US Edition Bunzl
505½p +2½
Questor says BUY
The business is performing as well as can be expected throughout the downturn, so Questor believes that the recent underperformance provides a chance for investors to buy into this cash-generative business at a low rating.
The company has a very simple business model. It sources and supplies all the items that a business consumes – and it does so cheaper than its customers could themselves.
Bunzl does not provide its clients with their main stock in trade but all the consumables they use in day-to-day business, be that coffee cups, carrier bags, labels, toilet rolls and cleaning items.
It also provides safety gear such as hard hats and face masks. Essentially, the company provides "goods not for resale".
Its major customers include companies such as Wal-Mart, Domino's Pizza, Del Monte, Bupa and the NHS.
The benefit to the consumer is that Bunzl can source its goods internationally, saving costs, and provide a one-stop shop for its clients to order consumables.
Bunzl's services also allow customers to run their businesses using less working capital so they can focus on their own business strengths. It also cuts down on administration.
The company grows mostly by acquisition. It is important in Bunzl's business to have local specialist knowledge and the company never goes into a new territory and sets up a "greenfield" business.
Significantly, the company funds these acquisitions through its cashflows and not by issuing new equity.
Pursuing this strategy the company now operates in 23 countries worldwide, with a significant operation in the US. It imports largely from Asia, where the goods are cheaper and it buys in bulk.
Bunzl also has an excellent financial track record.
Between 1991 and 2008 it had a compounded annual growth rate in operating profits of 15pc, with the figure for revenues over the same period being 14pc. The market was concerned over its first-quarter trading statement which reported that growth had slowed.
Also, as investors have become less risk averse, defensive stocks have underperformed. There has also been some concern over margins.
In the second half of the year, organic growth improved slightly. Overall revenue growth in the six months to June was 17pc, although much of this was down to currency effects. Net debt increased too – again down to currency effects.
As an investment, now looks like a great time to buy Bunzl shares. The company has an enviable and unrivalled market position, it undertakes an activity that benefits its customers and saves them costs and the business is prudently managed, with management continuing to cut costs.
Of course, everything in the Bunzl world is not rosy – the wider economy affects its business just like any other – but about 75pc of its business, including healthcare and cleaning services, are relatively resilient.
The shares have been left behind in the recent market rally and growth fears appear overdone. They are trading on a December 2009 earnings multiple of just 9.4 times and yielding a secure 4.3pc. The shares are a buy.
Centamin Egypt
88p -1¾
Questor says HOLD
One of Questor's tips of the year that is turning in a better performance than Bunzl is Centamin Egypt. The shares are now up 107pc since their initial recommendation and the stance on the shares is hold.
Yesterday, the company said it had achieved what it had been working towards for the past 14 years. The mine is now functional and gold is being produced with the first gold bar poured from its Sukari mine.
Centamin has been exploring for gold in Egypt since 1995 but it was the lease it was granted over the Sukari Hill gold project in 2005 that made the company. Sukari is Egypt's first modern gold mine. The company is expected to ramp up production in the next few months to a commercial level, with an annual rate of 200,000 ounces expected by the end of this year.
Yesterday's milestone is important because it means that management has delivered on its promise by starting production before the end of the June quarter.
There has been a lot of takeover speculation surrounding the stock over the past few months, with the names of North American producers Newmont Mining and Barrick Gold in the frame.
In May, the company said it had a cash balance of $70m (£42m) and the group is entirely debt free. It is also entirely unhedged, which means the company is a pure play on movements in the gold price.
Centamin's stake in Sukari is held through a profit-sharing agreement with the Egyptian government.
It will receive 100pc of the cashflows from the mine until all of its costs have been repaid.
After this, the group will have to pay 50pc of its operating surplus to the Egyptian government. This is expected to start in 2015.
Questor maintains a hold stance on the shares for now, as a lot of good news is in the price.