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Steady, diversified Bunzl is expensive for a reason

The diversified support services supplier remains an attractive investment in uncertain times
August 30, 2016

In volatile markets investors look to Bunzl (BNZL) to be reassuringly boring. The group, which supplies products ranging from supermarket packaging to safety helmets, tends to grow through bolt-on acquisitions within its existing markets. This year has been no different, with the group spending £101m on eight companies so far, including Earthwise Bag Company, a distributor of reusable packaging. Higher-margin acquisitions helped push operating profits for the first half, before one-offs, up 9 per cent in constant currency terms to £235m.

IC TIP: Hold at 2464p

In North America acquisitions helped deliver a 5 per cent constant-currency increase in sales to £2bn. But organic growth was held back by pricing pressure on plastic resin-based products, which impacted its largest grocery business. Management has taken steps to reduce operating costs here, as well as expanding its product range within the foodservice (napkins, tableware) and food processor markets. This included extending its 'own-label' range to products such as bin liners and shrink bags, from which it can earn higher margins.

In continental Europe tightly controlling costs offset currency-related pressure, boosting adjusted operating profits by almost a fifth to £61m. Improvements in the industrial, food processing and public sectors in France were partially offset by a decline in the hotel, restaurant and catering (horeca) sector. Nevertheless, operating margins continued to improve as operating costs were kept in check. In central Europe the business benefited from new customers in Hungary, Romania and Czech Republic, and management expects its planned acquisition of Silwell to give it access to a greater number of customers in the horeca market.

Trading was patchier in the UK and Ireland, where sales declined 3 per cent at constant currencies to £523m. The loss of a big customer in food retail coupled with a weaker macroeconomic backdrop during the first half dented the group’s performance at home. However there was better news for the 'rest of the world' segment, where sales grew 15 per cent to £287m despite the ongoing macroeconomic tumult in Brazil. The good news was almost entirely due to the benefit of acquisitions made last year.

Analysts at JPMorgan Cazenove expect adjusted pre-tax profits of £463m for the year to December 2016, giving EPS of 101p compared with £411m and EPS of 90p in 2015.

BUNZL (BNZL)

ORD PRICE:2,464pMARKET VALUE:£8.27bn
TOUCH:2,463-2,465p12-MONTH HIGH:2,535pLOW: 1,700p
DIVIDEND YIELD:1.6%PE RATIO:34
NET ASSET VALUE:348p*NET DEBT:100%

Half-year to 30 JuneTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20153.1414732.111.75
20163.4515633.813.00
% change+11+6+5+11

Ex-div: 16 Nov

Payment: 3 Jan

*Includes intangible assets of £1.86bn, or 555p a share