ii view: catering and retail buoy Bunzl profit

There's been a recovery in the business excluding sales of higher margin Covid products and 28 years of consecutive dividend growth. Buy, sell or hold?

First-half results to 30 June

Currency adjusted revenue up 6.3% to £4.87 billion

Adjusted operating profit up 14.7% to £367 million

Interim dividend up 2.5% to 16.2p per share

Net debt to adjusted profit (EBITDA) of 1.4 times

Chief executive Frank van Zanten said:

"The Group's performance over the first half and the excellent underlying revenue growth we have delivered over a two-year period demonstrate the resilience of our diversified portfolio. 

“Our outlook for 2021 is unchanged and we continue to expect, at constant exchange rates, underlying revenue to be moderately higher than the pre-pandemic period in 2019.  Looking ahead, we expect future growth to be supported by a recovery in the base business and economic activity, enhanced hygiene trends and our differentiated offering of sustainable and responsible solutions.”

ii round-up:

Distribution company Bunzl (LSE:BNZL) today reported a near 15% improvement in adjusted first-half profit as a recovery in its base business, which includes packaging, catering equipment and work safety wear, but excludes its top eight Covid products. Strength in the foodservice and retail sectors helped offset an anticipated slowing in Covid related sales.

Adjusted operating profit of £367 million broadly matched analyst forecasts. Management’s full-year expectations remain unchanged, pointing towards a modest increase in sales compared to the pre-pandemic levels in 2019.However, expect a further normalisation of operating margins in 2022 given reducing demand for higher margin Covid products. 

Shares in Bunzl, which distributes products to customers including the National Health Service, Walmart (NYSE:WMT) and Domino's Pizza (LSE:DOM), fell by as much as 4% in UK trading, leaving them up by around 90% since pandemic induced market lows in March 2020.

Underlying foodservice and retail sector related sales rose 13% compared to a 9% fall in the Covid hit first half of 2020. Sales of its top eight Covid products including masks fell 3.9% during the period. Smaller Covid related orders remained robust while larger orders retreated. 

Geographically, revenue for its largest region - North America - accounting for over half of total group profit, rose 10.6%. Sales for its Rest of the world region, accounting for nearly a fifth of profit, rose by 12.3%. Sales across both its European and UK and Ireland regions fell by 11.2% and 10.3% respectively. 

Two new acquisitions, this time in Spain, take Bunzl's total so far this year to eight totalling £134 million, with its pipeline of potential buys remaining active. It declared an interim dividend of 16.2p per share, up 2.5% year-over-year. 

An update on its strategic priorities is planned for the 11 October.

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. Its two latest business acquisitions are for two personal protection equipment providers in Spain - Proin Pinilla and Arprosa. Both businesses strengthen its safety offering in the country. Growth through acquisitions remains an important part of its ongoing strategy.

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

But a rebound in base business sales such as those to the catering trade is being seen. There are also further growth enhancing bolt-on acquisitions, and the shares currently sit on a dividend yield of around 2%, not derisory in an ultra-low interest rate environment, along with a record of 28 consecutive years of dividend growth. In all, and while market dips may offer better buying opportunities, this diversified and unrivalled distributor remains worthy of 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