Bunzl has not really had to do recoveries, but it looks as if it has one on its hands now. The blue-chip supplier has been a big beneficiary of coronavirus through its provision of masks and sanitisers, yet life after the crisis looks uncertain.
Worries about a slowdown in some of its main geographical markets are set to continue well into next year, amid pressure on profit margins and, arguably, an unfamiliar feeling that it needs to do deals to generate growth.
The shares, so reliable for so long, are beginning to look vulnerable.
Bunzl equips builders, restaurants, bars and offices with the everyday stuff, from plastic knives and forks and paper napkins to hard hats, lavatory rolls and first aid kits.
Founded as a haberdashery in Bratislava in 1854, it has its headquarters in the UK, where it is also listed, and has operations spread across 31 countries. It is a constituent of the FTSE 100, with a valuation of just under £8.3 billion, and in its most recent financial year made a pre-tax profit of £453.3 million on revenues of £9.3 billion.
The supplier is highly acquisitive and has continued to pursue deals this year, sealing six since January plus a bolt-on addition yesterday of a Canadian company that supplies cleaning products and packaging.
Setting aside the short-term boost that Covid has provided, Bunzl’s problem lies in generating stronger organic growth in revenues, which tend to be closely tied to GDP in the countries in which it operates.
The biggest headache has been North America, which historically contributes 58 per cent of revenues and half of its adjusted operating profit. However, nearly two years ago Bunzl began to warn of a slowdown there, an underlying drag that it is finding difficult to shrug off. In August this year, Bunzl reported that revenues in North America grew by 1.5 per cent to more than £2.7 billion over the six months to the end of June. Strip out the effect of acquisitions and an additional day of trading and underlying revenue was down by 3.9 per cent over the period.
Needless to say, the picture is complicated by short-term Covid-related disruptions to the retailing and food outlets that Bunzl serves, plus lower sales to a large grocery customer, but it demonstrates the uphill battle that the company faces. Operating margins in the region declined to 5.7 per cent, against 6 per cent for that period last year.
Margins also fell in the UK and Ireland but improved in Europe and its rest-of-the-world division.
While overall revenues will feel the significant benefit of higher smaller orders as a result of Covid-19, that is expected to fall away next year, when underlying growth and margins revert to more historical levels. Effectively, that means low.
To be clear, Bunzl is not in crisis. Its model of bolstering relatively modest underlying growth in earnings with regular acquisitions is not flawed as such. Nor is there any suggestion that the wider corporate world’s need for the products it supplies is going to go away.
However, the continued pressure on its organic growth rates has definitely dented its attractions. To be fair to Bunzl, it has managed to maintain its 27-year track record of increasing its dividend, after reinstating a payment in August that it had earlier cancelled in the light of the virus.
Bunzl’s shares, which were down 91p. or 3.7 per cent, at £23.85 yesterday, have more than recovered the ground they lost in the earlier days of coronavirus, but they remain marginally below where they were two years ago.
The stock trades for 17.2 times Citigroup’s forecast earnings and yields 2.3 per cent. That doesn’t justify a “buy” but existing owners should hold on.
Advice Hold
Why Next year’s earnings are likely to be weak but should gradually improve and that is reflected in the price
Foxtons
The resurgent housing market has certainly boosted Foxtons. Whether it has justified the investment case for the London-centric estate agent is another matter. The company was able to tick up its forecasts at the end of last week after a strong increase in property sales in the capital, driven by Londoners fleeing the city for the apparent safety of the countryside.
It remains a shadow of the agency giant that listed its shares seven years ago, although given the ferocity of the competition and fragility of the property market that is perhaps unsurprising.
Foxtons was founded in 1981 in Notting Hill and now operates from 57 London branches.
Formerly owned by private equity investors, the group raised £55 million from its stock market listing at 230p a share in 2013. It has a reputation for achieving high sales prices for the homes on its books and also for charging above-average fees.
Two things have made life difficult for Foxtons. First, the competition, not just for homeowners, but also among potential share buyers, who can choose from rivals including Rightmove, Purplebricks and Countrywide, which is being pursued by Connells.
Second, sales in the London market have dwindled — last year they were at their lowest level in 25 years — putting obvious pressure on commission income.
The picture that emerged from last week’s update was mixed. While recent sales have gathered momentum, revenues for the 11 months to the end of November were 15 per cent below the same point last year. Income from lettings was also marginally down.
Foxtons said that, in part thanks to cost controls, it would turn last year’s adjusted operating loss into a profit of as much as £1.5 million this time. After a £22 million placing in April, the company’s finances are also strong: it will use some of its balance sheet strength to pursue further acquisitions in the rentals market and return £3 million to investors by buying back its shares.
Foxtons shares — up ¼p, or 0.6 per cent, at 48¾p — are not cheap, trading at 49 times Numis’s forecast earnings for a prospective yield of only 0.7 per cent.
Advice Avoid
Why Wildly competitive market and pressure on sales
