Bunzl's revenue fell 4.8% in the third quarter, ignoring the effect of exchange rates. That reflected a continued decline in Covid-19 related sales, lower inflation and broader normalisation of trends which dented volumes. This was worse than expected, and Bunzl has downgraded full year revenue expectations to "slightly lower" than 2022.
Despite the sluggish revenue performance, operating margins have been more resilient. As such, the group has maintained its full year operating profit outlook.
Bunzl completed two acquisitions in the period. A distributor of surgical and medical devices, and an Irish traffic and safety solutions distributor.
The shares fell 4.3% following the announcement.
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Our view
Bunzl has disappointed the market with a softness in revenues. Margins are proving resilient, but this hasn't been enough to reverse sentiment.
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. Overall we retain the view that Bunzl's an attractive business, but there are some things to monitor.
Recent organic performance has been largely propped up by higher prices, which have been essential as a tool to keep inflated costs from eating into margins. Falling inflation is pulling sales down and normalising sales from Covid related products across geographies are a drag. The latter should normalise as we move through the year and comparable periods ease. The exact timing of this is tough to map though.
Aside from organic growth, it's acquisitions that take centre stage. Around two thirds of the revenue growth over the last 10 years has been a result of adding new businesses to the portfolio. Acquisitions spend has been increasing in recent years 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. As is the balance sheet, where leverage has significantly dropped in recent years. We think there could be scope for buybacks if things continue, though acquisition spend will likely take priority.
We're mindful that there could be some further declines before things stabilise, especially around raw material pricing. But we've been genuinely impressed by Bunzl's margin performance. There aren't too many companies that can see revenue fall to the tune of 5% and maintain operating profit guidance.
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 come down in recent months reflecting those concerns.
Bunzl key facts
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