FTSE 100 interview: Bunzl benefits from Covid shift

Our head of equity strategy caught up with CEO Frank van Zanten to discuss Bunzl’s latest results.

At first glance, Bunzl (LSE:BNZL) doesn’t seem very exciting. The FTSE 100 distribution company uses trucks and ships to transport food packaging, healthcare equipment and services to supermarkets, caterers and hospitals around the world. But there’s lots to like about this hugely successful business, as the chief executive told me today.

I spoke with CEO Frank van Zanten (pictured) following publication of annual results for 2020, a year unlike no other, not just for Bunzl but for every business.

Revenue, assuming no change in foreign exchange rates, grew by 9.4% last year to over £10 billion. Adjusted operating profit increased 20.9% to £778.4 million, giving a better-than-expected 70-basis point increase in operating margin to 7.7%.

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I first talked with van Zanten, a Bunzl employee for the past 26 years, about the drivers behind the big increase in both the top and bottom line.

“We saw a substantial increase in healthcare, safety, cleaning and hygiene, and a reduction in retail due to lockdown,” he explained. 

In its results statement, the company said: “As a result of our extensive supply chains and our Asia sourcing and auditing operation, we were able to quickly source and deliver significant quantities of quality assured Covid-19 related products, such as gloves and masks.”

That line of business - masks, sanitisers, gloves, disinfectants, coveralls, disposable wipes, face shields and eye protection - was responsible for £2.2 billion of revenue in 2020, 2.6 times the figure for the previous year. About 40% of this was attributable to large orders.

Could you explain the change in mix and benefit to margins from selling more disposable gloves and masks?

“There was a significant reduction in business with the retail sector, where margins are lower, due to lockdown,” said van Zanten. “Healthcare generates higher than average margin which gained sales, plus Covid items are mostly own-brand, which is very favourable for us.”

The increase in operating margin was a positive surprise. Do you see this as sustainable as the mix changes again in 2021?

“I think this year margins will go back toward the historical level of around 7%, or just below” admitted van Zanten. “It depends how long Covid is still there. Margins could be higher if Covid is around longer. It depends on speed of recovery.

“Australia is relatively Covid-free. Post lockdown there’s been a quick recovery to normal levels. In the UK, people will want to go out, do nice things have a party, so things will come back relatively quickly. But the timing unclear. Europe is a bit slower on vaccination.

“The influence of cleaning and hygiene going forward will be very favourable – masks, cleaning of office and hotels will mean a lot more money spent on them than before.”

You spent a lot of money on acquisitions in 2020. What’s been the driving force behind this?

“It’s just the way it fell,” said van Zanten, explaining how Bunzl had its second biggest year for acquisitions in 2020 at £445 million.

“We were working on these acquisitions, then Covid happened. We picked up these deal discussions and were ready to execute them. We would have done the same acquisitions, we just had to pause them, then execute once position became clearer.

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Do you expect similar acquisition activity this year?

“It’s difficult to say. It is an ongoing story and I’m not too worried if a deal happens in December 2021 or January 2022! We are disciplined and want to buy quality businesses.

“The key driver is whether the owner is ready to sell the business because they want to retire. I think in the next couple of years we’ll have lots of people knocking on our door.”

Bunzl has already announced three further acquisitions today and admits to having “an active pipeline supported by substantial financial headroom.”

Bunzl’s dividend track record is enviable. Is it something you are committed to at all costs?

“We are strong supporters of the dividend. We paused [the final dividend announced in March] out of prudency, but as soon as we saw things were going in the right direction, we paid back the government [employee-related government support packages] then reinstated the dividend and have increased the dividend.”

Bunzl now has a 28-year track record of consecutive dividend per share growth, with the final dividend this time up 7% to 38.3p. The annual dividend is up 5.5% to 54.1p.

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“We are very cash generative and want to continue paying a good dividend. But buying businesses is also very important, so we don’t want to change the dividend significantly.”