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
Sport
sportGareth Bale, Carl Froch and Kelly Gallagher also in the mix for award
News
Japan's Suntory Beverage & Food has bought GlaxoSmithKline's Lucozade and Ribena
news
News
A tongue-eating louse (not the one Mr Poli found)
newsParasitic louse appeared inside unfilleted sea bass
News
The illusionist believes hypnotism helped him to deal with the lack of control he felt growing up
people'It’s not that people react badly to it – they really don't care'
PROMOTED VIDEO
News
peopleJack Monroe accuses David Cameron of 'misty-eyed rhetoric'
News
Tana Ramsay gave evidence in a legal action in which her husband, Gordon, is accusing her father, Christopher Hutcheson, of using a ghost writer machine to “forge” his signature
peopleTana Ramsay said alleged discovery was 'extremely distressing'
Arts and Entertainment
Robin Windsor and Aljaz Skorjanec rehearse their same-sex dance together on Strictly Come Dancing
TV
News
ebooksNow available in paperback
Money
Anyone over the age of 40 seeking a loan with a standard term of 25 years will be borrowing beyond a normal retirement age of 65, and is liable to find their options restricted
propertyAnd it's even worse if you're 40
Arts and Entertainment
Perhaps longest awaited is the adaptation of Jack Kerouac’s On the Road with Brazil’s Walter Salles directing and Sam Riley, Kristen Stewart and Viggo Mortensen as the Beat-era outsiders
books
Arts and Entertainment
theatreSinger to join cast of his Broadway show after The Last Ship flounders at the box office
Life and Style
fashion'To start singing with Pharrell is not that bad, no?'
News
news
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

Argyll Scott International: Risk Assurance Manager

Negotiable: Argyll Scott International: Hi All, I'm currently recruiting for t...

Argyll Scott International: Business Analyst - MGA - London Market - Insurance Broker

£50000 - £60000 per annum + benefits: Argyll Scott International: A Business A...

Ashdown Group: PR, Marketing & Events Executive - Southwark, London - £35,000

£30000 - £35000 per annum + benefits: Ashdown Group: PR Marketing & Events Exe...

Selby Jennings: C++ Developer – Hedge Fund – New York

$80000 - $110000 per annum, Benefits: Bonus and Employee Investment Scheme: Se...

Day In a Page

In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible