Top ASX share Brambles Ltd (ASX: BXB) has excelled in 2024 and is up 42% this year to date, outpacing the broad index by a country mile.
One prominent fund manager believes this ASX 50 stalwart has an economic moat others can only dream of.
Bronte Capital founder and CIO John Hempton says his fund is long Brambles and likes the business's economics and valuation.
Not one to mince words, Hempton said Brambles was an "okay rather than special" company with solid financials and a history worth scrutinising.
But is its dominant position in the global pallet market enough to make it a compelling investment? Let's see.
What makes this top ASX share stand out?
At the heart of this top ASX share is CHEP, the world's largest reusable pallet business. You've likely seen those iconic blue pallets stacked at the back of major retailers like Costco and Woolworths. Hempton explains that CHEP benefits from a powerful network effect — being the largest player in a capital-intensive business gives it an edge over smaller competitors.
CHEP operates more than 330 million pallets globally, offering scale that's impossible for new entrants to replicate. With a return on equity (ROE) hovering around 20%, Brambles appears to be a good business on the surface.
But Hempton points out that its history of poor capital allocation has left some scars, making it an investment story worth unpacking.
We are left with a business with a history of mild mismanagement and not much trust in the Australian market.
The stock was hugely rated in the early 2000s. It is now traded at a sub-market price to earnings ratio. It is however back to the core and only consistently good business – blue pallets in massive pools.
Hempton dives deep into the top ASX share's history, shedding light on its past as a diversified industrial conglomerate. At one point, Brambles operated everything from forklift rentals to waste management. Over the years, management leaned into its CHEP business, shedding poorly performing segments.
However, Hempton notes that the company's attempts to expand into non-core areas like plastic pallets and reusable containers have been less successful. These ventures often failed to generate returns above the cost of capital, draining resources from its core CHEP operations.
Brambles is now a leaner operation, having sold off underperforming segments such as IFCO, its plastic container business, in 2018. This return to basics might explain the top ASX share's improved financial metrics and investor confidence.
Hempton believes that Brambles' current management is on the right track. The focus on CHEP and its unmatched global network should provide a stable foundation for growth. Additionally, advancements in pallet tracking technology — such as GPS-enabled pallets — are helping the top ASX share reduce losses and improve customer accountability.
If things go well, it could work very well. The company has excellent financials but a distinctly patchy history. The patchy history means that (relative to other companies with similarly excellent financials) it trades a discount.
The question with this one is whether the patchy history is prologue. We do not think it is and indeed we finish with a suggestion that should ensure the future is different from the past.
We own this stock because we believe the current business model (and the current numbers and the seeming prospects) is different from the past, and the company no longer deserves the discount it trades at.
What are analysts saying?
It's not just Bronte Capital that sees potential in the top ASX share. Ord Minnett has a buy rating on the stock with a price target of $20.80. Analysts point to Brambles' Serialisation Plus program, which aims to improve efficiency and margins by tracking pallets more accurately.
IML's Josh Freiman also praises the company for its recent operational improvements, including reduced capital expenditure and improved free cash flow. Freiman forecasts earnings to compound at 10% per share over the next three years.
Bottom line
Bronte Capital is constructive on Brambles and likes where the business is headed. Based on recent updates, analysts tend to agree.
The market has rewarded Brambles with higher stock values in the last 12 months. Over that time, shares are up more than 45%.
