Bunzl shares blast to new all-time high

“A second increase to sales and profits guidance for the year to March 2025, a higher dividend and a share buyback programme are helping to drive Bunzl’s shares to new all-time highs, thanks in part to select acquisitions,” says AJ Bell investment director Russ Mould.

“Bunzl’s track record with making the most of its purchases is good, not least because they are bolt-ons designed to supplement momentum that is already there, rather than big-bang, so-called ‘transformational’ deals designed to conjure up growth that would not be there otherwise.

Source: LSEG Refinitiv data

“The other secret is that Bunzl sticks to what it knows when it makes a deal. An acquisition can be made to work when it involves either a new market or a new geography but purchases that take a buyer into a new field on both fronts tend to be the ones that lead to trouble, gobbling up management time at best and leading to profit disappointment and sub-optimal returns on capital at worst.

“Bunzl is already committed to spending £650 million on acquisitions in the fiscal year to March 2025, thanks to eight deals, including one announced last year but completed in 2024 and the swoop for Australia’s PowerVac, announced alongside the first-half results. One purchase offers a way into a new geography – Pamark in Finland – but none take Bunzl into uncharted territory so far as the end market is concerned. All of them serve to strengthen the FTSE 100 member’s position in its target areas of grocery supplies, food service and retail and cleaning, hygiene and safety, to increase the chance of value accretion and lower the risk of value destruction.

Source: Company accounts

“Bunzl’s underlying business model remains very solid. Bunzl supplies the things that other firms need in order to do business, but not items they would sell to their customers. For example, it supplies disposable coffee cups to cafes, food wrap to supermarkets, hard hats to builders and cleaning materials, bandages and rubber gloves to hospitals. The required nature of the products it provides may shelter the firm from the vagaries of the economic cycle, at least to some degree, and also provide Bunzl with pricing power, a key ingredient during inflationary times.

“The sale of its Argentine operations takes some momentum away from the stated numbers for the first-half results, which show a drop in sales and profits. Adjust for currency movements and add in the acquisitions and the picture looks brighter, although further questions may be asked down the road if underlying revenue growth stays subdued across the target end markets and the key geographies of the UK and Ireland, North America and Europe.

“In the first half, underlying sales fell in all three regions, so the Argentine disposal was not the only factor at work. Post-pandemic destocking and a lull in the cleaning and hygiene business, as well as cooling inflation, are all factors here.

Source: Company accounts

“As a result, sales dipped on both a stated basis and on constant currencies, once acquisitions are excluded.

Source: Company accounts

“Nevertheless, chief executive Frank van Zanten is raising earnings guidance for the second time this year, as acquisitions provide some top line growth. Moreover, cost efficiencies continue to drive earnings.

“Alongside February’s full-year results for 2023, the boss had suggested that the group’s adjusted operating margin would come in ‘slightly below’ last year’s record high of 8.0%. In June’s trading update he then predicted it would come ‘slightly above’ that of 2023, while the fresh comments about how 2024’s operating profit will show a ‘strong increase’ imply further margin expansion.

Source: Company accounts

“Bunzl’s business model does not require substantial capital investment and if it goes smoothly then working capital requirements should be fairly modest, too, so the company should be very cash generative. This helps to fund the dividend, where the company would be on its way to a 31st consecutive increase in the annual dividend, had it not been for the timing issues and complications caused by Covid-19 in 2020. The 10.4% increase in the first-half payment easily exceeds the 6% rate of increase that analysts had been expecting for 2024 as a whole before the release of the first-half numbers.

Source: Company accounts, Marketscreener, consensus analysts’ forecasts

“Bunzl is generating sufficient cash that it is now even launching its first major share buyback operation, so it can return further liquidity to its investors (rather than merely cover stock option issuance). The company intends to buy back £250 million of stock in 2024 and £200 million in 2025, and such a timetable may also reassure shareholders that the company is not planning a bigger, splashier and, by implication, riskier acquisition.”

Source: Company accounts, management guidance for 2024 and 2025

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