Investing.com -- Bunzl (LON:BNZL) has received an upgrade from HSBC (LON:HSBA) Global Research, which raised its rating on the stock to "buy" from "hold," citing a combination of factors that could drive earnings growth over the coming years, in a note dated Thursday.
Shares of the distribution and outsourcing company were up 1.8% 08:40 ET (12:40 GMT).
The brokerage revised its target price to 3,408p, down from a previous 3,625p, but still representing an upside of approximately 14% from the current share price of 2,988p as of March 18.
The company has struggled with organic growth in recent years, with declines of approximately 2.9% in 2023 and 2.4% in 2024.
HSBC attributes this trend to weak pricing in the market, a shift toward lower-priced but higher-margin own-brand products, and contractual adjustments with US grocery clients that resulted in a reduction of held inventory.
However, the report suggests that these challenges are cyclical rather than structural, and could begin to ease.
One potential catalyst for a turnaround is the introduction of US import tariffs, which HSBC analysts believe could benefit distributors like Bunzl.
If tariffs lead to increased inflation, price adjustments may become more feasible, enabling organic growth to return to positive territory.
Additionally, businesses affected by tariffs may turn to large-scale distributors such as Bunzl to source alternative, cost-effective products.
HSBC projects a modest organic growth rate of 0.8% in 2025, with improvement expected later in the year.
Bunzl’s valuation remains undemanding, with the stock trading at a price-to-earnings ratio of 14.9x for 2025, below its long-term average of 17.8x since 2015.
HSBC estimates that if Bunzl’s valuation returns to historical levels, its share price could reach approximately 3,681p, implying an upside of 23%.
Under a scenario where the company continues its acquisition strategy at historical rates, a valuation of 4,130p per share—38% above current levels—could be achievable.
HSBC’s updated earnings estimates anticipate earnings per share of 200.46p for 2025, slightly down from a prior estimate of 204.76p.
The brokerage continues to base its valuation on a price-to-earnings multiple of 17x, in line with Bunzl’s five-year average.
While the new target price of 3,408p is lower than the previous estimate, HSBC maintains confidence that acquisitions will bolster earnings in 2025, 2026, and 2027.
Bunzl’s financial outlook includes a projected revenue increase from GBP 11.78 billion in 2024 to GBP 12.07 billion in 2025, with EBITDA rising from GBP 1.19 billion to GBP 1.25 billion.
The company’s return on equity is expected to improve from 22.6% in 2024 to 23.3% in 2025, with steady dividend growth anticipated.
The dividend yield is forecasted to rise from 2.5% to 2.6% in 2025 and further to 3.1% by 2027.
Despite the optimism surrounding acquisitions and pricing recovery, HSBC acknowledges risks to the outlook.
A sharp economic recovery could shift capital toward more cyclical stocks, while a weakening US dollar poses a potential downside to earnings.
Additionally, European regulations on plastic recycling could increase costs, and an unexpected spike in inflation could create short-term pressure on margins.
With a strong track record in acquisitions and a business model well-positioned to benefit from supply chain disruptions, Bunzl is expected to navigate current market conditions effectively.