Bunzl Shares Rise Following Upgrade

Investing.com — Shares of Bunzl plc (LON:BNZL) climbed on Monday after an upgrade from RBC Capital Markets, elevating the stock’s rating to “outperform” and raising the price target to 4,000p from 3,350p.

The analysts at RBC attributed the upgrade to Bunzl’s dependable growth trajectory, underpinned by a combination of organic margin expansion, strong M&A activity, and an ongoing share buyback program.

RBC highlighted Bunzl’s strong position in defensive markets, with over 55% of its revenue from North America, and noted the company’s consistent performance compared to its peers in the defensive growth sector.

Favorable comparisons were made to companies like Compass and Diploma, which trade at higher multiples, suggesting that Bunzl’s valuation remains undemanding.

Bunzl’s long-term growth strategy plays a pivotal role in analysts’ confidence. Over the past two decades, the company achieved a compound annual growth rate of about 9% in adjusted EBIT, facilitating uninterrupted dividend increases.

This growth, largely fueled by reinvestment in value-accretive acquisitions, demonstrates Bunzl’s ability to thrive through economic cycles.

The company’s robust free cash flow generation supports these acquisitions, enabling self-funded growth without reliance on equity markets.

RBC noted an optimistic outlook for Bunzl’s M&A pipeline, citing a strong network of acquisition targets across various geographies and industries. With a history of leveraging synergies effectively, Bunzl is expected to enhance its scale and profitability through strategic acquisitions.

Additionally, analysts observed a shift in the company’s organic profit potential, with advancements in operational efficiencies, purchasing, and own-brand penetration contributing to margin improvements.

RBC’s revised price target incorporates adjustments to its discounted cash flow model, reflecting a lower weighted average cost of capital and higher terminal margin assumptions.

The new target implies a FY25 price-to-earnings ratio of 19x, with a portion of the company’s enterprise value tied to future M&A prospects.

While acknowledging potential risks like fluctuations in input costs, changes in global economic conditions, and acquisition-related uncertainties, they maintain that Bunzl’s consistent performance and strategic initiatives position the company for sustained growth.

As of the latest market close, Bunzl shares were trading at 3,520p, offering what RBC described as “mid-teen” total shareholder return potential at current levels.