- Sales weakness persists
- Deflation to impact profits
- Further £200 million buyback announced
Renowned for its resilience, outsourcing business Bunzl (BNZL) said it expects to deliver a ‘strong’ year-on-year adjusted operating profit increase for the year ending 31 December 2024 in the face of an uncertain economic backdrop.
So why were shares in the distribution and services business the FTSE 100’s biggest fallers in early deals on 17 December, sliding 5.3% to £33.68?
Well, the London-headquartered firm warned ‘more persistent’ than expected deflation will weigh on its 2024 profits and there was also disappointment as guidance for ‘slight’ organic growth in 2025 left investors cold.
ONGOING SALES WEAKNESS
Bunzl supplies those mundane-yet-essential items other firms need in order to do business but don’t sell to their customers, such as disposable coffee cups to cafes, food wrap to supermarkets, hard hats to builders and rubber gloves to hospitals.
Guided by CEO Frank van Zanten, Bunzl insisted 2024 has been another year of ‘significant progress’ and it expects reported revenue for 2024 to be ‘between 0% and 1% lower at actual exchange rates’.
Unfortunately, that guidance was below the 0.1% growth called for by consensus and Bunzl is on course to deliver ‘a small decline in underlying revenue over the year’.
The company also spooked the market by warning that deflation is likely to be ‘more persistent than previously anticipated’ and have a ‘slight impact’ on 2024’s adjusted operating profit, driven by Continental Europe.
ACTIVE DEAL PIPELINE
The reassuring news for investors was that group operating margin for 2024 is ‘strong and continues to be moderately above the level reported for 2023’. And for next year, the company expects operating margins will remain substantially higher compared to pre-pandemic levels with a boost from higher margin acquisitions.
In its statement, deal-hungry Bunzl also drew attention to two modest bolt-on acquisitions in the fourth quarter with combined revenues of £46 million, namely specialist foodservice business C&C and Comodis, a distributor of cleaning and hygiene products in France.
‘We continue to execute on our capital allocation commitments, and welcome C&C and Comodis to the group, enhancing our offerings in the UK and France, whilst also confirming a further £200 million share buyback over 2025,’ said van Zanten.
‘Overall, during 2024 the Group has committed a record spend of more than £850 million with 13 announced acquisitions year-to-date, and our pipeline remains active.’
MARGIN HEADWIND
Russ Mould, investment director at AJ Bell, commented: ‘It’s rare to see Bunzl doing anything other than plod along so a warning from the distribution company has caught the market by surprise. The company says stickier than expected deflation will hit profit and that’s upset the share price.’
Mould continued: ‘Bunzl supplies items needed by companies to do their work but nothing that’s sold to customers, making it an essential cog in the wheel. It makes a small margin on supplying products, but a deflationary environment can act as a headwind if it has already bought a lot of stock at higher prices and has to sell them for less than originally expected.’
Jefferies, which has an ‘underperform’ rating on Bunzl, a ‘sell’ in other words, argued the group’s rating seems full, ‘if US consumer headwinds continue and there is an absence of further gross margin upgrades in a normalised inflationary environment.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Martin Gamble) own shares in AJ Bell.
