Bunzl PLC (LON: BNZL) – Dividend increased as Covid-19 products boosted trading.

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 source 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.

 (Source: Presentation, Company Website)

Key Fundamental Statistics

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. Adjacently, the Foodservice market was worth nearly 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. 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.

Growth Prospects and Risk Assessment

Bunzl is a one-stop-shop for essential everyday items, which is supported by 3,200 sales specialists. It 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. Moreover, there are significant opportunities for future growth through expansion in new geographies and new sectors. Furthermore, the business has maintained a strong financial discipline over the years, and thus, dividend per share has witnessed a CAGR of 10% from FY1992 to FY2019. Also, the cash conversion ratio has remained above the target of 90% since FY2004.

(Source: Presentation, Company Website)

However, there are certain risk and uncertainties to business growth. The organic growth can be impacted if the Company fails to respond to the competitive pressure successfully. Moreover, cost inflation and lower commodity prices can impact revenue and profits. Further, the inorganic growth can be impacted if the Company fails to acquire new businesses or integrate the acquired businesses successfully. Also, there are several financial risks arising from currency fluctuations, unavailability of adequate funding, and increase in taxes.

Key Recent Developments

• 3 September 2020: Bunzl completed the acquisition of MCR Safety (US based distributor of safety products). The acquisition will strengthen the safety business and expand operation in the United States.
• 24 August 2020: The Company confirmed that the additional interim dividend per share for FY19 of 35.8 pence, will be paid on 6 November 2020. It also affirmed that the interim dividend per share for FY20 would be paid on 7 January 2021.

A Glimpse of Business Segments

The Company bifurcates the operations in terms of four business areas based on geographical regions.

(Source: Company Website)

Measuring Non-Financial Key Performance Indicators

The successful implementation of strategies reflected in key performance indicators.

(Source: Presentation, Company Website)

Key Shareholders Statistics 

Financial & Operational Highlights – H1 FY2020 (30 June 2020)

(Source: Interim Report, Company Website) 

• In the first half of the FY2020, despite the challenges due to Covid Crisis, the Company has demonstrated the strength of supply chain and customer proposition along with a resilient business model and strategy.
• The Company delivered revenue growth of 7% and 6.7% on CER (constant exchange rates) basis for the period.
• BNZL has delivered a double-digit increase in reported operating profit, adjusted operating profit, adjusted profit before income tax, reported profit before income tax, adjusted earnings per share and reported earnings per share on both reported and constant exchange rates bases.
• The Company has given an increase of 39.7% in return on average operating capital and 14.4% growth in return on invested 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, and interim dividend surged by 1.9% to 15.8 pence in H1 FY2020.
• Bunzl has resumed acquisition activities with the proposed acquisition of Abco Kovex and MCR Safety and is in active discussions to create a strong pipeline of potential opportunities in future.

Financial Ratios – Decent Profitability Margins and Liquidity Profile versus the Industry Median

Reported profitability metrics for the H1 financial year 2020 stood in line with the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Bunzl Plc has delivered a decent return for the shareholders’ as return on equity of 10.2% was slightly higher as compared to the industry median of 9.7%. On the liquidity front, Bunzl Plc’s current ratio was slightly lower than the industry median of 1.52x but has a sufficient liquidity to meet short-term obligations. On leverage front, the debt-equity ratio was 1.33x, which was higher as compared to the industry median of 0.65x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

Daily Chart as on 14 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 14 September 2020 (before the market close, at 8:38 AM GMT+1), Bunzl Plc shares were trading at GBX 2,379.00, up by 0.46% against the previous day closing price. Stock 52-week High was GBX 2,521.00 and Low of GBX 1,242.00, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 2,327), 100-day (GBX 2,119), and 200-day (GBX 2,005) simple moving average prices, which reflects an uptrend in the stock.

200-day RSI is currently supporting the upward movement (45 level), which means there is a good potential for a short term rebound in the stock price.

Bunzl Plc Vs FTSE-100 Index (1 Year)

(Source: Refinitiv, Thomson Reuters)

In the last one year, Bunzl Plc share price has delivered 9.53 per cent return as compared to negative 17.80 per cent return of FTSE-100 index, which shows that the stock has outperformed the index during the last one year.

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

Business Outlook Scenario

Despite the unprecedented challenges presented by the Covid-19 pandemic, Bunzl demonstrated consistent growth in top-line and bottom-line financial items of the income statement. Therefore, the fundamental aspects of business remain attractive with robust cash generation and long track record of dividend growth. 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.

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.

(Source: Presentation, Company Website)

Over the course of 4 years (FY15 - FY19), the Company’s revenue surged from GBP 6,489.7 million in FY15 to GBP 9,326.7 million in FY19. Compounded annual growth rate (CAGR) stood at 9.49 per cent.

Based on the strong financial performance, strength of supply chain, resilient business model and support from the valuation as done using the above method, we have given a “Buy” recommendation at the current market price of GBX 2,379.00 (as on 14 September 2020, before the market close at 8:38 AM GMT+1), with high single-digit upside potential based on 20.15x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

*Dividend Yield may vary as per the stock price movement.

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

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