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All at the margins for Bunzl

The core business has seen a volume recovery even as Covid-19-related sales contract
August 30, 2022
  • Retail and hospitality revenue channels restored
  • Profitability constrained by lower-margin sales mix 

The share price of Bunzl (BNZL) is now back in black for 2022 after hitting an eight-month low in June. Despite earlier misgivings, the anticipated fall-away in Covid-19 sales has been offset by price increases and volume growth in the core business, but the group has not been immune to cost inflation at the operating level.

The distribution and outsourcing group certainly benefited from an upsurge in demand for personal protection equipment during the pandemic, but unlike other companies which benefited from the resultant obsession with hygiene, its diversified offering supported sales as the global economy groaned back into life and retail and hospitality revenue channels were restored.

Falling pandemic-related sales led to an overall 6.1 per cent decline in Covid-19-related orders, while the spread of hybrid working patterns has continued to weigh on cleaning and hygiene sales. By contrast, product cost inflation in food service and retail has proved beneficial to underlying sales growth. The North American segment, which accounts for 61 per cent of sales, delivered revenue growth of 9.9 per cent on an underlying basis, while Continental Europe and the UK & Irelandalso registered significant top-line growth.

If volume recovery has been a feature of the first-half performance, so, too, has a squeeze brought about by the oil price surge and rising freight costs. The North American segment saw a 30 basis point drop in the operating margin to 6.7 per cent. Wage growth in the US has stabilised, but the change in business mix has had a negative impact on profitability. Inflation has supported margins to a degree, but it has been countered by the reduction in sales of higher-margin, Covid-19-related products. Bunzl still managed to drive up operating profits by 7.7 per cent to £327.5mn and management expects that the full-year operating margin will be “higher than historical levels and only slightly lower than that achieved in 2021”.

Chief executive Frank van Zanten lauded “the depth and flexibility of [Bunzl’s] global supply chains”, but the group’s geographical spread has also supported trading.

The group operates in a fragmented marketplace, so acquisitions play an important role, with a further six announced since May this year alone, adding an estimated annualised revenue of approximately £220mn.

Aggregate demand in the economy could contract markedly in the coming months, but management believes Bunzl is reasonably well placed given the “essential nature of the products and value-added services”. Maybe so, but with the shares changing hands at 17 times consensus earnings and no obvious near-term share price catalysts, we remain on hold.

Last IC View: Hold, 2,887p, 28 Feb 2022

BUNZL (BNZL)    
ORD PRICE:2,977pMARKET VALUE:£10.0bn
TOUCH:2,976-2,982p12-MONTH HIGH:3,249pLOW: 2,363p
DIVIDEND YIELD:2.0%PE RATIO:22
NET ASSET VALUE:712p*NET DEBT:75%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20214.8727663.316.2
20225.6529766.217.3
% change+16+8+5+7
Ex-div:17 Nov   
Payment:04 Jan   
*Includes intangible assets of £2.94bn, or 870p a share