Bunzl PLC updates
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The following 675 words are about Bunzl, though for many readers those seven will have been enough. Britain’s foremost distributor of hard hats, beard guards and disposable cutlery has never lent itself to clickbait.
Bunzl tends to feature in the financial press once every six months, typically on results day, and usually with the word “boring” somewhere close to the top. It is not much for a FTSE 100 constituent with a market value of £9bn. It is also a potential disservice to investors: since its full-year update in March Bunzl shares have risen 17 per cent in a flat wider UK market.
The problem they face is that Bunzl is dull by design.
Even a hint of lobbying sleaze has failed to raise its profile. Campaign group the Good Law Project has brought a judicial review against health secretary Sajid Javid to investigate the circumstances around Bunzl being awarded a £22.6m government contract for personal protective equipment. But the case has barely registered with shareholders, carrying a total value equivalent to less than 0.5 per cent of first-half group revenue. The global sprawl of the company means it rarely has to worry much about any constituent part.
So it was with interim results on Tuesday. Continued bulk-buying of high-margin health and hygiene supplies lifted pre-tax profit 12.3 per cent to £275.7m on steady revenue. PPE prices spiked higher in the first few months of 2021 amid concerns about the Delta variant. And though European demand for masks and gowns has since been winding down, US retail and food service markets are opening back up. Management’s 2021 guidance, including a target for moderately higher underlying revenue versus 2019, was identical to the March update.
Predictability has been Bunzl’s signature since it transformed in the 1990s from an untidy conglomerate to a pure-play distribution company. Growth ever since has been underpinned by small, low-risk acquisitions in fragmented markets whose products can be plugged straight into the local distribution network. Almost three decades of unbroken dividend growth are taken as evidence that the strategy works.
Bunzl hoarded much of the cash it has made through the PPE boom so is ready to pick off family owned businesses now forced into difficult decisions as tax increases replace pandemic support measures. Frank van Zanten, chief executive, talks of a 1,000-company hit-list of potential targets. Net debt equivalent to just 1.4 times ebitda, versus a target range of between 2 and 2.5 times ebitda, gives him about £1bn to play with.
But because Bunzl is facing many of the same challenges as its competitors, acquisitions will need to deliver.
Wage inflation in the US, by far its biggest market, was 3 per cent in the first half and likely to rise further. Paper, plastics and chemicals costs are climbing. Sales volumes across the main business are still well below 2019 levels and the obvious operational savings, such as warehouse consolidation, have already been applied.
Only the big US clients are typically on cost-plus supply contracts, so passing on higher prices to customers will be tricky. The one area where customers have little resistance to higher prices, PPE, has turned deflationary. Contract renewal talks with key client Walmart are ongoing.
Van Zanten sees rising prices as a way to shift customers on to Bunzl’s own brands, which are higher margin than the alternative and account for nearly a quarter of first-half sales. More acquisitions should also lift profitability because Bunzl invariably buys businesses generating higher margins than the group average. Yet the CEO also guided on Tuesday for margins next year to slip back to historic levels. It is not obvious why the caution is merited.
Pre-pandemic, doubts were growing about Bunzl’s acquisition-led strategy. Van Zanten spent nearly £1bn between 2017 and 2019 yet the share price did almost nothing. Two years on, the company’s valuation is close to historic highs at nearly 20 times forward earnings even though it is even more reliant on his dealmaking abilities. It’s not difficult to imagine ways in which the story could get more interesting from here.