Shares in FTSE 100 distribution group Bunzl (BNZL), which investors normally rely on to beat estimates, dropped as much as 4.5% after the firm delivered an underwhelming first quarter trading update.

For the quarter to March, the company reported headline revenue growth of 10.4% at constant exchange rates, which seems impressive at first glance. However, it turns out that 4.3% of the increase came from recent acquisitions and a further 4.7% came from an increased number of trading days compared with last year’s first quarter.

In other words, underlying or organic revenue growth was a paltry 1.4% for the first three months of the year, although it was ‘in line with the group’s expectations’.

COVID BOOST

Sales of Bunzl's top eight Covid-related products, which are primarily own-brand, rose by 6.4% which was just enough to offset the 5% drop in sales of non Covid-related products.

North American revenues were driven by demand for Covid-related items, with ‘certain category-specific pricing remaining elevated’, while sales of non-Covid products showed a steady recovery.

However, sales to Europe, the UK and Ireland ‘continued to be impacted by the effect of pandemic-related restrictions, particularly on foodservice and non-food retail segments’.

For the full year the firm said it still expected ‘robust revenue growth’, stripping out £550 million of large Covid-related orders received last year, with acquisitions contributing to the increase, although margins are set to drop back to ‘a more historical level’.

RELIANT ON ACQUISITIONS

Chief executive Frank van Zanten described the mood at Bunzl as ‘confident in the strength of our consistent and proven compounding strategy, supported by enhanced hygiene trends, our differentiated offering of sustainable and responsible solutions and acquisition momentum’.

The firm has already made three acquisitions this year and has an ‘active pipeline’ of future deals, which suggests if all else fails it can spend its way out of the downturn thanks to its prodigious cash flow generation.

Shore Capital analyst Robin Speakman maintained his earnings forecasts and Buy recommendation, and called the company ‘well placed’ for now, but admitted ‘other companies may see a short-term recovery eclipsing Bunzl’s performance’.

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Issue Date: 21 Apr 2021