New Acquisitions In Health Care And Safety Will Expand Market Presence In 2024

Key Takeaways

• Active acquisition strategy across diverse sectors and digital transformation initiatives boost operational efficiency, revenue, and profit margins while expanding market reach.
  
• Share buybacks and focus on growing sectors like safety and health care enhance shareholder returns and support future organic growth.
  
• High leverage from acquisitions and buybacks, alongside currency and cost pressures, could strain Bunzl's financial flexibility and profit margins.

Catalysts

Operates as a distribution and services company in the North America, Continental Europe, the United Kingdom, Ireland, and internationally.

• Bunzl's active acquisition strategy, including 13 acquisitions across diverse sectors and geographies in 2024, is expected to drive future revenue growth through increased scale, market share, and entry into new markets such as Finland and the catering business in the UK. This should positively impact revenue and profit margins due to synergies and efficiencies gained from acquisitions.
  
• Increasing own brand penetration from 25% to 28% has helped drive margin improvements. With further efforts to develop own brands, especially in North America, Bunzl can expect margin expansion and increased profitability, which may support higher net margins in the future.
  
• Bunzl is focusing on digital transformation and automation, such as increasing sales processed digitally from 72% to 75% and implementing autonomous mobile robots in warehouses. This is expected to boost operational efficiency, reduce costs, and support margin expansion, benefiting future earnings.
  
• The announcement of £200 million worth of share buybacks indicates Bunzl's strategic allocation of capital to enhance shareholder returns and EPS growth. The ongoing buyback program is likely to increase EPS, especially when combined with Bunzl's resilient cash generation from operations.
  
• Bunzl's focus on sectors with strong growth potential like safety, cleaning and hygiene, and health care supports future organic growth and aligns with market consolidation trends. This strategic orientation is expected to enhance revenue and profit growth beyond 2025.

Bunzl Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bunzl's revenue will grow by 1.2% annually over the next 3 years.
• Analysts are assuming Bunzl's profit margins will remain the same at 4.2% over the next 3 years.
• Analysts expect earnings to reach £511.1 million (and earnings per share of £1.59) by about August 2028, up from £500.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £582 million in earnings, and the most bearish expecting £458.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 15.5x today. This future PE is greater than the current PE for the GB Trade Distributors industry at 14.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.43%, as per the Simply Wall St company report.

Bunzl Future Earnings Per Share Growth

Risks

• Persistent deflation in North America and parts of Europe could continue to pressure margins, reducing overall profitability and impacting revenue growth.
  
• Currency translation losses, with about 90% of adjusted operating profit generated outside the UK, suggest potential vulnerabilities to exchange rate fluctuations that can negatively affect earnings.
  
• High leverage levels due to record acquisition spending and ongoing buybacks could constrain Bunzl's financial flexibility, impacting net margins and earnings.
  
• Increased operating costs due to wage inflation and elevated property lease renewals, particularly in Europe, could squeeze profit margins unless offset by corresponding revenue growth or significant price increases.
  
• Continued reliance on acquisitions to drive growth carries execution risks, such as failing to integrate acquisitions effectively or overestimating synergies, potentially impacting the projected return on invested capital.

Valuation

• The analysts have a consensus price target of £26.386 for Bunzl based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £32.8, and the most bearish reporting a price target of just £19.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £12.2 billion, earnings will come to £511.1 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 9.4%.
• Given the current share price of £23.62, the analyst price target of £26.39 is 10.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.