Bunzl shares react to half-year results

Still bearing the scars of an April profits warning, Bunzl is busy repairing confidence.

The appeal of Bunzl (LSE:BNZL) and its 26-year record of dividend growth continues to be tested after half-year results did little to ease market jitters about slower growth in North America.

Shares have now fallen by a fifth since April, leaving the global distributor of non-food consumables as among the worst performers in the FTSE 100 index this year.

Bunzl dipped as low as 1,967p today, although, as this placed shares at a level not seen for 18 months, many investors took the opportunity to stock up on a company whose progressive dividend and solid growth record have made it a staple of many portfolios.

That buy-and-hold reputation, however, has wavered in recent months after April's warning on North America trading, where Bunzl generates 58% of its business. The region reported underlying growth of just 0.1% in the six months to June 30, with its largest business serving the grocery sector the culprit for the disappointing performance.

Encouragingly in today's results, Bunzl showed it has been successful in protecting profitability in North America and across the group as a whole. Margins were slightly better than feared given the slower growth, leading to a 2% rise in earnings per share at 60.6p.

Analysts at Citigroup said that Bunzl had displayed "impressive resilience" in the half, while Goldman Sachs backed the company to continue delivering double-digit earnings growth.

Source: TradingView Past performance is not a guide to future performance

Further progress may depend on a pick up in the pace of acquisition activity, which has been unusually weak for a group that struck 15 deals in 2017 and a peak of 22 in 2015. Only two businesses have been acquired so far this year, adding annualised revenue of £76 million.

More deals are expected later this year, with CEO Frank van Zanten reassuring the City today that discussions were taking place with a number of potential targets as the company looks to revive its previous drive to consolidate a fragmented marketplace.

About three quarters of recent growth has come via Bunzl's self-funded acquisition strategy, with 157 purchases completed from 2004 to 2018 for a total spend of £3.3 billion. Recent acquisitions are integrating well and trading ahead of hopes, the company added today.

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The recent share price weakness means Bunzl is now trading on a price/earnings (PE) multiple of 15 times, compared with 19 times earlier this year. It has a forward dividend yield of 2.5%, with analysts at UBS seeing another rise in 2019's award to 52.4p from 50.2p last time.

Barclays, which has a price target of 2,550p, said:

"If numbers do hold up in the second half this should go some way to repairing confidence and as we enter 2020 the valuation will look increasingly attractive."

This is unlikely to be an easy task, however, with Bunzl forecasting little change in the slower underlying revenue growth trends reported so far this year.

Encouragingly, the company has not highlighted any contract losses and has instead pinned the blame on the mixed macroeconomic and market conditions. 

Bunzl's van Zanten said:

"The board believes that our strong competitive position, diversified and resilient businesses and ability to consolidate our fragmented markets further are expected to lead to continued progress."

Almost a third of Bunzl's business comes from the foodservices sector, such as the supply of food packaging, disposable tableware and cleaning products. Another 26% comes from grocery, including the packaging, labels and hygiene supplies used by supermarkets.