Investment Column: Bunzl's dull update is good for investors

Senior; STV Group
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Our view: Hold

Share price: 767p (+1.5p)

Bunzl, which distributes a variety of products, including food packaging and catering equipment, posted what read as a rather dull update yesterday. Not that dull is bad: when dull means improving margins following cost reductions, dull is pretty good.

Bunzl's reported revenues for the first quarter were a touch weaker than some expected, but, then again, that was down to currency moves, with sterling stronger in the first three months of this year than in the same period in 2009. The outlook statement was cautiously optimistic, with Bunzl admitting that while the world macroeconomic picture remains hard to read, its businesses "should develop well due to revenue growth and the positive impact of cost reduction initiatives". Clearly this is a steady ship, underpinned by a strong balance sheet, which drives its acquisitive strategy.

But that doesn't mean you should hop aboard. After being at 652p in October, we now feel Bunzl's shares are up with events, having risen more than 20 per cent since the end of January alone. In terms of multiples, it trades on 13.6 times Panmure Gordon's forecasts for 2010. And though it yields around 3 per cent, we're inclined to agree with those who reckon that the rating now adequately reflects Bunzl's prospects.

Given the yield and the scope for growth, however, we see no reason to offload the shares. The price shouldn't reverse course unless there is major, unsettling event. A sudden dip in the world economy, for instance, might trigger a sell-off in stocks that are seen as adequately valued (but such weakness might represent a fresh buying opportunity in Bunzl's case).

But we don't anticipate such a catalyst anyway. Indicators are steadily turning positive, and, save for occasional ups and downs, should remain on the mend for the foreseeable future. Bunzl is a solid, reliable hold.


Our view: sell

Share price: 122p (+11.2p)

Senior's interim management statement yesterday was a broadly positive one. The aircraft and engineering parts supplier reported trading in line with expectations in the three months to March, along with stronger margins, healthy cash flow and falling debts. The aerospace division, which accounts for nearly 60 per cent of sales, is particularly positive.

While the Flexonics division is still pulled down by manufacturing recession, particularly in the car industry, the much-feared slowdown in aircraft production in the last 18 months largely failed to materialise. Both Boeing and Airbus have reiterated confident forecasts this year, and are set to increase production from next year.

Further, the much-delayed Boeing 787 "Dreamliner" finally had its maiden flight just before Christmas, and is now scheduled for first delivery towards the end of the year. The Dreamliner is the most valuable model ever for Senior, so the prospects are good.

All good stuff, and several analysts are retaining their "buy" recommendations on the basis of such prospects. In Investec's case, a multiple of 11.2 times forecast full-year earnings tells it owns story and the shares duly shot up by more than 11 per cent.

But we take another view. Senior's shares fell off a cliff along with the global economy in autumn 2008, but they have climbed fairly consistently since last spring and are now within a whisker of pre-crash levels.

Add that to yesterday's gains, and the fact that the strong news from the aircraft-makers has already been priced in, and now is the time to cash in. Sell.

STV Group

Our view: Hold

Share price: 95p (-6p)

So the iconic Pearl & Dean advertising business is on the move again with STV selling the loss-making operation for £1. That was the big news from yesterday's trading statement from the media group, although investors will be just as pleased to see that the company is trading in line with expectations at a time when TV advertising is recovering at a relatively rapid pace (national television advertising is forecast to be up +21 per cent in April and +23 per cent in May.) So trading on four times 2010 forecast earnings, it's a clear buy, right? Well, there are issues.

STV still has a relatively high debt pile (£55m) together with a £27m pension deficit, which is a nasty-looking figure. Then there is a legal dispute with ITV and an outlook statement which does not suggest ringing confidence in its prospects. STV is cheap, therefore, but comes with a number of problems. The business looks to be heading on the right track (especially with the sale of P&D), so a small holding might be in order. But no more. Hold.