Tue. Oct 19th, 2021

Bunzl PLC Update

The next 675 words are about Bunzl, but for many readers the seven would have been enough. Britain’s leading distributor of hard hats, beard guards and disposable cutlery has never lent itself to clickbait.

Bunzl tends to appear in the financial press every six months, usually on the day of the result, and usually with the word ‘boring“Somewhere near the top. That’s not much for a FTSE 100 component with a market value of £ 9 billion. This is also a possible inconvenience for investors: as it full update in March Bunzl shares rose 17% in a flat, broader UK market.

The problem they face is that Bunzl is dull in design.

Even a hint of scam did not raise his profile. Campaign group that has the Good Law Project brought a judicial review against the Secretary of Health, Sajid Javid, to investigate the circumstances surrounding Bunzl who received a £ 22.6 million government contract for personal protective equipment. But the case has barely registered with shareholders, with a total value equal to less than 0.5 percent of the group’s revenue from the first half. The global expansion of the business means that it rarely has to worry much about any part.

So it was with interim results Tuesday. Continued purchases of high-margin health and hygiene supplies increased profit before tax by 12.3% to £ 275.7 million on fixed expenditure. PPE prices rose higher in the first months of 2021 amid concerns about the Delta variant. And while European demand for masks and gowns has been declining since then, U.S. retail and food service markets are starting to reopen. Management’s guidance for 2021, including a target for moderately higher underlying revenue compared to 2019, was identical to the March update.

Predictability has been Bunzl’s signature since it changed from a sloppy conglomerate to a pure-play distribution company in the 1990s. Growth has since been supported by small, low-risk acquisitions in fragmented markets whose products can be plugged directly into the local distribution network. Nearly three decades of uninterrupted dividend growth are seen as proof that the strategy works.

Bunzl has amassed much of the cash he has made with the PPE proceeds, and is therefore ready to enforce family-owned businesses that are now being forced into difficult decisions as tax increases replace pandemic support measures. CEO Frank van Zanten talks about a list of possible goals of a 1,000-company venture. Net debt equivalent to just 1.4 times ebitda, compared to a target of 2 to 2.5 times ebitda, gives him around £ 1bn to play with.

But because Bunzl faces many of the same challenges as its competitors, acquisitions will have to be.

Wage inflation in the US, by far the largest market, was 3 per cent in the first half and is likely to rise further. The cost of paper, plastic and chemicals is rising. Sales volumes in the main industry are still well below the 2019 levels and the obvious operating savings, such as warehouse consolidation, have already been applied.

Only the large US customers mostly have cost-plus supply contracts, and it will be difficult to pass on higher prices to customers. The only area where customers have little resistance to higher prices, PPE, has become deflationary. Contract renewal talks with major customer Walmart continue.

Van Zanten sees rising prices as a way to switch customers to Bunzl’s own brands, which have a higher margin than the alternative and account for almost a quarter of sales in the first half. More acquisitions should also increase profitability, as Bunzl always buys businesses that generate higher margins than the group average. Yet the chief executive on Tuesday also led to margins returning to historic levels next year. It is not clear why the caution is deserved.

Before the pandemic, doubts grew about Bunzl’s strategy led by the acquisition. Van Zanten spent almost £ 1 billion between 2017 and 2019, but the share price did almost nothing. Two years later, the valuation of the business is near historical highs at nearly 20 times forward earnings, although it is even more dependent on its transaction capabilities. It is not difficult to suggest ways in which the story can become more interesting from here on out.

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