Source: Sharecast
RBC updated its estimates on Bunzl to reflect recently completed M&A activity and the latest guidance from the company, with earnings per share estimates rising by 6-7% over the "next couple of years", driving a roughly 4% uplift to the target price.
The Canadian bank stated that despite Bunzl's "long track record" of M&A-driven EPS growth, it believes limited underlying organic growth constraints the valuation and it sees the firm's heavy B2B2C exposure as "relatively unattractive" versus wider business services peers under current macro conditions.
"Bunzl's very high conversion ratio (EBITA/gross profit) and return on average operating capital at 30% and >45% respectively in FY23 are impressive on the one hand but, on the other hand, when considered in the context of BNZL's longer-term history of organic EBITA margin contraction and thus essentially zero real organic EBITA growth, suggest a business that is structurally over-earning," said RBC Capital.
"We think this constrains the terminal multiple investors should be willing to pay for the business, as Porter's Five Forces inevitably assert themselves. In the meantime, the business remains dependent on recycling earnings into M&A to drive earnings growth. We currently prefer stocks at similar valuations with stronger long-term organic growth dynamics."
Reporting by Iain Gilbert at Sharecast.com