Bunzl continues recovery after these half-year results

Bunzl (LSE:BNZL) has been navigating choppy waters and this update shows something of a return to form for the beleaguered group.

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The full-year results in March steadied the ship somewhat after a savage share price reaction to last year's profit warning that left a sour taste in the mouth for investors. However, subsequent trading statements stemmed further declines, and a relief rally has seen the shares rise by 34% in the year so far.

Even so, much of the damage had already been done, the price having fallen by 21% 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 had investors heading for the exit.

However, it is this part of the business, which is responsible for 52% of group revenues, where the return to strength is most evident. Revenue growth of 2.5% to £3.06 billion was achieved by a combination of higher volumes, margin expansion and product price increases, with the Distribution business doing much of the heavy lifting. The unit, which was bolstered by some new contract wins at the end of last year, saw underlying revenue growth of 8% which bodes well for the immediate outlook.

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There had also been some questions raised about 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.

This has been followed today with the announcement of the acquisition of Ghessu Bath of Spain. Even so, the pace of acquisitions has slowed considerably given the weaker macroeconomic backdrop, although the group expects an acceleration in the second half of this year underpinned by its active pipeline of potential deals. In addition, the group continues to explore different opportunities, citing the exclusive tie-up with Adidas safety footwear as an example.

Overall, the group posted revenue growth of 3% to £5.93 billion in the six months to June, while adjusted operating profit spiked by 8.9% to £440.6 million. Operating margin edged higher from 7% to 7.3%, while the temporary slowdown in acquisitions has fed through to reducing net debt, which currently stands at £2.42 billion versus £2.65 billion previously.

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Bunzl has upgraded its outlook for the year which should provide further solace. For the full-year, operating margin is now set to be flat versus a previously guided modest decline, while the group is expecting good growth in adjusted operating profit. Volume growth thus far has 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 terms of the former, this has not fallen on deaf ears and Bunzl has today announced a new £500 million share buyback which consolidates its shareholder returns.

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In the meantime, Bunzl remains a well-run and generally well-regarded company which has identified and remedied its weakest areas. The dividend has seen 33 consecutive years of increases and the current yield of 2.7% is of some appeal.

The shares have risen by 12% over the last year, as compared to a gain of 18% for the wider FTSE100, 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 group as a hold is likely to prevail for the time being, although today’s update will certainly soothe some of the investor nerves overhanging the shares, as reflected by the warm initial reaction to the numbers.