Should you buy, hold or sell Bunzl shares?
The real appeal of Bunzl is that it has a long-term track record of deploying capital at very attractive rates of around 20% and it currently has a strong balance sheet which would allow it to potentially accelerate its levels of capital deployment and offset any near-term organic weakness.
In particular, we note that the debt-to-EBITDA ratio (which measures how much income is available to pay down debt) hasn't been this good since 2006.
Furthermore, headline valuation multiples still look supportive compared to longer-term levels. Over recent times, Bunzl has delivered good organic growth alongside an asset-light business model, with cash either returned to shareholders or used for mergers and acquisitions (M&A).
What Bunzl does
Headquartered in London, Bunzl is a specialist international distribution and services group with operations across the Americas, Europe, Asia-Pacific and the UK and Ireland.
It supplies various products to sectors including grocery, food service, cleaning and hygiene, retail and healthcare. These include food packaging, personal protection equipment such as eye and ear protection, and cleaning and hygiene products.
Company strategy and outlook
A key driver of Bunzl's value is its ability to continue making highly accretive M&A by absorbing smaller companies into the bigger machine. Historically, this has generated a 20% return on invested capital (ROIC) on each acquisition.
Bunzl has never had a better balance sheet than it does today, with a net debt-to-EBITDA of around one compared to a net debt-to-EBITDA ratio of around three during the global financial crisis, providing tremendous latent value in the balance sheet.
Despite good organic momentum, solid cash flow conversion and a massive opportunity to keep deploying capital at very attractive rates, the stock remains cheap by our valuation, with an EBIT/enterprise value of around 12, compared to more than 16 a few years ago.
We think the stock could be worth £3800 (AUD$7453) over the next few years versus £2800 (AUD$5491) today, a 35% uptick.
Bunzl delivered a strong first-half result on August 29, with shares pushed up 3% on the day of release.
While organic sales were a touch weaker than expected, margin performance more than made up for this, and with the expectations for this to continue in the second half, also drove an upgrade to profits from the 2023 financial year.
Even more impressive was the fact that Bunzl managed to get on top of its sizeable inventory build (which was a big source of cash inflows) without sacrificing much in the way of margins, i.e. no evidence of discounting. The net of all this saw Bunzl produce very strong cash flows which it continues to spend on dividends (up another 5% in H1) plus more accretive M&A.
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