Bunzl reported first-half revenue of £5.7bn, down 0.4% when ignoring exchange rates. Revenue was boosted by acquisitions, which offset a 4.9% drop in underlying revenue. Volumes and revenue trends improved over the half and into the start of the new period.
Underlying operating profit rose 7.4% to £456mn. The increased penetration of own-brand products, higher margin acquisitions, and operational efficiencies all contributed to margins rising from 7.4% to 8.0%.
Free cash flow rose 8.4% to £310mn. Underling net debt, including leases, rose from £2.0bn to £2.5bn from the start of the year – largely due to the £439mn of net cash spent on acquisitions.
The interim dividend was raised 10.4% to 20.1p and a £250mn buyback was announced, with plans for another £200mn to begin at the end of the year.
Full-year guidance has been raised, with adjusted operating profit expected to show a “strong” increase on last year and margins moderately higher.
The shares rose 9.2% following the announcement.
Our view
Bunzl has shown its strengths over the first half. Performance isn’t shooting the lights out, but smart acquisitions and work on improving margins has paved the way for improved profit guidance.
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 a struggle. 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 2024 and comparable periods ease, but it’s pricing where we see headwinds persisting.
Aside from organic growth, it's acquisitions that take centre stage. Over the past 20 years, they’ve accounted for around two-thirds of the impressive 9% compounded annualised growth rate in revenue. It’s a highly fragmented market so there’s plenty of opportunity to snap up businesses with attractive margins at decent prices.
Having committed to over £650mn to acquisitions so far this year, Bunzl has already exceeded the previous high from back in 2017. There’s been further evidence that the pipeline is strong with management committing to spend at least £700mn on acquisitions in each of the next 3 years.
That’s positive news, but acquisition-led strategies have 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 this covered with a highly cash-generative business model and a strong balance sheet with plenty of room to tap debt markets if needed.
We've been genuinely impressed by Bunzl's margin performance and remain supportive of the resilient portfolio and highly cash-generative model. We're mindful that organic weakness puts a lot of pressure on acquisitions to do the hard work and expect top-line growth to be a near term challenge.
Environmental, social and governance risk
General Industrial companies are medium risk in terms of ESG but can trend up to the higher end of the spectrum depending on subindustry. The primary risks can include labour relations, emissions (either product or production-based), business ethics and product governance. Other concerns are waste and health & safety.
According to Sustainalytics, Bunzl’s overall management of material ESG issues is strong.
While its overall reporting could be further improved, Bunzl has implemented initiatives such as linking executive pay to ESG goals, establishing a board committee for ESG oversight, adopting a strong environmental policy, and providing robust whistleblowing channels.
Bunzl key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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