Bunzl calms investor nerves with upgraded outlook

Picture credit: Bunzl.

Bunzl (LSE:BNZL) has been navigating choppy waters and this cautiously positive update seeks to calm some investor nerves.

The group’s full-year results in March steadied the ship somewhat. A savage share price reaction to the profit warning last year left a sour taste in the mouth for investors. A subsequent trading statement and then half-year numbers in August stemmed further declines, and a relief rally has seen the shares rise by 19% in the year so far.

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However, much of the damage had already been done. The price has fallen by 18% over the last two years, with the group’s largest market in North America at the eye of the storm. A combination of sales weakness, product price deflation and costs following the rollout of its own branded offering led to investors heading for the exit.

That being said, Bunzl has recognised that the unit needed some attention and now maintains that most of the current volume growth is coming from North America and in particular the distribution business, which has been bolstered by some new contract wins at the end of last year.

There have also been some questions raised on Bunzl’s bolt-on acquisition policy, which has served the group well over a number of years and to which the company remains committed. Indeed, in April Bunzl added Australian distributor Scientifix Group to its portfolio, which is expected to add revenue of £9 million over the year and which adds to eight acquisitions made last year for a consideration of £132 million.

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Bunzl has upgraded its outlook for the year which should provide some solace. For the full-year, operating margin is still set to decline modestly as previously guided, but the group is expecting good growth in adjusted operating profit. For the first half, it expects group revenue growth of 4% of which acquisitions are likely to contribute somewhere around the 1% level. The growth has also been supported by some inflation, enabling cost increases to protect some of its margins.

In the background, there is an additional factor at play. Activist hedge fund Elliott Investment Management now has a near 5% stake and is reportedly pushing for change, most notably through a resumption of the share buyback programme and a review of the North American business which could conceivably result in a sale of the unit if agreed.

In the meantime, for the most part Bunzl remains a well-run if not currently well-regarded stock. The dividend has seen 18 consecutive years of increases and the current yield of 3% is of some appeal. The shares have risen by 8.5% over the last year, as compared to a gain of 19% for the wider FTSE 100 and although Bunzl may look undemanding on a historic valuation basis, investors are treading carefully until such time as a sustained recovery is in evidence. As such, the market consensus of the shares as a hold is likely to prevail for the time being.