Bunzl
Death by Amazon is a cheery index run by some too-smart analysts tracking the retailers that are being pushed toward the checkout of doom by everyone’s favourite etailer (or that most monstrous of corporate behemoths depending on whether you are a fan of how Amazon delivers the high street to our doorstep).
But Amazon isn’t just about killing much-loved local bookshops or music stores. The company, which has started to look at the industrial, healthcare and office supplies market, has seen a $2 trillion business for the taking and said: “We’ll have some of that.”
Last month, some analysts from Morgan Stanley took a look at this plan and working on the basis that Amazon either always wins or at the very least causes significant disruption to incumbent players, took the view that Bunzl, Britain’s world champion deliverer of the moribund matters of commercial life, could be in a bit of trouble.
Bunzl is a FTSE 100 company supplying napkins and plastic knives and forks to hotels and restaurants; plastic bags, packaging and display items to shops; rubber gloves and loo rolls for the office cleaners; earplugs and masks in industrial plants; gloves and masks for hospitals; and any number of other disposable bits and pieces for the workplace. It mainly operates in the US, UK and continental Europe.
It has also been the archetypal acquisitive business where underlying trends in any sector or geography can be skewed or masked by the sheer number of deals the company does. In the past year it has spent £600 million on acquisitions, nearly double its previous record spending spree in 2015. That is over 13 years 150 acquisitions at a total of £3.1 billion.
Acquisitions are typical of niche players in a specific commodity or in a specific region or locality, often a family firm which is selling up because the founders have got to a certain age and the family are more interested in living off the proceeds of a disposal.
The Morgan Stanley analysts, reporting five weeks ago, concluded that the Bunzl share price did not appear to be much moved by the arrival of Amazon and that perhaps people should wake up. They did. Bunzl stock — after another 30p loss to £20.19 yesterday despite a corporate update that said trading remained good — subsequently lost nearly 13 per cent of its value or almost £1 billion.
Bunzl is not quite sure what the hoopla is about. It says it has been under attack for a while from Amazon but doesn’t see much impact. It says its business turns on the quality of the service it provides to customers. Put another way, if the coffee chain outlet doesn’t get its disposable coffee cups before opening each day it doesn’t sell any coffee.
Frank van Zanten, chief executive of Bunzl, put his money where his mouth a few days after the Morgan Stanley note, spending £192,000 buying 9,000 shares at £21.35. Commendable, though perhaps a little more persuasive if there had been another zero on the end of the cheque.
Let us assume Amazon won’t kill Bunzl but will disrupt it and therefore make it a more competitive organisation. Amazon’s arrival does, however, shine a light on what people think Bunzl is worth.
Before this year’s sell-down Bunzl, a business delivering low-value products at relatively low margins of 7 per cent, was valued well in excess of 20 times next year’s earnings. It is still trading at more than 17 times 2018 earnings. That is too rich. Bunzl is one of Tempus’s picks of the year, at a not dissimilar price to where it is now. Though it has taken an Amazon-related derating this is a stock that Tempus should continue to support.
ADVICE Hold
WHY A Tempus pick of the year which despite a derating is good for the long term
Domino’s Pizza
Given the disastrous foray into Germany by Domino’s Pizza Group, David Wild, the chief executive, could have been forgiven for avoiding further overseas moves like the plague. When the veteran retailer joined the pizza delivery operator’s board four years ago, Germany had cost the company £50 million in investment and losses and most commentators predicted it would kill off its overseas ambitions.
On the contrary. In June last year Mr Wild boldly entered the Norwegian, Swedish and Icelandic markets by buying minority stakes in a £24 million deal. In March this year, he topped up its minority stakes in the three countries. Then yesterday he announced the early exercise of a right to acquire a further 44.3 per cent of Domino’s Iceland for £26.7 million, lifting its holding to 95.3 per cent.
Clearly, Domino’s has learnt from its German experience. Mr Wild said Domino’s Iceland was “a great business”. It is said to have the highest average weekly unit sales of any country in the Domino’s system — £35,000 v £20,000 in the UK — which explains the punchy price.
Mr Wild’s empire also includes stores in the Republic of Ireland and Switzerland but his biggest coup was probably bringing in Domino’s Pizza Enterprises (DPE), of Australia, as a controlling partner in its German operations, stemming the losses and providing a path to an elegant exit.
In July, after flat first-half like-for-like sales in its core UK estate sent its battered share price to a two-year low of 263¾p, Domino’s was itself being tipped as a bid target for DPE. Mr Wild admitted that after three years of strong growth, the profitability of its franchisees had been hit by rising food and labour costs, while analysts expressed fears over growing competition.
However, the bears were forced to eat humble pie in October after third-quarter like-for-like sales growth recovered to 8.1 per cent, helped by its new advertising campaign, The Official Food of Everything. Yesterday, the group said that, in view of its strong cash generation and new £350 million debt facility, it had decided to buy back another £20 million of shares. It hinted at more to come and the shares added 16½p to 338¾p.
ADVICE Hold
WHY Expansion and more cash returns should deliver growth
