, after increasing in 2014. Debt contributes to return to shareholders.

Earnings per share have been increasing strongly. Dividends have crept up, decreasing the payout ratio, making dividends more sustainable.

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EPS ¢ DPS ¢


Margin of Safety: Price versus Value

Brambles looks expensive now. However, I bought it at lower prices and I see it as a great business with a sustainable competitive advantage.

Ratios YieldsChart Model ValueMarket-based Criteria10-year Govt. BondPrice/Coupon 0.00 Coupon/Price x

All Ordinaries AveragePrice/Earnings 15.45 Earnings/Price 6.47%

Data for BramblesMarket Price $11.35

Price/Earnings 25.73 Earnings/Price 3.89%

EV/EBITDA 12.2 EBITDA/EV 8.22%

EV/ Free Cash Flow -124.6 Free Cash Flow/EV -0.80%

My Plan StockCost of Capital 12.5% Return on Equity 21.70%My Hurdle Rate 15.0% Recent ROE trend flat

All Ords Av StockDividend/Price 5.16% 2.73%Grossed up Dividend Yield

Margin of Safety - Price versus Value

Return on Equity v Cost of Capital


Updated to 1 April 2015 Since the last review in mid-March 2015, Brambles share price has been consolidating after the rises in recent months:

I am still wary of moving my stops up at this time. As I am fully invested in Brambles, there is no action to take at this time.

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14.00EXP MOV AVS 12(0) mnth 10.3373 M @ M 280495-300415 BXB - BRAMBLES LTD > -0.3% -0.04 to 11.48

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Updated to 8 May 2015 Since my last review, Brambles share price made a new high for the trend. It has then pulled back into the top of the previous sideways pattern and is consolidating:

As previously discussed, I am wary of raising my stops, especially as Brambles has a tendency to spiky moves at times. Also we are coming into a period of the year that is often volatile.

Brambles released a nine-month update and confirmed guidance on 21 April 2015:

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No action is necessary at this point.


Updated to 22 June 2015 On 20 May 2015, Brambles announced:

The purchase price implied an enterprise value to EBITDA multiple of 7.3 times, which is not unduly high and suggests this was a disciplined expansion. This seems to be a continuation of Brambles strategy of acquisition to complement its organic growth by acquisition of market leading operations. In a press report, Deutsche Bank estimated Rentapack’s gross margin as 44%, compared to 25% in the existing Brambles business.

Since my last review, Brambles share price has slipped somewhat, but not seriously, in a weak market:

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I am still happy with where my stops are as previously discussed, so no action is called for at this time.

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Updated to 30 July 2015 Since the last review, there have been no news announcements concerning Brambles.

The share price has been correcting somewhat in a downward-sloping sideways move:

So far, this has held above support represented roughly by the 2014 highs as we saw around the start of 2015. There is, of course always a risk in over-analysing a chart and with support and resistance levels, we are dealing with an ill-defined band rather than a precise level. So, I am still happy to have my stops where they are, but will make a judgement if the support level were to come under serious threat.

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14.00EXP MOV AVS 12(0) mnth 10.5082 M @ M 310895-310715 BXB - BRAMBLES LTD > Steady 10.83

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12.00EXP MOV AVS 52(0) week 10.5149 W @ W 060810-310715 BXB - BRAMBLES LTD > Steady 10.83


Updated to 1 September 2015 Since my last update, Brambles has announced its full-year 2015 earnings report. In summary:

The final dividend was increased by 0.5c.

The investor presentation included this outlook summary:

Results by segment:


RPC = Reusable Plastic Crates

IBC = Intermediate Bulk Container


I can now update my analysis:


Sales revenue has increased strongly.

As has statutory profit.

EBITDA and Operating Cash Flow are also up strongly, Free Cash Flow less so due to higher capital expenditure.


Financial Risk and Liquidity

Working Capital

These ratios remain in the range of the last nine years.

Not really relevant for Brambles – shown for completeness.

Working capital remains in the range of the last nine years.

