Australian shares of Brambles jump after dropping investment in plastic pallets | Investment News

(Reuters) – Shares of Brambles Ltd rose to their highest level in nearly seven weeks on Friday as investors cheered the Australian company’s decision to abandon investment in a plastic pallet project which it said it would have produced lower than desirable yields.

The supply chain logistics company on Thursday evening canceled its investment in plastic pallets for customers who supply U.S. big-box retailer Costco Wholesale Corp after failing to agree on prices and trade terms.

Brambles said last year that it would only invest in Costco’s switch to plastic pallets if the return on investment (ROCI) was above 15%.

On Thursday, Brambles said Costco and its suppliers were unwilling to agree on terms that would help it achieve that goal, even though the cost of plastic pallets has jumped 50% since September.

Brambles shares jumped 7.4% on Friday and were on their best day since mid-May as the company’s strict adherence to cost control swayed sentiment more than the loss of the project.

“We view this move as positive. Investing in the plastic pallet pool for Costco would have required a significant increase in capital expenditure while bringing in additional execution risk,” Morgan Stanley analysts wrote in a statement. note. “We believe the decision not to proceed with plastics is the best case scenario.

UBS analysts said while Costco’s further potential volume losses may be viewed negatively, that does not change their expectation of a substantial free cash flow recovery in fiscal years 2023 and 2024.

“The Brambles have remained steadfast in their capital discipline…Private equity is more likely to remain interested given the decline in committed investment,” they wrote.

Shares of Brambles, which was recently the subject of a takeover by European private equity firm CVC Capital Partners, rose 3.8% to 11.12 Australian dollars, at 0232 GMT, while the broader market rose 0.5%.

(Reporting by Shashwat Awasthi; Editing by Subhranshu Sahu)

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