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Smart Investor: why I could go a bundle on Bunzl
Bunzl, the highly profitable distribution company, boasts some impressive vital statistics, but is now the right time to buy?
What’s in a name? The marketing men may tell you it should have two syllables and be unique; Kodak, Facebook and Google immediately spring to mind. All successful (at least for a time) but surely a name matters little when compared to other areas such as quality of the good or service, price and customer service?
In any case, a company whose name has two syllables, is successful and yet is not well-known is FTSE 100 listed Bunzl (BNZL.L). It was established in 1854 and named after its founder, Moritz Bunzl, who opened a small haberdashery in Bratislava, Slovakia. Bunzl now operates in 23 countries and supplies businesses with products that are essential to their day-to-day operations, such as packaging, healthcare consumables and cleaning products. It operates an integrated supply service, including procurement and inventory management, which apparently enables customers to focus on their core business and increase efficiency and competitiveness. With a market capitalisation of £2.8 billion, Bunzl is the 82nd biggest company on the FTSE 100.
The company’s performance over the past five years has been impressive, with net profit growing each year, from £129 million in 2006 to £159 million in 2010. This equates to an annualised growth rate in net profit of around 4.3% and an average return on equity (ROE) of 25% over the period, with the figure for last year’s ROE also being impressive at 21.6%.
Of course, financial gearing (using the debt to equity ratio) of over 99% in each of the past 5 years has helped to boost ROE, although (as with many companies) debt has fallen over the past couple of years so that financial gearing stood at 104% last year. Whilst high, the company’s impressive profitability means that interest coverage is currently adequate at 8, although debt still appears to be rather excessive.
As for income, Bunzl currently yields 2.75%, which is below the typical FTSE 100 average of around 3.5%. This means that income investors may be put off, although the disappointing yield is a result of a high share price rather than a tight-fisted management team, since the payout ratio is perfectly reasonable at 48% of net profit. Meanwhile, free cash flow is strong, averaging £187 million over the past 5 years versus an average net profit figure of £141 million over the same period.
What am I buying?
A closer look at Bunzl’s balance sheet reveals that the asset side consists mainly of intangibles such as goodwill and customer relationships. This in itself is something of a double edged sword, since on the one hand it gives the company substantial economic goodwill but also renders the question: what assets am I actually buying? Clearly, Bunzl is able to consistently turn its assets into an impressive level of profit, but such large amounts of intangibles mean that any future impairments could prove costly.
Moving on to value and whilst Bunzl has been highly profitable over the past 5 years, its current share price of £8.48 equates to a price to earnings (P/E) ratio of over 17, which seems to be rather high. In addition, a price to book ratio of 3.75 is also generous, although Bunzl is able to generate an impressive return from its net assets and particularly from tangible net assets, which highlights its substantial amount of economic goodwill.
Indeed, in many ways Bunzl is an attractive company; ROE, past profitability, free cash flow and economic goodwill are all impressive. However, its current share price appears to be overly generous and its high debt levels are masked by an interest coverage ratio which, in turn, is flattered by impressive profitability. Therefore (and in spite of a catchy, distinctive name) value investors are unlikely to offer much interest at current price levels.
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