Barclays upgrades Bunzl, citing stronger FY25 outlook and M&A potential

Investing.com -- Barclays (LON:BARC) has upgraded Bunzl (LON:BNZL) to “overweight,” based on several factors indicating a stronger outlook for the company, in a note dated Monday. 

The brokerage notes that Bunzl’s shares are currently trading at the low end of their historical ranges, presenting an attractive entry point for investors. 

This upgrade is also supported by the expectation of a stronger FY25 outlook and the company’s balance sheet being re-levered through M&A and buybacks, which Barclays views as key drivers for earnings growth.  

The analysts outline a shift from FY24 headwinds to potential tailwinds in the latter half of 2025. 

Volume growth has been observed, with a strong exit rate in Q4. Deflation, which has been a concern, is diminishing, and the pricing environment for 2025 is expected to be more stable. 

Additionally, pulp prices, which negatively impacted European 2H profits in higher-margin product categories, are forecasted to rise in Q2/Q3. 

The inventory build-up in FY24 is also expected to normalize in FY25, leading to improved free cash flow. Further margin improvements are anticipated through increased own-brand penetration in the US and cost-saving measures in Europe. 

Barclays also suggests that potential tariffs could shift the deflation narrative, potentially leading to COGS inflation and supply-chain disruptions, from which Bunzl is expected to benefit.  

In assessing the risk of a US recession, Barclays analysts believe Bunzl demonstrates relative defensiveness. 

While a consumer-led recession scenario might lead to earnings downgrades, Bunzl’s shares are expected to outperform the broader FTSE250, as they are typically seen as defensive. 

The US is a major contributor to group profits, with a substantial portion coming from foodservice, retail, and convenience stores. 

Bunzl has a history of gaining market share, managing costs effectively, and pursuing M&A even during recessions, with group profits growing through the great financial crisis.  

Barclays projects a positive earnings outlook for Bunzl, with approximately 6% annual growth expected for FY25-27, including buybacks, and potential for M&A to further supplement this growth. 

This is compared to the approximately 3% annual earnings growth delivered over FY23-24. 

Key catalysts for this growth are anticipated to be diminishing deflation and M&A announcements. Barclays’ price target for Bunzl is 3,650p, indicating a potential upside of over 20%. 

The brokerage expects M&A and buybacks to support earnings growth through the end of 2027. 

M&A has historically contributed about 6% to annual profits, and this trend is expected to continue. 

The targeted £700 million annual spend in M&A is projected to add approximately 6-7% to annual earnings, with buybacks contributing an additional approximately 4%.