Looks Like A Dent In The Brambles Bottom Line

Sydney Morning Herald

Wednesday April 23, 2008

Edited by Matt O'Sullivan

The company has made reassuring noises, but the brokers are not buying it.

BRAMBLES' assurances to the market that Wal-Mart's review of its distribution centres will not affect its earnings have failed to settle investors' nerves.

About $1.5 billion was wiped from Brambles' market value on Friday after it announced that the largest user of its CHEP pallets, the US retail giant Wal-Mart, was "modifying its management of pallet flows".

The Brambles boss Mike Ihlein stressed on Friday during a hastily arranged briefing that Wal-Mart's review would not have an impact on the company.

But at least two big brokers have since calculated that Brambles's bottom line will be hit.

UBS reckons Wal-Mart could charge Brambles a fee of US40c a pallet to recover the storage platforms from the retailer's distribution centres, which would add an additional cost of $US30 million ($32 million) to Brambles's CHEP operations.

At any one time, up to 8 million CHEP pallets can be dotted around 60 Wal-Mart distribution centres in North America.

UBS also points out that this could have a further drag on CHEP's hopes of using "total pallet management" to lower transport and plant costs.

Worryingly, the broker said other big US retailers such as Sam's Club and Costco could follow Wal-Mart's lead.

JPMorgan has put Wal-Mart's charge at US43c a pallet for sorting and managing them. It estimates this charge would reduce the pre-tax earnings of Brambles's CHEP Americas division by $US25 million.

Shares in Brambles fell 30c to $8.90 yesterday, 40 per cent lower than six months ago.

However, at least Ihlein can find some positives in the share price slump: it lowers the cost of Brambles's on-market share buyback, which has been under way since November.

Comfort from Merrill

Macarthur Coal shares surged for the second consecutive day to close 90c higher at $16.10 yesterday, amid speculation that the founder Ken Talbot is holding out for at least $16 a share for his 24 per cent stake in the Queensland miner.

Talbot has been reluctant to hire investment bankers to help him with an auction process, sticking instead to legal advice.

But if he is in the market for more help, it appears Merrill Lynch may not be a bad choice.

A Merrill Lynch analyst, Mike Harrowell, said Macarthur could sell for $20 a share, based on the company's growth prospects and recent acquisition prices in the Australian coal sector.

"If Talbot is a seller, we would expect the full value of all projects and potential projects to be extracted," Harrowell said, echoing the message from Talbot's representative, Denis Wood, on Monday.

The potential steep price tag may not be welcome news to prospective buyers such as Xstrata Coal, but then again Xstrata has paid what looked like top dollar for the nickel miner Jubilee Mines and coalminer Resource Pacific in recent months. Those deals could look like bargains within a few years if commodity prices continue to outpace analysts' expectations.

Elsewhere in steel materials, Chinese iron ore trader Haoning Group told Reuters it was in talks to buy a 10 per cent stake in Brockman Resources, the Pilbara iron ore hopeful that last week released a successful study for its Marillana project.

Brockman said it was in talks about an equity placement and an offtake deal with two Chinese groups, one of which was Haoning, and expected to complete a deal "in the coming weeks".

Goodness pays

The boffins at Goldman Sachs JBWere have been able to point out that good governance is not just a nice thing for investors: it pays off, even in a downturn.

In an update of a seven-year research project into whether there is a link between good governance and share price performance, the quantitative team found a basket of stocks highly rated on governance issues performed well within a sample of 156 companies.

Overall governance was seen as improving share price performance by 5.9 per cent above the average performance in the nine months to March 31.

But rating well on specific forms of governance proved to be even more powerful: returns on specific good governance aspects were accounting (up 12.5 per cent), remuneration (up 8.2 per cent), overall board (up 4.1 per cent), audit (up 1.7 per cent) and board skills (down 3.7 per cent).

The basket is based on ratings drawn from the corporate governance adviser CGI. The names of the top-performing companies are not made public by Goldman Sachs JBWere.

"I think ... it reflects overall good management," said the project's leader, Andrew Gray. "It's been a very low volatility bull market period, so it's fascinating to see how it has performed over the last six months. It has performed very strongly."

Since the research began in 2001 the performance above the benchmark has been: remuneration (up 46.7 per cent), audit (up 37.1 per cent), board skills (up 19.2 per cent), overall board (up 20.6 per cent).

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