ii view: boring Bunzl hits new high

Distributing essential items like face masks, shares of this FTSE 100 firm are up around 25% in 2020.  

Third-quarter trading update

• Revenue up 4%

Guidance:

• Expects second-half revenue to grow strongly
• Anticipates a slightly higher second half profit margin compared to prior year

ii round-up:

Distributor Bunzl (LSE:BNZL) today outlined expectations for a slightly higher operating profit margin and stronger revenue growth in the second half, given continued demand for pandemic items such as personal protective wear.

The positive forecasts contrasted with its previous downplaying of second-half demand and what it believed was significant first-half customer stockpiling.

Bunzl shares rose by more than 5% in early UK trading to a new all-time high, although drifted back through hte session. Year-to-date, Bunzl shares are up by over a quarter, comfortably outperforming a 21% fall for the wider FTSE 100 index. 

Bunzl customers include Walmart (NYSE:WMT), Domino's Pizza and the National Health Service. Revenues for the third quarter rose by 4% or by 8.8% when adjusted for currency movements. 

Sales of its top eight Covid-related products, which are primarily its own brand, contributed 17.5% of growth – own branded and often China sourced items generate a higher profit margin. 

Sales of other non-pandemic items fell by nearly 10%. However, this was better than the second-quarter and followed the easing of pandemic-related restrictions across its markets.

Bunzl recently completed the acquisition of Abco Kovex, a distributor of flexible packaging based in Ireland with revenue of €23 million. Growth through acquisitions remains a key part of its strategy. 

Between 2004 and 2018 it bought 157 companies at a cost of £3.3 billion. Broker Jefferies forecasts almost a £1 billion of surplus capital looking ahead, cash which could fund acquisitions, providing an estimated 15% push to group earnings. 

ii view:

Diversification in the products it distributes, business sectors its serves and geographical locations it operates across, prove a core strength at Bunzl. The US remains its biggest market generating around three-fifths of sales, followed by Continental Europe at around one fifth. 

For investors, some caution in accompanying management outlook comments needs to be considered, while evaluating potential bolt-on acquisition targets – an important growth driver - will not be easy in the current pandemic clouded environment. 

That said, the previous reinstating of the cancelled 2019 final dividend and 1.9% increase made to the half-year payment leave the company’s progressive dividend policy intact, a policy which is being aided by sales growth that continues to surprise to the upside. In all, while market dips may offer better buying opportunities, Bunzl appears to remain worthy of a place in most long-term focused diversified portfolios. 

Positives: 

• Diversified customer type and geographical location
• Brexit protection - over 85% of revenue is generated outside the UK 

Negatives:

• Management caution expressed for the outlook
• Falling non-pandemic related sales

The average rating of stock market analysts:

Strong hold