Debt and Equity

Debt has increased due to acquisitions and to fund capital expenditure. It remains in the range of the previous five years, but may be a concern if it kept rising.


Interest cover remains strong.

Debt to EBITDA remains manageable, though it has crept up against Free Cash Flow.

Profitability


Both gross and net margins are up slightly.

Shareholder Return


Return on equity continues to increase, though less rapidly. Debt contributes to return on equity.

Earnings per share and dividends both increased again.

Free Cash Flow continues to cover the dividend.

Margin of Safety: Price versus Value

Brambles is not a cheap as it was, but is not overvalued.

Ratios YieldsChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 14.63 Earnings yield 6.84%


Price/Earnings 18.79 Earnings yield 5.32%

EV/EBITDA 9.2 EBITDA yield 10.86%


My Cost of Capital 12.5%Return on Equity 23.7%Recent ROE trend rising



Return on equity is above my cost of capital and rising.

The grossed-up dividend yield is lower than I would like, but still healthy against my cost.

Market Liquidity

Brambles is a large, liquid stock.

Risk Management

Chart Analysis

The market seems to have been disappointed in Brambles leading up to an after the results announcement. In the ongoing correction, Brambles share price has come back quite a way towards my stops and has probed deeper into the support levels on the chart:

All Ordinaries index Average 6.16%Brambles 3.24%

Grossed up Dividend Yield

Market LiquidityMarket Capitalisation $m 15,278Av Buy/sell spread % 0.2Annual Turnover % 60.8Annual Turnover $m 9,289Av trade/day last year $000 37,156Av trade/day last 20 days $000 39,412Top 20 Ownership % 84.6

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Share traders will, of course work off the daily chart and have a far shorter timeframe than I do as an investor. Traders who bought the breakout later 2014, will now have sold a few months ago. This is because traders are only exploiting changes in share price and tend to ignore dividends and the progress of the underlying business. Traders do not have the mindset of investors who see themselves as part owners of the business. Investors are buying ownership of the business, not trading the price of its shares. This is not intended to be a value statement about trading and investing. It is simply an important perspective that informs why traders and investors think quite differently.

I set my stops to manage risk. If I set them where a trader would have them, I would risk being stopped out of ownership of good businesses that are performing alright, but market sentiment has moved the price around in the short term.

In setting stops, it is important to start, as we should do with all analysis, with the longer term picture. This is important because different stocks have different personalities, shaped by the traders and investors who move in and out of them in varying timeframes. This is the longer term picture for Brambles:

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Notice how the Brambles price moves in nice trends much of the time. However, also notice the tendency for the price to spike down from time to time. This tendency is what guides my thought that my stops should not be too close for this stock.

Now let me look at the recent price action:

Notice how much of 2014 saw the formation of a wide sideways pattern. This should provide support and my stops are under the last low in that support zone. The price has come back in the recent decline into the top of the support zone and bounced weakly. Remember support and resistance are zones, not precise levels.

So, I still feel that my stops are in the right place. I have owned Brambles for two years and my total return over that period is currently sitting at 17.6%. Of course, I would like the price to have stayed higher and kept rising. However, it is the nature of investing that the price will change all the time, but the business may continue to prosper. It is easy to jump at the shadows of traders in the share price and end up selling out of a great business. Brambles is a very good business.

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Updated to 10 December 2015 Since the last report Brambles has posted their slides from presentations at the 2015 Investment Market Briefing in Pasadena, California, USA, on 15 and 16 September. Some interesting slides were:


Net Promoter or Net Promoter Score (NPS) is a management tool that can be used to gauge the loyalty of a firm's customer relationships. It serves as an alternative to traditional customer satisfaction research and claims to be correlated with revenue growth.

Net Promoter Score is a customer loyalty metric developed by (and a registered trademark of) Fred Reichheld, Bain & Company, and Satmetrix. It was introduced by Reichheld in his 2003 Harvard Business Review article "One Number You Need to Grow". NPS can be as low as −100 (everybody is a detractor) or as high as +100 (everybody is a promoter). An NPS that is positive (i.e., higher than zero) is felt to be good, and an NPS of +50 is excellent.

