Brambles less than total Recall commitment

What do you do when you can’t flog a division from your business? You demerge it.

Having failed to secure the mooted $2 billion asking price last year, Brambles now has no option but hive off its Recall document management and destruction business, particularly given the technological challenges the document storage industry faces.

It may once have been a natural fit to a business that, as a conglomerate, derived a fair portion of its income from security services.  That’s no longer the case.  

Brambles abandoned the Recall sale more than a year ago, after an extended sales process, at the time citing Europe’s debt crisis as a major contributing factor for the shortage of buyers. It is more likely they baulked at the price and its uncertain future.

Just months earlier, during the height of the crisis, the company and its advisors issued the obligatory off the record hints to the media that the company was being swamped with offers.

Chairman Graeme Kraehe has consistently argued Recall was a strong business  with solid growth potential. That point was rammed home this morning in a note the stock exchange outlining the intention to separately list the division.

“Stable, recurring revenue streams” and “strong operating cash flows to support dividends and investment” were featured throughout the document.

Unfortunately, it is earnings stability that seems to be missing this year. Recall’s underlying profit was downgraded to between $US138 and $US142 million this year on “reduced sales revenue and higher business development costs”.

Given there is no change to Brambles guidance, it is clear that the Recall division is becoming a drag on earnings.

Like many industries Recall is facing challenges from new digital technologies, particularly the emergence of cloud computing. While some professions, such as legal and accounting, still require hard copies, document storage is moving into the ether.

Old technology it may be, but Brambles pallet business by contrast is going from strength to strength.

The recent collapse of an American competitor iGPS has cemented its dominance in the market.

Last week, investment bank UBS argued the pallet division would lift earnings by 10% on a constant currency basis. Once foreign exchange movements  were taken into account, given the fall in the Australian dollar, should lift the Australian dollar earnings per share line by around 11%.

Eureka Report identified Brambles as a stock price laggard with good earnings growth prospects back in February.