The supply chain logistics firm canceled its investment in plastic pallets late Thursday for customers who supply U.S. big-box retailer Costco Wholesale Corp, after failing to agree on prices and commercial conditions.
Brambles said last year that it would only invest in Costco’s switch to plastic pallets if the return on invested capital (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.
Shares of Brambles soared 7.4% on Friday and were poised for their best day since mid-May as the company’s strict adherence to cost controls swayed sentiment more than the project’s loss.
“We view the decision as a 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 note. “We believe the decision not to go ahead with plastics is the best possible scenario.”
UBS analysts said that while the overhead of Costco’s potential volume loss may be viewed negatively, that does not change their forecast for a substantial recovery in free cash flow in fiscal 2023 and 2024.
“Brambles has stuck to its capital discipline…Private capital is more likely to remain interested given the decline in capital expenditure incurred,” they wrote.
Shares of Brambles, which was recently a takeover target from European private equity firm CVC Capital Partners, were up 3.8% at 11.12 Australian dollars, 0232 GMT, as the wider market rose by 0.5%.