When 21% profit growth isn't enough

Headline profits can mask a company's true performance

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 16, 2012 11:46 am AEST

A massive improvement in the US pallets business and a 145% jump in revenues for reusable plastic crates (RPC) has seen Brambles Limited (ASX: BXB) report an 21% jump in profit over the previous year to US$576.3m. Earnings per share rose by a lower 18%, after the company increased the number of shares on issue through a $448m share offer.

The company declared a 13 cents per share dividend, taking total dividends for the year to 26 cents, exactly the same as the previous year.

Brambles' pallets business had been losing customers to its rival iGPS, but improvements to the business and the quality of the company's customer service had seen it win back clients, according to the company. With many of its customers operating in the consumer staples sector – companies like Woolworths Limited (ASX: WOW) and Coles, owned by Wesfarmers Limited (ASX: WES) – Brambles' business has been fairly resilient, despite weak economic conditions in its major markets of the US and Europe.

The company's expansion into the RPC market looks like a good move, which complements its core pallet business, and the 145% jump in RPC revenues shows the company can grow sales with its existing customers, as well as win new customers.

Although the company views its balance sheet as strong, net debt to equity is still very high at 98%, and despite bringing in more than US$1 billion in operating cash flow, the company spent US$949 million on capital expenditure. No wonder then that the company had to raise equity to support a payout of US$398 million in dividends during the year.

The company has forecast profit growth of between 4 and 10% for the 2013 financial year, with underlying profit expected between US$1,010 million to US$1,070 million, despite weakness in major economies.

The Foolish bottom line

As a capital intensive business, Brambles has to continually raise new capital to fund its operations and pay dividends, much like BlueScope Steel Limited (ASX: BSL) and Sims Metal Management (ASX: SGM). Despite the 21% jump in profit, its capital intensity means that for Foolish investors, there are better opportunities out there.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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