Investing.com -- Shares of Bunzl plc (LON:BNZL) climbed on Monday following an upgrade from RBC (TSX:RY) Capital Markets, which elevated the stock’s rating to “outperform” and raised the price target to 4,000p from 3,350p.
The analysts at RBC attributed the upgrade to Bunzl’s dependable growth trajectory, underpinned by a combination of organic margin expansion, strong M&A activity, and an ongoing share buyback program.
The brokerage flagged Bunzl’s strong position in defensive markets, with over 55% of its revenue derived from North America, and noted the company’s consistent performance compared to its peers in the "defensive growth" sector.
RBC drew favorable comparisons to companies like Compass and Diploma, which trade at higher multiples, suggesting that Bunzl’s valuation remains undemanding.
Bunzl’s long-term growth strategy played a pivotal role in the analysts’ confidence. Over the past two decades, the company has achieved a compound annual growth rate of about 9% in adjusted EBIT, facilitating uninterrupted dividend increases.
This growth, fueled largely by reinvestment in value-accretive acquisitions, demonstrates Bunzl’s capability to deliver through economic cycles.
The company’s robust free cash flow generation has supported these acquisitions, enabling self-funded growth without reliance on equity markets.
RBC also pointed to an optimistic outlook for Bunzl’s M&A pipeline, citing the company’s strong network of acquisition targets across diverse geographies and industries.
With a history of leveraging synergies effectively, Bunzl is expected to continue enhancing its scale and profitability through strategic acquisitions.
Moreover, the analysts noted a shift in the company’s organic profit potential, with progress in operational efficiencies, purchasing, and own-brand penetration contributing to margin improvements.
RBC’s revised price target incorporates adjustments to its discounted cash flow model, reflecting a lower weighted average cost of capital and higher terminal margin assumptions.
The new target implies a FY25 price-to-earnings ratio of 19x, with a portion of the company’s enterprise value tied to future M&A prospects.
While the analysts acknowledged potential risks such as fluctuations in input costs, changes in global economic conditions, and acquisition-related uncertainties, they maintained that Bunzl’s consistent performance and strategic initiatives position the company for sustained growth.
As of the latest market close, Bunzl shares were trading at 3,520p, offering what RBC described as “mid-teen” total shareholder return potential at current levels.