Should investors buy Brambles or Recall?

Global pallet and pooling logistics company Brambles (ASX: BXB) is today trading minus the Recall documents storage business, having implemented a demerger that has resulted in Recall Holdings (ASX: REC) listing as a separate company.

The stated reason for the demerger was to enable Brambles to concentrate on opportunities within its Pooling Solutions businesses of CHEP and IFCO, while allowing Recall to have a dedicated information management focus.

Recall offers three primary services: Document Management Solutions, Secure Destruction Services and Data Protection Services. According to management, Recall has strong market positions across 23 countries; stable and recurring revenue streams, strong operating cash flows to support dividends and investment, growth prospects in developed and emerging countries, and a sound balance sheet with net debt of US$500 million.

While the growth opportunities of the Recall business are generally expected to be lower than those for Brambles, at the right price there are a number of appealing investment attributes to Recall.

Brambles isn’t the only company to be utilising a demerger process at present, with global packaging giant Amcor (ASX: AMC) yesterday receiving shareholder approval to demerge its Australasia and packaging distribution business into a separately listed entity to trade as Orora (ASX: ORA). The listing of Orora is scheduled for 18 December.

Foolish takeaway

While every investment opportunity needs to be evaluated on its own merits, there is some evidence that suggests shareholder value is created by the splitting of companies along operational lines to allow management to focus more intently on one particular business line.

There is also some evidence that a buying opportunity emerges soon after an ‘unloved’ demerged business begins to trade as a separate entity due to the uncertainty and volatility which can accompany a demerger.

Given Recall’s management is confident of delivering growth in revenues and underlying profits in 2014, investors should consider adding Recall to their watch list as a near-term buying opportunity could present itself.

Meanwhile, Brambles remains a very high quality business with solid long-term prospects and now a more focused management team that doesn’t have the distraction of the Recall business.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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