Bunzl reports near-record margins and snaps up two more firms

In some ways, Bunzl (BNZL) has become a victim of its own success. A 2 per cent slide in revenue for 2023 doesn’t look great, but it is 28 per cent above pre-pandemic levels and, as chair Peter Ventress pointed out, adjusted operating profit of £944mn was 46.3 per cent higher than in 2019 – a compound annual growth rate of 10 per cent. 

Yet the weaker top line occurred despite the addition of 19 new businesses (at a cost of £468mn) last year, bringing in an additional £325mn of annualised sales. 

Revenue in North America, which accounts for 60 per cent of the group’s total, fell by over 5 per cent. Chief executive Frank van Zanten said this was due in part to a normalisation of dining habits, reducing demand for takeaway packaging, as well as deflation that encouraged customers to shop around. There was also some disruption as Bunzl made changes to facilitate more own-brand sales in the US. 

Increased own-brand penetration helped to drive the group's margin growth, though, from 7.4 per cent to 8 per cent. Its cash conversion rate also remained high at 96 per cent and net debt excluding leases was steady at around £1.1bn, or 1.1 times earnings, giving it “substantial headroom” to do more deals. 

The company announced two acquisitions alongside these results – the most substantial being Bristol-based catering equipment distributor Nisbets. It has paid an upfront sum of £339mn for an 80 per cent stake in Nisbets, which generated a profit before interest, tax and amortisation of £40.2mn last year on sales of £498mn. Bunzl also bought its first business in Finland.

The shares fell by 5 per cent, though, as the company said organic revenue this year was likely to fall again and that its operating margin would come in “slightly below” 2023 levels. Van Zanten once more put this down to raised expectations, as the 8 per cent margin achieved last year beat prior guidance of 7.8 per cent. 

“We’re now guiding to slightly below 8 per cent and people talk about... warning about margins. We are not warning about margins, we’re very close to the record margins ever and we’re very confident about this going forward,” he said.

The share price decline means Bunzl's shares moved into negative territory for this year, and are only up 4 per cent over the past 12 months. However, with earnings expectations declining, they trade at 18 times earnings, which is slightly ahead of their five-year average and peers. Hold.

Last IC view: Hold, 2,822p, 29 Aug 2023