Brambles shares dive on big spending plans

Brambles shares fell 12 per cent after the pallets company unveiled a massive spending plan to modernise its business and pivot to the digital world.

Brambles will spend hundreds of millions of dollars to modernise its pallets business and pivot to the digital world.

Shares in logistics company Brambles, best known for its hundreds of millions of wooden pallets that pack and send products around the world, had their worst day in 18 months when its earnings outlook disappointed investors who smacked down the stock by 12 per cent.

Brambles fell as much as 12 per cent on Tuesday following the first day of a two-day strategy briefing to a new three month low of $10.79, before closing down $1.02, or 8.3 per cent, at $11.24. It was the lowest close for the stock since July and its worst one-day fall since March 2020.

Investors looked to have been spooked by the elevated operational expenditure and capital expenditure coming down the pipeline as Brambles pivoted to a digital future which would modernise its old-fashioned pallets business.

At the strategy day Brambles chief executive Graham Chipchase announced a number of transformation and strategic initiatives across digital, supply chain and short-term investments.

Planned capital expenditure for these investments is slated for $US295m in fiscal 2022-2023, with an additional investment of $US330m in 2024-25. Transformation expenditure is expected to total $US90m in each of fiscal 2022 and 2023.

This would hopefully grow earnings in the future, Brambles promised, but at the cost of short term profitability.

Brambles is now guiding to 5-7 per cent constant currency revenue growth and 1-2 per cent underlying profit growth, which is an almost 50 per cent retreat from analyst expectations for the profitability of the group, according to analysts.

Shares sank on the update and spending plans.

Citi analyst Samuel Seow said ultimately investors knew the correct way to allocate capital is for the long term.

“With management flagging a fiscal 2022 investment year, there’s always the potential to shake out short term capital with near term downgrades. However, the shape of the accelerating investment spend suggests a fairly large opportunity should the company deliver.

“Looking forward Brambles could be a structurally better business, through better asset efficiency and better pricing outcomes, so early signs of returns materialising in Brambles digital will be key.”