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Continuing my recent focus on dollar-exposed industrials, find below a quick take from Macquarie Equities on the Brambles demerger announced today.
Impact
- Deal mechanics and timing. Recall will retain its global HQ in Atlanta but have a corporate office in Sydney. Doug Pertz, the recently appointed CEO, will run the business, with Ian Blackburne (chairman of Aristocrat) being appointed Chair. BXB intends to demerge Recall with ~$450m of debt, which equates to ~16% of total BXB net debt (MRE FY13 end forecast). This will leave Recall with relatively high gearing, at 2.2x ND:EBITDA (FY14) on our numbers, while obviously lowering BXB’s leverage to ~1.4x for FY14. This should allow BXB to debt-fund further growth, with ~US$500m of further debt capacity before reaching management’s leverage target of 1.75x ND:EBITDA. Recall’s gearing compares favourably to Iron Mountain (IRM’s) at >3.6x, although IRM has a much greater percentage of properties held on balance sheet. A scheme booklet will be released in October with the transaction being executed in December.
- Recall earnings weaker than expected in FY13. Specific Recall underlying earnings guidance of $140-144m in FY13 is a fair bit weaker than our ~$165m (constant currency) expectation,
implying a flat to slightly down 2H, with the 2H traditionally being being 35-50% higher than first half due to seasonality in the business. Management highlighted that it has brought forward some costs in order to provide for growth going forward, however in our view this decline may also be partly due to the pullback in development costs seen in 2H12 during the sales process. Transaction volumes in Europe in particular have had a tough 2H, whilst recycled paper prices have stabilised year on year. With overall guidance unchanged, this suggests a stronger-than-expected result in the core pooling business. - Where should Recall trade? There is obviously another ~6 months prior to Recall trading on its own, however given we believe Recall should trade on FY14E EV/EBIT multiples slightly lower than both BXB and Iron Mountain (IRM US, US$26.91, Outperform, TP: US$40.50, Kevin McVeigh) of 13.4x and 13.6x respectively, we believe the market cap of Recall could be ~A$1.1-1. 25bn (based on spot currency), using a 10-15% discount. Using a notional FY13 EBITDA of $200m and taking into account capex of $75m, tax and interest of ~$50m leaves free cash flow of ~$75m, providing an unfranked dividend yield of up to 6.5% depending on the payout ratio.
Action and recommendation
- Unchanged at Outperform. There are few surprises in this announcement, and will allow management to focus its energies on the higher-growth pooling businesses.
June 2012A
2013E
2014E
2015E
Sales revenue m 5,625.0
5,900.0
6,118.9
6,460.3
EBITDA m 1,561.9
1,647.3
1,780.6
1,922.6
EBIT m 1,009.7
1,066.4
1,168.4
1,290.7
EBIT growth % 17.8
5.6
9.6
10.5
Recurring profit m 857.7
952.0
1,055.4
1,165.0
Adjusted profit m 645.4
685.3
754.6
824.1
EPS adj ¢ 43.4
44.0
48.5
52.9
EPS adj growth % 21.7
1.4
10.1
9.2
PE adj x 19.1
18.9
17.1
15.7
Total DPS ¢ 26.7
27.7
28.2
30.8
Total div yield % 3.2
3.3
3.4
3.7
Franking % 25
30
30
30
EV/EBITDA x 9.9
9.5
8.8
8.1
GCFPS ¢ 80.6
81.4
87.8
93.5
PGCFPS x 10.3
10.2
9.5
8.9
Net debt/equity % 98.2
87.2
75.3
64.2
Price/book x 4.7
4.1
3.7
3.3
*All values are in USD unless otherwise stated. Source: Company data, Macquarie Research, Jul 2013.
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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