2023-10-31 13:45:21 ET
Summary
- Bunzl is a well-run business in the foodservice and industrial peripherals industry.
- The company expects slightly lower revenue but continues to perform well and make acquisitions.
- The dividend has been growing steadily, but the current yield is not particularly attractive.
Bunzl (BZLFF) is a well-run business in an unexciting though potentially lucrative business, with its focus on foodservice and industrial peripherals like packaging for takeout drinks, towels, soaps and the like.
I last wrote about Bunzl in an August 2020 "hold" piece ( Bunzl: Pandemic Was A Tailwind Not A Headwind ), since when the London-listed shares have gained 3%. Business has improved but I continue to see the valuation as reasonable rather than a bargain and accordingly stick to my "hold" rating.
Trading Remains Solid
In a trading statement last week, the company said that it continues to perform well and reiterated its adjusted operating profit growth outlook (being moderately higher than in 2022 at constant exchange rates) for the year. However, it said it expects revenue to be "slightly lower" (again, at constant exchange rates) than in 2022. It also announced two new acquisitions, taking its total for the year so far to 14.
In a way that somewhat disappointing trading statement is not a surprise. Bunzl saw demand for certain items surge as a result of the pandemic and that demand has finally been getting back to more normal levels.
The underlying health of the business remains robust, as seen in the interim results that were published in August. To me they suggest a business that continues to run well, and smoothly.
Bunzl is moving along like the engine it has long been, with acquisitions continuing to help fuel revenue growth.
A look back at what the company achieved in 2019 compared to last year shows that it has grown on every major metric following the pandemic.
2019 | 2022 | Change | |
Revenue (£m) | 9,327 | 12,040 | 29% |
Operating profit (£m) | 528 | 702 | 33% |
Pre-tax profit (£m) | 453 | 635 | 40% |
Post-tax profit (£m) | 349 | 474 | 36% |
Basic earnings per share (p) | 105 | 142 | 35% |
Dividend per share (p) | 51.3 | 63 | 23% |
Net debt (£m) | 1,247 | 1,160 | -7% |
Chart compiled by author using data from company announcements
What Lies Ahead?
From here, I expect Bunzl to be able to continue steadily along its long-term path, growing revenues and earnings per share through careful management, organic growth and an ongoing program of relevant acquisitions.
There are risks, however.
One is currency changes. This can already be seen in the interim results: both revenue and profit growth were driven by currency movements more than underlying performance. Currency effects cannot be relied on to have that positive effect rather than a negative one going forward in my view.
A worsening global economic environment is not considered by the board as a specific principal risk but, given its spread across 31 countries and global supply chain, I see that as a significant risk over the next several years.
I am optimistic that the company can continue to find suitable acquisition targets as it operates in a market that remains highly fragmented. Its balance sheet has been improving over the past few years and debt looks easily manageable to me.
Dividend Should Keep Growing
As noted above, the dividend growth over the past five years has been meaningful.
Last year's dividend increase was the 30th consecutive year of such according to the company (although I would dispute that as the 2019 final dividend was declared then not paid out on the original timeline although an equivalent dividend was later paid, something I discussed in my last coverage of the company). The dividend was covered more than twice over by earnings and around 2.6x by free cash flow (for this I include the cost of mergers and acquisitions, which the company excludes in its own free cash flow figure but I consider to be part of cash flows).
Is business continues even reasonably well, I think that dividend should be able to keep moving up steadily.
Currently the yield is 2.2%, which I do not regard as particularly attractive for the U.K. market at present.
Valuation Looks Reasonable
From a P/E ratio in the low 20s when I last covered the company, a flattish share price and improved earnings mean the ratio has fallen slightly but remains around 20. I see that as reasonable for a company with a long proven ability to grow earnings and a strong position in a market with high ongoing demand.
But I do not see it as an especially attractive entry point. Accordingly I maintain my "hold" rating.
For further details see:
Bunzl: Solid Progress Across The Board