Bunzl Stock Surges on Profit Forecast Upgrade and Buyback Announcement
Bunzl has received a significant boost in its stock market performance following an upgrade to its annual profit forecast and the announcement of its inaugural share buyback, which will return an initial £250 million to shareholders, with a subsequent £200 million expected to follow.
On Tuesday, investors reacted positively, pushing shares of the FTSE 100 supplier of workplace products up by as much as 12 percent after the company revised its adjusted operating profit guidance upwards, supported by new acquisitions and improved profit margins.
Known in financial circles as “Boring Bunzl” for its unexciting product lineup and stable performance, Bunzl offers a range of supplies including safety gloves, helmets, and cleaning products tailored for industries such as food service, construction, hotels, supermarkets, and restaurants.
“I remain confident that the resilience of our business model, the diversification of our portfolio, and our unwavering focus on strategic priorities will continue to drive the group’s success,” stated Frank van Zanten, the company’s chief executive.
For the six-month period ending June 30, Bunzl reported a slight decline in revenue of 0.4 percent, totaling £5.7 billion. Meanwhile, pre-tax profits fell to £279.4 million, marking an 11.9 percent year-over-year reduction.
The company’s largest market, North America, faced challenges, with revenues declining by 5.1 percent to £3.2 billion due to reduced demand in the food service sector spurred by destocking and inflationary pressures.
Conversely, sales in continental Europe increased by 3.8 percent to £1.2 billion, and in the UK and Ireland, revenues rose by 4.1 percent to £689.1 million.
Bunzl’s operating margins improved to 8 percent, up from 7.4 percent in the first half of 2023, primarily due to recent acquisitions and increased penetration of its own brand products. Underlying operating profit rose by 7.4 percent, reaching £456 million.
Since the beginning of this year, Bunzl has made seven acquisitions, with expenditures on these takeovers exceeding £650 million. Noteworthy transactions include the acquisition of Pamark, a distributor based in Finland, and Nisbets, a catering equipment retailer in Bristol.
Additionally, Bunzl announced the recent purchase of Powervac, an Australian distributor of cleaning equipment.
The company’s growth strategy continues to focus on acquiring smaller, local businesses. Over its history, Bunzl has completed more than 170 acquisitions since its founding in 1940. Van Zanten pointed out that the company’s “acquisition pipeline remains active,” indicating ongoing plans for further takeovers.
Bunzl also reported a 10.4 percent increase in its interim dividend, from 18.2p to 20.1p. Alongside this, the inaugural £250 million share buyback program and an anticipated additional £200 million buyback in 2024 were announced.
Jacob Armstrong, an analyst at Stifel, noted, “This is a strong update from the group, demonstrating an increased commitment to capital allocation alongside the announcement of the buyback.”
Following the announcements, shares in Bunzl experienced an increase of up to 12 percent in early trading, with a later 238p rise, or 7.4 percent, leading to a share price of £34.52.
Company Background
Bunzl, which originated as a haberdashery in Bratislava in 1854, has historically focused on expanding its global reach through acquisitions. For the first time, the company is now prioritizing share buybacks. Having invested a record £650 million in acquisitions this year alone, Bunzl has committed to allocate £700 million annually for acquisitions over the next three years. If this figure is not fully utilized, the excess will be returned to shareholders in future capital returns.
This approach not only maintains an active acquisition pipeline but also aims to stabilize Bunzl’s net debt to EBITDA ratio, targeting an increase from 1.5 times to the 2-2.5 times range by the end of 2027.
In its mid-year financial results, CEO Frank van Zanten remarked that Bunzl’s “consistently strong cash generation means that leverage has been below our target range for some time.” He confirmed a commitment to returning leverage to the target range by 2027 and promptly initiated a substantial share buyback program.
The company’s major expenditure this year included the £339 million acquisition of Nisbets, a commercial catering equipment supplier built over four decades.
By the end of 2023, Bunzl reported free cash flow of £643.5 million, giving it the financial strength to return at least £450 million to shareholders before year-end.
Robin Speakman, an analyst at Shore Capital, commented on Bunzl’s strategy, stating, “Their preferred method of utilizing surplus capital will be through acquisitions and ordinary dividends, which remain a priority.” He also acknowledged that the share buyback plans indicate strong cash flow credentials.
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