Net Promoter Score (NPS) measures the loyalty that exists between a provider and a consumer. The provider can be a company, employer or any other entity. The provider is the entity that is asking the questions on the NPS survey. The consumer is the customer, employee, or respondent to an NPS survey.


I have concentrated here on the pallets business, but there is much, much more on the rest of the Brambles businesses.

Brambles has also announced their first quarter results:


I attended the Annual General Meeting in Sydney. Some interesting slides:


Out of my attendance at the Annual General Meeting, I gained better insights into the source of Brambles’ competitive advantage:

1. The density of their distributions system in their major markets is very difficult to counter 2. They are increasingly using technology not just to improve their efficiency, but assist

customers in increasing theirs 3. The width of their distributions system across major markets is of great value to larger multi-

national customers 4. Their range of packaging – pallets/Reusable Plastic Containers and specialised containers is a

major strength and growing 5. The complexity of the service provided deepens their competitive advantage. It is difficult to

reproduce and compete with

Brambles has now moved to 100% of Kegstar:


Since the last update the share price has based out well above my stops and begun rising again:

No action is required at this point on my investment plan.

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Updated to 3 February 2016 There have been no significant news announcements since my last update.

The share price has recovered strongly and is forming a large sideways pattern in the range of the 2000 and 2007-08 highs which is a strong resistance zone:

I am happy to leave my stops where they are, so no action is required at this point on my investment plan.

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Updated to 1 April 2016 Since the last update Brambles have announced their interim report. Some slides from the investor information pack:

RPCs = Reusable Plastic Containers.


My analysis of the results (note 2016 flow data are annualised):


Revenue growth has slowed slightly.

Likewise, statutory profit.


And EBITDA.

Operating cash flow growth has been more variable, but grew more strongly than EBITDA in the latest period.

Free cash flow has been constrained by investment for growth and acquisitions.


Financial Risk

Working Capital

Both ratios are significantly lower, but I cannot see any signs of stress in the other working capital ratios. Brambles has a relatively short activity cycle.

Shown for completeness only – Brambles has very little inventory.

No problem here.


Or here.

The trend to a shorter cash conversion cycle continues.

Likewise days working capital.


Debt and Equity

Debt has been reduced slightly. The high ratio is acceptable in this business, which is only mildly cyclical.

This measure shows debt is sustainable.

Although less so on the free cash flow measure.


The all-important net interest cover remains strong.

Profitability


Margins have been maintained.

Shareholder Return

Management of assets remains strong.


Return on equity is steady well above my cost of capital. Use of debt contributes.

Earnings per share have advanced again, though dividends less slowly.

The payout ratio has declined as Brambles invests in growth.

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Free cash flow just covers the dividends.

Summary: Price versus Value and Returns

Brambles is no longer cheap, but not overly expensive for a business with strong competitive advantage.

Strong return on equity, holding up.

RatiosChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 14.93


Price/Earnings 22.15

EV/EBITDA 10.5


My Cost of Capital 12.5%Return on Equity 22.9%Recent ROE trend steady



Dividend yield is low due to low payout ratio and no franking. I am happy to see Brambles reinvest profits at the present return equity.

Conversion of sales growth has been strong over the last five years.

Market Liquidity

Brambles is a large liquid stock.


My Average Cost $ 8.79Dividend per share $ 0.285Effective yield 4.63%


Growth % 10 Years 5 Years

Operating Revenue 33.3% 59.4%Earnings per Share 19.9% 96.8%Return on Equity -45.2% 37.6%Dividends per Share 81.2% 18.2%Free Cash Flow -29.8% 129.3%



Timing and Risk Management

Chart Analysis

Brambles share price has surged to a new high following the interim result:

I have decided to move my stops up slightly under the mid 2015 trough low:



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Updated to 28 July 2016 On 21 April 2016 Brambles released a third-quarter trading update:

On 3 May 2016, Brambles announced a divestment of a business:


On 5 May 2016 Brambles made a presentation at a Macquarie conference. Some slides from the presentation:


Since the last review, Brambles share price has been very strong:

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I have decided to move my stops up under the early 2016 trough low:



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It could be argued that I might have raised them under the end June 2016 trough low. I am reluctant to move my stops up too aggressively in the current market. I can always reassess that decision if the end June trough were to be taken out at which time I can make a decision in the context of how that occurred.

