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Spotlight on Brambles’ Recall division

When most investors think of Brambles (ASX: BXB), they think of blue CHEP pallets, which is fair enough, as not only is the humble pallet Brambles’ single largest earner, but it is also a global success story. There are however two divisions: Pooling Solutions and Recall, and as reported earlier in the week here, the company has announced plans to demerge the Recall business.

Pooling Solutions division

CHEP is part of the larger Pooling Solutions division. Pooling Solutions offers the provision of reusable pallets, crates and containers and associated logistics services through the CHEP and IFCO brands. On an underlying profit basis, in FY 2012 Pooling contributed around 86% of profits to the group (before Brambles HQ costs).

Recall division

The announced demerger is not the first time management has tried to separate Recall from Brambles. In August 2011, Brambles announced its intention to divest Recall. Eventually in June 2012, after “an extensive process” the company decided to retain Recall. Iron Mountain (NYSE: IRM), a US-based competitor, was touted as a logical owner, with private equity firms also believed to have looked at acquiring Recall. However, in the end no transaction proceeded.

Recall is a leading provider in document management and records management and is obviously the smaller division in terms of contribution to group profits. Globally in FY12 the business generated sales of US$845 million. Over the five years up to and including FY13, Recall is expected to have produced a compound average growth rate (CAGR) in revenue of 2%, while CAGR in profits over the same period are forecast to have increased by 3%.

These growth rates are not likely to get investors overly excited particularly with management forecasting that FY13 revenues will fall 3% on the prior year in what is seen by management as “short-term issues impacting the 2013 financial year.” Pleasingly expectations are that Recall is “well-placed to generate growth in sales revenue and underlying profit in FY14.”

Foolish takeaway

It’s not unusual for one company to be considered “better” than the other in a demerger. The recent split of News Corp into Twenty-First Century Fox (ASX: FOX) and New Newscorp (ASX: NNC) has led many analysts to question the investment merits of New Newscorp. It’s exactly this market apathy or negativity which can lead to opportunities for investors to purchase an unloved spin-off at an undervalued price.

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Motley Fool contributor Tim McArthur owns shares in Twenty-First Century Fox and New Newscorp.

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