Bunzl PLC (LON: BNZL) – Delivered the 28^th consecutive year of dividend growth during FY20

Bunzl PLC (LON: BNZL) is an FTSE 100 Index listed International Distribution Company, which provides customised solutions to B2B customers. Moreover, it provides one-stop-shop distribution and outsourcing service across six sectors and 31 countries. BNZL 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 that is supported by around 2,600 locally-based customer service specialists and approximately 3,200 sales specialists.

 (Source: Company presentation)

Recent trend of dividend payments

BNZL will pay a final dividend of 38.3 pence per share for FY20 on 01 July 2021, while the ex-dividend date will be 20 May 2021. Moreover, BNZL had already paid an interim dividend of 15.8 pence per share, taking the total FY20 dividend to 54.1 pence per share, an increase of around 5.5% from the total dividend paid in FY19. BNZL had delivered the 28^th consecutive year of dividend growth during FY20. 

Growth Prospects and Risk Assessment

• Lucrative acquisition deals made during Q1 FY21 – BNZL had completed three acquisitions in the UK, Netherlands, and Canada during the first two months of Q1 FY21. Moreover, the Company had acquired Deliver Net in January 2021 to strengthen the Company’s existing care home business in the UK. Furthermore, BNZL had completed the acquisition of Netherland-based Disposable Discounter, which is an online distributor of disposable food service products to a highly fragmented customer base, and it will enhance BNZL’s e-commerce capabilities. The Company had also acquired Canada-based Pinnacle during February 2021, which would complement BNZL’s existing cleaning & hygiene business in Canada.
• Sizeable Growth opportunities – BNZL had ample opportunities to increase the footprints in several countries based on the penetration in UK & Ireland. Meanwhile, the Company had adopted a disciplined acquisition approach with a current return on invested capital of around 16.2%.
• Diversification Benefits– The Company had made a significant shift towards higher-margin sectors like healthcare, safety & cleaning, and the hygiene market.
• Contract Renewal – The Company had renewed a multi-year contract with a logistics customer in the Netherlands. Presently, BNZL is a supplier of around 1,000 products, up from 600 previously, across branded items, packaging materials, disposables, and transport packaging.

 (Source: Company presentation)

The dividend yield and return on equity of BNZL remained significantly higher than the corresponding multiples of the General Industrials sector, illustrating the Company’s capability to generate higher returns for shareholders as compared to the industry.

Key Risks

• Competitive pressures – As the Company is operating in highly competitive markets, BNZL may lose several customers and face competition from international and national companies operating in a similar space.
• Financial collapse of a large customer – Any unexpected insolvency of a large customer or several small clients may lead to a significant reduction in the top-line business.
• Product cost deflation – The reduction in commodity prices, lower trade tariffs and foreign exchange fluctuations may require the Company to pass on such cost reduction to customers, which may affect the top-line and bottom-line business of the Company.
• Unsuccessful Acquisition – Inadequate pre-acquisition due diligence may result in paying more for a target company rather than its fair value.

Subsequently, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics. 

BlackRock Institutional Trust Company, N.A. is the most significant shareholder as it holds nearly 17.12 million shares as of 31 March 2021.              

Trading Update (as of 21 April 2021)

• BNZL had delivered revenue growth of around 4% at actual exchange rates and 10.4% at constant exchange rates during Q1 FY21 despite pandemic-related challenges.
• The underlying revenue growth stood at around 1.4% during the period, in line with the Group's expectations.
• Moreover, the sales of the top 8 Covid-19 related products made a healthy contribution of around 6.4% in the underlying revenue growth of 1.4% achieved during the period.

FY20 Financial Highlights (for the twelve months ended 31 December 2020, as of 01 March 2021)

(Source: Company result) 

• BNZL had reported a significant rise in total revenue as it grew by 8.4% from £9.33 billion during FY19 to £10.11 billion during FY20, benefitted from larger Covid-19 related orders.
• On the profitability front, the adjusted operating profit grew by 19.1%, and adjusted earnings per share rose by around 24.7% during FY20,
• With regards to the financial position, the Company had shown a strong cash conversion ratio of 103%, with net debt to EBITDA of around 1.5x during FY20, indicating significant financial headroom for growth.
• BNZL had incurred an acquisition expenditure of around £445 million during FY20, which remained the second-highest in the Company’s history. 

Financial Ratios (FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 17 May 2021, at 08:08 AM GMT, BNZL’s shares were trading at GBX 2,313.00, up by around 0.30% from the previous day closing price. Stock 52-week High and Low were GBX 2,710.00 and GBX 1,738.00, respectively.

BNZL stock is trading in an upward trend and sustaining above an upward sloping trend line for more than a year. On the weekly chart, the leading indicator RSI (14-period) is trading at ~46 levels and signalling sideways to a positive trend for the stock.

In the last ten years, BNZL’s stock price has delivered a positive return of ~205.88%, and it has outperformed the FTSE All-Share General Industrials index with a return of about 109.26% and the FTSE 100 index with a return of about 18.79%. 

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

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

The Company had shown remarkable business performance during Q1 FY21. Moreover, BNZL had anticipated robust revenue growth in 2021 at constant exchange rates after deducting Covid-19 related orders, which represented approximately £550 million of the total revenue in FY20. It is expected that the recovery in sales of other products would be offset by a decline in the Covid-19 related orders. Nonetheless, the recent acquisitions would make significant contributions to the revenue during 2021. Meanwhile, the foodservice and retail sectors would be expected to recover well during the second half of 2021. However, it would still be expected to remain lower than the levels achieved during 2019. On the geographical front, the North America region would be anticipated to show robust revenue growth driven by the accelerated benefits drawn from the recent acquisitions. In a nutshell, BNZL estimated the group operating margin to return to a more historic level during FY21.

Considering the good acquisition momentum, strong balance sheet, consistent dividend growth, robust cash generative tendency, ample growth opportunities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Bunzl at the current price of GBX 2,313.00 (as on 17 May 2021 at 08:08 AM GMT), with lower-double digit upside potential based on 20.12x Price/NTM Earnings (approx.) on FY21E 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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