Brambles - the pallet maintenance issue

A follow up

I wrote up Brambles as a rare long a few years ago. You can find the link here.

This is a company with a long history of over-promising and under-delivering. It was hated by the Australian financial market for a reason.

The new CEO - Graham Chipchase - seemed a lot better. He made a big retreat from Brambles’ many capital intensive financial misadventures, and focussed on the winning CHEP pallet business.

My long call was well timed. Over the next year it was pretty close to the best performing major Australian stock. And the Australian Financial Review nicely wrote up my call.

My argument was simply that they had stopped doing stupid things. I was far less bullish on Brambles after the run and sold about half my holding. (I wish I had sold it all.) But to quote the AFR quoting me:

So what has powered this old industrial stock from $14.40 to $23.30 over the past 12 months?

In essence, it is the gradual restoration of trust after decades of mismanagement and misallocation.

“The best thing about banging your head against the wall is it feels so good when you stop,” says Bronte Capital’s John Hempton. “And Brambles stopped.”

The outspoken hedge fund manager seldom comments on Australian companies. But in October 2024, he penned a detailed note about why he thought Brambles’ business model had evolved to the point where it no longer warranted the discount ascribed to it by the market.

“It’s still fundamentally a good business, and the business is no longer being deluded by stupid management,” he says.

The change was for Brambles to focus its effort and attention on its core business, Commonwealth Handling Equipment Pool, more widely known as CHEP, its pallet business.

I have a fair bit of time for Graham Chipchase.

But I have a little less respect after this morning.

The company told us its earnings were going to miss (not by much, but miss) “in light of repair capacity constraints emerging in the Central and Northeastern parts of its US service centre network during April 2026.”

This is VERY specific. And there have clearly been problems. This Reddit post from 24 days ago suggests a looming pallet shortage:

Anyone feeling a CHEP shortage coming? My account has seen three order cancellations in the past 30 days and I’ve heard similar stories from my business partners. I’m signing on with IGPS for backup or full service replacement going forward, but from what I understand I’m one of many doing the same thing. This of course worries me of a larger pallet pooling shortage.

Is it a general pileup of inventory on CHEP nationwide? Issues securing affordable freight? Supply chain disruptions emanating from the middle east? Truly I have no hard information, just guesses.

CHEP refuses to share any information; instead, they prefer to ignore my calls, share nothing and cancel POs the day of delivery. In my business, at our rate of production and with our current inventory surplus of short life product, we cannot handle such disruptions.

Now the whole point of Brambles is that they absolutely promise they have a pallet at your warehouse when you need it. If you do not have a pallet you can’t sell your product. They are mission critical and people will pay for a reliable pallet service.

That CHEP “preferred to ignore” calls is a sacking offence for someone. It is low integrity behaviour.

But then Brambles in their last earnings talked about 4 million excess pallets in the US. To quote:

Given the impact of headwinds on like-for-like volume growth in the US during 2H25, Brambles enters FY26 with ~4 million excess pallets across its US network and does not anticipate a return to optimal plant stock levels in this market until 1H27. This is expected to result in the continuation of storage, repair and transport costs associated with excess plant stock, while delivering a capital expenditure holiday in the US through to 1H27.

Now they are talking about 2 million shortage in the US.

The 4 million pallet excess did not just evaporate. Brambles has had a repair crisis for a while.

The same Reddit thread has a self-identified repair worker talking about pallets in a graveyard of unrepaired pallets.

I work at a chep repair facility and have ties to another, there is certainly no shortage of pallets but grade A pallets are not nearly as available as the vast graveyard of major repair sitting everywhere. There’s an outlook that for the foreseeable future repair facilities will be focusing on bringing the graveyard back into rotation rather than manufacture new grade A’s. So no shortage just the production to spit out pallets slows because it requires more work. In my piece work facility we’ve received raises across the board relative to ensuring quality as pallets require more work and chep doesn’t want us cutting corners.

If the 4 million pallets sitting excess in the US were sitting excess because they were unrepaired then Graham Chipchase has been less than forthcoming with the market.

Methinks he has some ‘splainin’ to do.

John Hempton