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brambles shareholders may have to wait a year to r

  1. Brambles Shareholders May Have to Wait a Year to Recoup 50 Percent Loss
    By Margreet Dietz


    Sydney, Jan. 2 (Bloomberg) -- Brambles Industries Ltd. shareholders, who lost more than half their investment in the world's biggest freight pallet supplier in 2002, may have to wait another year for a turnaround, investors said.

    The slide occurred as Brambles cut its profit forecast three times in 12 months. In November, the company said it will spend $71 million to locate 16 million missing pallets -- portable platforms used to transport goods -- or 8 percent of its total.

    ``What a disaster,'' said Alexander Muromcew, who helps manage $150 million in stocks at Loomis Sayles & Co. in San Francisco. ``I was joking with somebody that I need to look in my garage and see if a couple of those 16 million missing pallets are in there somewhere.'' Muromcew doesn't own Brambles stock.

    Cost cuts in Europe, where the Sydney-based company earns half its profit, will be key to boosting earnings. Its CHEP Europe pallet business was the biggest source of profit.

    In addition to retrieving more of its signature blue pallets, Brambles will pay $63 million to put its CHEP Europe business under single management and close outlets in a bid to reduce costs by $119 million within three years.

    ``You wouldn't say the level of confidence is overly high, just because of the track record over the last couple of years,'' said Shawn Burns, who helps manage $7.4 billion at Deutsche Asset Management Australia Ltd., including Brambles shares.

    Shareholders vented their frustration at the company's annual meeting in November, saying Chief Executive Chung Kong Chow should have foreseen the cost overruns.

    ``The main issue is to fix the CHEP operation in Europe,'' Burns said. ``If they don't, then there is a risk'' the share price will decline further.

    GKN Purchase

    Chow, 52, took over the company in August 2001 after it agreed to pay GKN Plc $4.3 billion for stakes in their CHEP and Cleanaway waste management ventures. Chow, who headed London-based GKN for almost five years, wasn't available to comment.

    ``Senior management who have been around for the last x-many years should have been fully on top of what was happening in Europe,'' said Bruce Low, an analyst at ABN Amro Australia Ltd. ``They have been damaged a lot by promising and not delivering.''

    Brambles was the worst-performing stock among Australia's fifty largest companies in the past six months, tumbling 50 percent. In the U.K., it was dropped from the FTSE 100 Index on Dec. 23 because of the decline in its market value.

    CHEP became a Brambles unit after the company in 1958 bought Commonwealth Handling Equipment Pool, consisting of pallets, forklifts and cranes left behind by U.S. forces during World War II, from the Australian government.

    Bricks, Bananas

    Companies lease pallets and crates to transport everything from bricks to bananas. Brambles lost track of pallets because some customers weren't part of its distribution system.

    Profit at CHEP Europe shrank as costs rose because each of the 20 countries where it operates ran its business separately and the company was buying more new pallets than it managed to collect and repair.

    CHEP charges customers a fee for hiring a wooden or plastic pallet and adds a daily rental charge. CHEP collects a transfer fee when a manufacturer uses the platform to transport goods to a retailer.

    ``The bottom line was that CHEP was buying more and more pallets, rather than collecting and reissuing them,'' Victor Mendes, chief executive of CHEP Americas, told shareholders in November. ``We were using more capital than we needed to.''

    CHEP accounted for two thirds of Brambles' capital expenditure in the year ended June 2002, or A$1.1 billion ($623 million). The changes at CHEP Europe will lower that amount by at least A$280 million over 2 1/2 years, Brambles said in November.

    Profit Delay

    Still, the revamp won't boost earnings until the year ending June 2004, when it will add an estimated A$42 million to profit, Brambles said.

    ``A lot of investors still won't buy the stock until there is solid evidence of a sustained recovery and that is probably not likely to come for a while,'' Low said.

    Before the GKN purchase, CHEP helped boost Brambles annual earnings an average 16 percent since 1995 by increasing its pallet pool, sending the stock to a record of A$12.93 on Aug. 7, 2000. The stock rose 3 cents, or 0.6 percent, to A$4.73 at 11:45 a.m. in Sydney.

    CHEP Europe's cost overruns probably wiped out any income growth this year, analysts estimate.

    Brambles will have net income of A$497 million in the year ending June 2003, according to the mean estimate of twelve analysts surveyed by Thomson First Call. That would be A$1 million, or 0.2 percent, more than it earned a year earlier.

    Investors can take heart from Brambles' record before the profit revisions. Shareholders reaped a 304 percent return on their investment in the five years ended Dec. 29, 2000, outpacing a 73 percent gain for Australia's benchmark stock index during that period.

    ``If the historic situation is a guide, then you tend to have some sort of confidence that the business model should work,'' said Albert Hung, who oversees A$800 million at Tower Asset Management Ltd. in Sydney. ``It may be a while before they could give you some positive news though.''



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