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

Market News

US equity markets recovered some recent lost ground last night – S&P 500 (+0.2%), Nasdaq (+0.5%) – as Amazon crossed $2 trillion in market value. Micron fell by 7% after hours – although its Q3 results were better than expected, its forecast disappointed investors seeking a bigger payoff from the AI mania.

Wall Street’s biggest banks passed the Fed’s annual stress test, paving the way for higher shareholder payouts. All of the 31 lenders assessed stayed above their minimum capital requirements, the central bank said. JPMorgan said the test results are rosier than its own projection.

This morning in Asia, markets were broadly lower – Nikkei 225 (-0.8%); Hang Seng (-2.1%); Shanghai Composite (-0.9%) – after Chinese industrial profits growth slowed sharply; up 0.7% in May, down from April’s 4% gain.

The FTSE 100 is currently little changed at 8,226, while Sterling trades at $1.2639 and €1.1817. Companies trading ex-dividend this morning include BAT (2.34%), Burberry (4.44%), Berkeley Group (0.71%), and Personal Assets Trust (0.61%).

The oil price drifted lower to $83.40 a barrel as US crude stockpiles rose by a bigger than expected 3.59m barrels to the highest since April. On the supply side, most US oil executives believe the country’s output will decline if the shale-sector acquisition spree continues for five years, a Dallas Fed survey showed. Consolidation has curtailed investment in exploration, one exec said. Gold held steady at $2,300 an ounce.

The US, Japan, and South Korea pledged to cooperate more closely on building resilient supply chains and developing key technologies including semiconductors and critical minerals.

Source: Bloomberg

Company News

Bunzl has this morning released an update on trading prior to entering its closed period for the six months ending 30 June 2024. Margin performance remains strong, and group has raised its profit guidance for the full year. In response the shares have been marked up by 2% 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 around three quarters of orders digitally, supporting customer retention and enhancing operational efficiency.

Group revenue in the first half is expected to fall by 3% to 4% at actual exchange rates and to decline by 0% to 1% at constant exchange rates. Underlying revenue, which is organic revenue adjusted for trading days, is expected to decline by around 5%.

As expected, the decline in underlying revenue in North America is driven by volume reductions in the group’s US foodservice redistribution business, as Bunzl transitions towards an increased own brand proposition; the ongoing impact from transitioning customer specific inventory in the group’s US retail business; and deflation. Q2 revenue trends in North America are expected to improve compared to Q1, with volume starting to recover. The group also expects a moderate decline in underlying revenue in Continental Europe and UK & Ireland, and some growth in Rest of the World.

Group operating margin in the first half is expected to show a strong year-on-year improvement, resulting in robust adjusted operating profit growth at constant exchange rates. By region, good margin growth is expected in North America in the first half, with very strong margin growth in the UK & Ireland and Rest of the World. This is mainly due to the benefit from acquisitions and good ongoing margin management across the group.

Bunzl’s balance sheet remains strong. This provides the flexibility to make acquisitions – so far this year, total committed spend is around £600m – and other capital allocation options. Purchases during the period included RCL Implantes, a Brazilian distributor specialising in surgical and medical devices, and Clean Spot, a distributor of cleaning and hygiene products and equipment in Canada. The acquisition pipeline remains active.

Bunzl has a strong track record of generating shareholder returns, with more than 31 consecutive years of dividend growth. In the last financial year, the payout was raised by 9% to 68.3p, representing a yield of 2.2%.

Looking forward, the group is upgrading its guidance for the full year based on improved margin performance, driven by good margin management, including increased own brand penetration, and acquisitions. The margin is now expected to be slightly above 2023, versus the previous expectation to be slightly below. The group now expects to deliver robust revenue growth in 2024, at constant exchange rates, driven by acquisitions already completed in 2024, with a small decline in underlying revenue.

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