Bunzl PLC (LON: BNZL): Encouraged by portfolio resilience, the strength of supply chain, and agility of the operating model.

Bunzl PLC is a FTSE 100 Index listed International Distribution Company, which provides customised solutions to B2B customers. It provides one-stop-shop distribution and outsourcing service across 6 sectors and 31 countries. The Company sources its products internationally, to ensure that customers have access to the most suitable products to meet their needs. Bunzl has a unique service offering which is supported by ~2,600 locally-based customer service specialists and ~3,200 sales specialists. The end customer market is quite diverse, which provides resilience to the business as it serves to various industries, such as Foodservice, Grocery, Cleaning & Hygiene, Retail, Healthcare, among others. The operations of the group are differentiated in four geographical segments, namely North America, Rest of the World, Continental Europe, and the UK & Ireland.

On 1 March 2021, Bunzl expects to provide results for the year ended 31 December 2020.

(Source: Company Website)

Growth Prospects and Risk Assessment

Bunzl has a well-diversified business model which is spanned across six sectors and 31 countries. Nearly 74% of the revenue is contributed by essential services (Foodservice, Grocery, Cleaning and Healthcare), which provides resilience to business against uncertain trading conditions. It is a one-stop-shop for essential everyday items, which is supported by 3,200 sales specialists. Moreover, there are significant opportunities for future growth through expansion in new geographies and new sectors. The recent acquisitions of SP Equipamentos and ICM shall expand the Company’s safety business in Denmark and Brazil.

However, there are certain risks and uncertainties to the business growth. The Covid-19 pandemic can lead to the financial collapse of large customers. Also, Bunzl operates in highly competitive markets and faces intense pricing competition, which can put pressure over margins. Moreover, revenue and profits can be affected if the Company fails to reduce the operating cost while commodities prices are lower. The unexpected increase in cost due to foreign currency fluctuations and higher trade tariffs can also impact profitability. Furthermore, the growth trajectory can be affected if the Company fails to acquire new businesses or integrate the acquired businesses successfully. Also, there is an operational risk with cybersecurity failure. Adjacently, the increase in taxes, currency fluctuations, and insufficient liquidity can cause significant financial risk.

Industry Outlook Dynamics

According to the report from 360 Market Updates, the market size of the Global Specialty Drug Distribution is expected to reach US$1,580 million by 2025. The key factors that will impact the market in future include digital engagement, rising food, and labour costs, growing demand for customisation, and rising demand for same-day delivery. Adjacently, the Foodservice market was valued approximately US$3.4 Trillion in 2018 and forecasted to reach US$4.2 Trillion by 2024, with a CAGR of 3.6% during 2019-2024.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Bunzl Plc.

Recent Developments

On 4 January 2021: Bunzl stated that it has 36,998,961 ordinary shares, with no treasury shares.

On 22 December 2020: The Company announced the appointment of Maria Fernanda Mejía as a non-executive director.

On 9 December 2020: BNZL stated that it had made a block listing of 75,000 Ordinary Shares in the capital of the Company, which is at 32 1/7 pence each, and to be admitted to the Official List and to trade on the London Stock Exchange.

Pre-Close Trading Update (for the year ending 31 December 2020, as on 16 December 2020)

• In the year ending 31 December 2020, the Company is expected to deliver a strong performance, with continued growth in Covid related orders in Q4.
• For FY20, the revenue is expected to increase by approximately 9% at constant exchange rates and by approximately 8% at actual exchange rates, driven by the impact of acquisition, a higher proportion of imported own brand products and growth in Covid related orders.
• The Company saw a decline in other product sales in 2020, but it expects further improvement.
• It expects operating margin to be higher for 2020 than the prior year, while availing sustainable benefit from the mix of products sold.
• Looking forward, the Company expects a 2021 revenue to be lower than 2020, with minimal benefits from Covid-19 related products.
• The Company announced that it has completed the purchase of Snelling and completed the acquisition with SP Equipamentos,

Q3 Trading Update (as on 14 October 2020)

• The year-to-date performance for FY2020 remained strong, with strong sales of Covid-19 related products.
• In the Q3, the revenue surged by 4% on actual exchange rates, reflecting growth in Covid-19 related products' sale.
• The top 8 Covid-19 related products contribute 17.5% of the total growth in sales, reflecting large orders received.
• The small orders declined for the period but remained strong.
• The revenue from other product sales improved after easing in lockdowns.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 24 August 2020)

(Source: Company Website)

• The Company delivered revenue growth of 7% and 6.7% on CER (constant exchange rate) basis for the period.
• BNZL has delivered a double-digit increase in reported operating profit, adjusted operating profit, adjusted profit tax, reported profit before income tax, adjusted earnings per share and reported earnings per share (on constant exchange rate basis).
• The Company has given an increase of 39.7% in return on average operating capital and 14.4% growth in return on capital for the period.
• The Company has a strong cash conversion in H1 FY2020 of 112% with net debt to EBITDA of 1.6x (FY2019: 1.9x).
• The Company remained committed to a 27-year dividend growth track record with a final dividend of 35.8 pence per share.

Financial Ratios

Share Price Performance Analysis

On 18 January 2021, at the time of writing (before the market close, at 8:05 AM GMT), Bunzl PLC shares were trading at GBX 2,436.00, down by 0.08% against the previous day closing price. Stock 52-week High and Low were GBX 2,710.00 and GBX 1,242.00, respectively.

From the technical standpoint, 200-day SMA (2,228.32), 200-day EMA (2,300.68) and 14-day RSI (40.76) are supporting the upside potential.

In the past one year, Bunzl PLC’s stock price has delivered a positive return of ~16.04% return as compared to negative ~11.87% return of FTSE 100 index and a positive ~1.08% return of FTSE All Industrials index, which shows that the stock has outperformed the benchmark index and the sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Business Outlook Scenario

Although the Company continues to face challenging trading conditions in some markets, their strong competitive position, resilient & diversified businesses, and the ability to consolidate the fragmented market should ensure improved growth in the coming years. In relation to acquisition activity, it has a promising pipeline to supplement organic growth with acquisitive opportunities. Looking forward, the Company plans to undertake focused acquisitions to consolidate the fragmented market. Moreover, the recent acquisitions of MCR Safety and Abco Kovex will create potential opportunities and strengthen the pipeline for business growth.

(Source: Company Presentation)

Considering a strong performance in Q3, increased FY20 production guidance, sustainable dividend yield, operational conditions improving towards normal levels, robust financial & liquidity position, higher profitability margins, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Bunzl Plc at the current price of GBX 2,436.00 (as on 18 January 2021, before the market close at 8:05 AM GMT), with lower-double digit upside potential based on 17.83x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

* The dividend yield is subject to change as per the stock price movement.

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