Barclays Downgrades Bunzl#
On Thursday, Barclays announced it has downgraded its rating on Bunzl, a British distribution and outsourcing company, from "overweight" to "equal weight." This change reflects concerns over declining profit margins and increasing fuel costs, which could lead to a second consecutive year of earnings decline for the company.
Price Target Reduction#
Barclays has also cut its 12-month price target for Bunzl by 18%, bringing it down to 2,250p (pence). Following this announcement, Bunzl's shares fell by 1.5% to 2,260p, which is slightly below the new target and significantly lower than its 12-month high of 3,884p.
Earnings Estimates Adjusted#
The analysts at Barclays have revised their earnings estimates for Bunzl, lowering the forecast for adjusted earnings per share (EPS) for FY26 by 10% to 174.4p and for FY2027 by 13% to 178.9p. These new estimates are approximately 2-4% below the consensus from Bloomberg.
Margin and Cost Concerns#
Barclays has also reduced its FY26 group EBITA (Earnings Before Interest, Taxes, and Amortization) estimate by 7.5% to £889 million, with a forecasted margin decrease of 63 basis points to 7.4%. While current trading conditions have stabilized, Barclays warns that if inflation rises and larger customers resist price increases, the company's full-year guidance could be jeopardized. Additionally, gross margins are expected to have declined by 60-70 basis points organically in FY25, particularly in North America.
Fuel Prices as a Threat#
The brokerage highlighted that oil prices exceeding $100 a barrel pose a significant risk. Fuel and freight expenses account for about 15% of Bunzl's operating costs. Barclays modeled a scenario where a 20% increase in these costs, with half of that increase passed on to customers, would negatively impact EPS by 4%. Unlike in 2022, there is no surge in revenue driven by COVID-19 to help mitigate these challenges.
The new price target of 2,250p is based on a multiple of 13 times FY2027 earnings, which is below Bunzl's historical average of around 15 times. Barclays also outlined a downside case of 1,700p and an upside scenario of 3,200p, noting that a free cash flow yield of about 7% and ongoing mergers and acquisitions activity suggest a full downgrade to "underweight" may not be warranted.