Morning Note: Market news and an update from distributor Bunzl.

Market News

Stocks in Asia fell – Hang Seng (-0.5%); Shanghai Composite (-0.9%) – alongside Europe and US equity futures as investors geared up for a busy week with data due on Chinese activity gauges and the Federal Reserve’s preferred measure of inflation. Once again, the positive outlier was Japan’s Nikkei 225 which rose 0.4%.

Marubeni led gains among Japanese trading houses after Warren Buffett said in his letter to investors the companies follow shareholder-friendly policies that are “superior” to those practiced in the US.  In a move like that seen in Japan, South Korea has announced corporate governance measures to help improve share price valuations.

The FTSE 100 is currently little changed at 7,709. The FT reports that the UK’s competition watchdog has launched an investigation into eight housebuilders for information sharing. The sector is trading a touch lower in response. Sterling trades at $1.2675 and €1.1699. The 10-year Treasury currently yields 4.22%, while gold is $2,035 an ounce.

Oil is set to extend its tight trading range, with Brent remaining between $70-$90 as volatility ebbs on modest geopolitical risk premiums, Goldman said. The bank expects only a $2 a barrel boost from disruptions in the Red Sea. Brent currently trades at $81.50 a barrel. Meanwhile, just two new supertankers are due to join the oil tanker fleet in 2024 – the fewest additions in almost four decades and about 90% below the yearly average this millennium. The tanker shortage comes as the efficiency of the global fleet is faltering amid the Red Sea disruptions.

Source: Bloomberg

Company News

Bunzl has this morning released 2023 results which were ahead of market expectations. However, its guidance for 2024 has been altered slightly and in response the shares have been marked down by 5% in early trading.

Bunzl is a specialist 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. The group now processes 72% of orders digitally, supporting customer retention and enhancing operational efficiency.

During 2023, revenue fell by 1.9% at constant exchange rates (CER) to £11.8bn, and by 0.4% excluding the disposal of the group’s UK healthcare business. Underlying revenue fell 2.9%, with a 1.5% decline in the base business and a 1.4% negative impact from the expected decline in Covid-19 related sales. Revenue was 28% ahead of 2019 (i.e. pre pandemic).

Underlying revenue fell by 5.6% in North America (the group’s largest division, 59% of revenue), driven by volume loss the foodservice redistribution business due to deflationary pressure increasing price competition, post-pandemic normalisation trends, and a reduced level of inflation benefit. Elsewhere, Continental Europe maintained its positive momentum (+1.0%), while the UK & Ireland rose 6.1%. The Rest of the World lagged (-3.2%) due in part to the non-repeat of some larger orders that were fulfilled in the prior year.

By sector, Grocery & Other rose by 2%, while Foodservice & Retail (-8%) and Cleaning & Hygiene, Safety, and Healthcare sectors (-1%) both fell.

Adjusted operating profit grew by 6.2% at CER to £944.2m. The operating margin increased from 7.4% to 8.0%, a new record. Progress was helped by increased penetration of own brands, higher margin acquisitions, and some one-off benefits in the second half of the year. The group also carried out 24 warehouse relocations and consolidations along with further investments into digital solutions and automation, continued to drive operating efficiencies.

Adjusted EPS grew by 2.7% at CER to 191.1p due to the impact of UK healthcare disposal and an expected increase in net finance expense and tax rate. Cash conversion has remained strong (96% of operating profit), supported by a substantial reduction in inventory.

Financial gearing ended the year at only 1.1x net debt to EBITDA. This provides the flexibility to make acquisitions – 19 deals were agreed in the year with a total committed spend of £468m – and other capital allocation options. As highlighted above, the group also optimised its portfolio through the disposal of its UK healthcare business.

The group has also announced two deals this morning. Firstly, Nisbets, a well-established, high quality, own brand focused omnichannel distributor of catering equipment and consumables that operates in the UK and Ireland, Northern Europe, and Australasia, for an initial consideration of £339m. Secondly, Pamark Group, a smaller anchor acquisition in Finland, bringing the total number of countries the group operates in to 33.

Bunzl has a strong track record of generating shareholder returns, with more than 31 consecutive years of dividend growth. Today, the group has declared a full-year payout of 68.3p, up 8.9% and representing a yield of 2.2%.

Looking forward, the group is maintaining the 2024 profit guidance published in December. However, following a slower than expected start to the year in North America, the group now expects to deliver slight revenue growth in 2024, at constant exchange rates, driven by acquisitions announced in 2023; with underlying revenue, which is organic revenue adjusted for trading days, declining slightly. Group operating margin is now expected to be slightly below 2023, versus previous guidance to be broadly in-line with 2023.

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