Bunzl plc (BNZL) Ordinary 32 1/7p

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Bunzl reported first quarter revenue growth of 2.6%, ignoring exchange rates. Growth was entirely driven by acquisitions, with underlying revenue falling 0.9%.

Underlying operating profit was down “significantly” over the quarter, driven by margin declines. Performance was weak in North America as Bunzl struggled to execute a ramp up of own brand products, alongside ongoing challenges with pricing.

The buyback has been paused, having completed £115mn of the planned £200mn.

Full-year guidance has been cut, with Bunzl now expecting moderate revenue growth driven by acquisitions and flat underlying growth (previously “slight” underlying growth). Underlying operating margins are now expected to be below 2024 levels (previously in line).

The shares fell 23.9% in early trading.

Our view

Bunzl, usually a very steady ship, is sailing into choppy waters. First-quarter trading has brought to light serious challenges, some of which have been self-inflicted. The result is a downgrade to current year guidance, a pausing of the buyback, hunkering down the balance sheet, and questions being asked about medium-term growth.

Bunzl is a distribution powerhouse that supplies everyday essentials in the UK, Europe, and North America - like packaging, cleaning supplies, and safety gear. North America is the largest market, highest margin region, and where most of the issues lie. A poorly executed shift in pricing strategy has coincided with ongoing deflation. Add in the loss of a key customer and it’s a recipe for trouble.

Fixes are underway, and there’s still hope that price inflation should start to feed through over the second half, when improved performance is expected.

Zooming out for a minute - despite this misstep, Bunzl is a very well-run organization. Margins are under some near-term pressure, but the longer-term trend has been impressive. It’s also been making good progress on the sales of higher-margin own-brand products, and the use of online channels.

Management sounded a cautious tone about the impact of tariffs, which was a little disappointing. There’s a lot of volatility, and it’s possible that any benefits from higher prices are offset by economic weakness. Still, we think Bunzl is more insulated than most.

We’ve seen this before during Trump’s last presidency, where Bunzl benefited from tariffs through higher prices for customers while at the same time negotiating deals with suppliers. Bunzl has another ace up its sleeve, with its capital light business model and no manufacturing facilities. That means it can quickly shift its supply chain away from high tariff areas.

Acquisitions have been a key part of the strategy and remain so. But given the softer outlook, focus is shifting from spending to saving and the £750mn acquisition pledge is unlikely to be met this year. That’s prudent risk management, but growth will ultimately take a hit given acquisitions have been a key driver in the past.

Profit downgrades are always disappointing, especially when self-inflicted and coinciding with a soft market. The near term looks more challenging than it has for some time. That said, we still have confidence in the long-term case for Bunzl’s resilient portfolio. The valuation, after expectations have been reset, looks attractive – there are no guarantees.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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