ii view: Bunzl buoyed by recovery in core business

Full-year sales guidance is up as catering helps compensate for falling Covid sales. Buy, sell or hold? 

Trading update from 30 June to 22 October

• Underlying currency adjusted revenue up 2.5%

Guidance:

• Now expects slight underlying revenue growth in 2021 compared to 2020
• Profit margin expectations for the year are unchanged

ii round-up:

Distribution company Bunzl (LSE:BNZL) today reported a 2.5% increase in adjusted revenue compared to the comparable period in 2020, as a recovery in its base business including the foodservice and retail sectors helped offset an anticipated slowing in Covid related sales.

The global distribution leader with no competitors of a similar scale also raised its full-year revenue estimate, with it now expecting slight growth compared to 2020.

Bunzl shares were little changed in UK trading having gained by more than 80% since pandemic induced market lows back in March 2020. Bunzl distributes products to customers including the National Health Service, Walmart (NYSE:WMT) and Domino's Pizza (LSE:DOM). 

Underlying revenues for its base business rose by 12% compared to the same period in 2020. Bunzl products include packaging, catering equipment and safety wear. Sales of its top eight Covid-related products including masks fell 9.4% in the period. Underlying revenue for the third quarter was approximately 10% higher than the comparable 2019 period.

Profit margin expectations for the year remain unchanged, with adjusted operating margin expected to be only slightly ahead of historic levels.  With 2021 continuing to reflect pandemic-related dynamics, management continues to expect a further normalisation of group operating margin in 2022 as the mix of sector and product sales returns to more typical levels.

In September, it completed its 11th acquisition for the year-to-date, buying Intergro, a distributor of agricultural supplies to commercial growers across the Eastern US. 

Full-year results to the end of December are likely to be announced in February. 

ii view:

Bunzl sells and distributes a wide range of disposable, cleaning and personal protection products to supermarkets, caterers, cleaners and industrial customers. Diversification in its products, business sectors its serves and geographical locations it operates across offer a core strength. It is an active market consolidator, buying 157 companies between 2004 and 2018 at a cost of £3.3 billion.

For investors, reducing sales of higher profit margin Covid-related products is expected to further normalise its operating profit margins in 2022. Rising operating cost inflation could also potentially hinder margins, while significant overseas sales also expose it to currency volatility. 

However, a rebound in base business sales such as those to reopened hospitality outlets have been seen. Growth enhancing bolt-on acquisitions are ongoing, while the shares currently sit on a dividend yield of around 2%, not to be dismissed in an ultra-low interest rate era. A record of more than 10 years of consecutive annual dividend growth is also worth remembering. In all, this diversified and unrivalled distributor remains worthy of ongoing long-term investor support. 

Positives: 

• Diversified customer type and geographical location
• Continues to seek growth enhancing acquisitions

Negatives:

• Falling high-margin Covid sales
• Subject to currency volatility

The average rating of stock market analysts:

Strong hold