Market news and an update from Bunzl.

Market News

China’s economic outlook is showing no signs of improvement. Economists now see GDP growing 5.1% this year, down from earlier projections of 5.2%, a Bloomberg survey showed. Against that backdrop, China has pledged to speed up fiscal spending to boost the economy, while the central bank may consider cutting the reserve requirement ratio for commercial lenders in the fourth quarter to improve liquidity, the China Securities Journal reported.

As a result, the risk mood is brighter this morning. In Asia, equity markets were firm: Nikkei 225 (+0.2%); Hang Seng (+1.9%); Shanghai Composite (+1.2%). The S&P Futures currently predict a slight rise at the open this afternoon. The FTSE 100 is currently trading 1.2% higher at 7,429. Ahead of key US inflation and jobs data this week, the 10-year Treasury currently yields 4.19% and gold trades at $1,923 an ounce.

UK shop price inflation fell sharply again in August to 6.9%, from 7.6% the month before, the BRC said. Food costs led the decline, relieving some pressure on the Bank of England to keep raising rates. Meanwhile, UK ministers are set to announce plans to drop environmental rules that developers say have prevented tens of thousands of homes from being built, the FT reported. Sterling $1.2613 and €1.1663.

Japan’s unemployment rate unexpectedly rose for the first time in four months in July to 2.7% from June. The job-to-applicant ratio declined to 1.29 from 1.30. The government highlighted progress toward stamping out deflation and urged close cooperation with the Bank of Japan in its annual white paper on the economy. The paper had “inflation” in its subtitle for the first time in 50 years.

Brent Crude trades at $84 a barrel. European natural gas surged over 10% yesterday as Chevron received a strike notice in Australia. The one commodity that should be getting hammered by China’s worsening property crisis is actually doing rather well. Iron ore has held above $100 a ton, pointing to the relative health of parts of the economy outside the real estate sector, such as railways.

Source: Bloomberg

Company News

Bunzl has this morning released its results for the first half of 2022 and raised its guidance for the full year. In response, the shares have been marked up by 4%.

Bunzl is an international distribution and services group. The company provides an efficient and cost effective one-stop-shop solution to enable its customers to reduce or eliminate the ‘hidden’ costs of sourcing and distributing a broad range of goods that are essential to the successful operation of their businesses but which they do not themselves resell – think disposable tableware, rubber gloves, and plastic trays. The strategy is to expand the business through organic growth, consolidating markets through focused acquisitions, and continuously improving operating efficiency. The group is also supporting customers looking to transition towards packaging better suited to the circular economy, with around half of Bunzl’s packaging sales made from alternative materials.

During the first half of the year, the results were impacted by the disposal of the group’s UK healthcare business. Revenue grew by 4.5% to £5.9bn, helped by currency and M&A. Underlying revenue declined by 0.4% with 1.6% growth in the base business offset by a 2.0% negative impact from the expected decline in Covid-19 related sales.

Underlying revenue fell by 3.1% in North America (the group’s largest division), driven by post-pandemic related normalisation trends. Elsewhere, Continental Europe maintained its positive momentum (+3.7%), while the UK & Ireland surged by 11.6%. The Rest of the World lagged (-4.1%) due in part to the non-repeat of some larger orders that were fulfilled in the prior year.

By sector, foodservice & retail fell by 4% driven, while grocery sector (+2%) and Cleaning & hygiene, safety, and healthcare sectors (+2%) both rose.

The operating margin increased from 7.3% to 7.4%, significantly ahead of that achieved prior to the comparable period of 2019 (i.e., pre-pandemic). This was a result of management initiatives, inclusive of an increase in own brands. Furthermore, the impact of operating cost inflation reduced and was moderate over the period. Adjusted EPS fell by 1.7% to 88.3p due to the impact of UK healthcare disposal and an expected increase in net finance expense and tax rate.

Cash conversion has remained strong (93% of operating profit), supported by a substantial reduction in inventory. Financial gearing was 1.1x net debt to EBITDA. This provides the flexibility to make acquisitions, with 12 deals agreed in the year to date with a total committed spend of £350m. As highlighted above, the group also optimised its portfolio through the disposal of its UK healthcare business.

Bunzl has a strong track record of generating shareholder returns, with more than 30 consecutive years of dividend growth. Today, the group has declared a half-year payout of 18.2p, up 5.2%.

Looking forward, the group is upgrading its 2023 adjusted operating profit guidance, supported by a meaningful increase in operating margin expectations.

Overall, we believe Bunzl is well placed because of its predominant focus on high volume/low value consumable products and the ability for the business to adapt quickly to changing demands and challenges, including within disrupted supply chains. Its business proposition is highly valuable to its customers, allowing them to focus on their core business and run their operations more cost-effectively by achieving purchasing efficiencies and savings, while at the same time freeing up working capital, improving their distribution capabilities.

Source: Bloomberg