Bunzl under the cosh on HSBC downgrade

Bunzl was under the cosh on Friday as HSBC downgraded its stance on the distribution and outsourcing group to ‘hold’ from ‘buy’ given the valuation multiples and macroeconomic uncertainty.

“We expect that margins in Europe and UK are likely to be hit by a weaker exchange rate relative to the USD, albeit with a 4-6 months lag due to hedging.”

On a longer-term basis, however, HSBC said the shares remain attractive. It said Bunzl’s target markets tend to be grocery, food service, cleaning and safety, which are by nature defensive.

“In a recessionary environment, investors prefer such defensive exposure. Moreover, if the recession is driven by an industrial slowdown, the consumer exposure may leave Bunzl's volumes relatively more secure.

“More importantly, the company actively focusses on products that are not for resale and represents a small portion of the customer's cost base. These characteristics and ability to switch to lower priced/high gross margin own brand product enables the company to offset some of the input cost fluctuations.”

HSBC said its scenario analysis for Bunzl suggest the company needs to continue delivering on M&A momentum in order to justify the current valuation. If the M&A momentum comes to a halt, the shares’ valuation could easily de-rate to 1,710-1,860p, it said.

The bank lifted its price target on Bunzl to 2,400p from 2,140p.

At 0947 BST, Bunzl shares were down 2.9% to 2,295p.