Packaging giant Bunzl's profit warning stuns investors

(c) Sky News 2019: <a href="">Packaging giant Bunzl's profit warning stuns investors</a>

It is a company almost unknown outside the City - but Bunzl is a company that touches the lives of millions of people every day.

Used a paper plate or serviette at a party lately?

Or used plastic cutlery there? The chances are it was supplied by Bunzl.

Perhaps you wore safety glasses, helmets or harnesses at work today? They may well have been supplied by Bunzl too.

Maybe you visited a doctor today. The mattress cover and gloves the doctor used, while examining you, could well have come from Bunzl.

And, popping into the shops to buy your evening meal on the way home, you may well have put your groceries in a paper bag made by Bunzl.

The packaging and labels on them may also have been supplied by the company.

You get the idea.

This is a business that supplies hundreds of millions of items used by millions of customers and businesses each year.

Despite being almost comically unsexy, though, Bunzl has been a real darling among investors.

Its activities, while sounding dull, have proved exceptionally reliable profit generators.

Its sales have grown at a compounded average of 10% a year for the last quarter of a century.

Those sales tend to be cash-generative and have supplied plenty of firepower for the company to expand through acquisition.

It spent more than £3.1bn acquiring more than 150 companies between 2004 and 2017, mainly family-owned businesses, usually ones it has spent years cultivating.

This healthy cash generation has also enabled Bunzl - founded in Bratislava, Slovakia, in 1854 by the haberdasher Moritz Bunzl - to dole out plenty of money to shareholders.

Its dividend has also grown by a compound average of 10% a year for the last 25 years.

Such has been this track record of reliability that today's trading update came as an unpleasant surprise to investors.

Bunzl, which derives 59% of its annual sales and 52% of its annual operating profits from the United States, warned that "the rate of underlying revenue growth has slowed" during the first three months of 2019.

Worse still, it added: "In particular, the company's business in North America has experienced slower underlying growth of approximately 1% as a result of slightly lower sales to customers in the grocery and retail sectors, principally due to the lack of both volume growth and product price inflation."

This rattled the share price which, since the beginning of March last year, had risen by 32% by Tuesday night's close.

Today, they fell by as much as 14% at one point, before rallying to finish down 237p at £23.14 - a decline of 9.3% - leaving the company with a stock market value of £8.62bn.

The big question investors will now be asking is whether this means an end to a hitherto unblemished period of reliable growth.

Profits warnings, as the old City saying has it, tend to come in threes and so some will worry that there will be further hiccups identified by the company before it is safe to start buying the shares once again.

But those in the City paid to follow Bunzl's fortunes do not, as yet, appear too concerned.

Sylvia Barker, analyst at broker JP Morgan Cazenove, said: "The slowdown was not due to any contract losses and thus does not seem to be company specific."

Sam Dindol and Caroline de La Soujeole, at broker Stifel, added: "We had expected organic growth [across the entire company] to moderate from the prior year given the tough comparatives [with last year]…we continue to view Bunzl as a high quality defensive business well placed to continue its track record of compound growth, supported by its sector and geographic diversity."

And Robin Speakman, of Shore Capital, argued: "Following a strong recent share price performance, we are not fazed by the share price 'pull-back'."

Paul Checketts, analyst at Barclays, meanwhile, noted that the "highly rare" disappointing update from Bunzl could reflect the fact that "after a strong period of Bunzl winning new outsourcing work, this period has no new big wins."

Despite that, there does not appear to be any sign of Bunzl's successful recipe, of buying small family-owned businesses and welding them profitably into its existing businesses.

Today's statement was accompanied by news Bunzl - which floated on the stock market 62 years ago - had bought Coolpack, a Dutch distributor and supplier of specialist packaging to the supermarkets, pharmaceuticals and food sectors, a deal that looks in keeping with past deals.

So far, then, the market is giving Bunzl the benefit of the doubt.

Its City fan club seems confident that the company can continue to grow as the highly fragmented markets in which it operates continue to consolidate and its customers look to carry on outsourcing unglamorous activities.

It certainly seems too soon to be bringing back the unwanted sobriquet of 'Bungle' by which the company - one of whose main activities in those days was making cigarette filters - was briefly known in the 1980s by disgruntled investors.