Fever-Tree has a problem with managing expectations. A series of profit warnings has driven the former stock market darling’s shares down by more than half over the past five years. And now the fancy tonic maker has done it again, cutting its revenue guidance to between £380 million and £390 million, from the £390 million to £405 million suggested previously. This time weak demand in the UK has sapped sales, which the group blames on a bad British summer.
In reality, it will add to doubts over whether the company is edging closer towards saturation point in a mixers market where it already has a 45 per cent share — flat on the same point last year.
Sales volumes in Britain during the first six months of the year fell back, but higher prices made up the slack, pushing up revenue by 1 per cent. That is not expected to suffice for the rest of the year, which means that revenue is expected to fall by between 2 per cent and 4 per cent. Its adjusted profit guidance is characteristically wide, set to land anywhere between £30 million and £36 million this year, again lower than the £36 million to £42 million that had been flagged.
On the cost line, there could be some easy wins. Spending on marketing and promotion this year will be weighed towards the first half, which means that a depressed adjusted margin before interest, taxes and other charges of 5.8 per cent could be due a recovery in the second half of 2023. That was less than half the margin recorded over the same period last year.
Heavy spending on pushing further into the vast American market and maintaining share in the more mature British and European territories has amplified inflationary cost pressures. Those, too, should fall away next year.
Tim Warrillow, Fever-Tree’s founder and boss, has dangled a 15 per cent adjusted profit margin for next year, higher than the 13.5 per cent that analysts had expected. Transatlantic freight prices have come down; the bulk of energy costs have been hedged for next year; and, more importantly, glass supplies for next year are at a lower price. But investors might want to view the promise of a far better margin next year with scepticism. True, inflation might be less of a headache, but sales prospects still look shaky. The United States might now be the biggest contributor to revenue, but what happens at home matters. Britain is a big cash cow, so any weakness here stands to have an outsized impact on the group’s wider profitability.
There’s also the question of whether it pulls off a smooth switch from third-party distribution in Australia to selling directly to its retail and on-trade customers.
Fever-Tree’s inconsistency is made more problematic by the weight of expectation still baked into the share price, which equates to almost 47 times forward earnings. The only real justification for such a racy multiple is a potential takeover of the drinks maker by a rival seeking to grab a slice of the US premium mixers market.
The stakes in America are high, as Fever-Tree throws cash at taking market share. It is managing to do that, with a 5 per cent slice of the retail mixers market over the 17 weeks to mid-June, according to figures from Nielsen, up from 4.3 per cent over the same period last year. Of the 40 per cent US revenue growth in the first half, only five percentage points came via price inflation.
The strategy is not simply to win more supply accounts but also to launch new flavours and package sizes. Fever-Tree does not disclose profitability by market, but America is thought to be lossmaking because of the sheer scale of the outlay on expansion.
ADVICE Avoid
WHY Shares look overvalued given the risk that it may fail to meet margin guidance
Dowlais
There is a potentially sticky situation ahead for Dowlais. This week contracts between the United Auto Workers and General Motors, Ford and Stellantis are due to expire, which could lead to the start of strike action and weaker demand for parts made by the engineering group spun out of Melrose Industries.
Those three carmakers represent roughly 15 per cent of its revenue, a feature that has prevented Dowlais, which makes the drivetrain components for cars, from upgrading forecasts this year, despite a bullish first six months. Its maiden first-half trading figures showed a 10 per cent rise in revenue at constant currency rates and an improvement in the adjusted operating margin of 130 basis points to 6.3 per cent, as it works towards a target of 11 per cent.
The shares trade at just under eight times forward earnings, a fall from an already undemanding multiple of ten when it was listed in April.
The potential strike action is one source of uncertainty. Another is the semiconductor shortages that have held back vehicle production. Yet that paltry valuation ignores the recovery potential. Those shortages are easing, according to Liam Butterworth, the Dowlais boss, contributing to better sales volumes in the first half. A habit of chasing new business at the expense of profitability meant Dowlais inherited roughly £300 million of onerous contracts, which have been renegotiated. It is now in the middle of overhauling its manufacturing facilities, where it specialises in the sideshafts that transmit power to a car’s axle and the wheels. Just over two thirds of orders came for electric vehicles, a record. Three new plants are now operational, although won’t be running at full capacity until 2025.
Greater efficiency could partially mitigate any shortfall in production volumes. It has come at a cost, as capital expenditure roughly doubled to £122 million, but spending is set to fall next year. If you strip out demerger costs, it still managed free cashflow of £33 million, which should be roughly neutral for the full year. Net debt of 1.4 times adjusted profits is down from 1.5 at the time of the demerger. It has a low bar to surpass the market’s expectations.
ADVICE Buy
WHY Cheap valuation does not reflect recovery potential