Bunzl steadies the ship with annual outlook maintained

Picture credit: Bunzl.

Bunzl has apparently steadied the ship after navigating some choppy waters of late, and there remains more than a little hope on the horizon.

After a savage share price reaction to the profit warning last year, the full-year results in March and subsequent interims in September showed something of a return to form. A relief rally, which has seen Bunzl shares rise by 36% so far this year, unfortunately cannot mask the damage that had been done, and the price remains down by 21% over the last two years.

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The main culprit for that weakness was the group’s largest market in North America. A combination of sales weakness, product price deflation and costs following the roll-out of its own branded offering led to 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 proving most evident.

Revenue growth of 2.5% to £3.06 billion in the first half was achieved by a combination of higher volumes, margin expansion and product price increases, with the Distribution business doing much of the heavy lifting and the volume growth momentum has continued over this last quarter. The unit, which was bolstered by some new contract wins at the end of last year, saw previous underlying revenue growth of 8%, which bodes well for the immediate outlook.

In the latest quarter, overall revenues rose by 3.1% and underlying sales by 3.7%, bolstered not only by volume growth especially in North America but also supported by some inflation, enabling cost increases to protect some of its margins. Acquisitions contributed 0.4% to revenue growth, although fewer trading days in the period provided a 1.1% headwind.

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Bunzl has also maintained its previously raised outlook for the year which provided further solace. For the full-year, operating margin is now set to be broadly flat versus a previously guided modest decline, while the group is expecting modest underlying revenue and good growth in adjusted operating profit. 

In addition, the £500 million share buyback programme is ongoing and consolidates its shareholder returns. The dividend has seen 33 consecutive years of increases and the current yield of 2.7% is of some appeal. Whereas some questions had been raised on Bunzl’s bolt-on acquisition policy, which has served the group well over a number of years, the company remains committed.

Indeed, the latest deal involves the purchase of Blueleaf Care in October, a leading distributor of care and nursing home products which generated revenues of £58 million last year. While the pace had slowed considerably given the weaker macroeconomic backdrop, an acceleration in the remainder of this year underpinned by its active pipeline of potential deals is possible, as Bunzl continues to prioritise such value-accretive bolt-on acquisitions. In addition, the group continues to explore different opportunities, previously citing the exclusive tie-up with Adidas safety footwear as an example.

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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. While the group may look undemanding on a historic valuation basis, investors are treading carefully until such time as a sustained recovery is in evidence.

The shares have seen some renewed benefit from the recent remedies, having risen by 15% over the last year as compared to a gain of 14.5% for the wider FTSE 100, although there is clearly an element of impatience with the progress as evidenced by the initial share price reaction which may also be subject to some profit taking after the recent run. As such, the market consensus of the shares as a hold is likely to remain in place for the time being.