Questor share tip: Hold Bunzl despite pounding

Bunzl
£16.39+9p
Questor says HOLD

THE strength of the pound has hammered revenue and profits at Bunzl [LON:BNZL] during the first half of the year. However, maintaining a long-term investment in the company is wise if you dig a little deeper into yesterday’s interim results.

The FTSE 100-listed distribution group has carved out a successful and sizeable niche by supplying the food retail industry with bags, stationery and plastic display items. The company also provides workers as diverse as cleaners and surgeons with products such as latex gloves, safety goggles, aprons, and face masks.

The one common factor being that these items tend to be thrown away after use. Because the products are consumable and provided to industries such as food retail and health care the revenue is recurring and stable. Bunzl’s business model is one of centralised bulk-buying of these disposal products to reduce costs and the products are then distributed to customers.

This stable revenue and a focus on keeping costs down means the company makes plenty of cash. Bunzl uses that cash in two ways; the company funds growth through acquisitions and has a track record of consistent dividend growth since 1997.

Bunzl continued this strategy by snapping up four UK companies to add to those it purchased during the first six months. The company spent £119m in the first half on acquisitions, down from £150m at the same stage last year.

The company tends to buy family-run businesses where the current management is looking for an exit strategy. The problem with this is that it can lead to protracted and unpredictable acquisition timelines.

The first half results were hit by the strong pound. In the six months ended June, revenue was down 1pc to £2.9bn, with pre-tax profits up 2pc to £132.3m. However, adjusting for the impact of currency movements, revenue would have increased by 7pc and pre-tax profits would be up 14pc.

Bunzl’s growth was still well behind the 14pc in revenue growth and 17pc increase in pre-tax profits reported in 2013, even adjusting for the currency impact.

Questor thinks that with revenue and profit growth slowing, then acquisitions will accelerate in the second half. When asked about takeover targets Michael Roney, chief executive, said the second-half bid pipeline was “as good as it’s ever been” with the greatest opportunities being in the safety, cleaning and hygiene and food service sectors.

Mr Roney said he still expects to meet full year market expectations with analysts forecasting revenues of £6.1bn and pre-tax profits of £373m, giving earnings per share of 82.1p this year.

The company is still generating plenty of cash as well. Operating cash flow in the first half was £200m, up from £194m at the same stage last year, and achieved from operating profits of £197m in the first six months ended June.

The interim dividend was increased by 10pc to 11p and the payment date is January 2, ex-dividend November 7. The dividend target for the year is 33.6p, which is an increase of about 3pc on a year earlier. The prospective yield, based on the current forecast, is 2.1pc. The dividend payments of £32.6m in the first half are covered more than four times by the £133m in free cash flow. The company ended the period with net debt of £880m against shareholders’ equity of £866m.

Bunzl growth has certainly slowed in the first half of this year due to the strong pound fewer acquisitions to boost growth. Questor thinks that with growth in the single digits it is hard to justify the price earnings ratio of 20 times on the shares, falling to 19 times next year.

That said, Bunzl is still cash generative and remains a class defensive share due to its dividend track record. Hold.