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Investing.com -- Shares of Bunzl plc (LON:BNZL) fell by 2.5% on Tuesday after RBC Capital Markets downgraded the stock to “sector perform” from “outperform” and cut its price target by 10% to 2,350p.
The brokerage cited rising competition and waning investor confidence following an April profit warning.
Bunzl had previously been seen as a defensive play amid global economic uncertainty, but RBC noted that with tariff risks easing, the case for outperformance has weakened.
The company’s recent loss of a high-margin grocery customer, attributed to pricing pressures, underscored the competitive challenges in the Goods Not For Resale market.
The market remains difficult to assess due to the presence of numerous privately owned or conglomerate-affiliated competitors.
RBC reported that private equity-backed rivals are becoming more active and potentially aggressive in pricing as they aim to gain market share.
Investor sentiment remains cautious. RBC stated that after multiple investor meetings, confidence in Bunzl’s business model is likely to take time to recover.
The cancellation of the share buyback program has fueled concerns about a possible second profit warning. Some investors believe management changes may be necessary to rebuild trust.
In revising its valuation, RBC raised its weighted average cost of capital to 9.5% from 9% and lowered its terminal growth rate to 1% from 1.5%.
The new price target implies a FY26E price-to-earnings ratio of approximately 13x, compared to the 20-year forward 12-month average of 15.5x.
Financial projections reflect these pressures. Revenue for 2025 is forecast at £11,775 million, flat from 2024. Adjusted diluted EPS is expected to decline 7.2% year-over-year to 179.2p. EBITDA margin is projected to fall to 8.3% from 8.7%, while net profit margin is expected to narrow to 5% from 5.5%.
EBITA for 2025 is estimated at £931.3 million, down from £976.1 million in 2024, reflecting a 4.6% decline. Free cash flow yield is expected to remain steady at 8.5% in 2025.
Bunzl’s historical performance has been strong, with adjusted EBITA and dividend per share growing at 9% compound annual rates between 2004 and 2024, and 31 consecutive years of dividend increases.
However, RBC pointed out that past centralization efforts have caused some operational challenges. Despite these setbacks, the company’s asset-light model continues to generate cash to fund acquisitions.
Mergers and acquisitions remain central to Bunzl’s strategy, with an expected annual M&A spend of £400 million growing at 2% annually.
However, RBC acknowledged potential headwinds from vendor hesitancy that may slow deal flow.
RBC listed several risks to its rating and target price, including fluctuations in costs of goods sold, outsourcing trends, foreign exchange rates, acquisition pace, and global GDP shifts.