Investment Column: Bunzl's shares don't reflect its strengths

Paddy Power; Cupid

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The Independent Online

Our view: Buy

Share price: 779p (+779p)

You don't have to look very far to catch sight of the economic storm clouds gathering over the US, Europe and the UK. Growth figures look sluggish and investors are increasingly nervous as they face up to the prospect of another downturn.

This backdrop bodes ill for businesses. And this, on the face of it, looks like bad news for companies like Bunzl, the business supplies distributor. After all, it is likely to face challenges if its customers are struggling to navigate stormy economic seas.

However, it is worth nothing that Bunzl notched up an admirable performance over the first half of the year. Yesterday's update on the six months to the end of June showed that the group had beaten market hopes, with pre-tax profits rising to £112.1m from £100m last year, and earnings per share climbing by 15 per cent to 24.9p. A key highlight was the improvement in organic revenue growth, which ticked up from 1.2 per cent to 3.3 per cent.

That said, there were weak spots, such as the UK, where around 17 per cent of the sales are to the public sector. Elsewhere, business was good, with Bunzl, which is eyeing further acquisitions to bolster its operations, reporting strong organic growth in North America, Continental Europe and other territories.

But what about the road ahead? The question brings us back to where we started, namely the pressures building up in key Western economies. Although strong, will the business be able to deal with another slump?

Well, if past performance is any guide, then the answer has to be in the affirmative. During the dark 2008-10 period, the company's earnings per share grew at a compounded annual growth rate of 10 per cent. Moreover, at around 11 times forward earnings, Bunzl trades well below the sector, which is valued at around 17 times.

Paddy Power

Our view: Hold

Share price: €35.5 (-€0.81)

The gambling industry tends to react to Paddy Power with a weary "not them again, give it a rest". Ladbrokes and William Hill's noisy neighbour from across the Irish Sea is an expert in marketing and PR.

But all that blarney masks some sharp business brains which know what customers want. Just look at the numbers in yesterday's half-yearly update.

While bookies are struggling to look good this year, partly because of the weak economic backdrop and partly because last year's figures were flattered by a punters blowing millions on the World Cup, Paddy Power turned in underlying pre-tax profits of €56.8m (£50.3m), up 15 per cent, with the online and telephone operations standing out. This is no mean feat.

We last looked at Paddy in August 2009, saying hold at €20.24. The shares looked pricey, but they have sky rocketed since then. This means they still look pricey. Indeed, at 18 times forward earnings, Paddy's multiples are more than twice those commanded by Ladbrokes and William Hill.

Although it deserves a premium, it could be argued that the other two are undervalued, particularly William Hill. Given these questions over valuation, we wouldn't buy. But, in light of Paddy's performance and the chance that it could exceed expectations yet again, we would certainly stick with our investment.


Our view: Buy

Share price: 246p (+16.75p)

If Cupid can make its users as attractive as investors clearly find the online dating site, then it will be truly living up to its name. Since first landing on the AIM in June 2010 with a float price of 60p, the stock has quadrupled, yesterday adding a further 7.3 per cent after the release of its first-half results.

The group has been busy expanding its international presence, most recently spending £500,000 on a number of Brazilian online dating sites, and the figures show the success of this strategy with a 137 per cent jump in underlying earnings, ahead of analysts' predictions.

With its stable of titles ranging from the traditional to the rather more risqué, the company now claims to have over 12m active members, double the number at the end of last year.

A strong increase in the gross margins at its more mature UK operations shows the potential for Cupid as its fledgling businesses develop, with analysts expecting further investment. Given the promise held out by Brazil and the US, Cupid appears set to have a string of admirers for some time yet.