It had the makings of being an extremely painful year for companies in the soft drinks sector. Conviviality Retail, the owner of Bargain Booze, collapsed into administration; the government’s sugar tax came into effect and there was a shortage of carbon dioxide that interrupted bottling, including at a factory producing drinks for Coca-Cola.
In practice, however, while they suffered their share of price volatility, companies in the sector performed rather well over the 12 months, turning in respectable increases in revenues and profits for the periods they have reported so far. They have adapted their product lines quickly to the new tax and absorbed the impact of Conviviality, whose retail division was acquired by Bestway, the grocery wholesaler.
In a recent sector note, analysts at Berenberg made the case that trading for the companies that they cover — Fevertree, Britvic, AG Barr and Nichols — should stand up well again over the coming 12 months, recommending that their clients buy shares in the first two and hold those of the others.
The note begs some questions. The Berenberg team, for example, argues that the soft drinks sector is a relatively defensive play, suitable for an investor looking for a perceived safe place from the stock market storm.
That feels somewhat counterintuitive. It’s tempting to assume that the upmarket premium mixer produced by Fevertree, or the branded Irn-Bru fizzy pop from AG Barr, would be among the first things that the cash-conscious consumer would ditch in favour of a cheaper option when they’re feeling financially stretched, as they may well do next year. Leaving that aside, the note is informative.
Fevertree is the most highly rated by a country mile, largely because it is perceived as a high-growth stock with plenty of room to grow in the United States. Founded in 2004, it produced its first product, Indian Tonic Water, that was sold in Selfridges and Waitrose. Listed on the AIM market a decade later, the modern Fevertree sells a range of 14 different mixers in more than 70 countries and generates about half of its sales outside the UK.
Berenberg reckons Fevertree will continue its rapid growth, forecasting that annual revenues will grow by 42 per cent this year, having jumped by 66 per cent to £170.2 million last year. It argues that the shares, which have fallen by 44 per cent this year, have been oversold, and also floats the tempting thought that the business could find itself at the receiving end of a takeover approach, most realistically from Pepsico of the US.
Nevertheless, despite the fall, Fevertree shares trade on 41 times Berenberg’s forecast earnings for next year, which take in another year of predicted strong growth, for a prospective yield of only 0.6 per cent. For a business whose premium-priced mixers could so easily fall foul of a consumer downturn and fail to win traction with the US drinking public, that feels toppy. The shares, off 80p at £21.94 yesterday, are probably best avoided.
Britvic is a tougher call. The company was created by a chemist in Chelmsford in 1845 but took on the Britvic name in 1972. Having expanded through a series of acquisitions, it now produces brands including Robinsons, Tango and J2O as well as Pepsico-owned drinks such as 7UP and Pepsi and exports its wares to more than 50 countries.
That breadth of product exposure, from squashes for all ages to high-profile, and inexpensive, fizzy drinks, makes Britvic look as if it would be far more resilient than Fevertree if consumer confidence hit the wall.
Although it doesn’t have the same growth potential, at £1.5 billion Britvic’s annual revenues are not far short of ten times those of Fevertree, although its profit margin, at about 13.7 per cent against 30 per cent or more, is considerably thinner.
Using Berenberg’s forecasts for next year, Britvic’s shares, off 5½p at 801p, trade on a more manageable 13.7 times earnings for a respectable yield of 3.7 per cent. That is considerably more attractive.
AG Barr and Nichols trade at a premium to Britvic, despite making lower revenues and profits, though they operate with higher margins and have their own growth stories to tell, Scandinavia for the former and the Middle East and Africa for the latter.
Nichols was established in 1908 in Manchester and is best known for its Vimto brand, which is available as a cordial as well as a fizzy drink. It owns Levi Roots, Starslush and Sunkist, among other brands, and also makes Vimto sweets, shipping its products to more than 85 countries.
Led by Vimto, Nichols has been a strong performer in its core UK market, which accounts for about 75 per cent of sales, but has found life difficult in the Middle East and Africa, not least because of the conflict in Yemen that has halted deliveries. Nichols seems perfectly respectable, but, to be honest, uninspiring. Its shares, up 10p to £13.75, trade on 19.4 times forecast earnings for a yield of 2.9 per cent. Comfortable but not compelling.
AG Barr began as a family-owned Scottish business in 1875 and is best known for Irn-Bru, though it also makes Snapple, Rubicon and Simply Fruity among others. The company has been performing solidly this year, though its margins have been under pressure as it bumps up its spending on marketing.
It too has successfully reformulated its products in response to the sugar tax and as well as gaining sales of Irn-Bru has been quick to launch new brands, including Le Joli spritzer water. Like Nichols, AG Barr is a stable, highly respectable player, but hard to find exciting.
The shares, up 8p to 788p, have been boosted by buybacks and trade on 23.6 times next year’s projected earnings for a yield of about 2.1 per cent. Again, not compelling and an investor keen to own a share in this sector should probably go for Britvic.
ADVICE Hold Britvic, avoid Fevertree, AG Barr and Nichols
WHY Britvic is the most diverse share in the sector, has stable growth potential and is the most sensibly rated
