Bunzl's plastics on solid ground

Hold Persimmon as it builds for future; Encouraging signs at Metal Bulletin
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The Independent Online

If Bunzl was a verb if would probably mean something like "to grow modestly without drawing attention to oneself".

If Bunzl was a verb if would probably mean something like "to grow modestly without drawing attention to oneself".

In fact Bunzl is a packaging company whose main business involves distributing lots of those plastic products used by supermarkets. These include plastic gloves used by the deli staff, the bowls you put your salad into, and even the spoon you use to do it.

It is a low-profile business with attractive growth prospects and that is precisely how this company likes it. Indeed it is investors who have had the last laugh.

Plastic packaging is a growing business and with increasing trends towards takeaways and "ready to eat" meals providing a healthy backdrop.

Bunzl has therefore been a consistent performer and last year entered the FTSE 100 index. It now has a market value of £2bn.

Yesterday's results were vintage Bunzl - a decent set of numbers with no headline-grabbing material to speak of.

Pre-tax profits in the six months to June were up 5 per cent to £92m if exchange rate fluctuations are stripped out. Sales volumes in outsourcing, which accounts for two-thirds of Bunzl's business, rose by 7 per cent with operating profits up 11 per cent at constant exchange rates, showing that Bunzl is keeping a tight lid on costs. At Filtrona, which supplies cigarette filters as well as ink reservoirs for printers, grew sales by 6 per cent and profits by 10 per cent at constant exchange rates.

The strategy is for more of the same, with a programme of smaller, bolt-on acquisitions, largely of private companies.

One worry is on margins with scope for price rises looking limited as raw material price hikes ease.

Another slight concern is the boardroom structure which does not comply with UK best practice. Anthony Hapgood is executive chairman, however, the company says it has the full support of its shareholders.

Analysts are forecasting profits of £212m for the full year which puts the shares - down 3.75p at 446.25p - on a forward price-earnings ratio of 15. Share buy-backs should act as a support, making the stock a decent hold.

Hold Persimmon as it builds for future

You wouldn't know from Persimmon's results that there is anything to worry about in the housing market. Interim pre-tax profits, before goodwill, at the UK's second biggest housebuilder were up 29 per cent to £152m, well above market expectations. The figure came from an improvement in margins, which rose to 19.4 per cent from 16.4 per cent on sales up only 5 per cent at £857.2m. The company said it would increase the full-year dividend at least 15 per cent to 17.4p.

Forward sales of £840m have already been achieved for the second half, so there seem to be few concerns for the rest of the year.

The company swallowed rival Beazer a couple of years ago and it has been able to use the advantages of scale in procuring supplies and buying land, though this is not really an economies of scale business. Persimmon now has a landbank equivalent to 4.7 years of building.

Although gearing is down to a level where Persimmon could consider more deals, the company says it has plenty of room for improvement in its existing business. It is divided into 24 regional housing units and not all of these are producing the number of homes the group wants to see and there is plenty of scope for growing the Charles Church executive homes business and improving margins there.

The company says that, after a pause at the start of the year, the market returned to "normal" healthy conditions. This is driven by under-supply of new homes, low interest rates and low levels of unemployment. It appears the housing market is shaking off the gloom that stopped people buying earlier this year, when they feared an imminent crash.

Persimmon shares were tipped by this column at 399p in December and have since motored ahead, closing at 545p yesterday, down 10p. That puts the stock on a forward multiple of 7, which is the sector average. Given that Persimmon is a class play, the shares are well worth hanging on to.

Encouraging signs at Metal Bulletin

Metal Bulletin, the specialist publisher and conference organiser, has had a grim time, with conferences hit by the war in Iraq and then the Sars epidemic. The downturn in metals trading also affected the company, with profits collapsing dramatically.

But maybe the green shoots of recovery are starting to emerge. Yesterday's half-year results showed a lift in profits to £0.8m, compared with £0.5m last year, and the company is starting to sound more confident.

The key point was that gross margins rose by 2 percentage points as Metal Bulletin cut costs and moved more of its publication on to e-mail. For example Metal Bulletin used to be a twice-weekly paper publication. Now it has a daily e-mail service with a paper product once a week. The business is investing more in subscriber marketing to ensure sales are supported. Other good news is that BCA Research, the bank credit analyst business, is also doing well.

The sticky area is conferences which used to account for 19 per cent of group revenues but has shrunk to just 12 per cent, as companies rein back on spending. For example, revenues at the flagship Bermuda Hedge Fund conference in September will be down £0.5m due to lower sponsorship.

Market conditions remain challenging, the company says, but this could be about to change. The shares jumped 11.5p to 173.5p yesterday and, assuming full-year profits of £4.7m, they trade on a forward p/e of 19. That already prices in some recovery but, as ABN Amro points out, the shares have lagged media peers such as Informa and United Business Media. A speculative buy.

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