Shares in Bunzl PLC (LSE:BNZL) fell almost 3% following a downgrade by a Canadian investment bank amid concerns over growing competition.
RBC Capital Markets dropped its recommendation to 'outperform' to 'sector perform,' lowering its price target by approximately 10% to 2,350p.
High up on the worry wall is the fear that Bunzl’s profit warning in April might not be an isolated incident, more a reflection of the new rivalries in the packaging market.
Analysts Karl Green and Andrew Brooke highlighted specific issues underpinning the downgrade, notably the challenging competitive environment and uncertainty in the Goods Not For Resale (GNFR) sector.
The loss of a key, higher-margin grocery customer due to price competition has raised alarms, reflecting the opaque competitive landscape largely driven by privately held or private equity-backed rivals whose pricing strategies are difficult to assess.
The note also underscored investor sentiment, indicating a prevalent lack of confidence in Bunzl’s near-term operational recovery.
RBC pointed out that many investors expect the forthcoming trading update, scheduled for June 24th, to be, at best, a neutral holding statement and, at worst, potentially another profit warning, particularly in the context of the company's recent cancellation of its share buyback programme.
Further, it has adjusted its valuation assumptions, increasing the weighted average cost of capital (WACC) from 9.0% to 9.5%, and trimming terminal growth expectations from 1.5% to 1.0%.
The revised price target implies limited total shareholder return potential, with the company now valued at around 13 times forecasted 2026 earnings, below its historical 20-year average forward multiple of approximately 15.5 times.
Despite current challenges, RBC acknowledged Bunzl’s historically robust financial performance and successful M&A-driven growth strategy.
The group has maintained a consistent record of dividend growth over 31 years, leveraging an asset-light model, generating high returns on capital employed.
RBC anticipates continued strategic acquisitions as integral to Bunzl’s growth narrative, albeit at a potentially slower pace in the near term.
However, the Canadian bank suggested better medium-term investment opportunities might be found elsewhere, specifically citing Rentokil Initial and Teleperformance as having superior special-situation potential compared to Bunzl in the current market environment.
The shares were down 64p at 2,238p.