MARKETS SPECTATOR: A shaky Recall

Brambles shareholders could be forgiven for suppressing a shudder after today’s announcement that the company was splitting off its document storage company, Recall Holdings, through a share allocation to existing stockholders.

Exactly how many shares Brambles investors will get or what those shares may be worth has not yet been decided by Brambles or their investment banking advisers UBS and Bank of America Merrill Lynch. That will be determined by October, says Brambles chief executive Tom Gorman. Recall shares may be trading on the ASX by the end of this year.

Gorman had tried through the same investment banks to sell Recall last year. He failed.

Recall’s underlying profit (profit from continuing operations before finance costs, tax and significant items) in the 12 months to June 30 this year will fall to between US$138 million and US$142 million compared with US$168 million in the 12 months to June 30, 2012. Gorman blames falling paper prices, a slowdown in storage activity and higher costs. Recall’s net debt is US$450 million. It’s a “good business,” insists Gorman.

But compound annual sales growth over the last five years for Recall has been just 2 per cent. Compound underlying profit growth over the same period has been only 3 per cent. In 2012 just 4 per cent of Recall’s revenue came from one of the world’s fastest growing economic region, Asia. The company has 25 offices in Asia. In Australia and New Zealand it has double that number.

Gorman says Boston Consulting Group has identified US$11.4 billion worth of business opportunities for Recall. Regulatory and compliance guidelines may mean more companies want to store documents but do they really want to physically store such items when they can do it more easily electronically? Document storage revenue accounted for 72 per cent of Recall’s 2012 sales.

Despite Gorman’s protestations to the contrary, Brambles obviously sees Recall as a drag on earnings. Otherwise why would Gorman want to sell it twice in the last 12 months?

This makes Recall a challenging investment prospect for Brambles shareholders. Recall’s capacity to pay a fully franked dividend may be non-existent to Australian shareholders because most of its revenue is generated offshore, suggested one analyst on a conference call with Gorman today. Doug Pertz, Recall’s chief executive, has a tough job ahead of him convincing investors to keep their faith in his stock.

At 1029 AEST Brambles shares rose 27 cents, or 3 per cent, to $9.35. The stock has gained 52 per cent in the last 12 months compared with the S&P/ASX200 Index which has added 16 per cent.