ii view: Bunzl shares fall as Covid boost reduces

This distributor of PPE has proved a 2020 pandemic winner, but what are the prospects for 2021? 

Full-year trading update to 31 December

• Expects revenue to be up 8%
• Profit margin expected to be higher than 2019

Guidance:

• Expects revenue in 2021 to be lower than the current year
• Profit margin to return to more historical levels

Chief executive Frank van Zanten said:

"The Group's performance during the pandemic has demonstrated the resilience of the Bunzl portfolio, the strength of our supply chain and the agility of our decentralised operating model.  Growth through acquisitions continues to be an important part of our strategy and the new acquisitions demonstrate our continued success in attracting high quality businesses to join Bunzl.  This year has been one of the most acquisitive in our history, with more than £410 million of committed spend.  The acquisition pipeline remains active with a number of discussions ongoing."

ii round-up:

Distributor Bunzl (LSE:BNZL) today flagged a return to more normal profit margins in the year ahead as the boost provided by the provision of personal protective equipment (PPE) wanes.

Minimal benefit from larger Covid-19 related orders is expected in 2021, with overall revenue for the year ahead expected to be lower than the current year. 

Bunzl shares fell by more than 5% in UK trading, leaving them for the year-to-date up just under 15%. Bunzl customers include the National Health Service, Walmart (NYSE:WMT) and Domino's Pizza. 

Sales for 2020 are expected to rise by 8%, with the operating profit margin expected by broker Morgan Stanley to be up by around 0.5%. Sales of its own branded and often China sourced items such as surgical gloves have helped generate a higher profit margin.

Morgan Stanley expects operating profit estimates for 2020 to rise by around 5% to over £760 million, but estimates for 2021 to stay at around £680 million. 

The distributor, which generates around half of its sales in North America, also announced the acquisition of Snelling for £28 million. The Canadian company supplies customers operating in the grocery, industrial and hospitality sectors. The cost of bolt-on company purchases for the year now totals £410 million.

Having cancelled its 2019 final dividend payment of 35.8p per share at the onset of the pandemic, it later reinstated it. Full-year results are likely to be announced in late 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 a global leader in its market with no competitors of a similar scale. It is also an active market consolidator. Between 2004 and 2018 it bought 157 companies at a cost of £3.3 billion, providing acquisition growth to compliment organic growth. 

For investors, and given the rollout of Covid vaccines, 2021 is not expected to see the tailwind provided by the pandemic that 2020 has seen. Significant overseas revenues also expose the company to potentially volatile currency moves. But the continuation of a dividend payment and a forecast income yield of over 2% are not to be ignored in the current ultra-low interest rate era. Neither is the group’s opportunity to further consolidate its marketplace. In all, while market dips may offer better buying opportunities, Bunzl appears to remain worthy of a place in long-term focused diversified portfolios. 

Positives: 

• Diversified customer type and geographical location
• Progressive dividend policy

Negatives:

• Management caution expressed for the outlook
• Subject to currency volatility

The average rating of stock market analysts:

Strong hold