Bloomberg News

Wal-Mart Supplier Bunzl Packs Reliability on Slow Trip to China

September 29, 2013

Bunzl Plc (BNZL), the most reliable company in the FTSE 100 Index for investors over the past 20 years, is hunting for Chinese distributors it can buy to enter the world’s second-biggest economy.

It may take several years to do so, repeating a measured approach that has benefited investors including Microsoft Corp. founder Bill Gates. Bunzl, the world’s largest distributor of disposable tableware and food packaging, offers predictability rather than volatility.

Bunzl, whose clients include Wal-Mart Stores Inc. (WMT:US), has been on an acquisition tear for years, buying 78 businesses in the past decade. That’s no reason to speed up for China, Chief Executive Officer Mike Roney said in an interview.

“Assuming we find the right opportunity I would be disappointed if we weren’t there in three years,” Roney, 59, said at his office near London’s Hyde Park.

Bunzl is one of only three companies in the FTSE 100 that have increased dividends every year for 20 years, according to the company. The others are Capita Plc (CPI), a business services firm, and Weir Group Plc (WEIR), a supplier of industrial pumps. Bunzl’s stock gained ninefold in the period while the index rose about 114 percent.

The shares have fallen four times on a calendar year basis since 1993, fewer than any of the 60 companies in the index that have been publicly traded that long, Bloomberg data show. Two of the declines were 1.5 percent or less. The shares are up 34 percent this year, heading for their biggest gain since 2005.

Reliability Premium

From 2004 to 2012, Bunzl’s revenue, operating profit and dividend all rose at a compounded annual rate of 9 percent to 11 percent, Roney said. It matched or beat those numbers in the first half.

That makes Bunzl a steady source of income for investors such as Gates, the world’s richest man and owner of about 5 percent of the stock, his largest publicly disclosed holding in the U.K. The biggest shareholder in the 4.5 billion-pound company is Invesco Ltd. (IVZ:US), according to Bunzl.

The stock “has never been more expensive,” Kames Capital, owner of 1.1 percent, said in an e-mail. “In the current environment, investors are happy to place a premium on reliability.”

Most analysts would use the word overvalued.

Bunzl’s average analyst rating, based on buy, sell and hold recommendations, is 2.65 on a 5-point scale, according to data compiled by Bloomberg. Only William Morrison Supermarkets Plc (MRW), the worst-performing major European food retailer over the past 12 months, and drugmaker AstraZeneca Plc have lower ratings among FTSE 100 companies.

Above Target

Bunzl stock was 6.3 percent above its 12-month average analyst price target at the close of trading Sept. 27, suggesting it may fall. Only three FTSE 100 companies trade proportionately higher.

“Within most investors and analysts there is this innate desire to chase the latest fad,” Mike Murphy, an analyst at Numis Securities Ltd. who recommends buying the stock, said in an interview. “They can’t see what is in front of their own eyes. This is a Warren Buffett-type stock.”

Bunzl has an exclusive contract to supply Wal-Mart, the world’s largest retailer, with non-food consumables such as disposable cutlery and cleaning supplies, the U.K. company said. Other clients include Whitbread Plc (WTB)’s Costa coffee shops.

Acquisitions fuel most of Bunzl’s growth, with purchases since the start of 2004 costing 1.7 billion pounds ($2.7 billion) and adding annualized revenue of 2.6 billion pounds. That’s almost half of 2012 sales.

Acquisition Accounting

“One of the paradoxes of the business is that two-thirds of the growth comes from acquisitions yet almost none of the acquisitions are in analysts’ future earnings calculations,” said Roney, who became CEO in 2005. “We consistently pay about six times earnings before interest and taxes.”

Some analysts consider delivering plastic forks pedestrian and discount Bunzl’s achievements, said Murphy, the stock’s top-rated analyst according to Bloomberg data. It scores highly for return on capital, growth and low volatility, he said.

The company can spend 200 million pounds a year on purchases without increasing leverage, Roney said. “As we get larger we will throw off more cash.”

The stock has outperformed this year as investors recognized the value-creation potential of using spare cash for acquisitions, Charles Wilson, an analyst at Goldman Sachs, said in a note Sept. 27. He raised his recommendation to neutral from sell and his price target by 21 percent to 1,470 pence.

Brazilian Doors

Bunzl, with only 43 head-office employees among more than 14,000 workers, took two years “knocking on doors” to make its first purchase in Brazil in 2008, the CEO said. The slow pace came in a country Roney knows well after serving as Brazil manager for Goodyear Tire and Rubber Co. during a 17-year Latin America posting. He also favors Chile, Colombia and Mexico for investment.

When Roney joined in 2003 as a non-executive director, Bunzl operated in 12 countries, none in Latin America. It now has businesses in 27 countries. The company envisages serving companies operating along the Chinese coast from the port city of Dalian to Shanghai, where it has a sourcing operation.

Bunzl became a pure distributor in 2005 after spinning off Filtrona Plc, a cigarette-filter maker now called Essentra Plc. The company began as a haberdashery in 1854 and started making paper in 1883 with a move from Bratislava to Vienna. Bunzl expanded further after the family moved to London in 1938 at the dawn of World War II.

While Roney looks for territory, he’s not interested in branching beyond six areas -- grocery, food service, cleaning and hygiene, safety, non-food retail and health care. “We would look at tangential areas such as dental or veterinary and at where we can consolidate sectors.”

The steady pace suits Kames Capital, according to the Edinburgh-based investor. “It’s all very Bunzl.”

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net

To contact the editors responsible for this story: Douglas Lytle at dlytle@bloomberg.net; David Risser at drisser@bloomberg.net


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Companies Mentioned

  • WMT
    (Wal-Mart Stores Inc)
    • $85.16 USD
    • -0.78
    • -0.92%
  • IVZ
    (Invesco Ltd)
    • $40.17 USD
    • -0.29
    • -0.72%
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