Bunzl plc (BNZL) Ordinary 32 1/7p

Bunzl has upgraded its full year expectations. Group operating margins are now expected to be slightly higher than last year, compared to expectations of a small dip. The improvement reflects improved own-brand performance, and acquisitions.

Underlying revenue is expected to fall around 5% in the first half, as previously announced lower volumes and deflation take effect in the US business. Volume reductions are being driven by the US food service redistribution business, as Bunzl pivots towards increased own-brand trading.

The group agreed to buy RCL Implantes, a Brazilian distributor specialising in surgical and medical devices, in April.

The shares rose 1.3% following the announcement.

Our view

Bunzl has injected enthusiasm into proceedings, on news margins are going to be better than expected this year. While performance isn’t shooting the lights out, this is definitely a step in the right direction.

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.

The Nisbet deal (a distributor of catering equipment and consumables) was bigger than we’re used to seeing. At £339mn on its own, that’s already 72% of the total spend on 19 acquisitions in 2023. Initial details point to a slight premium paid compared to the usual sweet spot, but it’s expected to be a meaningful benefit to earnings in its first full year post-completion.

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. In the short term, we're mindful that organic weakness puts a lot of pressure on acquisitions to do the hard work. Expect to see some further top-line declines before things stabilise.

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