Bunzl plc (BNZL) Ordinary 32 1/7p
HL comment (14 December 2023)
Bunzl expects full-year revenue to be 1-2% lower than the prior year, ignoring exchange rates. Revenue growth from acquisitions is expected to be offset by lower COVID-19 related sales and reduced inflation benefits.
Profit guidance was nudged slightly higher. Underlying operating profit is expected to deliver moderate growth, with margins now expected sightly ahead of previous levels.
For 2024, Bunzl is expecting some revenue growth. That'll be driven by acquisitions and a small contribution from organic growth. Operating margin is expected to remain in line with 2023 levels.
There were three new acquisitions announced, taking the total this year to 17.
The shares rose 1.6% in early trading.
A small uptick in profit guidance was welcome news, as was new commentary suggesting there could be scope for some organic revenue growth next year.
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. Overall we retain the view that Bunzl's an attractive business, but there are some things to monitor.
Recent organic performance has been a struggle. Falling inflation is pulling sales down and normalising sales from Covid related products across geographies are a drag. The latter should normalise as we move through 2024 and comparable periods ease. The exact timing of this is tough to map though.
Aside from organic growth, it's acquisitions that take centre stage. Around 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.
We're mindful that there could be some further declines before things stabilise, especially around raw material pricing. But we've been genuinely impressed by Bunzl's margin performance. There aren't too many companies that can see revenue drop and improve operating profit guidance.
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 below the longer-term average, reflecting those concerns.
Bunzl key facts
- Forward price/earnings ratio (next 12 months): 16.9
- Ten year average forward price/earnings ratio: 18.3
- Prospective dividend yield (next 12 months): 2.2%
- Ten year average prospective dividend yield: 2.2%
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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