Bunzl PLC (LSE:BNZL) has been handed a ‘sell’ rating by Panmure Liberum, which has set a target price of 2,000p, 15% below the current share price.
The broker argues that, despite the packaging and distribution giant's reputation as a steady compounder, the group is essentially running hard to stand still, with much of its recent margin gains at risk of unwinding.
After years of flat earnings before interest and tax (EBIT) margins of around 7%, Bunzl enjoyed a boost in profitability post-pandemic.
However, Panmure questions whether this uplift is sustainable.
The report highlights that while management claims a structural shift, most of the margin improvement has been offset by lower stock turnover and higher operating capital, especially as Bunzl’s product mix shifts towards slower-turn sectors such as safety.
Furthermore, wage inflation, particularly acute in North America, has placed additional pressure on returns, while staff turnover and operational costs remain elevated.
Bunzl’s decentralised model means there are limited opportunities for cost-saving synergies from its frequent acquisitions, and any benefits from scale or cross-selling have been hard to capture.
Crucially, Panmure warns that Bunzl’s EBIT margin is likely to revert towards its long-term average, with consensus forecasts appearing too optimistic.
As a result, the broker believes the shares could de-rate further as the market recognises the “gravitational pull of history”.
In short, while Bunzl remains a strong cash generator, investors should be wary of expecting further margin expansion or significant upside from current levels.
The shares were off 1% at 2,318p against the backdrop of a broadly flat market.