Bunzl PLC Overview

Bunzl (OTC:BZLFY) PLC, a multinational distribution and outsourcing company, is anticipated to see further positive margin momentum following its interim financial results. The company has demonstrated improving organic revenue growth and better margins, along with a structured plan that could provide an annual capital return of £700m to the market.

Analyst Ratings

Analysts have reiterated an Outperform rating on Bunzl’s shares, raising the price target (PT) to 4,000p.

Strategies for Margin Growth

Bunzl has outlined several key strategies for ongoing margin growth:
– Acquisitions with EBITA margins of 10-15%
– Expansion of its own brand
– Effective portfolio management
– Transitioning away from plastic products
– Cost initiatives at both gross margin (GM) and operating expense (opex) levels

These measures are expected to sustain positive earnings per share (EPS) momentum and support a higher valuation multiple for the shares throughout economic cycles.

Capital Allocation Strategy

The company has committed to a capital allocation strategy involving mergers and acquisitions (M&A) or share buybacks totaling £700m per year, starting in FY2024 with a £250m share buyback. Subsequent decisions on buybacks, expected to total £200m, will be announced at the preliminary results for FY24. For FY2025 to FY2027, acquisition spending will complement buybacks to achieve the £700m target.

For modeling, analysts have included a £700m buyback in FY26 while keeping net financial debt to EBITDA at less than 1.8 times throughout the forecast period.

Earnings Estimates

Analysts have updated their EBITA estimates to be 2%-10% above consensus. With the initial buyback, EPS is projected to increase by 4% in FY25, followed by 5% in FY25e and an 8% rise in FY26e, surpassing Visible Alpha consensus estimates.

Valuation Methodology

The appropriate price-to-earnings (P/E) multiple is set at 18 times the forecasted FY25 EPS. This reflects substantial improvements in organic margin and potential balance sheet flexibility. The 18x multiple is a 15% premium over the FY07-23 trading median and slightly below the average trading multiple from 2014 to 2017.

Potential Risks

However, Bunzl faces several risks, including prolonged deflation affecting revenues, legislative changes against single-use items, scarcity of acquisition targets, and increased competitive pressures, which could impact the company’s financial performance and share valuation.

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