Jefferies downgrades Bunzl, says core legacy margins under pressure

That led analysts Will Kirkness and Kean Marden to lower their target price for the shares from 2,230p to 1,950p and to lower their recommendation from 'hold' to 'underperform'.

Mergers and acquistions and increased penetration of its own-brand products had masked pressure on the distribution and outsourcing company's core margins, they said.

Assuming acquired margins of between 10% to 11%, they estimated the underlying business had seen a deterioration of between 20 to 30 basis points over the past two years.

Recent M&A, especially into segments such as safety, had also pushed the firm into more cyclical end markets.

Meanwhile, increased own-label penetration was a headwind to organic growth, although the broker estimated that since 2010 it had boosted margins by 50 basis points.

Environmental regulation was also a concern, Jefferies said, amid a war on non-recyclable single-use products.

"To avoid margin deterioration and keep the top line ticking, current capital allocation needs to be sustained," they said.

However, on Jefferies's current assumptions for future M&A and dividends the company's leverage would rise to the top end of the leverage range by 2020 and a normalised pound-US dollar exchange rate might accelerate the pressure.

Shares had pulled back recently from a forward price-to-earnings multiple of 23.5 to 21.5, but that was still "lofty", the broker said.

As for upside risks, potential for that existed from M&A, margin improvement in 'rest-of-the-world' and more aggressive cost input inflation, the broker said.