Bunzl (OTC:BZLFY) PLC, a multinational distribution and outsourcing company, was forecasted to experience further positive margin momentum following its interim financial results. The company has shown improving organic revenue growth and better margins, alongside a structured plan that could see an annual capital return of £700m to the market.
Analysts have reiterated an Outperform rating on Bunzl's shares, with an increased price target (PT) of 4,000p.
Bunzl has outlined several strategies for ongoing margin growth, including acquisitions with EBITA margins of 10-15%, expansion of its own brand, effective portfolio management, transitioning away from plastic products, and cost initiatives at both gross margin (GM) and operating expense (opex) levels.
These measures are expected to sustain positive earnings per share (EPS) momentum and support a higher valuation multiple for the shares throughout economic cycles.
The company has committed to a capital allocation strategy that includes mergers and acquisitions (M&A) or share buybacks amounting to £700m per year. This plan will commence in the fiscal year 2024 with a £250m share buyback.
Subsequent decisions on buybacks, expected to be £200m, will be made at the preliminary results announcement for FY24. For the fiscal years 2025 to 2027, acquisition spending will be complemented with buybacks to reach the £700m target.
For modeling purposes, analysts have included a £700m buyback in FY26, while maintaining net financial debt to EBITDA at less than 1.8 times across the forecast period.
Analysts have updated their EBITA estimates to be 2%-10% above the consensus.
The inclusion of the initial buyback increases EPS by 4% in FY25, with subsequent buybacks leading to a 5% rise in FY25e and an 8% increase in FY26e. These estimates surpass those of Visible Alpha consensus.
In terms of valuation methodology, a price-to-earnings (P/E) multiple of 18 times the forecasted FY25 earnings per share (EPS) is considered appropriate, reflecting significant improvements in organic margin and the potential for balance sheet flexibility. The 18x multiple is a 15% premium over the FY07-23 trading median and is slightly below the average trading multiple from 2014 to 2017.
However, Bunzl also faces potential risks, including prolonged deflation affecting revenues, legislative changes against single-use items, scarcity of suitable acquisition targets, and increased competitive pressures. These factors could potentially impact the company's financial performance and share valuation.
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