Brambles is due to report their full year earnings on 18 August 2016.

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Updated to 19 August 2016 On 5 August 2016 Brambles announced the formation of a joint venture business:


On 18 August 2016 Brambles announced its full-year earnings report.

Some slides from the investor presentation:


My analysis of the full-year report:


Operating revenue up, but by less than the big gain the previous year


Statutory profit growth has also slowed

Reflecting a slowing in EBITDA growth

Operating cash flow down, but second highest in the last decade


Free cash flow impacted by increased Capex

Financial Risk

Working Capital

Working capital liquidity ratios are within the range for the previous nine years

Inventory days increased, but this is a minor item for Brambles


Receivables are up slightly, but within the range of the previous eight years

Likewise, payables

Debt and Equity

Debt has been reduced slightly and is within the range of the previous six years


The leverage ratio is within the range of the previous nine years and looks conservative

Interest cover remains strong

Profitability


Margins came under slight pressure


Shareholder Return

As did return on assets

And return on equity. Use of debt contributes to return on equity.

Per share return growth more than held the previous year’s large gain


The payout ratio remained steady

Free cash flow did not quite cover the dividend and is partly an explanation for the low payout ratio

Summary: Price versus Value and Returns

Brambles now looks fairly fully priced.

RatiosChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 17.10


Price/Earnings 24.32

EV/EBITDA 11.5



Return on equity remains strong and well above my cost of capital.

Brambles yield is low, partly due to low franking credits, but my yield on cost is attractive.

Market Liquidity

Brambles remains a very liquid stock

Timing and Capital Preservation

Chart Analysis

Brambles share price was strong coming into the report, but has weakened somewhat since, possibly a reaction to the CEO transition:

My Cost of Capital 12.5%Return on Equity 21.1%Recent ROE trend flat



My Average Cost $ 8.79Dividend per share $ 0.29Effective yield 4.71%




My view on the positioning of my stops is unchanged from the last review.

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Updated to 30 November 2016 On 20 October 2016 Brambles announced a first-quarter trading update:

On 24 October 2016Brambles announced completion of the Oil & Gas Containers Joint Venture:

On 2 November 2016 Brambles announced divestment of CHEP Aerospace Solutions:


The divestment was completed on 30 November 2016.

Some slides from the annual general meeting:


Since the last update, Brambles share price has encountered resistance in the vicinity of the 2007 top and come off somewhat in a weak market:


I do not see a case on my investment plan to alter the position of my stops at this time. The 2015 price action can be expected to provide support.

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Completed 20 February 2017 On 23January 2017 Brambles issued a half year trading update and revised guidance:

The share price fell in response, but held above my stops:

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I decided to monitor the situation and act if my stops were hit.

Brambles reported on 20 February 2017 and opened below my stops. I sold my holding shortly after the open at $9.637. The day closed at $9.47:

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Outcome of the investment Capital growth $12,776

Dividends $13,487

Franking Credits $ 1,639

Total Return $27,902

Percentage Return 20.7%

I bought Brambles between August 2013 and January 2014, so the investment was for just over three years.

Evaluation against investment plan Model identification

Correctly identified as value model

Capital invested

6% in three tranches

Diversification

I did not hold any stock that was in the same industry

Max % capital risked

1% in total on three tranches

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Liquidity

Brambles is a large and very liquid stock

Buy signal

Bought during an uptrend after a wide accumulation pattern

Margin of safety

Generally OK although PE ratio was higher than I would have liked

Position building

Bought in three tranches of 2%

Sell-stop and sell signal

Sold immediately my stops were violated

Profit-taking

NA

Re-entry

NA

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