Must read weekly preview: Bunzl, Sainsbury's, Barclays

Bunzl Q3 – Tuesday 20 October

Richard Hunter, Head of Markets, interactive investor says, “Bunzl (LSE:BNZL) has been navigating choppy waters and its half-year update in September showed something of a return to form for the beleaguered group. The full-year results in March had steadied the ship somewhat after a savage share price reaction to the profit warning last year left a sour taste in the mouth for investors. 

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However, subsequent trading statements stemmed further declines, and a relief rally has seen the shares rise by 35% in the year so far. Even so, much of the damage had already been done, with the price having fallen by 22% over the last two years, with the group’s largest market in North America at the eye of the storm. A combination of sales weakness, product price deflation and costs following the rollout of its own branded offering led to investors heading for the exit.

Still, 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. The unit, which was bolstered by some new contract wins at the end of last year, saw underlying revenue growth of 8% which bodes well for the immediate outlook.

Bunzl also upgraded its outlook for the year which should provide further solace. For the full year, operating margin is now set to be flat versus a previously guided modest decline, while the group is expecting good growth in adjusted operating profit. Volume growth thus far has been supported by some inflation, enabling cost increases to protect some of its margins.

In addition, Bunzl announced a new £500 million share buyback programme which consolidates its shareholder returns. In the meantime, the company remains a well-run and generally well-regarded company which has identified and remedied its weakest areas. The dividend has seen 33 consecutive years of increases and the current yield of 2.7% is of some appeal. While Bunzl may look undemanding on a historic valuation basis, investors are treading carefully until such time as a sustained recovery is in evidence.”

Sainsbury's half-year – Thursday 22 October

Richard says, “At its first quarter update in June, Sainsbury (J) (LSE:SBRY) highlighted that significant operating cost inflation and investment in value to keep prices lower for consumers were the main drivers of any lighter numbers. Like-for-like sales growth of 2.1% was below the previous 3.1%, with the Middle East energy shock giving an “uncertain” impact. Nonetheless, underneath the bonnet there were some signs of further progress. Grocery remains central to the group’s efforts, accounting for 72% of overall sales, and grew by 3.6%, with the likes of the group’s Aldi Price Match and Your Nectar Prices proving popular.
Indeed, the company estimates that over the current three-year strategic period Nectar will provide incremental profit of £100 million. The group is already ahead of plan with the target, which would be a significant bonus given the ferocity of competition which the sector attracts. The Taste the Difference range also continued to fire ahead, with the group adding around 600 new products last year, with the range as a whole enjoying an increase of 6% in sales and ahead of the group’s medium term £2 billion target.

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Less positively, Argos remains a work in progress after some years in the doldrums on reduced discretionary spend. A tough promotional market had previously resulted in lower prices, a weak gaming market amid subdued consumer confidence. Accounting for 16% of group revenue, the unit remains something of a thorn in the side for the group as a whole, although Sainsbury's seems committed for the time being, taking “determined action to accelerate the transformation of Argos” including a wish to improve the customer proposition.

Guidance relating to the full year was unchanged, with underlying operating profit expected to be in a range of between £975 million and £1.075 billion, retail cash flow to exceed £500 million and remaining on target for £1 billion of cost savings over the three years to March 2027. In the meantime, shareholder returns remain in focus with an additional tranche of £200 million planned for a share buyback programme, while the previous payment of a special dividend lifts the current yield to a punchy (if temporary) 7.3%, underneath which an ordinary yield of 4% is nonetheless attractive. However, the shares have struggled to make much progress of late, having risen by just 1% over the last year although a gain of 27% over the last two years is evidence that the group is capable of delivering, which investors are perhaps becoming increasingly impatient to see.”

Barclays Q3 – Thursday 22 October

Richard says, “If the current US bank sector quarterly reporting season is any guide, Barclays (LSE:BARC)’ US operations may see the benefit of both lower consumer defaults and loss provisions, with stronger trading in its equity unit and a promising uptick in investment banking. Less positively, lower trading income in its FICC (Fixed Income, Currencies and Commodities) unit is also possible.

The UK banks have an additional hurdle to overcome in the form of the imminent Budget. The sector has underperformed so far this year (Barclays is down by 9%) on a number of concerns, one of which is the bank surcharge. One market estimate suggests that the bank surcharge will be returned to 8% from the current 3% which in turn would reduce earnings by a possible 6%, although whatever the outcome some of the uncertainty which has been overhanging the banks would be removed.

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Barclays will be hoping for a repeat performance of the half-year numbers in July, when it kicked off the quarterly earnings season in some style. Revenue growth of 11% to £16.5 billion and a rise of 17.3% in pre-tax profit to £6.1 billion were both comfortably ahead of estimates and largely driven by an exceptionally strong second quarter, where revenues and pre-tax profit grew by 16% and 32% respectively. The drivers for the improvement were spread across its units, with notable contributions from its global markets operation within the Investment Bank, higher Net Interest Income (NII) and the ongoing benefit of structural hedge income, which lessens the group’s susceptibility to changes in interest rates while providing a meaningful tailwind to revenues.

Promisingly the level of defaults on its huge cards business in both the US and the UK was stable, which did not therefore lead to any immediate alarm bells. At the half year, the group raised projected income for the year to around £31.5 billion from a previous £31 billion, which was perhaps typically conservative but brought a tinge of disappointment nonetheless. A further share buyback of £1 billion was announced, which runs in tandem with a dividend hike which took the projected yield to a pedestrian 2.6%, although this should be further boosted later in the year. 

Despite the recent weakness, the shares have risen by 15% over the last 12 months and by 86% over the last two years, with the group’s financial strength, alongside its geographical and business diversity, keeping the stock in hot demand.”