Bunzl has carved a successful and sizeable niche by supplying the food retail industry with stuff that customers need but don't buy - bags, labels and display items. Its steady growth characteristics have caused investors to pile in. Currently the price is 49 per cent up on its 12-month low and close to its record high of 1,168p. That puts its rating well above shares in similar companies, leaving little margin for error. It's time to bag profits and sell.
- Defensive favourite
- Headroom for more deals
- Share rating well above similar companies
- Cash flow falling/debt rising
- Underlying sales growth uninspiring
The distributor has an enviable record of delivering steady growth in sales and adjusted earnings per share for the past 10 years. Add in consistent dividend growth since 1997 - and still lots of dividend cover - and its shares are an unlikely 'sell' candidate. But this week's first-half results for 2012 show that headwinds from falling cash flow and rising debt could constrain the acquisitions that have fuelled more than two-thirds of that growth.
The food packaging and hygiene supplies distributor reported solid results at the halfway stage, with revenue up 7 per cent to £2.61bn, and underlying pre-tax profits up 9 per cent to £152m; the interim dividend was increased by 9 per cent in line with profits. But, take out last year's acquisitions, and underlying revenue growth was an uninspiring 4 per cent. Put another way, the current share rating is a high price to pay for a company growing at only around nominal GDP.
BUNZL (BNZL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,099p | MARKET VALUE: | £3.6bn | |
| TOUCH: | 1,099-1,100p | 12-MONTH HIGH: | 1,168p | LOW: 715p |
| DIVIDEND YIELD: | 2.7% | PE RATIO: | 15 | |
| NET ASSET VALUE: | 234p | NET DEBT: | 88% | |
| Year to 31 Dec | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 4.65 | 216 | 46.4 | 21.6 |
| 2010 | 4.83 | 225 | 49.1 | 23.4 |
| 2011 | 5.11 | 194 | 38.2 | 26.4 |
| 2012* | 5.35 | 328 | 71.5 | 27.7 |
| 2013* | 5.64 | 353 | 76.5 | 29.7 |
| % change | +5 | +8 | +7 | +7 |
Normal market size: 2,500 Matched bargain trading Beta: 0.8 *Jefferies forecasts (profits and earnings not comparable with historic figures) | ||||
The key then to sustaining the heady rating is a record of successful acquisitions. But growth by acquisitions always brings risks, as a recent blemish on Bunzl's record shows. The 1999 purchase of UK vending business Provend was sold last year for a loss of £56m. That meant reported pre-tax profits for 2011 (see table) were barely ahead of the £191m made in 2007.
Bunzl has funded many of its bolt-on acquisitions through cash and debt, but, as the half-year results show, the room available to fund growth is getting tighter. Operating cash flow in the first half was down £8.2m to £133m as Bunzl had to fund an extra £42m of working capital. That meant free cash flow - the amount left over for shareholders - fell from £84m to £73m. Deduct £73m spent on acquisitions (£52m in the previous first half) and net debt rose £32m to £685m.
Chief executive Michael Roney thinks there is still plenty of room left on existing borrowing facilities and he is comfortable increasing debt by around a further £300m if the right deal comes along. But some £430m of Bunzl's debt facilities and bonds are up for renewal over the next 12 months, almost double the amount that needed refinancing at the same time last year.
