Bunzl cashes in on niche control

THE INVESTMENT COLUMN

Since his arrival as chief executive in 1991 Tony Habgood has done a good job cleaning out the stables at Bunzl, the packaging and cigarette filters group. His performance has been reflected in a share price that has tripled over that period.

The tidying up process was largely completed last year when the group disposed of the building supplies division and took the decision to make a pounds 49.7m write down against many of the other acquisitions.

Although the resulting goodwill charge led to a notional loss in 1994, the potential of the remaining businesses showed through clearly in yesterday's interim results.

Pre-tax profits up 52 per cent to pounds 50m were to some extent flattered by comparison with a comparable period depressed by bad weather in the United States and initial losses on a couple of acquisitions that have since recovered. But there was plenty of underlying growth too. Total sales up 25 per cent in continuing operations reflected organic growth of more than 14 per cent.

Part of that reflected Bunzl's ability to pass on price rises of up to 80 per cent for raw materials over the past 18 months or so. More encouraging, in view of those spiralling prices, was underlying volume growth in the latest period of perhaps 6 to 7 per cent and margins raised from 4.6 per cent to 5.8 per cent. Part of the secret of Bunzl's success lies in its commanding position in several niche markets.

The group is now the biggest supplier of packaging for American supermarkets and disposable supplies for contract caterers and number two in the Britain. Bunzl beat the market in the first half by raising volumes 7 per cent in the paper and plastic disposables division and saw profits rise 61 per cent to pounds 31.7m in the process.

One-off factors restrained profits growth in the cigarette filters operation to 3 per cent. But prospects in Bunzl's main market for low tar filters are underpinned by volume growth of 43 per cent in the latest period.

Fine paper distribution to printers, where Bunzl is up against bigger groups such as Arjo Wiggins, is the odd-ball. But Mr Habgood believes not being tied to its own paper mill helps customer service, a view supported by the 15 per cent growth in UK volumes in the first half.

Strong cash flow and the conversion of loan stock has reduced gearing to a modest 9 per cent, leaving the way clear to further acquisitions. The only fly in the ointment is the uncertainty over future prices, but they look to be moving in the right direction. Rivals have posted paper price rises in the autumn, while plastic costs could now start to level off.

After a 0.5p fall to 209p yesterday, the shares stand on a rating close to the market at just under 14 times earnings, based on Panmure Gordon's pounds 104m profits forecast for this year. That seems a bit harsh for a company that should now start to show its paces. For the first time in several years Bunzl has raised the interim dividend, which goes up 11 per cent to 2p.

Burmah Castrol

sparkles again

A low-growth lubricants market, a highly cyclical chemicals arm and a rag-bag of fuel, transport and energy investments is hardly the combination of choice but it hasn't stopped Burmah Castrol producing another set of sparkling figures.

Cheered by unexpected confidence in Europe, where drivers are tinkering with their cars again, and continuing good news from the dynamic economies of Asia, the market warmed to yesterday's interim figures and the shares closed 16p higher at 970p. They have doubled over the past three years.

Post-tax profits of pounds 59.9m, up 19 per cent, were right at the top end of expectations and after a 16 per cent rise in earnings per share to 29.7p, the well-covered interim dividend rose 10 per cent to 11p.

As usual, Castrol drove the figures with perennially impressive volume growth of 6 per cent compared with a world market edging higher at about 1 per cent a year. The differential shows what a fantastic brand Castrol is and is testimony to the company's ability to spot the market's growth spots and take a decent slice before the competition gets up and running.

In India, for example, where the company hung on during a programme of Indianisation of the country's industry, deregulation has allowed Burmah to increase its share from 6 per cent to 15 per cent in three years. Malaysia was another highlight.

The beauty of the lubricants market is that, despite its maturity, margins can always be levered upwards by persuading existing buyers to pay a bit more for a higher-spec product. It makes Burmah's other main division, chemicals, seem a clumsy commodity operation by comparison.

In fact, despite a useful rise in profits from pounds 22.1m to pounds 30m and another rise in return on sales to almost 8 per cent, it is still not clear why Burmah is in chemicals at all. After over-paying in 1990 just ahead of the recession, the long-promised 10 per cent margin (just around the corner we are told again) has been a long wait. It is not apparent that the money couldn't have been a lot better spent invested in Castrol.

The other problem with the chemicals arm is that it dilutes the premium rating that the Castrol business would otherwise merit. On forecast profits of pounds 130m this year (pounds 114m last time), the shares trade on a prospective p/e of 15, about a market rating. With a yield of 4.3 per cent, the shares have finally caught up with events. Fairly priced.

Time to take Bluebird profits

The really attractive present from Bluebird Toys for Christmas 1990 would have been its shares, which have enjoyed a spectacular run.

From 7p almost five years ago, the shares rocketed to 257p this spring, fuelled by a strong performance from the Mighty Max range of boys' toys and, more recently, the Polly Pocket range of miniature dolls.

As with all companies in this volatile sector, the question is whether the magic will last. The toy industry is heavily reliant on the craze- obsessed whims of the pre-teen generation. A massive hit is a licence to print money. A mis-judged investment, or being late on a trend, can take a heavy toll.

Which is why yesterday's announcement from Bluebird is a little worrying. Though profits were up by 5 per cent to pounds 7.6m in the six months to June, sales were down by a similar amount to pounds 38m.

The hot weather hit the traditionally weak summer period, making Christmas trade uncertain to predict as shops will be sitting on unsold stock.

More significant is the rapid decline of Mighty Max, which accounted for a quarter of group profits last year.

Hit by competition from rivals such as Power Rangers and the natural slowdown of a product nearing the end of its life, Mighty Max sales will halve this year and disappear completely by 1996.

Also worth noting are recent share sales by both management and institutions. Torquil Norman, chairman, halved his stake earlier last year. Swiss investor Fransad did the same in February.

Normally that would be a clear signal to take profits, but there are a couple of caveats. One is bid speculation. The company had net cash of pounds 22m at the half-year and could prove attractive to toy giants such as Mattel and Hasbro.

The other is the shares' low rating. On forecasts of pounds 19.5m to pounds 20.5m for the full year, the shares, down 18p to 224p yesterday, trade on a forward price-earnings ratio of just 8.

There could be more growth to come, but taking profits looks the safest course.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Attenborough with the primates
tvWhy BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
News
people
News
Campbell: ‘Sometimes you have to be economical with the truth’
newsFormer spin doctor says MPs should study tactics of leading sports figures like José Mourinho
News
news
ebooks
ebooksA special investigation by Andy McSmith
Sport
Wes Brown is sent-off
football
Voices
Lance Corporal Joshua Leakey VC
voicesBeware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Life and Style
Alexander McQueen's AW 2009/10 collection during Paris Fashion Week
fashionMeet the collaborators who helped create the late designer’s notorious spectacles
News
i100
News
Perry says: 'Psychiatrists give help because they need help. You would not be working in mental health if you didn't have a curiosity about how the mind works.'
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?