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Bunzl - costs ease, profit guidance raised

Bunzl reported first-half revenue of £5.9bn, up 0.6% when ignoring exchange rates.

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Bunzl reported first-half revenue of £5.9bn, up 0.6% when ignoring exchange rates. The net effect of acquisitions and disposals was a 1% increase in revenue. That was offset by a 0.4% decline in underlying revenue, where the benefits of higher prices are being more than offset by normalising Covid-related sales.

Adjusted operating profit rose 2.5% when ignoring exchange rates, to £438.3m. Margins ticked higher as cost controls kicked in and customers shifted to own brand products.

Free cash flow rose 21% to £286.3m, driven by improving supply chain conditions and a reduction in inventory back toward pre-pandemic levels. 12 Acquisitions have been announced year-to-date, with a committed spend of over £350m. Net debt, including leases, fell from £1.7bn to £1.6bn.

Guidance has been raised, with adjusted operating profit to be "moderately higher" than the £885.9m generated last year.

An interim dividend of 18.2p was proposed, up 5.2%.

The shares rose 3.9% in early trading.

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Our view

First half performance was a mixed bag, though well received by markets. Organic revenue declines pointed to softness in the market, but margin expansion pushed full year profit guidance higher.

Bunzl's a mashup of around 150 distribution businesses, which source and deliver a range of essential products. There's nothing fancy about the products on offer, think food packaging and safety equipment. But that's what we like about the product range, these are things customers can't go without.

Growth won't shoot the lights out, but it's been consistent for a long time. Both revenue and adjusted operating profit have grown at an annualised rate of 9-10% going back to 2004. Growth in 2023 will be harder to come by as we lap strong 2022 numbers, but robust performance during tough times has been particularly impressive. Something that has benefitted both investors and helped attract customers but there are no guarantees that will continue.

Recent organic performance has been largely propped up by higher prices, which have been essential as a tool to keep inflated costs from eating into margins. For now, Bunzl sits in a nice spot, inflation's still lingering enough to keep selling prices up, but falling costs mean margins can expand.

There are question marks about how long that'll continue. We're already seeing signs in the key region of North America that falling inflation is pulling sales down and normalising sales from Covid related products across geographies are a drag. The latter should normalise though, as we move through the year and comparable periods ease.

Aside from organic growth, it's acquisitions that take centre stage. Two thirds of the revenue growth over the last 10 years has been a result of adding new businesses to the portfolio. Acquisitions spend has been increasing in recent years and a healthy pipeline support continued growth from this avenue.

Acquisition-led strategies have their drawbacks. If the pool of target companies dries up or a business needs to raise external cash to fund acquisitions, then it's not usually sustainable. Bunzl's got the latter covered though. Cash conversion (how much operating profit feeds through to cash flow) is a key strength, coming in at over 100% in each of the last 4 years. As is the balance sheet, where leverage has significantly dropped in recent years. We think there could be scope for buybacks if things continue, though acquisition spend will likely take priority.

Overall, we think Bunzl has much to offer. We're supportive of the resilient portfolio and highly cash-generative model. The key thing to watch is how organic growth plays out from here, prolonged weakness in this area puts added pressure on acquisitions to do the hard work. The valuation's come down in recent months but remains ahead of the peer group, adding pressure to deliver.

Bunzl key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 29th August 2023