Bunzl's pack offers rock-solid defence

Bunzl; Persimmon; Metal Bulletin

Think of all the things that restaurants, caterers and supermarkets use to package food products and provide clean service. There's a good chance that Bunzl, which began life as a specialised paper and packing maker, is a supplier.

As the new economy has imploded, Bunzl has proven a nice earner for investors. The rotation into defensive stocks, which began 18 months ago, helped the company rise 65 per cent to an all-time high of 488p earlier this year.

Yesterday, it reported that pre-tax profit before goodwill grew 16 per cent £96.9m, though fully-diluted earnings per share climbed at a slightly lower 12 per cent to 12.5p. Sales, helped by acquisitions, jumped 20 per cent to £1.4bn. The interim dividend rose 11 per cent to 3.4p.

How Bunzl will fare in the second half and in 2002 is less clear. Should the dollar, for example, weaken further, Bunzl's North American bias could rapidly become a liability.

Two other concerns could make it difficult for the shares to overcome the lethargy of the broader market: price deflation from slowing economic growth across the Atlantic and a need for acquisitions to maintain current growth rates.

Balanced against those factors is the growing use of outsourcing among both Bunzl's established client base and among businesses that the company could turn into customers. Outsourcing, which accounts for over two-thirds of the group's turnover, achieved a 31 per cent growth in operating profit.

Analysts were largely upbeat about the interim figures, which exceeded expectations. Several were mulling boosting full-year forecasts, though there is some unease that non-core businesses, including Filtrona, which distributes cigarette filters and makes Superstrip adhesive tape, haven't been put up for sale.

But as Filtrona and the plastics unit, which saw a dip in operating profit, still generate solid cash flow. Tony Habgood, its chairman, is under no pressure for deals in the absence of a full price. Nor is the balance sheet under pressure, a factor that leaves them well positioned to capitalise on potentially value-enhancing acquisitions in a business environment that may throw up some unexpected opportunities.

With the stock up 16p to 450p and full-year earnings per share expected to hit 27.8p, Bunzl is trading at a prospective price/earnings rating of 16. That isn't expensive and given the company's rock-solid defensive characteristics, moderate progress going forward is likely.

Persimmon

As Britain's biggest housebuilder, Persimmon is well placed to cash in on soaring house prices. Its tried and tested strategy of persuading buyers to dig deep has left the company poised to achieve sales targets for this year and beyond.

Duncan Davidson, the chairman, has again shown the management's aptitude for bedding down acquisitions. Successful integration of its £610m purchase of fellow housebuilder Beazer helped Persimmon deliver an interim pre-tax profit of £68.8m, 42 per cent higher than the £48.8m achieved a year earlier.

In three months, Mr Davidson, has transformed Beazer's volume-driven focus into Persimmon's own margin-led strategy. High selling prices and vigorous cost cutting helped Persimmon turn Beazer's low operating margins of less than 12 per cent into an overall operating margin of 14.4 per cent. The group remains on target to achieve future margins of more than 15 per cent.

Encouragingly, Mr Davidson is confident that high house prices can be sustained. Demand remains strong and supply limited. Current industry completions are 50,000 less than the 200,000 of the Eighties. The average selling price for a Persimmon house rose to £119,645 from £103,770, reflecting the recent runaway housing boom, on sales up 93 per cent to £698.1m.

Persimmon is on target to reduce its gearing to less than 70 per cent by the end of the year from over 100 per cent when it bought Beazer. Debt fell to £575m from £800m, leaving Persimmon with scope to pounce on future acquisition opportunities.

Analysts raised full-year forecasts in light of yesterday's strong numbers. UBS Warburg expects pre-tax profits before goodwill and exceptionals of £195m and earnings per share of 54p. On a prospective p/e ratio of 7.2 for the current year, Persimmon is at a small premium to its peers. With the shares hitting a year high of 395.5p, up 11.5p, there is room for further gains.

Metal Bulletin

The air went a little bit further out of the business publishing sector yesterday when Metal Bulletin turned in disappointing interim results. Ignoring an exceptional gain of £2.37m from the sale of databases, MB saw first-half operating profit dip to £2.3m from £2.5m a year earlier. Sales, fuelled by acquisitions, rose by nearly one-third to £19.8m.

The company is expanding further into financial services and other niches. Currently MB's metal and steel industry customers are cutting back due to weak trading conditions.

But from adversity comes opportunity. Thus, MB's only significant rival in the metal publishing business, the American Metal Markets trade daily, has finally agreed to be taken over. That will dilute earnings this year, but in future will give the UK group unfettered control of the global market for metals information.

More of a gamble is the acquisition in January of Bank Credit Analyst of Montreal for £32m. This pushes MB much further into the currently difficult market for financial information.

MB shares closed at two-year lows yesterday, losing 12.5p to 207.5p. With full-year earnings per share likely to struggle to attain the forecast 12p, buyers should be patient.