Own brands help Bunzl to eke out more margin

The tougher trading environment has weighed on distributor Bunzl (BNZL), with many of the end markets it supplies enduring tricky conditions.

Revenue for the half-year edged up by 0.6 per cent at constant exchange rates, or by 2.4 per cent if the contribution from a UK healthcare business that was sold last year is stripped out.

Its UK & Ireland and European arms performed better than its North American division, where weakness in the foodservice sector sucked momentum out of the business – underlying revenue dropped by 3.1 per cent.

Still, the company reported a 10 per cent increase in statutory operating profit, with its operating margin edging up from 7.3 per cent to 7.4 per cent. Chief executive Frank van Zanten highlighted the growth in take-up of its own brand products as a factor in this. Own-brand sales have increased in recent years as foodservice and other businesses facing inflationary pressures have swapped out branded lines. They now make up around a quarter of Bunzl's product mix, but it has the opportunity to increase this as it adds new businesses.

The company has spent £350mn buying 12 businesses so far this year, including two announced alongside these results: Safety First, a distributor with £22mn in 2022 revenues that has given it a foothold in Poland, and Netherlands-based industrial consumables seller EcoTools.nl (£17mn in revenues last year). These bring the total number of acquisitions since 2004 to 207, and it has self-funded the £4.9bn it has shelled out on these.

“Bunzl is a real cash machine,” van Zanten said.

Indeed, an unwind of inventory built up over the pandemic allowed Bunzl to increase the amount of free cash flow generated in the half year to £286mn, which helped it to reduce net debt (excluding leases) by £140mn to just over £1bn, or 1.1-times cash profit. This gives it plenty of headroom for further buys, and its current deal pipeline is “very active”, according to van Zanten.

An upgrade to full-year guidance (it now expects adjusted operating profit to be “moderately higher” than the £886mn generated last year) helped to push Bunzl’s shares up by 4 per cent. They trade at almost 16-times broker Shore Capital’s forecast earnings, marginally below their five-year average of 17-times but well ahead of peers. Still, we agree with the broker’s assertion that this is a reasonable price to pay for a company that is “a quality cash compounding play”. Buy.

Last IC View: Hold, 3,079p, 27 Feb 2023