THE INVESTMENT COLUMN: Bunzl's double act well received

When Anthony Habgood and David Williams took control at Bunzl in 1991, the rival paper groups Bowater (now Rexam) and Arjo Wiggins Appleton were sneezing and Bunzl was on the floor after a 1980s spending spree. After nearly five years of treatment by the duo, the roles have been reversed. Both the big groups are now suffering at the hands of the paper cycle, while Bunzl's distribution businesses have ridden out recent wild fluctuations in pulp (and plastics) prices.

Yesterday, the group announced pre-tax profits up a third to pounds 106m, right at the top of expecations, and was rewarded with an 8p rise in the share price to 209p.

The medicine administered by Messrs Habgood and Williams has been to dump around a third of the business and concentrate on four areas, ranging from paper and plastic plates and the like to protective plastic caps for engineering parts, where it has leading positions. As a result, the group has seen net margins rise from 4.3 per cent in 1992 to 6.1 per cent last year, when return on capital topped a highly respectable 20 per cent, even after taking account of goodwill on acquisitions.

The problem for management now is how to maintain the momentum of growth. Profits have risen at a faster rate than sales since 1992, showing compound growth of 25 per cent over that period, some eight points ahead of the expansion in the top line. But fatter margins will be harder to come by from here on. The building supplies business, the last of the remaining serious underperformers, went in mid-1994.

Mr Habgood is confident that growth can continue and points to new business won in the key US market so far this year. Contracts with Supervalu, a grocery distributor, will alone be worth in excess of $400m over four years. But to get things going, Bunzl may need to use its minimal 11 per cent gearing to buy something bigger than the pounds 3.7m of bolt-on acquisitions announced yesterday.

Despite a lowly forward rating of 12, based on profits of pounds 116m this year, the shares may mark time until there are signs of further action. Hold.