Bunzl has shared details on first-half trading, with revenue expected to increase 4-5% at the reported level driven by acquisitions and the benefit of a weaker sterling. Underlying revenue and operating margin are expected to be broadly flat.
Revenue in North America is expected to decrease due to lower volume in the food service sector, which is likely to be temporary, and reduced benefits from higher prices. There's also expected to be a decline in revenue growth in the Rest of the World due to reduced sales related to Covid-19. Revenue growth is expected to be good In Continental Europe and strong growth in the UK & Ireland, thanks to higher prices.
Full-year guidance remains, with revenue expected "slightly higher" driven by organic growth and acquisitions. Guidance on operating margin has improved, now expected to be "slightly lower" than last year as opposed to previous commentary suggesting it would be "slightly higher than historical levels".
The shares were down 2.4% in early trading.
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Our view
The small amount of underlying growth seen over the first-quarter looks to have reversed over the second, as Bunzl expects half-year underlying revenue to be broadly flat. The new, upgraded, guidance on operating margins points to something slightly lower than the 7.4% delivered last year.
Bunzl's a mashup of around 150 distribution businesses, which source and deliver a range of essential products. There's nothing fancy about the products on offer, think food packaging and safety equipment. But that's what we like about the product range, these are things customers can't go without.
Growth won't shoot the lights out, but it's been consistent for a long time. Both revenue and underlying operating profit have grown at an annualised rate of 9-10% going back to 2004. Growth in 2023 will be harder to come by as we lap strong 2022 numbers, but robust performance during tough times has been particularly impressive. Something that has benefitted both investors and helped attract customers but there are no guarantees that will continue.
Recent organic growth has been largely driven by higher prices, which have been essential as a tool to keep inflated costs from eating into margins. We're expecting cost pressures to continue over 2023, and further price rises will likely follow. A benefit of selling essential products and being deeply integrated into customers' supply chains is a degree of stickiness that aids in pricing power.
Aside from organic growth, it's acquisitions that take centre stage. Two thirds of the revenue growth over the last 10 years has been a result of adding new businesses to the portfolio. A handful of acquisitions this year and a healthy pipeline support continued growth from this avenue.
Acquisition-led strategies have their drawbacks. If the pool of target companies dries up or a business needs to raise external cash to fund acquisitions, then it's not usually sustainable. Bunzl's got the latter covered though. Cash conversion (how much operating profit feeds through to cash flow) is a key strength, coming in at over 100% in each of the last 4 years and the balance sheets in a strong position, last we heard.
Overall, we think Bunzl has much to offer. We're supportive of the resilient portfolio and highly cash-generative model. The key thing to watch is how organic growth plays out from here, prolonged weakness in this area puts added pressure on acquisitions to do the hard work. The valuation's ticked higher over 2023, with shares outperforming the broader market. That adds pressure to deliver and there are no guarantees.
Bunzl key facts
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